Objectors to class action settlements: Watchdogs or scum of the earth?
Class action lawsuit: three little words that can drive the most adversarial attorneys and corporate defense lawyers to the bargaining table. Insurance companies are no strangers to the class action process. Millions, perhaps billions, of dollars, corporate reputations, and the compensation of thousands of customers can be at stake, making it no small wonder that most class action lawsuits against insurance companies are settled before they go to trial.
After a deal between the insurer and the class is hammered out, but before attorneys for the class and defense part ways and consumers get their settlement reimbursement, the settlement must be approved by the court at a fairness hearing. By design, the fairness hearing allows anyone — with or without a financial stake in the settlement agreement — to air concerns about the deal before the court. Those who have gripes about the settlement are known as "objectors."
|Objectors are an integral, if controversial, part of the class action settlement process.|
Some objectors might improve the class action settlement — lawyers with clients who have a legitimate gripe with the settlement, for example. Some might be lawyers who, on behalf of consumer groups, object to the amount of money the plaintiff class lawyers receive as their fees for the settlement (a.k.a. ideological objectors). And some might be lawyers whose interests are propelled by the hope of a cash payoff, known in some legal circles as "professional" objectors. In any case, objectors are an integral, if controversial, part of the class action settlement process.
"Nobody likes to get shaken down"
Objectors can hold up the acceptance of the settlement by the court, in some cases with due cause. Objectors will often point out real deficiencies in the settlement, such as objecting to a settlement notice written in English that's sent to a predominantly Spanish-speaking class. Under these circumstances, the objector will suggest an alternative — making English and Spanish versions of the settlement notice available to the class — and force the settlement back to the bargaining table, delaying the lawsuit's resolution by weeks. Lawyers on both sides can usually tolerate a delay when an objector adds value to the settlement.
|Professional objectors are treated "like the scum of the earth."|
Few attorneys, however, can tolerate the "professional" objector. Professional objectors are treated "like the scum of the earth" in many legal circles, says Samuel Issacharoff, a Columbia Law School professor and expert on class actions. "Nobody likes to get shaken down," he says.
Issacharoff says that a professional objector is an extortionist whose only aim is to hijack the final settlement agreement. He says some objectors issue a clandestine (or sometimes not-so-clandestine) demand for payment in exchange for dropping their gripe.
"The objector has a great deal of leverage because no finality can be reached until the objections are resolved," says Issacharoff. For example, one lawyer who objected to the $150 million Jordan vs. State Farm class action settlement, approved in February 1999, actually sent a letter to the plaintiff class attorneys offering to drop his objection in exchange for a $1 million payment. That objector didn't get paid $1 million, but "there's very strong incentive to make objectors go away," says Issacharoff. "And normally the plaintiff class lawyers have to give up money to the objector."
"No good comes from the professional objector," warns Michael Hyman, attorney with Chicago-based Much Shelist Freed Denenberg Ament & Rubenstein P.C., and co-counsel for the plaintiffs in the Snider vs. State Farm auto-parts class action lawsuit, decided in October 1999. "They are a form of anticonsumerism. All they do is add expense and delay, and typically they're a nuisance to plaintiff lawyers, defendants, and the court," he says.
Hyman points to the Prudential class action settlement as an example of the detrimental effect of objectors. A settlement in the Prudential class action was originally reached in September 1997 but was not approved until January 1999. An objector, Michael Malakoff of Pittsburgh-based Malakoff, Doyle & Finberg P.C., was sanctioned by U.S. District Court Judge Alfred M. Wolin for unduly delaying the plaintiff lawyers' payday. Malakoff's objection forced plaintiff attorneys from New York-based Milberg Weiss Bershad Haynes & Lerach LLP to wait more than two years for half of their $90 million fee. Malakoff did not hold up the reimbursement to the class itself; that was delayed by Prudential.
How to hijack an insurance class action settlement
Some of the most common objections
"I've been involved in several settlements in which objectors have come in and held the settlements hostage until their demands are met," says Elizabeth Cabraser, attorney with San Francisco-based Lieff, Cabraser, Heimann & Bernstein LLP, and co-chair of the American Bar Association's (ABA) class actions and derivative suits committee. "'Extortionist' is sometimes the most appropriate word for professional objectors," she says. (The ABA has no official position on objector involvement in class actions.)
Typically, professional objectors are not interested in dragging out the process for long. Issacharoff says professional objectors are interested in a payoff, often using the threat of an appeal of the settlement as leverage. That threat allows professional objectors to siphon money from the settlement's general fund, diminishing the final amount distributed to the class members and plaintiff attorneys.
Objectors could take 1 percent to 3 percent of the plaintiff attorneys' fees. And considering more than one objector is paid in a high-profile class action case — such as the Prudential class action — that 3 percent can add up to big bucks.
Here's the math in a hypothetical situation. Say Law Firm A, the plaintiffs' counsel, is paid $90 million for its services in a class action settlement. Say three objectors propose changes to the settlement and those changes are approved by the class' and defendant's attorneys and the court. Those objectors just earned themselves compensation for their "services." Law Firm A then agrees to pay each objector 3 percent of its fees. That's a grand total of 9 percent out of the plaintiff attorneys' fees: a hefty $8.1 million.
Objectors' fees are rarely taken directly out of the plaintiff class' reimbursement fund but, indirectly, they raise the cost of doing "class action business" for plaintiff attorneys and defendants. Plaintiff lawyers will often build in to their fees the estimated cost of objectors. Defendants usually set aside a certain amount of money to pay for litigation, including the plaintiff attorneys' fees. So, theoretically, the more a defendant spends on plaintiff lawyers, the less money there is for the class. "It's like a small incremental tax, a rake on consumer recovery," says Issacharoff.
Maybe you as a class member can live with a tariff on the settlement, but how do you feel about a one- to two-year delay between the initial settlement agreement and when you actually get your compensation? If a zealous — some might say overzealous — objector appeals the settlement, years can pass before a resolution is reached.
"An objector in one case in which I was involved held up the initial settlement of a class action, which put in motion a chain of events that had people fighting over the settlement for seven years," says Cabraser.