Pioneering Judges Keep A Closer Eye On Class Action Deals

Law360—Cara Bayles

In a nascent trend that could impact a range of class actions in the employment, securities, consumer protection and product liability spheres, some diligent judges are beginning to track settlements after granting final approval — adding a so-called third phase of review to ensure class members get the relief they are due.

One recent example is U.S. District Judge Vince Chhabria’s work overseeing Wells Fargo’s $142 million settlement with an estimated 3.5 million customers who were charged fees for accounts they never authorized. During a case management conference in March, after the preliminary approval stage but before final approval had been granted, Judge Chhabria of the Northern District of California said he could see that administering the settlement was going to be a complex process.

Wells Fargo sought to heal any harm that had come to class members’ credit score as a result of the fraud, a remedy class counsel Derek Loeser of Keller Rohrback LLP lauded, saying it had “never been done before.” ​ 

In addition, some class members had complained they didn’t receive notice of the settlement. And Wells Fargo said that others had filled out the claims form incorrectly, putting a year in a field intended for the number of false accounts they had been saddled with, which made it appear there were thousands more fraudulent accounts than actually existed.

Amid it all, Judge Chhabria was troubled by an issue that had bothered him since he took the bench four years ago — whether it was right that after he blessed the deal, it would disappear from his docket, and he would never know whether class members got what they were owed.

“It’s a real problem in class action settlements that the court grants final approval and then gets out of the process,” he said at the case management conference in March. “I’m increasingly thinking that there needs to be, maybe, in a certain category of class action settlements, or maybe in all class action settlements — I’m not sure yet — a third level of review.”

The concept was borrowed from Yale Law School professor Judith Resnik. Resnik has written extensively about Rule 23, which outlines federal civil procedure for class actions, and how it delves into the requirements for certification and settlement approval, but “falls silent once settlements have been approved” and “places no obligations on parties to inform judges or the public about the results.”

Some jurists, like Judge Chhabria, are trying to stay involved during that “third phase” after final approval, to ensure class members get what they are owed. Judge Chhabria is revising his standing orders to require that attorneys report to him after all class members are paid — and to withhold a portion of attorneys' fees until they do. He has said the carrot-and-stick model is meant to encourage class counsel to “ride herd” on the settlement administrator, keeping close watch to make sure the job is done properly.

“There’s an implementation phase and we haven’t yet written rules for it,” Resnik told Law360. “But case law and judicial innovation are both methods of filling in some of those gaps.”

Making Sure Settlements Don’t Get Lost in the Wilderness

Early in Judge Chhabria’s tenure on the bench, he grew uncomfortable with the way his role in class actions abruptly ended.

“It’s something that’s been bothering me since I started,” he told Law360 in an interview in June. “It started off as a general uneasiness with granting final approval to a class action settlement and then sending it off into the wilderness without a process in place to be informed about how the settlement administration was going.”

His standing orders will soon require that attorneys representing plaintiffs in class action settlements file a “notice of completion of duties” — a detailed accounting of when payments were made, how many class members received money, the total amount paid out, the number of cashed and uncashed checks, and which class members could not be located. The notices will also detail any concerns raised by class members and any other settlement administration hiccups experienced along the way.

To ensure the job is done properly, Judge Chhabria said he will also withhold 10 to 25 percent of attorneys’ fees until after that third phase of review.

“There are two types of cases where it’s necessary. One is if you have a particularly complicated settlement process. And two is where you have lawyers who you don’t think are particularly responsible,” he said. “I’ve decided the majority of class action settlements probably fall into one of those two categories.”

Judge Chhabria first started requiring a notice of completion of duties in April, with two different class action deals.

The first was a wage class action brought against Valley Emergency Physicians Healthcare Inc. In his order requiring the additional notice of completion of duties, Judge Chhabria said the case was marked by “shoddy and unreliable work” by class counsel.

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Both sides had tried to remand the suit to state court after reaching a $2 million deal in a case once estimated to be worth $32 million, “an apparent attempt to avoid rigorous review of the agreement,” the judge said in the April 3 order. The attorneys also had to refile preliminary approval papers twice because of errors.

The judge withheld $100,000, or a quarter, of the attorneys’ fees, to be paid once the settlement is administered.

Three days after the Valley Emergency Physicians order, Judge Chhabria also required a notice of completion of duties in a deal ending California drivers’ claims that Lyft misclassified them as independent contractors. The $27 million settlement was reached a month after the judge rejected a $12.5 million deal, saying it miscalculated their mileage reimbursement by using outdated information, shortchanging drivers by half. The updated settlement recalculated those expenses and limited the reasons the company can terminate drivers.

In his order on that settlement, Judge Chhabria didn’t cite any reason for requiring the notice of completion of duties, nor did he withhold attorneys’ fees.

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Pushback From the Plaintiffs Bar

Judge Chhabria’s practice of withholding attorneys’ fees as part of “third phase” review has prompted some raised eyebrows in the class counsel community.

Jahan Sagafi of Outten & Golden LLP, a national class action attorney whom Judge Chhabria consulted on the completion of duties requirement, called the “unusual” new procedure “a great idea” and “an innovative way to confirm that settlements are implemented as expected.”

But he said the lion’s share of class counsel’s work is over by the final approval stage, and that judges have other options, like sanctions or reporting misconduct to the bar, if an attorney misbehaves.

“After years of unpaid litigation, a delay after class counsel have been diligent could feel punitive,” he said. “Delaying fee payments creates perverse incentives to rush settlement administration, which could, ironically, harm class members.”

During the Wells Fargo hearing, class attorney Loeser echoed this point, noting that class counsel often wait years to get paid under the contingency model.

“The usual saying is that ‘Defense attorneys get paid per hour, and plaintiffs’ attorneys get paid perhaps,’” he told the judge.

Other Judges Joining in on 'Third Phase' Oversight

Judge Chhabria is not alone in trying to stay involved at the third phase.

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