We’ll be very clear – as we have before: We don’t like most class actions. Indeed, if given our druthers, we would abolish Rule 23, as it applies to class actions for damages, altogether. But that’s not in the offing anytime soon. Today, we offer a class action decision that we think both sides, us on the defense and those on the plaintiffs side, can agree on, excluding only those responsible for the problem.
In Pearson v. Target Corp., 968 F.3d 827 (7th Cir. 2020), the court came up with one possible solution to the class action “objector problem.”
Well, once a class action settles (as most do), all too often “objectors” come out of the woodwork. While these objectors purport to assert the interests of the class, usually, all they want is money to make them go away. Or, as described in Pearson:
We address here a recurring problem in class-action litigation known colloquially as “objector blackmail.” The scenario is familiar to class-action litigators on both offense and defense. A plaintiff class and a defendant submit a proposed settlement for approval by the district court. A few class members object to the settlement but the court approves it. . . . The objectors then file appeals. As it turns out, though, they are willing to abandon their appeals in return for sizable side payments that do not benefit the plaintiff class: a figurative “blackmail” by selfish holdouts threatening to disrupt collective action unless they are paid off.
968 F.3d at 829.
Since the motive of these “selfish” objectors is strictly pecuniary, removing their ability to collect (and keep) the money they get simply for getting out of the way would effectively end this problem. That’s what happened here.
In Pearson the original class action settlement had been successfully opposed as “a ‘selfish deal’” by virtually the only class action objector we think gives them a good name − Ted Frank. Id. at 830 (describing Pearson v. NBTY, Inc., 772 F.3d 778, 787 (7th Cir. 2014)). The settlement was then reworked and reapproved. Id. Up popped three new objectors, and the following occurred: “All three objectors appealed. All three dismissed their appeals before briefing began. The dismissals struck Frank as suspicious and possibly in bad faith.” Id. at 830-31.
Frank filed “a motion for disgorgement of any payments made to objectors in exchange for dismissing their appeals.” Id. at 831. The district court didn’t think it had jurisdiction to do that. Another appeal ensued, and the Seventh Circuit determined that it did. See id. at 829 (describing Pearson v. Target Corp., 893 F.3d 980, 983 (7th Cir. 2018)).
Back in the district court again, and discovery revealed that, sure enough, the objectors had been paid off. “[T]he three objectors had indeed all received side payments in exchange for dismissing their appeals—$60,000 each to [two of them] and $10,000 to [the third] . . . while the class had received nothing.” 968 F.3d at 831. Nonetheless, they were allowed to keep the money because the side deals did not “harm” the class “by taking money that had been earmarked for it.” Id. By this time, none of the original litigants was party to the appeal – leaving Frank and the settling objectors to duke it out. Id.
Ted Frank – winner by a knockout.
And a knockout the third Seventh Circuit Pearson opinion indeed is. It was an abuse of discretion not to order disgorgement of the objector’s side deals:
[I]n finding that the money defendants paid to objectors had not been earmarked for the class, the district court failed to address a critical piece of evidence. More fundamental, though, that factual question appeared relevant only because the district legally erred by requiring some positive statutory violation as a predicate for disgorgement.
968 F.3d at 831. The same principle that motivates the in pari delicto defense applied – “[i]t has long been axiomatic “that no person shall profit by his own wrong.” Id. (citation and quotation marks omitted). The role that objectors are supposed to play in class action litigation, justifies treating them as fiduciaries. “As a general rule, wherever confidence is reposed, and one party has it in his power, in a secret manner, for his own advantage, to sacrifice those interests, which he is bound to protect, he shall not be permitted to hold any such advantage.” Id. at 832. These “ancient principles” apply to class action litigation. Id. at 834. Objectors thus “ha[ve] a duty to object only in good faith.” Id. (citation and quotation marks omitted).
The Seventh Circuit thus ordered the objectors to pay back their side deal proceeds to the class:
These objectors made sweeping claims of general defects in the . . . settlement. Either those objections had enough merit to stand a genuine chance of improving the entire class’s recovery, or they did not. If they did, the objectors sold off that genuine chance, which was the property of the entire class, for their own, strictly private, advantage. If they did not, the objectors’ settlements of meritless claims traded only on the strength of the underlying litigation, also the property of the entire class, to leverage defendants’ and class counsel’s desire to bring it to a close. Either way, the money the objectors received in excess of their interests as class members “was not paid for anything they owned,” and thus belongs in equity to the class.
968 F.3d at 834 (quoting Young v. Higbee Co., 324 U.S. 204, 214 (1945)).
So blackmailing objectors can be ordered to disgorge the proceeds of their side deals, which will go a long ways – perhaps all the way – to eliminating the incentive for this kind of legalized extortion. But what to do with the money? The “best remedy, to give it to the class, “is no longer possible or would be self-defeating because the administration costs would swallow the benefits.” Id. at 837 (citation omitted). What the court came up with, we don’t much like, a cy pres “constructive trust.” Id. In our opinion, the money should be returned to whomever the bogus objectors extorted those funds from (which is not clear from the opinion), but we’d rather just about anybody get it other than the blackmailing objectors who received it.
We agree that “reasonable and good-faith objections” should not be deterred by the Pearson court’s treatment of objectors as fiduciaries. Id. at 838. Just don’t take secret payoffs as a quid pro quo to abandon purportedly valid appeals:
We do not expect any good-faith objector will fail to bring her objection because she is prohibited from selling out the class in exchange for private payment, where she may choose instead not to sell out the class and still receive payment if she brings the class a real benefit.
Id. Let’s see if other courts follow the Seventh Circuit’s lead in cutting through the Gordian Knot of objector blackmail.