A critical reappraisal of class action settlement procedure in search of a new standard of fairness.

AuthorPiche, Catherine
PositionCanada

Class action settlements are most frequently agreed upon in a multi-party context where the majority of putative class members are unaware of the proposed settlement, of its terms and substance, or even of the class action's existence. In this context, class members' interests must be closely protected. Settlements must be thoroughly scrutinized and approved by the courts in light of a standard of fairness, supported by a list of factors relevant to its determination. Courts have developed qualitative requirements regarding the content and form of class action settlements, and they have attempted to define settlement fairness, but this exercise has produced a highly indeterminate and subjective test.

In this article, the author critically reappraises the legislative standard and factors relevant to the judicial review and approval of North American class action settlements. She re-categorizes these factors into procedural and substantive fairness categories and emphasizes two "golden rules" of the fairness inquiry. She discusses the inadequacy of the current class action settlement judicial review process and suggests that a new standard of fairness is required.

Finally, she proposes a clearer standard of fairness, which, among other things, emphasizes the respect for class action law goals and promotes a more inquisitorial role for the reviewing judge.

Dans la majorite des reglements de recours collectifs, il semble que la plupart des membres du groupe propose ignorent la teneur du reglement propose, qu'il s'agisse de ses conditions ou de son contenu, voire de l'existence meme du recours collectif en question. Dans cette optique, les interets des membres du recours doivent etre soigneusement proteges. Les tribunaux ne doivent donner leur approbation a un reglement qu'a l'issue d'un examen effectue a la lumiere d'une norme d'equite, etaye par une liste de facteurs pertinents pour la prise de decision. Les tribunaux ont, dans cette optique, elabore des exigences de type qualitatif pour le contenu et la forme des reglements en matiere de recours collectifs, ils ont meme tente de definir ce qu'est l'equite d'un reglement, mais cet exercice n'a produit qu une norme des plus incertaine et hautement subjective.

Dans cet article, l'auteure reevalue de maniere critique la norme legislative a ce sujet et les facteurs pertinents pour la revision judiciaire et l'approbation des reglements en matiere de recours collectifs en Amerique du Nord. Elle classe ces facteurs dans de nouvelles categories d'equite, selon qu'il s'agisse de questions de procedure ou de fond et met l'accent sur deux << regles d'or >> du critere d'equite. Elle discute en outre de l'inadequation du processus actuel de revision judiciaire en matiere de recours collectif et recommande l'adoption d'une nouvelle norme d'equite. Enfin, elle propose une norme d'equite plus precise qui serait notamment davantage axee sur le respect des obiectifs juridiques du recours collectif et revendique un ro1e plus inquisitoire pour le juge saisi de la demande de revision d'une transaction proposee.

Table of Contents I. INTRODUCTION II. FAIRNESS HEARING DOCTRINE IN AMERICAN AND CANADIAN COURTS A. "Fair, Reasonable and Adequate" or "In the Best Interests of the Class" B. Substantive and Procedural Inquiries into the Proposed Settlement's Fairness III. RE-CATEGORIZATION OF THE RELEVANT FAIRNESS FACTORS A. Tracking the Merits of the Proposed Settlement: Factors Useful to the Substantive Fairness Inquiry 1. Intrinsic Factors of Substantive Fairness (a) Judicial Risk Analysis: Likelihood of Recovery or Likelihood of Success on the Merits Weighed Against Amount and Form of Settlement Relief (b) Future Expense, Complexity and Likely Duration of the Litigation 2. Extrinsic Factors of Substantive Fairness (a) Class Reaction: Number and Nature of Objections (b) Recommendation and Experience of Counsel and Opinion of Interested Persons B. Procedural Concerns about the Proposed Settlement: Factors Useful to the Procedural Fairness Inquiry 1. Adequacy of Representation, Good Faith and Absence of Collusion (a) Negotiation of Counsel Fees in Settlement and Amount of Fees (b) Discovery Evidence Sufficient for "Effective Representation" 2. Adequacy of the Notice of Proposed Settlement to Absent Class Members C. Golden Rules of the Fairness Inquiry 1. Required "Range of Reasonableness" of the Proposed Settlement 2. Consideration of the Underlying Objectives of the Class Action Statutes IV. INADEQUACY OF THE CURRENT JUDICIAL REVIEW PROCESS OF CLASS ACTION SETTLEMENTS A. Strong Public Policy and Judicial Preference for Class Action Settlements B. Inconsistent Uses and Applications of the Procedural and Substantive Fairness Lines of Inquiry at the Fairness Hearing C. Unclear Judicial Role at the Class Action Settlement Review Stage V. IN SEARCH OF A NEW STANDARD OF FAIRNESS A. Is Fairness Definable in a Class Action Settlement Context? B. The "Fair" Class Action Settlement I. INTRODUCTION

Class action settlements are most frequently agreed upon in a multi-party context where not everyone is aware of the existence of a proposed settlement or of its terms and substance. Accordingly, in this very context, class members' interests must be closely protected. Settlements must be thoroughly scrutinized and approved by the courts in light of a standard of fairness supported by a list of factors relevant to its determination.

The reviewing judge's reasoning and approach in using these standards and factors to assess settlement fairness, however, are rarely appreciable by others. Most court judgments fail to reveal exactly how settlement fairness is appreciated. Moreover, the standard of fairness generally accepted in North American case law and doctrine is indeterminate and subjective and has been characterized by many legal scholars as unfit to assist courts in determining whether the settlement is in fact fair (1) or unfair. In fact, there is a general tendency for courts to approve class action settlements without substantive changes, (2) in line with, perhaps, an inclination toward or preference for out-of-court settlements as opposed to often lengthy and complex traditional court adjudication.

This phenomenon cannot be considered lightly. When class action settlements are approved judicially, they are no longer interpreted as purely private contracts. (3) Their fairness concerns not just the class members who participated in negotiating the settlement but "absent" class members (i.e., those members of a putative or certified class who are not named plaintiffs) and the public in general. Participants to the settlement and absent class members are concerned because they will be bound by the settlement. The public is also concerned because class action litigation--and related settlements--have a great potential to ensure enhanced compliance with the law and promotion of a "prompt, efficient judicial administration." (4)

Even if the settlement of a dispute is in theory a good thing, fairness cannot be assumed simply because the parties' lawyers have voluntarily agreed to settle? The class action is a procedure in which the number of "clients" may be extremely large and widely scattered and where individual class members often have little or no contact with their lawyers. Accordingly, clear standards of fairness, with supporting factors and detailed procedural guidelines for their judicial review, are necessary to ensure that class members receive compensation for their claims in a fair and efficient manner, that all interests at stake are protected, and that the integrity of the judicial process is preserved.

In this article, I will first critically reappraise the legislative standard and various factors relevant to the judicial review of North American class action settlements. Second, I will re-categorize these factors into separate procedural and substantive fairness categories and will emphasize two "golden rules" of the fairness inquiry. Third, I will discuss the inadequacy of the current class action settlement judicial review process and suggest that a new standard of fairness is required. Finally, I will propose a clearer standard of fairness applicable to this process, which, among other things, emphasizes the respect for class action law goals and promotes a more inquisitorial role for the reviewing judge.

  1. FAIRNESS HEARING DOCTRINE IN AMERICAN AND CANADIAN COURTS

    Court approval is required to effect class action settlements in North American federal, state or provincial class action statutes. These statutes, however, do not explain how the duty of oversight should be discharged and what settlement fairness truly signifies and requires. Accordingly, courts have had to develop a more elaborate framework to regulate this process: this process is commonly referred to as the "Fairness Hearing Doctrine."

    In this section, I will critically review the Fairness Hearing Doctrine and the various factors used by the courts to assess the fairness, reasonableness and adequacy of class settlements. I will also explain how these factors relate to substantive and procedural fairness lines of inquiry.

    1. "Fair, Reasonable and Adequate" or "In the Best Interests of the Class"

      In the United States, Federal Rules of Civil Procedure Rule 23(e)(2) establishes that a class action settlement must be "fair, reasonable, and adequate" to be approved judicially. (6) By contrast, in Canada there is no equivalent statutory provision, such that courts have had to develop a similar standard for the judicial oversight of class action settlements. (7) Accordingly, in both civil and common law provinces, the generally accepted standard is the Dabbs No. I test of whether the settlement is "fair, reasonable and in the best interests of the class as a whole." (8)

      The fair, reasonable and adequate (and in the best interests of the class as a whole) standard does not help to properly determine what to look for...

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