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By Perry Cooper
June 23 — The most significant proposal to come out of the federal rules committee's look at class actions seeks to curb the power objectors hold over the class settlement process.
Plaintiffs' and defense attorneys say these objectors can derail deals the parties have reached until the parties pay the objectors “greenmail” to go away.
But a frequent objector says the extent of the problem is overblown. The real focus should be preventing frivolous class actions from getting traction in the first place, he says.
Any class member who is unhappy with the terms of a deal to resolve class claims can object to its terms.
Some of these objectors “have legitimate beefs about the settlement that they would like to see actually reformed,” Brian T. Fitzpatrick, a professor at Vanderbilt Law School in Nashville, Tenn., told Bloomberg BNA.
But others are just trying to delay the settlement process until they can force a side payment out of the parties, he said.
The key question is how to separate the good objectors from the bad objectors, Fitzpatrick said. He specializes in class actions and has written about the challenges posed by extortionist objectors.
Plaintiffs' attorney Jocelyn Larkin said bad objectors will submit vague objections with no substance to them.
Then the objectors don't show up at the fairness hearings, but they appeal when the settlement is approved, she said. Larkin is the executive director of the pro-plaintiff Impact Fund in Berkeley, Calif.
Greenmail opportunities happen on appeal because objectors can hold up deals for a year or two, Fitzpatrick said.
Larkin and Fitzpatrick said greenmail objections put plaintiffs' counsel in a tough spot. Some consider it unethical to pay off the objectors. But the objections don't just hold up class counsel's fee award, they also hold up the payout to the class.
Sometimes defendants won't pay anything to the class while an appeal is pending in case the settlement approval is overturned, Larkin said. That means it can be years before class members see any recovery from the suit.
Fitzpatrick said greenmail objectors show up in every class action where the class counsel fee awards are large enough that the lawyers might be willing to throw a decent amount of money to objectors.
That's only about 10 percent of all class settlements, but that doesn't mean it's a non-problem, he said.
Defense attorney Paul G. Karlsgodt agreed.
“We do not see objectors in every class action settlement, but when they do come forward, they can cause significant disruption and delay, which is not in the interest of the defendant or the settlement class,” Karlsgodt of Baker & Hostetler LLP in Denver told Bloomberg BNA.
But frequent objector Lawrence W. Schonbrun in Berkeley, Calif., told Bloomberg BNA that there's no proof that greenmail is a significant problem. “There's no statistics on how often this happens,” he said.
There are only about a dozen lawyers who frequently make frivolous appeals just to elicit a settlement, he said. The easy answer is for the parties to file motions to have the appeals declared frivolous.
The Judicial Conference Advisory Committee on Civil Rules has been considering changes to Fed. R. Civ. P. 23, which governs class actions, for over a year (16 CLASS 516, 5/8/15).
It proposed amendments to Rule 23, addressing the greenmail problem, to the Judicial Conference standing committee in early June.
Under the proposals, each objection must be specific and state whether it applies only to the objector, to a subset of the class or to the entire class.
Any side payments made to objectors must be approved by the district court, even if the case has already been appealed to the circuit court.
Larkin called the proposal a “really straightforward way of dealing” with “ever-devious” objectors.
Fitzpatrick would have liked the amendments to go further, to ban side payments altogether.
But he said he thinks the proposal is likely to discourage the use of such deals because it will shed light on just how much money was changing hands to get the objectors to go away.
Legitimate objectors—like consumer group Public Citizen and Ted Frank of the Center for Class Action Fairness—won't be affected by the proposal because they aren't in it for the money, he said.
Karlsgodt agreed that the proposals will likely disincentivize greenmail objections, but said that “most reputable plaintiffs’ class action lawyers have already adopted a strategy of refusing to ‘negotiate with the kidnappers,' so to speak.”
“At minimum, this rule change serves to codify what is already a best practice within the class action bar,” he said.
But objector Schonbrun said the rules committee is looking at the wrong problem.
According to the committee's agenda, “Class members sometimes object to settlements not because they have good faith objections but instead because they want to receive payments to withdraw their objections so that the settlements can go forward.”
Schonbrun said the committee could just as easily turn it around to say, “Sometimes class members bring class action lawsuits not because they have good faith claims against the defendant but because they want to receive payments to settle their claims.”
Plaintiffs' attorneys blackmail defendants every time they bring meritless class actions meant only to extract a settlement. But their good faith is never questioned the way that of an objector is, he said.
“You would have thought in a saner world that the bigger problem of blackmail settlements that cost companies millions and tens of millions and hundreds of millions of dollars unjustifiably should be something they tackle, rather than this minor problem where they give $50,000 to an objector and his lawyer,” Schonbrun said.
He said the rule changes benefit plaintiffs' attorneys because their only effect will be to lower the amount of money plaintiffs have to pay objectors to make them go away.
The greenmail proposal is the most significant change to Rule 23 proposed by the committee, Fitzpatrick said.
Other changes include bringing class notice procedures into the 21st century by allowing e-mail notice, and clarifying the factors courts should consider when approving settlements.
“It’s pretty modest stuff, Fitzpatrick said. “They really decided not to tackle any of the thorny questions” they originally considered, like cy pres and ascertainability, he said.
“A lot of it is just codifying what the courts are already doing,” he said. “It started out much more ambitious than it ended up.”
The greenmail provision is one of the few proposals to survive this far because “there is unanimity among the plaintiffs’ and defense bars and the courts that greenmail objectors are a continuing problem,” Karlsgodt said.
“These rules would seem to do a good job of addressing that problem without also eliminating the ability of class members or public interest groups to make legitimate and constructive objections to proposed class action settlements,” he said.
Schonbrun questioned whether any objector lawyers were invited to be part of the amendment process.
“They discuss a million things and then the only thing they want to get done has to do with this minor problem of objectors,” he said.
At its meeting in early June, the committee overseeing the various rules committees approved these amendments for the next stage—putting the proposed rule changes up for notice and comment, Robert H. Klonoff, professor at Lewis & Clark Law School in Portland, Ore., told Bloomberg BNA.
Klonoff is a member of the U.S. Judicial Conference Advisory Committee on Civil Rules' subcommittee on class actions.
He said they have yet to set a timeline for notice and comment, but they will hold public sessions on the amendments over the next several months.
To contact the reporter on this story: Perry Cooper in Washington at firstname.lastname@example.org
The agenda from the rules committee's June meeting is at http://src.bna.com/gcN, with class action proposals starting at page 251.
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