Class Action Settlements and Bad Faith Objectors: A Plague on Both Our Houses

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Class actions often end in settlement for myriad reasons. The exposure for a defendant company or government is usually substantial. Often the conduct was accidental and the entity wants to make it right. Sometimes the company is publicly traded and litigation exposure will affect their stock price.

These cases are regularly worth millions of dollars to the class, the defendant and plaintiffs’ counsel. Is there insurance coverage for any of this? What should be the minimum payout of claims/ maximum all-in for the defendant? What should the notice plan look like? If the claims rate is low, do you proportionately pay more to each class member? Does the money revert back to the company or go to cy pres? If we don’t have their contact information, should there be a claims process? What records would the class member be required to submit to make a claim? What are the timelines for all of these procedures?

The answer to all of these questions, and dozens of others, are on the table as negotiation chips. All the while, everyone is obligated under the law to protect both the present and absent class members. All of this is done in good faith, arms-length negotiations. It is always zealous and often heated advocacy.

Enter the objectors. The law allows people whose rights will be affected by the classwide settlement to object. This was intended to protect all interested parties if they had concerns. There are four general types of objectors – another attorney with a competing case, a political zealot, an honest objector who has legitimate concerns (the rarest objector). But we will only be addressing the most common type – the bad faith objector – who is, without question, a plague on both the plaintiffs’ bar and defense bar.

The bad faith objector takes this mechanism of objection and uses it as a tool to extort money from the settling parties. One key to the objection mechanism is that a denial of an objection is immediately appealable. Practically speaking, if someone objects to a settlement and threatens to immediately appeal any denial, they are holding the settlement hostage for the months and years long appellate process. The only way they go away is with a payoff. Oft en these are the same people over and over again, serially objecting. They troll for class action settlements, figure out a way to object, and hold the settlement hostage for a payoff. It is (barely) legal extortion.

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The plaintiffs’ bar and defense bar both find these bad faith objectors to be not just annoying, but illegitimate. Both sides fight, advocate and negotiate for months over the amount and structure of a settlement, only to have a bad faith objector swoop in at the last second and grind the process to a screeching halt.

Fortunately, this issue has come up frequently enough that it is now being taken seriously by the courts, state bar ethics committees, the Advisory Committee on Civil Rules, and class action attorneys.

Serial objectors now face sanctions by the courts. There have been numerous instances across the country where a baseless objection has been held sanctionable under civil rule 11. Courts have been reluctant in the past, but are now starting to hold accountable these bad faith objectors given how prevalent they are. There have likewise been findings of ethics violations for bad faith objections. An attorney, as a member of the bar, has an ethical obligation to act in good faith and not to file anything for any improper purpose.

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Moreover, there have been proposed changes to the civil rules themselves. These proposed rule changes would increase the pleading requirements for objections on the issues of specificity and applicability, and, importantly, would require the objector to disclose how many times he or she has objected to class actions in the past. Doing this could head off bad faith objectors.

Finally, class action attorneys are beginning to fight back. In the most dramatic example, aft er being shaken down for a six-figure payoff by bad faith objectors, a national powerhouse plaintiffs’ firm filed a civil RICO case against the objectors. While this litigation is still ongoing, drawing a line in the sand and exposing these objectors to that kind of liability could potentially deter these bad faith objections in a very real way.

When parties come together to settle litigation, it is a rare and often proper resolution. When objectors interlope at the last second in search of an unearned payout, it not only angers the defendant entity and plaintiffs’ counsel, it undermines our faith in the judicial system. Thankfully, there is now an emerging multi-pronged attack on these bad faith objectors in a long-overdue attempt to obviate this clear abuse of process. Hopefully soon we will be able to lift the plague on both our houses. Patrick J. Brickman

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