By reversing a previously approved class action settlement, the Seventh Circuit’s holding in the recent case of Eubank v. Pella Corp., 2014 U.S. App. LEXIS 10332 (7th Cir. Ill. June 2, 2014) illustrates the potential ethical and practical dangers of negotiating class action settlements with overly self interested class counsel.
Calling the settlement “inequitable—even scandalous,” (Id. at 9) Judge Richard Posner roundly criticized the purported $90 million settlement agreed to by Pella, a window manufacturer, and representatives of a class of its customers. Initiated in 2006, the suit claimed that Pella’s “ProLine Series” casement windows “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.” Id. at 4
Posner criticized much about the circumstances of the settlement. For example, the initial named plaintiff and class representative in the case was the father in law of Paul M. Weiss, who was lead counsel for the class. Eventually four other plaintiffs were added as class representatives. When those four disapproved of the settlement agreement, they were removed and replaced with another four representatives who, together with Weiss’s father-in-law, unanimously approved of the settlement.
The problems with the settlement itself are numerous. First of all, Judge Posner agreed that an $11 million fee for Weiss and his law firm may have been reasonable if the class could expect to see anywhere near the remaining $79 million. But the court concluded that $79 million was a gross exaggeration of the expected proceeds to class members. There are several reasons for this, not the least of which were the onerous procedures claimants must satisfy in order to bring a claim and the meager limits to recovery (as little as $750 for one type of claimants and $6000 for another) stipulated as part of the proposed agreement. Judge Posner concluded that under the terms of the agreement, class members might recover around $1.5 million dollars, a far cry from the $79 million claimed by Weiss.
Finally, the court noted that the settlement was pushed through during the pendency of proceedings that ultimately resulted in a suspension of Mr. Weiss’s law license for 30 months. Posner found that Weiss had every reason to try to push through a settlement that “sold out the class.” Id. at 27. In addition to being subject to disciplinary proceedings, Weiss was a defendant in two suits regarding misappropriation of funds from his former law firm. In short, Weiss needed money. Despite the fact that “almost every danger sign in a class action settlement that our court and other courts have warned district judges to be on the lookout for was present in this case,” the district court did “not even mention” most of these danger signs, or brushed them off entirely. Id. at 33. Finding the “settlement flunked the ‘fairness’ standard,” Posner reversed the district court’s approval of the settlement and remanded the matter for more proceedings.
Ultimately, the case should be a warning to potential class action defendants: do not expect to dispose of a class action case by negotiating a settlement with class counsel that protects class counsel’s right to payment while dramatically disadvantaging the class. Pella has already spent eight years defending the suit, and after the Seventh Circuit’s reversal, “much remains to be done in this case” (Id. at 35) including replacing class counsel and class representatives and renegotiating a settlement, or litigating the suit. Regarding class settlements, defendants should take heed. If it seems to good to be true, it probably is.