609 F.3d 590 (3rd Cir. 2010), 08-4323, Ehrheart v. Verizon Wireless
|Citation:||609 F.3d 590|
|Opinion Judge:||NYGAARD, Circuit Judge.|
|Party Name:||Nicole EHRHEART; John J. Garland, Individually and on behalf of all others similarly situated v. VERIZON WIRELESS; Does 1 Through 10 inclusive; Verizon Wireless Services, LLC; Cellco Partnership d/b/a Verizon Wireless Nichol Ehrheart and John Garland, Appellants.|
|Attorney:||Gary F. Lynch, Esq., (Argued), R. Bruce Carlson, Esq., Carlson Lynch, New Castle, PA, for Appellant, Ehrheart. Justin S. Gilbert, Esq., Gilbert Russell & McWherter, Jackson, TN, for Appellant, Garland. Michael A. Carvin, Esq., (Argued), Noel J. Francisco, Esq., John M. Gore, Esq., Washington, DC,...|
|Judge Panel:||Before SMITH, FISHER, and NYGAARD, Circuit Judges. SMITH, Circuit Judge, dissenting.|
|Case Date:||June 15, 2010|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued Oct. 29, 2009.
[Copyrighted Material Omitted]
We focus in this appeal on the parameters of a district court's role in reviewing class action settlements. The factual and procedural background is straightforward. The Fair and Accurate Credit Transaction Act (FACTA), 15 U.S.C. § 1681 et seq., prohibits a seller from printing a receipt that displays more than the last five digits of a buyer's credit or debit card and/or the expiration date of the credit or debit card. 15 U.S.C. § 1681c(g)(1). The Appellants claimed that Verizon Wireless violated these provisions and filed a class action lawsuit against the company.
The parties participated in court-ordered mediation, starting in January of 2008. During this time, legislation was pending before Congress-the Credit and Debit Card Receipt Clarification Act of 2007, 15 U.S.C. § 1681n(d)-which would amend FACTA by eliminating the Appellants' cause of action. After completing mediation, the parties arrived at a settlement which they submitted to the District Court for approval pursuant to FED.R.CIV.P. 23(e) on April 22, 2008. The District Court entered a preliminary order approving the settlement two days later.
The Clarification Act was signed into law by President Bush on June 3, 2008. Six days later, Verizon filed a motion asking the District Court to vacate its order granting preliminary approval to the settlement. The District Court granted this motion.1 Verizon then moved for a judgment on the pleadings, which was granted on September 25, 2008. We will reverse.
Federal Rule of Civil Procedure 23(e) requires a district court to approve any settlement of a certified class before the settlement becomes final. In evaluating a class action settlement under Rule 23(e), a district court determines whether the settlement is fundamentally fair, reasonable, and adequate. Id. The purpose of
Rule 23(e) is to protect the unnamed members of the class from unjust or unfair settlements. See In re AT & T Corp., 455 F.3d 160, 175 (3d Cir.2006) (quoting In re Cendant Corp. Litig., 264 F.3d 201, 231 (3d Cir.2001)). Here, the District Court never considered whether to approve the settlement because, citing the Clarification Act, the court vacated its preliminary approval.
In vacating its order granting preliminary approval to the settlement, the District Court lost sight of three important points that guide our decision today. First, there is a restricted, tightly focused role that Rule 23 prescribes for district courts, requiring them to act as fiduciaries for the absent class members, but that does not vest them with broad powers to intrude upon the parties' bargain. Second, a strong public policy exists, which is particularly muscular in class action suits, favoring settlement of disputes, finality of judgments and the termination of litigation. Third, our jurisprudence holds that changes in the law after a settlement is reached do not provide ground for rescission of the settlement.2
A. Appropriate Role of the District Court
Under FED.R.CIV.P. 23(e), a district court's primary role is to determine whether the settlement is fundamentally fair, reasonable and adequate. In re Ins. Brokerage Antitrust Litig., 579 F.3d 241, 258 (3d Cir.2009). The purpose of Rule 23(e) is to protect the unnamed members of the class. In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 534 (3d Cir.2004). Under Rule 23(e), a district court acts as a fiduciary, guarding the claims and rights of the absent class members. In re AT & T, 455 F.3d at 175 (citing In re Cendant Corp. Litig., 264 F.3d at 231); see also, In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liability Litig., 55 F.3d 768, 782 (3d Cir.1995).
The requirement that a district court review and approve a class action settlement before it binds all class members does not affect the binding nature of the parties' underlying agreement. In re Syncor ERISA Litig., 516 F.3d 1095, 1100 (9th Cir.2008). Put another way, judicial approval of a class action settlement is a condition subsequent to the contract and does not affect the legality of the proposed settlement agreement. Collins v. Thompson, 679 F.2d 168, 172 (9th Cir.1982). A district court is not a party to the settlement, nor may it modify the terms of a voluntary settlement agreement between parties. In Evans v. Jeff D., 475 U.S. 717, 106 S.Ct. 1531, 89 L.Ed.2d 747 (1986), the Supreme Court explained the role of a district court in reviewing settlements in class actions:
Rule 23(e) wisely requires court approval of the terms of any settlement of a class action, but the power to approve or reject a settlement negotiated by the parties before trial does not authorize the court to require the parties to accept a settlement to which they have not agreed.
Id. at 726-27, 106 S.Ct. 1531 (footnotes omitted). Similarly, our role as an appellate court is to ascertain whether or not the trial judge clearly abused his or her discretion in approving or rejecting a settlement agreement. See GM Truck, 55 F.3d at 782; Cotton v. Hinton, 559 F.2d 1326, 1333 (5th Cir.1977).
We have no doubt that the settlement agreement reached in this case is a binding and enforceable contract under general principles of contract interpretation. The settlement agreement was negotiated through and executed by experienced counsel on both sides, following mediation with a well-respected and experienced mediator. The parties acknowledged to the District Court that the agreement was negotiated in good faith and at arm's length. Verizon admits no wrongdoing in the settlement agreement and denies all liability, but agreed to the settlement after taking into account the uncertainty and risks inherent in any litigation, especially in multi-party cases like this litigation.
Post-settlement, Verizon made the argument, which was endorsed by the District Court, that a settlement agreement is not a binding contract until final judicial approval. This is incorrect. There are two steps in reaching a settlement in a class action. First, the parties reach an agreed-to settlement. Second, the District Court evaluates the agreement as a fiduciary for absent class members. In re Ins. Brokerage Antitrust Litig., 579 F.3d at 257. The reason for judicial approval is to ensure that other unrepresented parties (absent class members) and the public interest are fairly treated by the settlement reached between the class representatives and the defendants. Collins, 679 F.2d at 172. Here, the District Court's own local rules specifically establish this fiduciary relationship by requiring parties to class action settlements to give the court " sufficient information for the Court to make findings with respect to the fairness and reasonableness of the settlement to the class. " Local Rule of the United States District Court for the Western District of Pennsylvania 23(i) (emphasis added). We make clear that this fiduciary protection does not extend to defendants in a class action, who are in a position to protect their own interests during negotiations. See Ibarra v. Texas Employment Comm'n, 823 F.2d 873, 878 (5th Cir.1987).
If Verizon's argument was accepted, and the District Court's action in vacating its preliminary approval affirmed, the settlement process would become meaningless since either party to a class action settlement (or any other type of settlement that requires court approval) could back out of an agreement at any time before court approval and avoid any legal repercussions for breaching the earlier offer and acceptance. Here, the Clarification Act was pending before Congress when the parties negotiated their agreement. In negotiating this agreement, Verizon bet on the certainty of settlement instead of gambling on the uncertainties of future legislative action. Verizon lost, and the District Court erred by letting it replay its hand.
B. Presumption in Favor of Settlements
The District Court's decision also ran afoul of the strong presumption in favor of voluntary settlement agreements, which we have explicitly recognized with approval. See, e.g., Pennwalt Corp. v. Plough, 676 F.2d 77, 79-80 (3d Cir.1982). This policy is also evident in the Federal Rules of Civil Procedure and the District Court's Local Rules, which encourage facilitating the settlement of cases. See, e.g., FED.R.CIV.P. 16(a)(5) (one of the five purposes of a pretrial conference is to facilitate settlement); L.Cv.R. 16.2(B) (recognizing the burden litigation places on parties and mandating that they utilize a broad range of court-sponsored ADR processes); L.Cv.R. 23(C)(5) (including among matters to be discussed at pretrial conference the timing and plan for methods of alternative dispute resolution).
This presumption is especially strong in " class actions and other complex cases where substantial judicial...
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