Deterring Frivolous Class Action Settlement Appeals
By: Evan G. Hebert
Like a wedding guest who shouts, “I object!” at the ceremony, those who appeal the certification of a class action settlement are frequently viewed as officious intermeddlers who would best go away.[1] But federal law protects the rights of those who disagree with the terms of a class action settlement, recognizing the potentially divergent interests of class members—whose individual claims are often dwarfed by the attorney’s fees awarded in a given case—and their counsel.[2] Class members must be informed of their right to opt out of the action and proceed individually,[3] and a district court is obligated to conduct a fairness hearing in which the court reviews the settlement to determine whether it is fair, adequate, and reasonable under the circumstances.[4] This determination is entitled to significant deference under an abuse of discretion standard.[5] Still, there is a broad right of appeal for all members of the class, rather than just named parties.[6]
The broad right of appeal of class action settlements creates disproportionate incentives for individual, unnamed members of the class to file frivolous appeals of a district court’s ruling that a settlement is fair, adequate, and reasonable under the circumstances.[7] A single plaintiff can potentially hold up millions in settlement funds while an appeal is litigated, creating an economically-measurable detriment to the other class members which can be expressed in terms of the lost time value of the settlement funds; this encourages the parties to simply settle with the individual plaintiff in order to avoid a lengthy appeal and protect the interests of the class as a whole.[8] The result of these competing incentives has been referred to as a “scandalous state of affairs,” wherein “collusion and inadequate representation are everyday features of the class action world.”[9]
Thankfully, courts have found a solution to this serious problem—namely, the appellate and supersedeas bonds authorized by Rule 7 and Rule 8 of the Federal Rules of Appellate Procedure.[10] These bonds are intended to guarantee the availability, in advance, of funds for cost-shifting on appeal.[11] Rule 7 authorizes a district court to “require an appellant to file a bond or provide other security in any form and amount necessary to ensure payment of costs on appeal.” Generally, this amount includes the costs incurred to the class as a result of litigating the appeal, including court costs, the cost of notifying the class of the appeal, and anticipated attorney fees if those are awardable under the statute creating the plaintiffs’ cause of action.[12] Under Rule 8, a district court may require an appellant to post a supersedeas bond in order to remunerate the lost value of the settlement to the class in the event that the settlement is upheld.[13]
Once an appellee submits a motion requesting an appeal bond, the district court will determine whether a bond is appropriate and its amount.[14] The first question turns on a four factor test that considers “(1) the appellant’s financial ability to post a bond; (2) the risk that the appellant would not pay appellee’s costs if the appeal is unsuccessful, (3) the merits of the appeal, and (4) whether the appellant has shown any bad faith or vexatious conduct.”[15] Factor one is presumed in the absence of specific evidence of significant financial hardship,[16] and factor two favors imposing a bond whenever an appellant-objector resides outside the jurisdiction of the court.[17] Bad faith or vexatious conduct can be shown by an appellant’s choice of counsel, specifically whether appellant’s attorney is a “professional, or serial [class action] objector.”[18] The third factor—the merits of the appeal—is generally weighted against appellants because the district court’s determination that a settlement is fair, adequate, and reasonable under the circumstances is entitled to significant deference.[19] Finally, courts have cited attorneys’ professional histories—for example, whether the attorney has filed settlement appeals later deemed frivolous or withdrawn an appeal once a bond was imposed—in decisions finding “bad faith or vexatious conduct” and imposing a bond.[20]
Bond amounts in class action appeals have been set at hundreds of thousands,[21] and even millions,[22] of dollars. Generally, the amount will depend on the size of the class, the court’s estimate of how long the appeal will take, whether the jurisdiction allows the Rule 7 component of the bond to include attorney fees, and whether the objector can make a showing of financial hardship such that the appellees’ requested bond amount would constitute an impermissible barrier to appeal.[23] An appellant who refuses to pay the bond will forfeit his or her right to appeal the court’s approval of the class action settlement.[24]
Academic literature on the theoretical validity of class action lawsuits has focused on the relationship and divergent interests between the members of a class and their attorneys.[25] The unnamed plaintiff’s right to appeal is one way to monitor this relationship and prevent abuse; unfortunately, however, this mechanism is itself ripe for abuse. A district court’s decision to post a substantial appeal bond under Rules 7 and 8 of the Federal Rules of Appellate Procedure should be viewed as an opportunity to set the up-front costs of the appeal at a level that will deter frivolous litigants, but not those who present serious challenges to the validity and/or value of a settlement. However, the inherent difficulty of calibrating this exact amount will require district courts to peer through the pleadings and evaluate the merits of the appeal using any tools which are available—including the past conduct of the objector’s counsel and the care with which the court has reviewed the proposed settlement.[26] This is the precise reason why Rule 7 gives the court discretion to set the bond amount.
Class action settlements are an area of the law where traditional relationships (attorney-client, plaintiff-defendant) begin to break down. For example, a motion for an appeal bond may be submitted to a district court under the names of both the named plaintiff and the defendant, and a meddling serial objector may effectively steal from the class in the name of protecting it.[27] Appeal bonds present a solution for reining in frivolous appellate litigation that is contrary to the interests of the class, the defendant, and the court. To extend the metaphor of appellant-as-wedding-objector, the imposition of a substantial appeal bond tells guests that they should hold their peace during the ceremony unless they are willing to pay for the reception.
[1] See Lawrence W. Schonbrun, The Class Action Con Game, 20 Regulation 53 (1997) (“Objectors are as welcome in the courtroom as is the guest at a wedding ceremony who responds affirmatively to the minister’s question, ‘Is there anyone here who opposes this marriage?”’); see also Edward Brunet, Class Action Objectors: Extortionist Free Riders or Fairness Guarantors, 2003 U. Chi. Legal F. 403, 472 (2003) (referring to class action objectors as “perhaps the least popular parties in the history of civil procedure”).
[2] John E. Lopatka & D. Brooks Smith, Class Action Professional Objectors: What to Do About Them?, 39 Fla. St. U. L. Rev. 865, 867 (2012) (stating that “[t]his well-known dynamic has prompted Congress and the Supreme Court to design procedural measures intended to protect the class from overreaching by its lawyers”).
[3] See Fed. R. Civ. P. 23(c)(2)(B)(v).
[4] See Fed. R. Civ. P. 23(e)(2).
[5] See Fidel v. Farley, 534 F.3d 508, 513 (6th Cir. 2008) (“We review a district court’s approval of a settlement as fair, adequate, and reasonable for abuse of discretion.”).
[6] See Devlin v. Scardelletti, 536 U.S. 1, 14 (2002) (holding that an objecting nonnamed class member is a “party” to the action and therefore has a right to appeal a final judgment approving a settlement).
[7] See Lopatka & Smith, supra note 2, at 868 (“It is this broad right of appeal that enables a professional objector to find nonnamed class members willing to lend their names to a dubious objection and a meritless appeal in the expectation that class counsel will pay a handsome sum to make the complainants go away.”).
[8] See Susan P. Koniak & George M. Cohen, In Hell There Will Be Lawyers Without Clients or Law, 30 Hofstra L. Rev. 129, 155 (stating that the situation is “ripe for abuse” because “[i]t is in the interest of all the participants in the class action—save the absent members of the class—to settle class actions by collusively transferring money from the class to class counsel”).
[9] Id.
[10] See Fed. R. App. P. 7; Fed. R. App. P. 8.
[11] Fed. R. App. P. 7.
[12] Compare In re Cardizem CD Antitrust Litigation, 391 F.3d 812, 817 (6th Cir. 2004) (ruling that attorney fees may be properly included in the amount of a Rule 7 bond where a statute includes attorney fees as part of the costs that may be taxed on appeal) with Tennille v. Western Union Co., 774 F.3d 1249, 1255 (10th Cir. 2014) (citing In re Am. Presidential Lines, Inc., 779 F.2d 714, 716 (D.C. Cir. 1985)) (limiting the amount of the bond “to only costs listed in [Federal Appellate Rule] 39”).
[13] Fed. R. App. P. 8.
[14] See Gemelas v. Dannon Co., No. 1:08 CV 236, 2010 WL 3703811 at *1 (N.D. Ohio Aug. 31, 2010).
[15] Id. (citing Tri-Star Pictures, Inc. v. Unger, 32 F.Supp.2d 144, 147-50 (S.D.N.Y. 1999)).
[16] In re Cardizem, 391 F.3d at 818 (“It is [the appellant’s] burden to demonstrate that the bond would constitute a barrier to her appeal.”).
[17] In re Polyurethane Foam Antitrust Litigation, 178 F.Supp.3d 635, 641 (N.D. Ohio 2016).
[18] See id. (citing Roberts v. Electrolux Home Prods., Inc., 2014 WL 4568632 at *10 (C.D. Cal. 2014)).
[19] Fidel, 534 F.3d at 513 (stating that the standard is abuse of discretion).
[20] Id. (collecting cases).
[21] See, e.g., Gemelas, 2010 WL 3703811 at *2 (requiring a single objector to post a $275,000 appeal bond which included $250,000 for attorney fees).
[22] See Allapattah Serv., Inc. v. Exxon Corp., 2006 WL 1132371 at *18 (S.D. Fl. April 7, 2006) (setting appeal bond at $13.5 million for any individual plaintiff who appealed its judgment that the proposed settlement was fair, adequate, and reasonable under the circumstances).
[23] See, e.g., In re Polyurethane Foam Antitrust Litigation, 178 F.Supp.3d at 645 (reducing the ultimate amount of the appeal bond from $250,000 to $145,463 to avoid “unduly burdening Objectors’ right to appeal”).
[24] See In Re Cardizem CD Antitrust Litigation, 391 F.3d at 818 (“A litigant cannot ignore an order setting an appeal bond without consequences . . . failure to secure an appeal bond can result in dismissal of the appeal.”).
[25] See, e.g., Brunet, supra note 1, at 405 (“The theoretical attack on class actions rests heavily upon the agency cost problem: class members, including their leaders—the representative parties—simply cannot efficiently monitor their attorneys—class counsel.”); See also John C. Coffee, Jr., Rethinking the Class Action: A Policy Primer on Reform, 62 Ind. L. J. 625, 629 (1987) (“[T]he members of the plaintiff class usually have very little capacity to monitor their agents.”).
[26] See, e.g., In re Polyurethane Foam Antitrust Litigation, 178 F.Supp.3d at 643-45 (conducting the balancing test outlined above).
[27] See Koniak & Cohen, supra note 8, at 155 (“Even when objectors and their lawyers have sufficient incentive and funding to challenge the class settlement, however, they are often motivated not by the chance to protect the class from a sellout settlement but by the prospect of being paid off by class counsel and/or the defendant to drop their objections and walk away.”).