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Lessons on how not to settle a class action (American style)

Trials & Tribulations
|Written By Margaret L. Waddell
Lessons on how not to settle a class action (American style)

We are very fortunate in Canada that the class action bar — both plaintiff and defence — is relatively small and most of the major participants are well known to each other. In typical Canadian fashion, we adhere to a code of the highest integrity both in our representations to the court and in our dealings with opposing counsel. The instances where the court has reprimanded counsel for shoddy work or inappropriate conduct are exceptional.

Unfortunately, such is not the case, it appears, in respect of our neighbours to the south.

In a scathing decision from the United States Court of Appeal (7th Circuit) released in June, Justice Richard Posner highlighted some of the abuses to which class actions have been subjected by class counsel who, as Posner says, “sell out the class” in pursuit of maximizing their own fees.

Posner overturned the district court’s approval of a settlement in Eubank v. Pella Corp. regarding defective windows, finding that the settlement was “inequitable — even scandalous.”

Posner identified a number of red flags that the proposed settlement presented, which should have signalled to the lower court that the settlement was inappropriate, and that class counsel had indeed “sold out the class.” He forcefully reminded the courts that they must undertake “intense judicial scrutiny of proposed class action settlements.”

This product liability case involved allegations that a particular line of Pella windows had a design defect that resulted in water penetration. As certified, there were two separate classes with competing interests: those who had incurred a loss because they had repaired or replaced their windows, and those who had not. A national class was certified in respect of the latter sub-class alone, for whom only declaratory relief was originally sought.

However, under the terms of the proposed settlement, the class was to be redefined to include all owners of windows with the defect nationwide — a significantly broader scope of class members whose recovery for losses would be bound by the settlement.

The litany of defects Posner identified in the proposed settlement was remarkable, starting with the glaring conflict of interest of lead class counsel, Paul Weiss. While the settlement was being negotiated, Weiss was embroiled in litigation with his former firm, and was in financial distress. Weiss was also then the subject of discipline proceedings for repeated misconduct, which could (and did) result in a suspension from practice.

Posner found Weiss’ financial troubles influenced the decision to settle the case in a manner that was highly favourable to the defendants and class counsel.

Posner concluded that the terms of the settlement were “stacked against the class” and “[strewed] obstacles in the path of [the class],” and was “bristling with technicalities” that would protect Pella from making any significant payments.

The settlement was to be on a claims-made basis, with a cap of $60 to $100 per window, and unless the class member gave “notice” to Pella before replacing the window, they would not be entitled to any recovery. Alternatively, class members could submit to an arbitration process in the hopes of receiving up to $6,000, but Pella would have a wide range of defences open to it, making the arbitration route highly unlikely to result in success for any class member with the fortitude to pursue that process.

Finally, up to half of the class members would only be entitled to discount coupons, redeemable against future Pella purchases. Posner fairly commented that a coupon is “a warning sign of a questionable settlement.”

In sum, Posner concluded that the real value of the settlement was substantially less than either the $90 million estimate from class counsel, or even the $22.5 million estimate of the defendants.

Furthermore, both the notice of settlement and the claim form were so complicated that the average class member would not be able to understand them. Posner found that the 12-page long claim form was so complicated that Pella would be able to reject many as being completed incorrectly or incompletely.

The notice, he concluded, was “incomplete and misleading” as it left the impression that class members would receive at least $750 on the claims-made basis or $6,000 through the arbitration process, when in fact those were the ceilings, and most would be entitled to much less, assuming their claims were allowed.

Compounding the conflict was the fact the primary representative plaintiff (Leonard Saltzman) was Weiss’ father-in-law, and Weiss’ wife was both a partner in the class counsel’s firm, and a co-defendant in the partnership litigation. Hence, the representative plaintiff who was advocating for the settlement was patently conflicted, and this was not brought to the attention of the class.

The action had a total of five representatives. Other than Saltzman, all the representative plaintiffs objected to the settlement. Class counsel, therefore brought a motion to remove and replace the objecting representatives with new representatives of their own choosing who would support the settlement. This, too, was self-serving on the part of class counsel.

In rejecting the settlement, Posner concluded: “In sum, almost every danger sign in a class action settlement that our court and other courts have warned district judges to be on the lookout for was present in this case.”

He cited multiple cases in support.

While the United States’ past record may have led Posner to view class actions settlements with a particularly high degree of skepticism, in this case, he seems to have been justified in concluding that the settlement was predominately a vehicle for remunerating self-serving class counsel, extricating the defendant from the action at minimal cost, and of very little benefit or value to the class.

Fortunately, the Canadian experience has been quite different. The Canadian bar has learned from the identified abuses to the procedure that Posner identified, and our class action judges are vigilant in their review of the terms of settlements. We can be justifiably proud that in Canada, the class action bar conducts itself with integrity, and that we do set an example that our southern neighbours should emulate.