Eubank v. Pella Corp.

• Decision Date: 02 June 2014
• Docket Number: 13–2162,Nos. 13–2091,13–2133,13–2136,13–2202.,s. 13–2091
• Citation: 753 F.3d 718
• Parties: Kent EUBANK, et al., Plaintiffs–Appellants, and Leonard E. Saltzman, et al., Plaintiffs–Appellees, v. PELLA CORPORATION and Pella Windows and Doors, Inc., Defendants–Appellees. Appeals of Ron Pickering and Michael J. Schulz, Objecting class members.
• Court: U.S. Court of Appeals — Seventh Circuit

753 F.3d 718

Kent EUBANK, et al., Plaintiffs–Appellants,andLeonard E. Saltzman, et al., Plaintiffs–Appellees,

v. PELLA CORPORATION and Pella Windows and Doors, Inc., Defendants–Appellees.Appeals of Ron Pickering and Michael J. Schulz, Objecting class members.

Nos. 13–2091, 13–2133, 13–2136, 13–2162, 13–2202.

United States Court of Appeals, Seventh Circuit.

Argued April 22, 2014.

Decided June 2, 2014.

David M. Oppenheim, Anderson & Wanca, Rolling Meadows, IL, Jeffrey A. Leon, Complex Litigation Group LLC, Highland Park, IL, Hall Adams, III, Law Offices of Hall Adams LLC, Chicago, IL, John Jacob Pentz, III, Sudbury, MA, for Plaintiffs–Appellees.

Aaron D. Van Oort, Faegre Baker Daniels LLP, Minneapolis, MN, John Allen Roberts, Edwards Wildman Palmer LLP, Chicago, IL, for Defendants–Appellees.

Theodore H. Frank, Washington, DC, Peter F. Higgins, Lipkin & Higgins, Chicago, IL, Joseph Darrell Palmer, Law Office of Darrell Palmer, Carlsbad, CA, for Appellant.

Before POSNER, WILLIAMS, and TINDER, Circuit Judges.

POSNER, Circuit Judge.

The class action is an ingenious procedural innovation that enables persons who have suffered a wrongful injury, but are too numerous for joinder of their claims alleging the same wrong committed by the same defendant or defendants to be feasible, to obtain relief as a group, a class as it is called. The device is especially important when each claim is too small to justify the expense of a separate suit, so that without a class action there would be no relief, however meritorious the claims. Normally only a few of the claimants are named as plaintiffs (sometimes only one, though there are several in this case). The named plaintiffs are the representatives of the class—fiduciaries of its members—and therefore charged with monitoring the lawyers who prosecute the case on behalf of the class (class counsel). They receive modest compensation, in addition to their damages as class members, for their normally quite limited services—often little more than sitting for a deposition—as class representatives. Invariably they are selected by class counsel, who as a practical matter control the litigation by the class. The selection of the class representatives by class counsel inevitably dilutes their fiduciary commitment.

The class action is a worthwhile supplement to conventional litigation procedure, David L. Shapiro, “Class Actions: The Class As Party and Client,” 73 Notre Dame L.Rev. 913, 923–24 (1998); Arthur R. Miller, “Of Frankenstein Monsters and Shining Knights: Myth, Reality, and the ‘Class Action Problem’,” 92 Harv. L.Rev. 664, 666–68 (1979), but it is controversial and embattled, see Robert H. Klonoff, “The Decline of Class Actions,” 90 Wash. U.L.Rev. 729, 731–33 (2013), in part because it is frequently abused. Martin H. Redish, Wholesale Justice: Constitutional Democracy and the Problem of the Class Action Lawsuit 1–2 (2009); Jonathan R. Macey & Geoffrey P. Miller, “The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform,” 58 U. Chi. L.Rev. 1, 3–4 (1991); John C. Coffee, Jr., “Rethinking the Class Action: A Policy Primer on Reform,” 62 Ind. L.J. 625, 627 (1987). The control of the class over its lawyers usually is attenuated, often to the point of nonexistence. Except for the named plaintiffs, the members of the class are more like beneficiaries than like parties; for although they are authorized to appeal from an adverse judgment, Smith v. Bayer Corp., ––– U.S. ––––, 131 S.Ct. 2368, 2379, 180 L.Ed.2d 341 (2011); Devlin v. Scardelletti, 536 U.S. 1, 9–10, 122 S.Ct. 2005, 153 L.Ed.2d 27 (2002), they have no control over class counsel. In principle the named plaintiffs do have that control, but as we've already hinted this is rarely true in practice. Class actions are the brainchildren of the lawyers who specialize in prosecuting such actions, and in picking class representatives they have no incentive to select persons capable or desirous of monitoring the lawyers' conduct of the litigation.

A high percentage of lawsuits is settled—but a study of certified class actions in federal court in a two-year period (2005 to 2007) found that all 30 such actions had been settled. Emery G. Lee III et al., “Impact of the Class Action Fairness Act on the Federal Courts” 2, 11 (Federal Judicial Center 2008). The reasons that class actions invariably are settled are twofold. Aggregating a great many claims (sometimes tens or even hundreds of thousands—occasionally millions) often creates a potential liability so great that the defendant is unwilling to bear the risk, even if it is only a small probability, of an adverse judgment. At the same time, class counsel, un-governed as a practical matter by either the named plaintiffs or the other members of the class, have an opportunity to maximize their attorneys' fees—which (besides other expenses) are all they can get from the class action—at the expense of the class. The defendant cares only about the size of the settlement, not how it is divided between attorneys' fees and compensation for the class. From the selfish standpoint of class counsel and the defendant, therefore, the optimal settlement is one modest in overall amount but heavily tilted toward attorneys' fees. As we said in Creative Montessori Learning Centers v. Ashford Gear LLC, 662 F.3d 913, 918 (7th Cir.2011), “we and other courts have often remarked the incentive of class counsel, in complicity with the defendant's counsel, to sell out the class by agreeing with the defendant to recommend that the judge approve a settlement involving a meager recovery for the class but generous compensation for the lawyers—the deal that promotes the self-interest of both class counsel and the defendant and is therefore optimal from the standpoint of their private interests. Reynolds v. Beneficial National Bank, [288 F.3d 277, 279 (7th Cir.2002) ]; Culver v. City of Milwaukee, [277 F.3d 908, 910 (7th Cir.2002) ]; Greisz v. Household Bank (Illinois), N.A., 176 F.3d 1012, 1013 (7th Cir.1999); Duhaime v. John Hancock Mutual Life Ins. Co., 183 F.3d 1, 7 (1st Cir.1999); In re General Motors Corp. Pick–Up Truck Fuel Tank Products Liability Litigation, 55 F.3d 768, 805 (3d Cir.1995); Plummer v. Chemical Bank, 668 F.2d 654, 658 (2d Cir.1982).”

Fortunately the settlement, including the amount of attorneys' fees to award to class counsel, must be approved by the district judge presiding over the case; unfortunately American judges are accustomed to presiding over adversary proceedings. They expect the clash of the adversaries to generate the information that the judge needs to decide the case. And so when a judge is being urged by both adversaries to approve the class-action settlement that they've negotiated, he's at a disadvantage in evaluating the fairness of the settlement to the class. In re General Motors Corp. Pick–Up Truck Fuel Tank Products Liability Litigation, supra, 55 F.3d at 789–90; Redish, supra, at 188.

Enter the objectors. Members of the class who smell a rat can object to approval of the settlement. See, e.g., Reynolds v. Beneficial National Bank, supra, 288 F.3d at 287–88; Edward Brunet, “Class Action Objectors: Extortionist Free Riders or Fairness Guarantors,” 2003 U. Chi. Legal F. 403, 411–12. If their objections persuade the judge to disapprove it, and as a consequence a settlement more favorable to the class is negotiated and approved, the objectors will receive a cash award that can be substantial, as in In re Trans Union Corp. Privacy Litigation, 629 F.3d 741 (7th Cir.2011).

In this case, despite the presence of objectors, the district court approved a class action settlement that is inequitable—even scandalous. The case underscores the importance both of objectors (for they are the appellants in this case—without them there would have been no appellate challenge to the settlement) and of intense judicial scrutiny of proposed class action settlements.

The suit was filed in the summer of 2006, almost eight years ago. Federal jurisdiction was based on the Class Action Fairness Act's grant of federal jurisdiction over class actions in which there is at least minimal (as distinct from complete) diversity of citizenship. 28 U.S.C. § 1332(d)(2)(A). The defendants are Pella Corporation and an affiliate that we can ignore. Pella is a leading manufacturer of windows. The suit alleges that its “Proline Series” casement windows (a casement window is a window attached to its frame by hinges at the side) manufactured and sold between 1991 and 2006 had a design defect that allowed water to enter behind the window's exterior aluminum cladding and cause damage to the window's wooden frame and to the house itself. Pella's sale of the defective windows is alleged to have violated the product-liability and consumer-protection laws of a number of states in which the windows were sold.

The district judge certified two separate classes: one for customers who had already replaced or repaired their defective windows, the other for those who hadn't. The latter class sought only declaratory relief and so was nationwide, but the former sought damages and was limited to customers in six states, with a separate subclass for each state. We upheld the certifications over Pella's objections in Pella Corp. v. Saltzman, 606 F.3d 391 (7th Cir.2010) (per curiam).

Class counsel negotiated a settlement of the class action with Pella in the fall of 2011. The district judge gave final approval to the settlement in 2013, precipitating the objectors' appeals. The settlement agreement ignores the certification of the two classes and purports to bind a single nationwide class consisting of all owners of Pella Proline windows containing the defect, whether or not the owners have already replaced or repaired the windows. This provision is the first of many red flags that the judge failed to see: “the adversity among subgroups requires that the...