Sullivan v. DB Investments, Inc., 667 F.3d 273 (3d Cir. 2011). By a 7-2 vote, the Third Circuit, sitting en banc, disagreed with a panel decision (613 F.3d 134 (3d Cir. 2010)), vacated by the grant of en banc review) that had voided approval of this major class action case. The majority opinion was written by Judge Rendell, who had dissented from the panel opinion. Judge Scirica filed a concurring opinion, while Judge Jordan, the author of the panel decision (he was joined by a district judge, who was sitting by designation), joined by Judge Smith, dissented.
The several opinions consume 171 pages. In summary, however, the panel opinion had voided the settlement approval on the ground that the district judge should not have certified a settlement class. That was because, in this antitrust context, some state laws permit suits by indirect purchasers while others do not. As a result, under the settlement, some settlement class members had no valid claims by virtue of the laws of their states. The panel found a settlement class that includes persons without any valid claims to be improper.
The en banc court disagreed. “At bottom, we can find no persuasive authority for deeming the certification of a class for settlement purposes improper based on differences in state law.” The notion that all class members must have valid claims was misplaced. “An analysis of the legal viability of asserted claims is properly considered through a motion to dismiss under Rule 12(b) or summary judgment pursuant to Rule 56, not as part of a Rule 23 certification process.” And, because statutory standing, unlike constitutional standing, is not jurisdictional, there was no jurisdictional basis for rejecting class certification.
Judge Rendell and the majority also pointed to practical considerations. Parties may agree to settle cases even if plaintiffs have no valid claim, “to achieve ‘global peace’ by obtaining releases from all those who might wish to assert claims, meritorious or not.” The panel opinion would improperly have foreclosed that right. If parties could not obtain “global peace,” the strong presumption in favor of voluntary settlement agreements” would be thwarted, since parties would not be willing to settle cases if a significant subset of plaintiffs could bring a new suit on the same conduct.
Because the panel opinion had voided the settlement based on perceived flaws in the certified settlement class, the panel did not reach the objectors’ complaints about the merits of the settlement. In a painstaking analysis, Judge Rendell reviewed each of the relevant factors of Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975), and concluded that the settlement was fair, reasonable and adequate. Among other things, the majority held that settlement of a case in which treble damages might have been obtained at trial need not be compared to a treble damages recovery even though that might be the “best possible recovery.” There has been something of a split in authority on that issue, though the greater number of cases, and the better reasoned ones, have agreed with the majority’s conclusion here.
Judge Rendell also rejected objections to the attorneys’ fee award of 25% of the fund. The majority found that the district court had properly applied the relevant factors, contained in Gunter v. Ridgewood Energy, 223 F.3d 190 (3d Cir. 2000), and In re Prudential, 148 F.3d 283 (3d Cir. 1998).
This opinion will have great impact on many issues, including a number of questions not discussed in this post. It is well worth a careful reading (even better, more than one careful reading) by any attorney who represents anyone in connection with class actions.
The majority’s ruling was the correct one. As Judge Rendell stated, Rule 23 does not incorporate a “failure to state a claim” component. The practical considerations of allowing parties to settle even claims that may not be valid, in order to achieve “global peace” confirm the rightness of the majority’s result. The parties should be allowed to craft their settlements as they see fit, provided that such settlements are fair, reasonable and adequate on their merits.