Third Circuit Rejects Division of Settlement Class Into Two Groups Because Group Receiving Lesser Benefits Not Adequately Represented

June 13, 2012

On May 31, 2012, the Third Circuit reversed the certification of a settlement class of Volkswagen and Audi owners because the settlement divided the single class into two groups, provided different benefits to each group, but failed to ensure adequate representation of the interests of the group receiving the lesser benefits.  Dewey v. Volkswagen Aktiengesellschaft, Nos. 10-3618, 10-3651, 10-3652 & 10-3798, 2012 WL 1948970 (3d Cir. 2012) (available here).

The named plaintiffs claimed that the defendants’ automobiles had defectively designed sunroofs that allowed water to leak into the vehicle.   They sought to represent a class of all owners and lessees of a wide range of Volkswagen and Audi models and years, whether or not the class member had experienced any leaking from the sunroof.  This type of proposed class could potentially involve Rule 23(a)(4) “adequacy of representation” issues of the type the Supreme Court recognized in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1996)-a case where the Court held that named plaintiffs who had manifested an injury allegedly caused by asbestos could not adequately represent future claimants who had been exposed to asbestos but had not yet manifested any injury.

The parties in Dewey negotiated a settlement after two years of discovery but before any class had been certified.  They asked the district court to certify a single settlement class that divided the class members into two groups-a “reimbursement group” and a “residual group”-with those car models that experienced higher rates of leakage claims in the first group and those with lower claims rates in the second.  All class members would receive maintenance information on how to inspect and clean their sunroofs to avoid leakage, but only persons in the “reimbursement group” who had experienced leaks could immediately seek recovery of cleaning, drying or repair expenses from the $8 million settlement fund.  Those in the “residual group” had to wait until all claims from the first group had been paid and make their claims against whatever was left.  Even though all the named plaintiffs were members of the “reimbursement group,” the district court certified the settlement class.

The Third Circuit analyzed two different “adequacy of representation” issues that objectors raised and concluded that only one of them required reversal.  First, although the objectors insisted that lumping those who had experienced a leak into the same class as those who had not was a “classic Amchem conflict,” the Third Circuit concluded that the circumstances in Dewey were different.  Volkswagen and Audi owners who experienced leakage had sufficient incentive to represent the interests of those who had not yet had any leak because a class member “who has already suffered leakage, and is thus a ‘past’ claimant, can continue to suffer leakage into the future to the same extent as a future claimant, and can continue to make future claims.”  Slip op. at 38, 2012 WL 1948970, at *12.  For this reason, the court viewed “the alignment of interests” as “not so starkly problematic” as in AmchemId.

There was, however, an intra-class conflict between the “reimbursement group” and the “residual group” that doomed the certification of the settlement class.  The court described it as “the representative plaintiffs’ incentive to shift the dividing line between the residual and reimbursement groups in order to maximize their own recovery, at the expense of other members of the class who lacked a representative to protect their interests.”  Slip op. at 42 n.15, 2012 WL 1948970, at *13 n.15.  The court suggested that, on remand, the named plaintiffs might satisfy Rule 23(a)(4) either by allowing all class members to seek reimbursement from the fund “with no difference in priority” or by creating subclasses, “each with representative plaintiffs to ensure that their interests are being accommodated.”  Slip op. at 48-49, 2012 WL 1948970, at *15.

Dewey demonstrates that, under some factual circumstances, a proposed class that includes members who have manifested an injury and members who have not yet manifested an injury may satisfy at least Rule 23(a)(4)’s adequacy of representation requirement.  But it also provides a cautionary warning that parties attempting to settle a proposed class action must ensure that any allocation of benefits among differently situated class members be accomplished in ways that satisfy Rule 23(a)(4).