Preventing Collusion between Plaintiff and Defense Lawyers

When a class action is settled, class members accept the benefits of the settlement while giving up any legal claims they may otherwise have against the defendant. When the class members’ claims are for money-damages, the rule of civil procedure require that prospective class members must be given the opportunity to opt out of the class to pursue their individual claims independently. This opt-out requirement is a barrier to collusion between defendants and class counsel, who could negotiate a low per-member monetary (or coupon) award in exchange for extinguishing the claims of a large number of people.

An exception to this general rule exists, however, when the claim is not for money but rather for declaratory or injunctive relief—in other words, that the defendant do or stop doing something. In that case, individual class members would have no need to pursue a separate claim for personalized relief. Put simply, in a case seeking an injunction, there’s no possibility that a different attorney would be able to get any one class member more stuff—because there’s no money or other goodies to be gotten anyway.

This commonsense reasoning for the exception to the opt-out requirement breaks down, however, when a case involves both injunctive and monetary relief. Denying an opt-out mechanism in these cases is not only illogical, but depriving class members of their money-damages claims without an opportunity to opt out of the class violates the constitutional rights of absent class members. Specifically, the Fifth Amendment’s Due Process Clause protects class members’ rights to remove themselves from the class, pursue separate claims against the defendant, and be represented by their counsel of choice. The Supreme Court has said that “due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court.” Phillips Petroleum Co. v. Shutts (1985).

While the right to opt out of the class alone is insufficient to prevent self-dealing by—and collusion between—class counsel and defendants, it gives class members the final word on whether a settlement sufficiently compensates them for surrendering their legal claims. Despite all this, the Richmond-based U.S. Court of Appeals for the Fourth Circuit recently upheld a settlement certification without opt-out in a case that originally made claims only for monetary relief, Schulman v. LexisNexis.

The statute under which the class sought relief, the Fair Credit Reporting Act, provides for money-damages remedies only, not for injunctive relief. Nevertheless, the settlement reached by class counsel and defendants would extinguish class members’ money-damages claims while awarding them merely the defendants’ agreement forever to cease harmful actions. Moreover, the court certified the settlement without requiring that class members receive notice and opportunity to opt out precisely because the settlement provides for no monetary relief. If allowed to stand, this precedent will be a wink and a nod to class counsel and defendants everywhere that, if sufficient care is taken in crafting a settlement, they need not worry about the rights and interests of those pesky class members.

Cato has filed an amicus brief urging the Supreme Court to review Schulman and ensure that the due process rights of class members are protected nationwide.