Summary
The Second Circuit vacated and remanded a district court's approval of a class action settlement concerning falsely advertised flushable wipes. The appellate court clarified that Federal Rule of Civil Procedure 23(e)(2)(C)(iii) requires district courts to perform a proportionality analysis comparing the allocation of total recovery between class counsel and the class, irrespective of whether the settlement uses segregated funds. The court explicitly declined to determine whether the underlying settlement was ultimately fair.
Topics
Practice areas
Questions Presented
- Whether Federal Rule of Civil Procedure 23(e)(2)(C)(iii) requires a district court reviewing the fairness of a class action settlement to compare the proportion of total recovery allocated to class counsel with the proportion allocated to the class, even when attorney's fees and class compensation are paid from separate funds.
- Whether the district court's separate analysis under Rule 23(h) satisfied its independent obligation under Rule 23(e) to evaluate the allocation of recovery between attorney's fees and class relief.
- Whether the settlement itself was unfair and should be rejected.
Holdings
- Rule 23(e)(2)(C)(iii) requires a district court evaluating the fairness of a class action settlement to compare the proportion of total recovery allocated to attorney's fees with the proportion allocated to the class, regardless of whether the settlement uses separate funds for fees and class compensation.
- The use of separate funds for attorney's fees and class recovery may be relevant to settlement fairness but does not replace the proportionality analysis required by Rule 23(e)(2)(C)(iii).
- A district court's analysis under Rule 23(h) does not satisfy its separate obligation under Rule 23(e) to examine the comparative allocation of attorney's fees and class relief.
- The selection of the actual, hypothetical maximum, or predicted class recovery as the benchmark for comparing attorney's fees is a fact-bound determination committed to the district court's discretion, so long as the court compares fees with the relief provided to the class.
Key quotations
“Today, we clarify that this tandem analysis of class relief and attorney’s fees requires courts to compare the proportion of total recovery allocated to the class to the proportion of total recovery allocated to class counsel.” (142 F.4th at 113)
“For the reasons we explain below, regardless of whether a settlement is structured as two separate funds, Rule 23(e) requires courts to consider the allocation of recovery between class counsel and the class before approving a settlement.” (142 F.4th at 117)
“We conclude that Rule 23(e) directs courts to compare the proportion of the total recovery going to attorney’s fees with the proportion going to the class, and to consider whether that comparison reveals a sufficient imbalance as to cast doubt on the settlement’s fairness.” (142 F.4th at 121)
“Although a defendant’s separate funds for attorney’s fees and class recovery may be a relevant consideration in assessing a settlement’s fairness, it is not a replacement for the proportionality analysis required by Rule 23(e)(2)(C)(iii).” (142 F.4th at 123)
“Rule 23(h) and Rule 23(e) are distinct rules with distinct purposes, and analyses conducted under one cannot suffice to satisfy the other.” (142 F.4th at 124)
Factual background
Plaintiffs brought class actions alleging that Kimberly-Clark falsely advertised moist bathroom wipes as flushable, causing purchasers to pay a price premium and potentially suffer plumbing damage. The parties settled for up to $20 million in class compensation, with a separate provision for up to $4.1 million in attorney's fees and expenses. Class members ultimately claimed slightly less than $1 million, while the district court approved approximately $3.1 million in attorney's fees and approved the settlement without comparing the relative allocations to the class and class counsel.
Procedural history
The district court preliminarily and finally approved a settlement concerning allegedly falsely advertised flushable wipes, then approved the settlement again after reconsidering it in light of Moses v. New York Times Co. The district court separately awarded class counsel approximately $3.1 million in fees, although the fee award itself was not before the court of appeals. Frank appealed the settlement approval, and the Second Circuit vacated and remanded because the district court applied an incorrect legal standard under Rule 23(e).
Remand instructions
The district court must reevaluate the settlement under Rule 23(e), including a comparison of the proportion of total recovery allocated to attorney's fees with the proportion allocated to the class, and then determine in the first instance whether the settlement is fair.