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Inequitable Settlements

By: Derek Hawkins//July 16, 2018//

Inequitable Settlements

By: Derek Hawkins//July 16, 2018//

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7th Circuit Court of Appeals

Case Name: Nick Pearson, et al. v. Target Corporation, NBTY, Inc., et al.

Case No.: 17-2275

Officials: WOOD, Chief Judge, and ROVNER and HAMILTON, Circuit Judges.

Focus: Inequitable Settlements

Inequitable settlements are an unfortunate recurring bug in our system of class litigation. Federal Rule of Civil Procedure 23(e) is designed to minimize such problems, but appeals by class members who object to a settlement indicate that the system still needs improvement. All too often, class counsel negotiate a settlement with substantial attorneys’ fees but meager benefits for the class. See, e.g., Redman v. RadioShack Corp., 768 F.3d 622, 638–39 (7th Cir. 2014). Named plaintiffs fail to live up to their ethical obligations as fiduciaries to the class. See, e.g., Eubank v. Pella Corp., 753 F.3d 718, 723–24 (7th Cir. 2014). The objector-appellant before us, Theodore Frank, has brought problems like these to our attention before, including in an earlier appeal in this case. See, e.g., Pearson v. NBTY, Inc., 772 F.3d 778 (7th Cir. 2014); In re Subway Footlong Sandwich Mktg. & Sales Practices Litig., 869 F.3d 551 (7th Cir. 2017).

But this appeal is different. It does not concern the class settlement itself, but rather what happened after the district court approved the settlement. Frank characterizes it as “objector blackmail”: an absent class member objects to a settlement with no intention of improving the settlement for the class. Instead, the objector files her objection, appeals, and pockets a side payment in exchange for voluntarily dismissing the appeal. A potential benefit for the class—a better settlement—is leveraged for a purely personal gain—a side bargain. Although Rule 23 may change at the end of this year, if Congress allows some proposed amendments to go into effect, up until now the federal rules have not had any provision targeted at side settlements reached on appeal. Proposed Amendments to the Federal Rules of Civil Procedure, Rules 5, 23, 62, and 65.1, Slip Order at *9–15 (U.S. Apr. 26, 2018), https://www.supremecourt.gov/orders/courtorders/frcv18_5924.pdf.

In this case, three objectors voluntarily dismissed their appeals before appellate briefing began. Frank suspects that they acted in bad faith. He hoped to bring the issue to the district court’s attention, but he was stymied because final judgment had already been entered with prejudice. Frank moved for a limited reopening of the case, but the district court denied that motion. Because the motion should have been granted and Frank allowed to pursue his theory, we reverse.

Reversed and Remanded

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.

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