Class action lawsuits continue to pose substantial risks to corporate America, notwithstanding the passage of the Class Action Fairness Act and recent U.S. Supreme Court decisions, which should be reigning in these types of cases. In particular, there has been an explosion of consumer protection actions filed in the past few years. These will continue to grow since they have now begun to attract some of the more reputable members of the plaintiffs' class action bar. While plaintiffs' lawyers are seemingly quick to navigate around legal obstacles companies may place in their way, companies can implement a number of pre-litigation strategies, discussed below, to try to curtail the class action process. If and when a company does decide to settle, though, it has a vested interest in ensuring the settlement receives judicial approval. Given the recent trend of courts being critical of and rejecting class action settlement agreements, companies should consider retooling their approach to the settlement process to better protect their hard-fought negotiated agreements.
Taking Corrective Action
On occasion, courts reward companies for proactively identifying and resolving budding legal concerns, such as instituting a product recall or offering product refunds. For instance, just this January, Toyota prevailed against a class action in large part because it had initiated a voluntary safety recall of its vehicles to correct a defect in the anti-lock brake system.1 Finding that car owners suffered no actual injury as a result of Toyota fixing the defect through the recall, the court denied class certification. It was not Toyota's first win of this kind, however, as a different court held last year that another of Toyota's recalls rendered that lawsuit prudentially moot.2
Offering refunds has also curried favor in some jurisdictions as long as the putative class members are properly informed and made whole through the refund. A company that implemented a liberal refund program without requiring proof of purchase and provided wide-spread notification to consumers through press releases, information on its website, and general news coverage did not have to face a class action that emanated from a large-scale salmonella outbreak in its peanut butter.3 Other class actions have met the same fate even where proof of purchase was required.4
And in 2011, the Seventh Circuit provided companies offering refunds with yet another defense by deeming "inadequate" the class representative who chose to pursue litigation and incur high transaction costs, such as attorney fees and costs related to class notices, at the class members' expense to obtain a refund that was already available to affected consumers.5
The decision whether to take corrective action is not one to make lightly. In circumstances where no lawsuit has yet been filed, recalling products may hasten litigation. And, in circumstances where litigation is pending, providing a refund may deprive the company of a remedy it can later offer as part of a negotiated settlement. Nevertheless, particularly in jurisdictions that have already rejected class actions on these grounds, resolving the problem in the short term may yield long-term cost savings.
Contract Clauses Precluding Class Actions
Contracts that either (1) contain explicit and clear provisions requiring individual arbitration, (2) specifically preclude class arbitrations, or (3) are silent on permitting class arbitrations have succeeded in preventing either a class action or class arbitration from going forward. In 2011, the Supreme Court permitted AT&T to enforce a mandatory arbitration clause in its sales contract that also required that any claim by a consumer of its wireless service be brought in an individual capacity and not as a plaintiff or class member in any class proceeding.6
Courts have applied the Supreme Court's holding to a variety of cases, including employment class actions where employees had agreed to arbitration in their employment contracts and personal injury suits.7 Most recently, various courts have held that class action waivers are enforceable in sales contracts, notwithstanding a statutory right to a class action.8
Several companies, including Sony, Microsoft, Netflix and now PayPal, have taken the next step of adding terms to their user agreements requiring consumers to waive the right to participate in class action lawsuits. Others, like auto manufacturers, have inserted arbitration provisions in their consumer product warranties.9 But these provisions are not practical in all situations, such as in the sale of retail goods, where there is no contract between the manufacturer and consumer.
Moreover, despite such waivers, certain types of class actions will still proceed, particularly where the arbitration provision is overly one-sided or confusing to the consumer. Companies should also evaluate the potential downside of requiring arbitration since the ability to seek judicial review of awards is limited. But a well-drafted, consumer-friendly arbitration provision in a sales or service contract could prove advantageous in defending against class actions.
While most companies initially shun the idea of settling what they perceive to be frivolous class action lawsuits, the burden of defending these cases might soon outweigh the cost of settlement. Once the decision to settle is made, whether because of limited financial resources, the strain on employees and business operations, or the uncertainty of litigation, negotiating favorable terms with class counsel is only half the battle. A number of settlements have recently come under attack by parties other than the usual professional objectors. In order to avoid having to go back to the drawing board, companies need to pay attention to the terms of the agreement and implement procedures to thwart meritless objections that may derail a settlement.
First, the parties need to consider what to do with unclaimed funds. Reversion of unclaimed funds to companies will invite objections, appeals, and likely reversal of the settlement if it is even initially approved. Cy pres distributions to charities with no connection to the class or the claims have met with increasing judicial scrutiny and resistance, particularly after the U.S. Chamber of Commerce petitioned Congress last year to eliminate these awards in class actions.10 While few options remain, additional pro rata distributions to class members tend to pass judicial muster, even if criticized for creating windfalls.11 Moreover, cy pres donations may be approved as long as the parties have provided ample justification for the selection of the charity and persuasively described the nexus to the lawsuit.12 Finally, in some instances, contributions to a state or the federal government's coffers have been deemed acceptable.13 For example, concerned with the "feeding frenzy of competing interests" over more than $79 million designated for a cy pres distribution in a class action settlement, a New York federal court ordered the entire amount turned over to the U.S. Treasury.14
Second, while the need to justify the amount of the attorney fee requested should fall on class counsel, courts have criticized and even rejected settlements that contain a disproportionately high attorney fee award out of a concern of collusion and the possibility that class counsel might have bargained away a benefit to the class in exchange for a handsome fee.15 Companies, therefore, need to distance themselves from fee requests, to include resisting efforts to condition a settlement on a specified amount for fees. The safest practice is to enable a court to rule on the fairness of the fee request independent from the fairness of the settlement to class members. While class counsel runs the risk that the fee award will be reduced, this practice best ensures that the settlement will be approved and upheld.
Third, it is important to provide sufficient notice to the class, irrespective of the size of the settlement. As a threshold issue, the notice must be clear and inform interested parties of the pendency of the action and afford them an opportunity to present their objections.16 While parties may want to keep notice costs down, a single notice in a newspaper such as USA Today was found insufficient to preclude a second copy-cat lawsuit from being filed.17 Concerned that class members were deprived of the due process right to adequate notice of the prior class settlement, courts have encouraged traditional forms of notice, such as through multiple publications and direct mail, as well as newer forms like email and internet postings, in order to later permit full release of class member claims. Moreover, Spanish-language notice may also be necessary depending on consumer demographics.