UNITED STATES – On August 25, 2017, the Seventh Circuit Court of Appeals offered a stern reminder of its distaste for “hollow class-action settlements” that benefit the plaintiffs’ lawyers but not the plaintiffs themselves. See In re Subway Footlong Sandwich Mktg. & Sales Practices Litig., No. 16-1652, 2017 U.S. App. LEXIS 16260 (7th Cir. 2017). In In re Subway, the Seventh Circuit evaluated a class action settlement that arose from claims (not ultimately supported in the lawsuit) that Subway’s “foot long sub” sandwiches (“footlong subs”) did not always live up to their twelve-inch billing. In reversing the district court’s approval of the settlement, the Seventh Circuit reinforced the significance of Rule 23(a) of the Federal Rules of Civil Procedure — requiring that class action representatives “fairly and adequately protect the interests of the class” — and Rule 23(e)(2) — requiring that class action settlements be “fair, reasonable and adequate.” The Seventh Circuit also reinforced the uniqueness of the class action context, in which settlement agreements not only can be, but must be, scrutinized by the district court judge with “the high duty of care that the law requires of fiduciaries.” In so ruling, the Seventh Circuit made clear that district courts facing proposed class action settlements, and the lawyers who prepared them, each have an obligation to ensure that the real people who brought the case are the ones who receive Rule 23’s protection.
Facts and Procedural History
In re Subway began in January 2013 when an Australian teenager posted, on his Facebook page, an image of himself holding a foot long sub next to a tape measure. The post showed that this particular footlong sub measured one inch short of a foot. The post of the 11-inch sub went viral and a “minor social-media sensation was born.” In response, Subway swiftly issued a press release promising to double down on “its efforts to ensure consistency and correct length in every sandwich.” Almost as swiftly, class action plaintiff attorneys across the country “rushed to court” to file claims for damages, and injunctive relief, based on alleged violations of consumer protection laws of various states. The cases, numbering nine in all, were later consolidated in multi-district litigation before the United States District Court for the Eastern District of Wisconsin.
Early discovery, conducted in anticipation of mediation, “revealed that the claims were deficient”. The “vast majority of Subway Footlong sandwiches are, as the name implies, at least 12 inches long.” Subway standardizes its footlong subs with “raw dough sticks that weigh exactly the same”, along with standardized amounts of meat and cheese to boot. In turn, a select few footlong subs “fall short by only about a quarter-inch” due to “the inevitable consequence of natural — and unpreventable — vagaries in the baking process.” Even still, the customer received the same quantity of food with a less-than-twelve inch footlong sub, especially because Subway’s “sandwich artists” provide “toppings in whatever quantity the customer desires.”
Eventually, the parties mediated to reach a settlement in principle. For its part, Subway, over the next four years, agreed to: ensure that its franchisees use a “tool” for measuring sandwich rolls, provide regularly scheduled inspections “to measure a sampling of baked bread”, have its inspectors check the bread ovens during each inspection for “compliance”, and post a notice on its website to explain that the “inherent variability in food production and the bread baking process” could not guarantee that each footlong sub roll will “always be exactly 12 inches or greater in length after baking.” For their part, plaintiffs’ class counsel agreed to cap their attorneys’ fees at $525,000 and the incentive awards at $1,000 for each named plaintiff. Class counsel, in a motion to the district court, subsequently sought $520,000 in fees and a $500 incentive award for each of the ten named plaintiffs.
Plaintiff Theodore Frank objected to the agreement on the grounds that did not benefit the class in any meaningful way. The district court judge “was unmoved”. The class was then certified and the settlement agreement was approved. The appeal to the Seventh Circuit followed.
In re Subway Court’s Ruling and Analysis
The Seventh Circuit reversed the district court’s decision to certify the class and approve the settlement. In a decision with a tone as disapproving as its express holding, the Seventh Circuit first confirmed that Frank, “as a class member who is bound by the settlement … clearly has standing to appeal.” The Seventh Circuit then addressed the central issue of the settlement agreement’s viability under Rule 23. The In re Subway Court held that decision to certify a class and approve a class settlement is “far from pro forma.” Citing its prior precedent, the Seventh Circuit noted that a “district judge in this situation is akin to a fiduciary of the class and is subject therefore to a high duty of care that the law requires of fiduciaries.” The district court judge must therefore “give the requirements for class certification undiluted, even heightened, attention.”
Noting Rule 23(a)(4)’s requirement for class representatives to “fairly and adequately protect the interests of the class,” and Rule 23(e)(2)’s requirement that class settlements be “fair, reasonable and adequate” for approval, the Seventh Circuit emphasized the “concern for the unnamed class members whose interests the named plaintiffs represent and the settlement is meant to serve.” The court observed the “tendency of class settlements to yield benefits for stakeholders other than the class: Class counsel support the settlement to get fees; defendants support it to evade liability[.]” This is why objectors, such as Mr. Frank, “play an essential role in judicial review” of proposed class settlements and “why judges must be both vigilant and realistic in that review.” Indeed, absent that role, a class settlement could emerge which provides no “effectual relief” to the class. In line with In re Walgreens Co. Stockholder Litig., 832 F.3d 718 (7th Cir. 2016), the Seventh Circuit observed that if the proposed class settlement’s “principal effect is to induce the defendants to pay the class’s lawyers enough to make them go away, then the class representatives have failed in their duty under Rule 23” and the district court should refuse to approve any settlement that provides “meaningless relief to the putative class”. In the Seventh Circuit’s words, a “class action settlement that results in fees for class counsel but yields no meaningful relief for the class is no better than a racket.” And in the court’s view, that “is an apt description of this case.”
The Seventh Circuit then determined that the settlement failed “to benefit the class in any meaningful way” and that the injunctive relief “approved by the district court judge is utterly worthless.” The court explained that the class members were in no different a position before the settlement than after it: they would likely get a twelve-inch long footlong sub, with the “rare sandwich” falling short of the “full 12 inches” that would “still provide the customer the same amount of food as any other.” As such, the “settlement enriches only class counsel and, to a lesser degree, the class representatives.” The Seventh Circuit then concluded that the consolidated class action against Subway, by seeking “only worthless benefits for the class,” should have been dismissed out of hand. The court reversed and remanded with instructions not to certify the class and not to approve the settlement.
Potential Class Action Implications
In re Subway may not be well-received by certain members of the class action plaintiffs’ bar. The ruling serves as a cautionary tale for those lawyers who file putative class action claims without having the substance to obtain any real relief for their allegedly aggrieved clients. The decision could also invigorate defendants in these actions to resist quick pay-out demands made simply to have the case “go away”. Defendants may be inclined, instead, to steer early discovery more purposefully toward the question of whether the claims have any merit in the first instance. If, as was the case in In re Subway, discovery reveals that the putative class plaintiffs have tenuous claims on liability or damages, or otherwise will see no actual relief from any proposed settlements, defense counsel may consider holding their counterparts’ feet to the fire by forcing them to prove their case or walk away.
The ruling also upholds the class action protections of Rule 23. Those protections are in place to ensure that the interests of (putative) class action plaintiffs receive adequate protection both by the representative whose name sits in the case caption, and the district court judge who is duty-bound to exercise a fiduciary level of care in evaluating any proposed class settlement. Although the full implications of In re Subway are yet unknown, the decision is clear in prioritizing the protections that Rule 23 affords to class action settlements over the process that often leads to them.