Judicial Approval of a Class Settlement

The claims, issues or defenses of a certified class, or of a class proposed to be certified for purposes of settlement, may be settled, voluntarily dismissed or compromised only with the court's approval. The requirement exists because the people bound by the release are not the people who negotiated it, and because the two sides at the table share an interest in the deal being approved.

The decision to give notice

The first stage is often called preliminary approval, but the rule frames it differently and the difference matters. The parties must provide the court with information sufficient to enable it to determine whether to give notice of the proposal to the class. The court must then direct notice in a reasonable manner to all members who would be bound only if giving notice is justified by the parties' showing that the court will likely be able to approve the proposal and to certify the class for purposes of judgment on it.

That formulation front-loads the analysis. A court is not merely checking that the proposal is not obviously improper; it is forming a provisional view on both approval and certification. The practical consequence is that the submission accompanying the motion has to address the four approval factors, the certification requirements and the notice program, rather than leaving substance for the fairness hearing.

The four factors the rule states

Approval requires a hearing and a finding that the proposal is fair, reasonable and adequate, after considering whether the class representatives and class counsel have adequately represented the class; whether the proposal was negotiated at arm's length; whether the relief provided for the class is adequate; and whether the proposal treats class members equitably relative to each other. The first two look backward at the process; the second two look at the substance.

The adequacy of relief factor carries its own sub-list. The court takes into account the costs, risks and delay of trial and appeal; the effectiveness of the proposed method of distributing relief, including the method of processing class member claims; the terms of any proposed award of attorney's fees, including timing of payment; and any agreement the parties were required to identify. Distribution mechanics have become the most contested of these, because a claims process that suppresses participation reduces actual relief without altering the announced figure.

Statutory constraints on particular terms

Several provisions restrict what may be approved regardless of the parties' agreement. A settlement may not be approved where the sums to be paid to counsel would result in a net loss to class members, unless the court makes a written finding that non-monetary benefits substantially outweigh the loss. A settlement may not provide greater sums to some members solely because they are closer in geographic proximity to the court. Where relief takes the form of coupons, further conditions apply and the portion of fees attributable to that relief is measured by the value of coupons actually redeemed.

Two structural terms attract scrutiny even where no statute addresses them directly. A reversion clause returning unclaimed funds to the defendant aligns the defendant's interest with a low participation rate, which is the opposite of what the distribution factor is meant to test. A clear-sailing provision, under which the defendant agrees not to oppose a fee application up to a stated amount, removes the only adversary the fee request would otherwise have.

A separate statute governs notice to public officials. Each participating defendant must serve the appropriate federal and state officials within ten days after the proposal is filed, supplying the complaint, the proposal, any side agreements and material describing the members, and no final approval order may issue earlier than ninety days after the later service date. The waiting period is jurisdictional in effect: an order entered too early is vulnerable on that ground alone.

The hearing and what it produces

Approval may be granted only after a hearing, and the hearing is where objections are heard. A court that has received substantive objections ordinarily addresses them individually in its order, because an appellate court reviewing approval will look for reasoning rather than a recitation of the factors. Where objections identify a structural problem, such as an allocation formula that favors one segment without justification, the usual outcomes are modification, subclassing or denial rather than approval with a comment.

The order that follows does more than approve. It defines the class bound, identifies those excluded, states the release, resolves the fee application or defers it, and retains jurisdiction over administration. Because the release is the operative consideration flowing to the defendant, its scope receives close attention: a release broader than the claims certified gives away what was never valued, a problem examined in predominance and superiority in a damages class.

After approval

Administration begins on entry of the order and generates its own record: claims received, claims paid, funds remaining, and the treatment of any residue. Courts increasingly require a post-distribution accounting, because the actual participation rate is the only reliable measure of whether the relief the court called adequate reached anyone. That figure also bears on the fee award where payment has been deferred, as described in attorney fees in a class case.

Unclaimed funds require a decision the settlement should have anticipated. Options include a second distribution to members who filed claims, escheat under state law, or distribution to a recipient whose work approximates the interests of the class. Each is contested in some measure, and courts examine whether a proposed recipient has any relationship to counsel or to the defendant, since a distribution that benefits the negotiators rather than the class reproduces the conflict approval is meant to police.

Appeals run from the final judgment in the ordinary way, and objectors who appeared at the hearing may take them without intervening. The rule now conditions any payment made in connection with withdrawing an objection or abandoning such an appeal on court approval after a hearing, a change examined in objectors and the rule that curbed their leverage, alongside the notice requirements set out in notice to the class and the right to opt out.