To Settle or Not to Settle: Eight Questions Corporate Counsel Should Ask in Evaluating Class Action Settlements

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To settle or not to settle; that is the question, right?  It is asked when you receive the demand letter threatening a class action, when the complaint is filed and served, at the initial scheduling conference, before the class certification hearing and after the class certification decision.  There is no single, right-or-wrong answer.  Your response will depend on many factors that only you, as in-house counsel, your management and, in some cases, your board of directors can answer.  But there are questions within the question that can point you to the path that may be most appropriate for your organization.  Here is a checklist of eight such questions (with additional sub-questions), some more obvious than others.

1.  What is your litigation risk?  As some courts have recognized, class actions often place undue pressure on defendants to settle unmeritorious cases because they magnify the company’s exposure in the event the plaintiff wins.  As disturbing as that reality is, it places a premium on analyzing the litigation risks at key junctures in the case.  Whether you choose to perform a formal litigation risk analysis or something more informal, you should consider your likelihood of success on dispositive motions, at class certification and at trial, and the likely financial outcome if you lose.  A thoughtful litigation risk analysis will help you place a settlement value on the case that can then be used to assess the benefits of any settlement that may be offered.  The accuracy of the analysis will depend on how much information you have.  It therefore will become more accurate as you gather more facts through your own internal investigation and discovery, and as you become more familiar with your judge and opposing counsel.

2.  What is your likely litigation expense?  This is another obvious question, although it also can be difficult to answer early in the case.  A companion question that is easy to overlook is:  what will be the legal expense of settlement?  The class action settlement process itself takes time and costs money, and some settlements can require years of additional work that should be taken into account.

3.  Will the settlement attract copy-cat lawsuits?  Sometimes settlement of a statewide class action invites additional filings in other states, greatly multiplying the company’s exposure.  If your company engaged in the same business practices in other states that are the focus of the statewide claims you are now facing, then you should consider settling on a nationwide basis, or at least make sure the attorneys’ fees award in the statewide settlement is not so rich that it will attract lawyers waiting in the wings or more filings by your current adversaries.

4.  Will the settlement buy you peace?  The answer will depend largely on how you draft the class definition and the scope of the release.  In drafting the class definition, you should ask whether it is expansive enough in time (its temporal scope) and space (its geographic scope) to include all persons who might become class members in a lawsuit involving the same or related subject matter.  In drafting the release, you should ask whether it will encompass all of the types of claims from which you reasonably may seek protection.  You also should consider including in the settlement agreement a provision that allows your company to withdraw from the settlement if a threshold percentage of class members opt out.

5.  Are you prepared to pay the price of fairness?  A class action settlement is valuable only if it is approved.  At the final fairness hearing, the trial court will have to decide whether the terms of the settlement are fair and reasonable to the class, and its determination could be overturned on appeal.  For cases in which there are no objectors, judges will make the fairness determination based only on the presentation of counsel for the settling parties.  In other cases, objectors may oppose the settlement, either because they truly believe it is unfair to class members or, all too often, because they want to hold the settlement hostage until they are paid a ransom to go away.  Even where there are no objectors, courts increasingly are taking closer looks at settlements to assess whether they treat potential class members fairly.  You and your outside counsel will want to make sure that the terms you are agreeing to will offer benefits to class members that can be defended as a fair and reasonable exchange for the rights they will be giving up by virtue of the release, viewed in light of the risks they bear of an unfavorable result if the litigation goes forward.  Happily, this is one area in which you and counsel for the settling plaintiffs have common interests, permitting what could be a helpful collaboration to craft a settlement that passes the fairness test.

6.  Can you live with the attention the settlement will receive?  There is no such thing as a private class action settlement.  The settlement agreement will be filed on the court’s docket and its fairness will be adjudicated in a public hearing.  What’s more, there will be a class notice, which may include publication in newspapers or on the Internet, and there likely will be a website describing the settlement.  If your company has public relations professionals, you may want to include them in reviewing the class notice and the notice plan, and your management and board will need to understand that the settlement could well attract attention not only from potential class members and lawyers, but also from your customers and competitors.

7.  How will the settlement affect your company’s reputation?  Will it signal to plaintiffs’ lawyers that you are an easy target, causing them to line up to bring the next lawsuit?  Or will it signal to the marketplace that yours is a responsible company that cares about its customers and is prepared to take care of them when they are harmed?  The answers to these questions will turn not only on the terms of the settlement, but also on the merits and seriousness of the claims in the underlying lawsuit.

8.  How important is it to the company to put the litigation behind it and return to business as usual?  Class litigation, like any significant litigation, can be an unwelcome distraction from the daily needs of running a business.  Some companies take a principled approach, choosing to fight rather than settle the unmeritorious case regardless of the resources and attention that defending the case may demand.  Other companies may decide that they would rather settle the matter and get on with their corporate lives, even though the case has no basis.  Each company, and each case, is different, but it is always worth considering the effects that ongoing litigation will have on the company’s operations.

Written by former litigation partner, Donald R. Frederico.