Third Circuit Tightens Requirements for Adequacy of Class Representation

Contributed by Jesse Morris

A recent opinion from the Third Circuit – in the case Dewey v. Volkswagen – held that class certification and judicial approval of a class-wide settlement in a products liability case was improper because the class was divided into two recovery groups but the settlement structure did not account for the conflicts between these groups in terms of maximizing their respective recovery.

The settlement at issue provided both reimbursement for damages already sustained by a class of car owners whose cars were allegedly damaged by leaky sunroofs, and also mandated measures to be taken by defendants to mitigate against future leaks.  It additionally provided for recovery for future damage claims that could occur despite these mitigation efforts.  More specifically, the settlement laid out a structure in which the plaintiff class was divided into two groups.  The “reimbursement group” purportedly aimed to contain the largest number of those plaintiffs whose cars have already been damaged, and that group of plaintiffs would receive prioritized damage awards for qualifying damages from the $8m settlement fund.

Rather than simply defining the group as plaintiffs who already suffered damages, however, the reimbursement group was defined by the make and model of the group members’ cars and contained those plaintiffs whose cars were deemed the most likely to suffer or have suffered the largest extent of damages.  The “residual group” of class members  – those plaintiffs who own all other car models covered by the class action – would have to wait until all of the reimbursement group’s claims were processed before making their own claims on the remaining money in the settlement fund should future damages arise; in anticipation of the possibility that the settlement fund would by that time be running low, the residual group’s damages were to be awarded on a pro rata basis.  The entire class would equally benefit from the mitigation measures with respect to future leaks.  As the Third Circuit pointed out, the reimbursement group was drawn in such a way as to capture all of the class representatives, and this is arguably not a coincidence.

The Third Circuit appeal was based on the claim that the class representatives could not have adequately represented the interests of the entire class in reaching this settlement agreement, but instead clearly prioritized their own interests.  The Third Circuit agreed with the appellants and found that the class was improperly certified under FRCP 23(a)(4) – which requires that “the representative parties [in a class action] . . . fairly and adequately protect the interests of the class”- and thereby reversed the district court’s order of class certification and remanded.  The Third Circuit held – citing back to its own previous decision which was upheld by the Supreme Court in Georgine v. Amchem Prods., Inc., 83 F.3d 610 as well as the Supreme Court decision in Ortiz v. Fibreboard Corp., 527 U.S. 815 – that wherever there is a potential conflict of interest between class members in negotiating a settlement such that some class members’ ability to maximize their recovery would come at the expense of others’, certification of a single class could be found unwarranted as a matter of law and therefore an abuse of discretion by the trial court.  The Third Circuit was careful, however, in its opinion to make clear that not all potential conflicts within a class defeat the requirement of adequate representation, only ones that are fundamental to the issues of the recovery being sought in the litigation and which pit class representatives against other class members.

Notably, the settlement itself is often an indicator of whether those conflicts rise to this level of unfairness – the opinion notes that “[a]n intra-class conflict will not necessarily prevent certification if the settlement agreement contains sufficient structural protections to ensure that the interests of the class will be adequately represented despite the conflict.”  In fact, the Third Circuit went so far to say that the differences between the reimbursement and residual plaintiffs in this class alone would not have been sufficient grounds to overturn the class certification and approval of the settlement.  It is precisely because the settlement structure itself focused on dividing the class into two groups and granting one group priority access to the settlement fund over the other (with the class representatives all fell into only one group), that the representatives can be found as a matter of law to not have provided adequate representation to the class as a whole.

What is interesting about this case is that it purports to expand the scope of Amchem and prior Supreme Court holdings on this issue.  The class certification that the Third Circuit overturned was likened to the class certification overturned in Amchem, though as the Third Circuit admits, in this case “the alignment of interests is not so starkly problematic.”  In Amchem the class representatives were deemed to provide inadequate representation to the class at large because they were individuals who had already suffered an injury from the product and would not suffer any further injury in the future, while the class contained some individuals who had not yet suffered an injury and were concerned only with future claims.  In this case, however, the class representatives have both already suffered injury and are poised to continue to suffer ongoing injury from the allegedly defective part in the vehicles they continue to own (due to the defect not being safety related there is no reason why these vehicles can not continue to be used); therefore they do have overlapping interests with those class members who are concerned only with potential future injuries; this overlapping interest is common to all class members, irrespective of whether they were placed in the reimbursement group or the residual group.  Still, the Third Circuit held that the class representatives were operating under the incentive to prioritize their own recovery over the recovery of other class members in the settlement negotiations.

The implications of this opinion are twofold from the perspective of defendants to class action suits, in the product liability sphere or elsewhere: first, defendants may be able to prevent class certification due to adequacy of representation as an initial matter where they can effectively argue that there would be no way for the class to overcome its internal conflicts between class representatives other class members in any potential settlement negotiations.  More importantly, however, defendants interested in ensuring that a class settlement agreement is upheld and enforced may have a vested interest in considering whether all plaintiff class members’ interests are equally represented and accounted for in the structure of the settlement.  While these are not new issues, this case does suggest that the scope of potential objections to class certification will expand beyond that which have been clearly outlined in prior Supreme Court case law.