General Motors Corp. Engine Interchange Litigation, In re

Decision Date26 February 1979
Docket NumberNo. 78-2036,78-2036
Citation594 F.2d 1106
Parties3 Fed. R. Evid. Serv. 992 In re GENERAL MOTORS CORPORATION ENGINE INTERCHANGE LITIGATION. Appeal of Betty OSWALD, on her own behalf and on behalf of all other persons similarly situated, and Phil Miller and Eileen Miller, on their behalf and on behalf of all other persons similarly situated, Plaintiffs-Appellants, v. GENERAL MOTORS CORPORATION, Defendant-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

William J. Harte, Chicago, Ill., of counsel, for plaintiffs-objectors Betty Oswald, Eileen Miller and Phil Miller.

Lawrence Walner, Chicago, Ill., for plaintiffs-appellants.

William J. Scott, Atty. Gen. of Illinois, Springfield, Ill., for plaintiff-appellee State of Illinois; Donald G. Mulack, Chicago, Ill., of counsel.

Charles E. Clark, Birmingham, Ala., for plaintiffs-appellees.

Thomas A. Gottschalk, Kirkland & Ellis, Chicago, Ill., for defendant-appellee.

Before FAIRCHILD, Chief Judge, and BAUER and WOOD, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

In 1976 the defendant, General Motors (GM), began substituting engines produced by its Chevrolet Division in many of the 1977 model year cars produced by its Oldsmobile Division. The discovery of the engine switch culminated in the commencement of a plethora of lawsuits against GM in the state and federal courts. The Judicial Panel on Multidistrict Litigation transferred those actions which had been filed in the federal courts to the United States District Court for the Northern District of Illinois for consolidated pretrial proceedings with several actions which were already pending there. See 28 U.S.C. § 1407. The district court certified that the actions could be maintained as a class action and later approved the settlement of the actions as to one of two subclasses of Oldsmobile purchasers.

This appeal is from the order of the district court approving the subclass settlement. Although the facts are lengthy, the litigation's history complex, and the resolution of the issues difficult, the issues may be stated with relative simplicity:

First, is the district court's order approving the subclass settlement appealable?

Second, should counsel prosecuting the appeal be limited to representing the interests of those class members who objected to the settlement before the district court?

Third, did the district court err by refusing to permit appellants' counsel to inquire into the conduct of the negotiations that led to the settlement?

Fourth, did the district court err by dismissing with prejudice the federal claims of those class members who declined to release their state law claims pursuant to the settlement agreement?

We find that this court does have jurisdiction to entertain the appeal and hold that the trial court erred in approving the subclass settlement. Consequently, we reverse and remand the order of the district court with instructions.

I. Facts
A. The Engine Interchange Litigation

Beginning in 1974, GM planners began considering the manufacturing requirements for GM cars for the 1977 model year. By 1976 various GM management committees began planning for extensive interdivisional engine exchanges. Because the Chevrolet Division had a significant surplus production capacity, GM planners decided to rely on Chevrolet produced engines to meet part of the engine requirements of GM's Buick, Oldsmobile and Pontiac Divisions.

To institute the engine interchange in the Oldsmobile Division, GM used codes to identify the different engines that would be used in its 1977 Oldsmobiles. The Rocket 350 V-8 engine produced by Oldsmobile, for example, was given the code name "L34"; the Chevrolet engine used in place of the Rocket was given the code "LM1." 1 Moreover, GM, over some objections by the Chevrolet Division, decided to adopt a common engine color for all of its engines. Thus, the distinctive red Chevrolet engine became blue. Despite the planned Oldsmobile-Chevrolet engine change, GM's advertising, EPA gas mileage disclosures and communications to Oldsmobile dealers referred to the changes by the use of the codes.

The switch from standard components to different components in Oldsmobiles was not confined to engines. GM used different components than it had used in previous years for other parts of the power train (the engine, transmission, and drive axle) in some of its Oldsmobiles. For reasons which do not appear with clarity in the record, GM decided in 1976 to install in all 1977 Oldsmobile Delta 88 coupes and sedans the THM 200 transmission instead of the THM 350, the transmission traditionally used in those cars. The THM 200, like the THM 350, is produced by GM's Turbohydramatic Division. The THM 200, originally designed for use in the subcompact Chevette, was used in all 1977 Delta 88 coupes and sedans regardless of whether they contained Oldsmobile or Chevrolet engines. The appellants maintain that GM's advertising materials nevertheless indicated that the THM 350 was standard equipment in all 1977 Deltas.

The case before this court is a subset of the Oldsmobile litigation spawned by the discovery of the engine interchange. After filing suit in the Cook County Circuit Court alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 1211/2, §§ 261-272, the Illinois Attorney General filed suit in the federal court for the Northern District of Illinois on behalf of the State of Illinois, which had purchased a 1977 Oldsmobile with a Chevrolet engine, and more than 100 other Oldsmobile purchasers. 2 The complaint alleged that the sale of the Oldsmobiles without disclosure of their engine source violated the Magnuson-Moss Act, 15 U.S.C. §§ 2301-2312, and sought certification of the action as a nationwide class action. 3 The Oswald and Miller actions were later brought to the federal district court and consolidated with the State of Illinois action before Judge McGarr. Upon GM's petition, the Judicial Panel on Multidistrict Litigation transferred seven actions then pending in other federal courts to the Northern District for consolidated pretrial proceedings. 4

On July 22, 1977, the district court entered an order adopting an agreement of the numerous counsel for the plaintiffs in the consolidated cases. The order created an executive committee of six attorneys to represent the plaintiffs in all pretrial proceedings. See generally Manual for Complex Litigation §§ 1.92-1.93. 5 Although the committee was given broad power in the pretrial proceedings, the order provided that the committee could conduct settlement negotiations only with the consent of all counsel for the named plaintiffs.

On October 13, 1977, the district court certified the consolidated cases as a class action. The order defined the class as "(a)ll persons . . . who purchased 1977 Oldsmobile automobiles which without their knowledge or consent, contained V-8 engines manufactured by the Chevrolet Motor Division . . ." The court dismissed all federal claims except the Magnuson-Moss claim and declined to exercise its power to take pendent jurisdiction over the related state law claims. The trial court recognized that parallel state court actions were pending, but rejected GM's position that the state proceedings should prevent class certification on the Magnuson-Moss claim. Despite the certification of the class, no notice to class members was mailed to inform them of the pendency of the class action at that time.

B. The Settlement

Sometime during the fall of 1977, General Motors entered into settlement negotiations with representatives of the various state Attorneys General who had filed or were contemplating filing actions against GM. 6 A representative of the Illinois Attorney General who was also a member of the executive committee participated in the negotiations without leave of the district court or other counsel for the plaintiffs in the federal class action. On December 13, 1977, one of the counsel for the plaintiffs received word that a tentative settlement agreement had been reached by GM and the Attorneys General. The attorney, in essence, requested the district court to order immediate disclosure of the progress of the settlement negotiations or any agreements that had been reached. The trial court, however, regarded the motion as premature. Unwilling to interfere with communications between GM and the Attorneys General before an agreement was reached, the district court declined to order the requested relief. The trial judge remarked that he believed he had sufficient power over the approval of any settlement to protect the interests of class members.

Six days later on December 19, the Illinois Attorney General in his capacity as one of the class counsel moved that the district court consider the settlement agreement between GM and all but five of the fifty state Attorneys General. 7 The proposed settlement provided that GM would provide to each consumer who had purchased a 1977 Oldsmobile, Buick or Pontiac equipped with a Chevrolet engine on or before April 10, 1977, $200 plus a 36-month or 36,000-mile extended warranty on the power train. In return each purchaser would be required to sign a release of all state and federal claims concerning the substitution of engines, components, parts, and assemblies in the car. GM also agreed to disclose the source of all engines of new GM cars for the next three years. The Attorneys General, in turn, promised to secure dismissals with prejudice of all actions prosecuted by them.

The district court showed itself willing to consider the agreement as a basis for settling the class action. Although the court afforded private counsel time to conduct discovery to determine whether the settlement was fair, it denied the motion of some of plaintiffs' counsel for discovery into the negotiations between the Attorneys General and GM. The court maintained that the negotiation...

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