Jonathan R. Macey
Deputy Dean and Samuel Harris Professor of Corporate Law, Corporate Finance and Securities Law, Yale Law School.
Geoffrey P. Miller
Stuyvesant P. Comfort Professor, New York University Law School. We thank Richard Stewart for helpful comments.
Both Macey and Miller have consulted in class action cases, and Miller has testified as an expert witness in a number of class action settlements, including several of the cases referenced herein. © The John M. Olin Center for Law, Economics and Business at Harvard Law School 2009
Abstract: This article proposes a simple and coherent approach to judicial review of class action settlements. Specifically, we propose that for questions going to the adequacy of a settlement, where no warning signals of fraud or collusion are found, the court should act relatively deferentially by employing a lenient standard of scrutiny and approving a settlement if it has a rational basis. An intermediate level of scrutiny should apply when the settlement presents facial issues that implicate the fairness of the settlement. Such facial issues include the allocation of settlement proceeds among subgroups in a class, the presence of coupon-type relief, "shotgun" settlements occurring very early in the litigation, and settlements in overlapping class actions. In settlements with one or more of these characteristics, if the initial inquiry raises concerns, the court should demand a well-reasoned explanation for the choices made. Finally, where the components of a settlement present a direct conflict between the interests of class counsel and those of the class issues, such as issues related to attorneys' fees, courts should employ exacting scrutiny and require convincing evidence that the proposal is reasonable.
Judicial scrutiny over settlements is the most important safeguard against inadequate or conflicted repre-sentation by class counsel.1 Yet the standards for performing this responsibility appear confused. Courts promote and Journal of Legal Analysis (2009) 1(1): 167-205 at 168
discourage early settlements,2 pronounce that the scrutiny required for settlement proposals is exacting and deferential,3 and esteem and denigrate the role of class counsel.4 Review of class action settlements takes the form of a list of factors uncertain in scope, ambiguous in meaning, and undefined in weight.5 Given that so many class cases settle,6 it would appear desirable to improve the clarity and efficacy of applicable rules.7 This article Journal of Legal Analysis (2009) 1(1): 167-205 at 169
proposes a simple and coherent approach to judicial review of class action settlements.
1. Existing law
Appeals courts provide four types of instructions to trial courts in reviewing class action settlements: (a) a basic standard; (b) factor tests; (c) simplified standards; and (d) advice as to the level of judicial scrutiny.
1.1. Basic Standard
The task of a trial court under Rule 23(e) is to assess whether the proposed settlement is "fair, reasonable and adequate."8 Although the mantra "fair, reasonable and adequate" is often recited as an indivisible re-quirement, each word conveys information. "Reasonable" implies that the settlement should be a product of considered judgment and not arbitrary. "Adequate" implies that the settlement should provide relief to the class sufficient in magnitude and rationally related to the harm alleged. "Fair" implies that the settlement should not discriminate between similarly situated class members, and also suggests that the bargaining process must be at arm's length.9
1.2. Factor Tests
Aside from these general implications, the "fair, reasonable and adequate" standard doesn't provide much guidance. In default of instructions from the Supreme Court,10 appeals courts have elaborated factor tests -- laundry Journal of Legal Analysis (2009) 1(1): 167-205 at 170