Class Action – Objector Blackmail

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7^th Circuit Court of Appeals

Case Name: Nick Pearson, et al., v. Target Corp., et al.,

Case No.: 19-3095

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

Focus: Class Action – Objector Blackmail

We address here a recurring problem in class-action litigation known colloquially as “objector blackmail.” The scenario is familiar to class-action litigators on both offense and defense. A plaintiff class and a defendant submit a proposed settlement for approval by the district court. A few class members object to the settlement but the court approves it as fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e)(2). The objectors then file appeals. As it turns out, though, they are willing to abandon their appeals in return for sizable side payments that do not benefit the plaintiff class: a figurative “blackmail” by selfish holdouts threatening to disrupt collective action unless they are paid off. See Brian T. Fitzpatrick, The End of Objector Blackmail?, 62 Vand. L. Rev. 1623, 1624 (2009).

That’s what happened here. Three objectors appealed the denial of their objections to a class action settlement and then dismissed their appeals in exchange for side payments. The last time this case was here, we called such “selfish” objector settlements “a serious problem.” Pearson v. Target Corp., 893 F.3d 980, 986 (7th Cir. 2018) (Pearson II). The question before us now is whether, on motion of another class member, the district court had the equitable power to remedy the problem by ordering the settling objectors to disgorge for the benefit of the class the proceeds of their private settlements. The district court held that it did not, finding that the objectors had not intended or committed an illegal act nor taken money out of the common fund.

We reverse. Falsely flying the class’s colors, these three objectors extracted $130,000 in what economists would call rents from the litigation process simply by showing up and objecting to consummation of the settlement to slow things down until they were paid. We hold that settling an objection that asserts the class’s rights in return for a private payment to the objector is inequitable and that disgorgement is the most appropriate remedy. Objectors who settle their objections for amounts in excess of their shares as class members are, in essence, “not paid for anything they owned.” Young v. Higbee Co., 324 U.S. 204, 213 (1945) (reversing denial of remedy in comparable private settlement of class-based objections). The objectors’ settlement proceeds here belonged in equity and good conscience (ex aequo et bono, according to the old formula) to the class and ought to be disgorged. We therefore reverse the district court’s order denying disgorgement and remand for further proceedings.

Reversed and remanded

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.