Third Circuit Vacates Approval of Class Action Settlement Because Factual Record On Fairness Was Inadequate

December 22, 2010

A new Third Circuit decision makes clear that the standards for a “fair, reasonable, and adequate” settlement under Federal Rule of Civil Procedure 23(e) must be supported by an adequate factual record.  The parties’ unsupported assurances that the Rule 23 standards are met will not suffice.  The requirement is especially important when the parties reach a settlement before a class has been certified, when the court has not had an opportunity to become familiar with the claims and the factual background of the case through a motion for class certification.  In re:  Pet Food Prods. Liab. Litig., Nos. 08-4741 & 08-4779, 2010 WL 5127661 (3d Cir. Dec. 16, 2010) (available here)

In Pet Food, plaintiffs filed more than 100 class actions arising out of the sale and recall of pet food contaminated by melamine and cyanuric acid.  The cases, consolidated by the Judicial Panel on Multidistrict Litigation, asserted claims for refunds of the purchase price (“Purchase Claims”) and for compensation for death or injury of class members’ pets and veterinary examinations (“Injury Claims”).  Many manufacturers and retailers had voluntarily refunded the purchase price of the contaminated pet food independently of the litigation.  After informal discussions and then formal mediation, the parties agreed to settle the claims on a class-wide basis for $24 million, $250,000 of which was allocated to the Purchase Claims.  31% of the $24 million was allocated to class counsel’s fees.

The district court preliminarily approved the settlement.  Objectors challenged it on a series of grounds, including:  (1) inadequate representation because of intra-class conflicts of interest between persons with Injury Claims and those with Purchase Claims alone; (2) inadequate representation because of differences in state laws under which plaintiffs sued; and (3) lack of fairness because only $250,000 was allocated to Purchase Claims.  The district court overruled the objections, certified the class for settlement purposes, and granted final approval of the settlement.  In re:  Pet Food Prods. Liab. Litig., MDL No. 1850, 2008 WL 4937632 (D.N.J. Nov. 18, 2008).

Objectors appealed.  The Third Circuit reviewed the district court’s analysis of adequacy of representation under the framework set out in Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613 (1997), and, as to fairness, under the factors in Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975), and those developed in the intervening thirty-five years, including in In re Prudential Ins. Co., 148 F.3d 283, 323 (3d Cir. 1998).  Pet Food, slip op. at 21-23, 42-43, 2010 WL 5127661, at *5, *12-*13.  The Third Circuit affirmed the district court’s rejection of the adequacy challenges.  First, the court noted that all of the class representatives had Purchase Claims as well as Injury Claims, which gave them the incentive to secure an adequate recovery on the Purchase Claims rather than sacrifice them to increase recovery on the Injury Claims.  Pet Food, slip op. at 32, 2010 WL 5127661, at *9.  This distinguished the Pet Food settlement from those that had been found wanting in In re Community Bank of Northern Virginia, 418 F.3d 277 (3d Cir. 2005), and In re General Motors Corp., 55 F.3d 768 (3d Cir. 1995), where the proposed class representa­tives did not assert or did not vigorously litigate certain claims held by other members of the class.  Second, the court found that the objectors failed to demonstrate how the variations in state law created conflicts of interest that would make class representatives inadequate representatives of the absent class members.  Pet Food, slip op. at 38-39, 2010 WL 5127661, at *11.

But on the third objection noted above-the contention that $250,000 was too little for the Purchase Claims–the Third Circuit remanded for further consideration.  The court noted that the district court properly applied the Girsh factors to the settlement as a whole, including the class members’ positive reaction to the settlement, the risks that the plaintiffs faced in establish­ing causation, liability, and damages at a trial, plaintiffs’ risks in maintaining class certification, and the reasonableness of the compensation that would be provided under the settlement. Pet Food, slip op. at 44-48, 52, 2010 WL 5127661, at *14-*15, *16.  The Third Circuit further noted-as had the district court-that the manufacturers and many retailers had already voluntarily given refunds for the pet food to many consumers irrespective of the litigation.  Pet Food, slip op. at 52, 2010 WL 5127661, at *16.

This did not, though, establish that $250,000 was enough to fund the Purchase Claims adequately.  The court noted that “[w]e ask district courts to apply an even more rigorous, ‘heightened standard’ in cases ‘where settlement negotiations precede class certification, and approval for settlement and certification are sought simultaneously.'”  Pet Food, slip op. at 41, 2010 WL 5127661, at *12 (quoting In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 534 (3d Cir. 2004)).  Applying this heightened scrutiny, and faced with the lack of a factual record regarding the reasonable valuation and number of Purchase Claims, the court concluded, “We see no error in the District Court’s common sense finding that many purchasers of recalled pet food were compensated for refunds outside of the settlement.  But the fact that many consumers had already received refunds did not necessarily answer whether the $250,000 allocation was a fair and adequate settlement of the Purchase Claims.”  Rather, “the settling parties should have provided the court with more detailed information about why they settled on the $250,000 cap,” and “information to determine the range of reasonableness of the $250,000 allocation ‘in light of the best possible recovery’ and ‘in light of all the attendant risks of litigation.'”  Pet Food, slip op. at 52-53, 2010 WL 5127661, at *16-*17 (quoting Prudential, 148 F.3d at 322; and Girsh, 521 F.2d at 157).

In remanding the Pet Food settlement for further consideration of the fairness requirement under Rule 23(e), the Third Circuit continues to show its concern that there be an adequate factual record-rather than simply assurances of counsel-whenever the requirements for class certification under Rule 23 are at issue.  The Third Circuit made this clear in the context of a disputed class certification motion in In re: Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2009); its opinion in Pet Food confirms that this applies in the pre-certification settlement class context as well.