Friday, March 21, 2014

Dukes Proves Hazardous to Mandatory Class Settlements

Carter v. City of LA, No. B241060 (D2d1 Mar. 13, 2014)

California law has long been unclear about the conditions under which a mandatory settlement class—that is, a class where class members have a right to object, but not to opt out—can be certified for settlement. It’s an issue that probably doesn’t come up all that much, but it will be pretty significant for practitioners who litigate certain kinds of cases—disability discrimination, consumer UCL, and certain kinds of securities cases—where damages are nominally sought but the relief ultimately provided in a class settlement is often purely injunctive. The court here holds that if the named plaintiff demands monetary relief, and the settlement releases such claims on the class’s behalf, federal procedural due process requires affording class members an opportunity to opt out. Even if their realistic chances of obtaining a monetary recovery are slim to none.

To settle class action disability discrimination claims brought against the City of LA, the City agreed to install at least 1,000 curb ramps to facilitate wheelchair travel over the course of a year and to make additional cuts over the next twenty-five years contingent on the availability of funding. Thirty of the 280,000 class members objected, claiming that the terms of the settlement weren’t fair. The trial court overruled the objection, certified a mandatory—with no right to opt out—settlement class, and approved the settlement. The objectors appealed.

The court makes pretty quick work of the fairness objections. Although the objectors suggested that the city was in need of more than 100,000 ramps, their figure was based on a fifteen year old estimate that was long out of date. The city established that it had installed over 32,000 ramps since the estimate and had required private property owners to install many more. And the fact that only thirty class members constituting .01 percent of the class objected was further indication of the fairness of the settlement. 

The court, however, takes umbrage with the certification of a non-opt out mandatory class. Procedurally, it holds the parties could not include such a provision in their settlement agreement. They could not bind the court or the members of the yet-to-be-certified class to a particular form of certification. 

On the merits of the opt-out issue, the court acknowledges that the issue of when a non-opt-out class action can be certified is not settled under California law. But it reasons that Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2557 (2011) suggests a federal constitutional angle. In Dukes, the district court certified a class under Federal Rule of Civil Procedure 23(b)(2)—which generally applies only to cases for injunctive relief—even though the plaintiffs sought a massive monetary recovery on behalf the class, along with substantial systemic injunctive relief that is commonly sought in impact litigation. In holding that the court could not certify under (b)(2), the Dukes Court acknowledged that in a (b)(3) class—where damages are demanded—due process would require affording objecting members of the class with an opportunity to opt out. In contrast, a Rule 23(b)(2) injunctive relief class does not. Thus, even though the (b)(2)/(b)(3) distinction in Dukes is largely an issue of federal procedure, it strongly suggests—and the court here finds it persuasive—that if a class could only be certified under (b)(3) as a matter of procedure, as a matter of federal constitutional law, due process would require a chance to opt out. The distinction is thus significant from a due process perspective, even in a state court case.

Turning to the issue directly presented in Dukes, the court notes that although (b)(2) classes are permitted when there are damages “incidental to” injunctive relief, damages are truly incidental only when they flow directly to the class as a whole. In contrast, any class claim involving a demand for individualized monetary relief must be certified under (b)(3). Here, plaintiffs’ complaint demanded statutory damages under the Unruh Act and the California Disabled Persons Act, which the court recognizes are recoverable individually, not by the class as an undistinguished whole. And although the class’s realistic chances of actually recovering these damages were pretty slim because their legal theory was shaky, they were nonetheless demanded in the complaint and within the scope of the general release afforded by the settlement. So it would violate due process if these claims could be wipe out by a settlement without affording class members an opportunity to opt out of the release to litigate them. Ultimately, a class settlement fairness hearing is not an appropriate context in which the court could or should determine that these damages were unrecoverable as a matter of law.

Reversed in part.

For practitioners—especially defendants—who practice in areas where the issue might come up, this case no doubt raises some additional difficulty in getting to finality. A common way for a defendant to cap the downside risk of excessive opt-outs is to include a so-called “blow provision,” which gives the defendant an option to rescind the settlement if there are too many opt-outs, and incentivizes class counsel to avoid do what it can to avoid them.  See, e.g., Jaffe v. Morgan Stanley & Co., No. C 06-3903, 2008 WL 346417, at *14 (N.D. Cal. Feb. 7, 2008). But having a blow provision provides another complication. If the number is known, an enterprising lawyer can try to recruit enough opt-outs to hold the deal hostage, often extracting additional consideration or fees as the price of peace. To avoid this result, the blow number is often contained in side letter or an addendum filed under seal with the Court. See id.

An interesting survey of the effect of opt-outs in securities cases can be found here.

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