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Swinging Blades, Tripwires, and Zombies, inter alia: the Adventurer’s Guide to Hidden Hazards in Class-Action Defense

Class-action litigation is rife with obvious hazards such as potentially huge exposure and unique procedural rules.  Class actions are also riddled with hidden traps:  lesser-known rules and evolving doctrines that can trip up the unsuspecting attorney.  We point out some traps so that you can leap over, run around, and/or defuse them in true Indiana Jones fashion.

Trap #1: Beware booby traps hidden within the local rules. 

Local rules sometimes contain hidden, and surprising, requirements that can make or break a class-action defense.  Take care to satisfy all requirements that apply to your client’s defenses and to exploit any failure by the plaintiff. 

Consider the following local rules from our home state, North Carolina:

One federal court in North Carolina (the Middle District) requires that class certification motions be filed within 90 days of the filing of the initial complaint.  See LR 23.1(b).  While Federal Rule 23 requires only that courts must resolve class certification issues “[a]t an early practicable time,” and though the local rules for the other federal courts in North Carolina contain no such deadline, the Middle District deadline may very well have teeth. 

For example, in Gonzalez v. Asset Acceptance, LLC, the Eleventh Circuit upheld the dismissal of a class-action lawsuit for failure to comply with a similar 90-day deadline contained in the district court’s local rules.  308 F. App’x 429, 430 (11th Cir. 2009).  The Court reasoned that “[a] district court is authorized to dismiss an action for failure to comply with local rules.”  Id.

Other hidden time bombs in the local rules can create problems specific to class-action defense.  For example, one North Carolina county’s local rules require that motions to compel arbitration be heard within 90 days of service of the complaint.  This rule appears to violate the Federal Arbitration Act (FAA) by imposing hurdles on the enforcement of arbitration rights that do not apply to other contract rights.  Nonetheless, the requirement remains on the books—ready to surprise unwary defense counsel wondering “what is the source of that ticking sound?” 

Other local rules specify potentially surprising requirements for the form of class-action filings.  For instance, Local Rule 23.1 in the United States District Court for the Middle District of North Carolina provides that a class-action complaint must state “Complaint – Class Action” next to the case caption.

It is not clear whether failure to comply with this local rule is grounds for denying class certification.  At least one federal court allowed the plaintiff to amend the complaint to correct a similar deficiency.  See Lee v. N. Penn Transfer, Inc., 15 Fed. R. Serv. 2d 1405 (E.D. Pa. 1972).  Another court pointed to a deficient case caption, among other local rule deficiencies, in refusing to certify a class.  See Jackshaw Pontiac, Inc. v. Cleveland Press Pub. Co., 102 F.R.D. 183, 186 (N.D. Ohio 1984).  So watch out.  Make sure that traps in the local rules do not surprise you during your next class action defense. 

Trap #2: Beware the swinging blade in the Federal Arbitration Act

Having successfully uncovered any hidden traps in the local rules, you find an arbitration agreement binding the plaintiff—and in time to meet any deadline for a motion to compel.  As defense counsel, you are doing a happy dance.  Take care, however, that the “transportation workers” exemption to the FAA does not cut your dance short.

Under the FAA, unless an arbitration clause explicitly provides that the parties consent to class arbitration, contractual arbitration clauses allow for only individual arbitration.  See Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 203 L. Ed. 2d 636 (2019).  Thus, because arbitration agreements provide a strong defense against class claims, many employers incorporate the FAA into their arbitration agreements. 

However, this defense will not apply if the dispute itself is exempt from the FAA.

In a departure from the general federal policy favoring arbitration, the FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  9 U.S.C. §1.  This exception, commonly referred to as the “transportation workers” exemption, applies only to interstate transportation workers, and it is enforced by courts even against arbitration clauses that purport to incorporate the FAA. 

For example, in Garrido v. Air Liquide Industrial U.S. LP, 194 Cal. Rptr. 3d 297 (Cal. Ct. App. 2015), the California Court of Appeals held that a class action waiver in an employment arbitration agreement involving truck drivers was unconscionable and unenforceable.  Even though the arbitration agreement at issue expressly stated that it was governed by the FAA, the court found that certain truck drivers fell under the FAA’s “transportation workers” exemption.  Thus, arbitration was denied.

Be sure to analyze whether the transportation workers exemption applies when seeking to enforce arbitration under the FAA.  Otherwise, your litigation strategy could be cut to ribbons.

Trap #3: Beware the arbitration waiver tripwire.

You sidestepped the FAA exemption and are about to leap for arbitration.  Keep an eye out, though, for the arbitration waiver tripwire.  Depending on your jurisdiction, this tripwire can be hidden in different places. 

Most of the circuits apply tests which allow a party to compel arbitration unless its litigation conduct is prejudicial to the other parties and inconsistent with arbitration.  For instance, the Fourth, Fifth, and Ninth Circuits require a strong showing of prejudice and have found that there is a robust presumption against waiver of arbitration.  See, e.g., Cargill Ferrous Int’l v. Sea Phoenix MV, 325 F.3d 695, 701 (5th Cir. 2003); see also Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 95 (4th Cir. 1996); Britton v. Co-op Banking Grp., 916 F.2d 1405, 1412 (9th Cir. 1990).  In those circuits, courts may find that conducting some discovery, such as a deposition, before moving to compel arbitration did not prejudice the other parties.  See Cargill Ferrous, 325 F.3d at 701. 

The First Circuit, on the other hand, requires prejudice, but seemingly a smaller amount—a “modicum”—for waiver.  See In Re Tyco Int’l Ltd. Sec. Litig., 422 F.3d 41, 46 (1st Cir. 2005) (finding more than a modicum of prejudice where defendant attempted to delay arbitration by claiming he needed more time to get through an ancillary criminal lawsuit, ultimately causing AAA to dismiss the arbitration demand).

In contrast, the Seventh and D.C. Circuits analyze whether a party’s litigation conduct was inconsistent with arbitration.  In those circuits, a “litigation choice inconsistent with the right to arbitrate,” such as filing a motion to dismiss instead of a motion to compel arbitration, may constitute waiver.  Brickstructures, Inc. v. Coaster Dynamix, Inc., 952 F.3d 887, 892 (7th Cir. 2020).

Finally, the Tenth Circuit analyzes prejudice as a non-dispositive factor in a multifactor test.  In In re Cox Enterprises, Inc. Set-top Cable Television Box Antitrust Litigation, the Tenth Circuit focused less on prejudice and more on the defendant’s strategic manipulation of “the litigation machinery” in finding that a defendant waived its right to arbitrate a class-action dispute.  790 F.3d 1112, 1117 (10th Cir. 2015).  There, the defendant waited until after the court granted class certification before mentioning its intent to arbitrate.  Id. 

The lesson?  To avoid stumbling, carefully examine arbitration waiver doctrine as applied in the relevant jurisdiction.  Be sure to inch along carefully when undertaking any litigation activity other than a motion to compel. 

Trap #4: Beware disfavor for incentive awards for named plaintiffs – a potentially crumbling bridge. 

Incentive awards are payments to a class representative for serving as the representative of the class.  These awards go above and beyond the recovery a class representative would be entitled to as a class member.  They are routinely included in class action settlements.  However, the Eleventh Circuit’s decision in Johnson v. NPAS Solutions, LLC last year held that incentive awards are prohibited under Supreme Court caselaw dating back over a century.  975 F.3d 1244 (11th Cir. 2020).  In the event the Eleventh Circuit’s view of incentive awards takes hold in other jurisdictions, class counsel should think twice before trying to cross this crumbling bridge—and defense counsel should think twice before including them in a settlement. 

For a detailed analysis of Johnson and its implications, check out Class Action Incentive Awards Under Siege? written by Michelle Liguori and Carson Lane for Ellis & Winters LLP’s Best in Class Blog. 

Trap #5: Beware the quicksand in the Rule 23(e)(2) and (e)(5) disclosure requirements. 

In December 2018, Federal Rule 23 was amended, codifying important developments in the law with respect to class action settlements.  Now, before approving a proposed class-action settlement, federal courts must consider several factors in determining whether a proposed settlement is “fair, reasonable, and adequate . . . .”  Fed. R. Civ. P. 23(e)(2).  This includes “any agreement made in connection with the proposal[,]” also known as “side agreements” between the parties.  Fed. R. Civ. P. 23(e)(2)(C)(iv).  The amended rule now also addresses “objector blackmail,” a ploy used by individual class members to delay final settlement approval by filing meritless appeals to induce defense counsel to pay them a side settlement to drop those appeals.

Typically, side agreements come about when some class members try to supplement the formal settlement agreement in return for releasing a particular defendant from liability, agreeing to allocate responsibility for damages among defendants according to an agreed-upon formula, or other exposure-limiting terms.  Courts now closely scrutinize these agreements to assess whether the division of funds between the class members and their counsel was fair and adequate.

For instance, in In re Samsung Top-Load Washing Machine Marketing, Sales Practices & Products Liability Litigation, a class member expressed his intent to object to a settlement because it allegedly allowed “class counsel to self-deal at the expense of class compensation.”  997 F.3d 1077, 1081 (10th Cir. 2021).  The class member and the defendant reached a side agreement and drafted a term sheet.  Id.  Class counsel, however, filed a brief opposing the side agreement and the court ordered the class member to disclose the details of the side agreement.  Rather than do so, as required by Rule 23(e), the class member walked away from the negotiations, never finalizing the side agreement.  Instead, he went ahead with his objection to the settlement.  Id.

Now that courts closely look at these side agreements as part of the proposed settlement approval process, be sure that your carefully planned and executed class settlement does not get stuck in the mud. 

Even if side agreements have lost some luster, defense counsel can find some solace over the amended rule’s treatment of “objector blackmail.”  Rule 23 now provides that no payment or other consideration can be provided in connection with withdrawing an objection or abandoning an appeal, unless approved by the court after a hearing. Fed. R. Civ. P. 23(e)(5)(B).

The Seventh Circuit put the amended rule to the test in Pearson v. Target Corp., scolding three such objectors and requiring that their payments be disgorged.  968 F.3d 827 (7th Cir. 2020).  In Pearson, following the approval of a proposed class settlement, three objecting class members appealed.  Id. at 830.  The objectors later withdrew their appeals after receiving side payments from defendants totaling $130,000.  Id. at 831.  One of the named plaintiffs filed a motion for disgorgement of these payments, which the District Court denied.  The Seventh Circuit reversed, rebuking the objectors as “selfish holdouts.”  Id. at 829.  Citing Rule 23(e)(5)(B), the Seventh Circuit dismissed the objectors’ arguments and concluded that the objectors had sacrificed the class interests for their own and “[e]quity does not permit them to keep that gain.”  Id. at 833.

Hopefully, this change means that fewer class members will object and appeal with the hopes of receiving an individual payout.  In any event, stay alert. Quicksand in the amended rule can pull both class counsel and defense counsel under if they aren’t careful.

Trap #6: Beware zombie claims hiding behind section 1715.

You fought class counsel tooth and nail.  You achieved a favorable settlement agreement including a full release.  At the fairness hearing, the court certified the class for settlement purposes and dismissed the claims.  All of the claims in the settlement class are extinguished, right?  Not necessarily. 

28 U.S.C. § 1715 provides that class action defendants must notify state and federal authorities of any proposed class settlement well before the fairness hearing.  See 28 U.S.C. § 1715(b).  The penalty for failing to do so?  Class members “may refuse to comply with and may choose not to be bound by a settlement agreement.”  Id. § 1715(e)(1). 

This is scary stuff.  Avoid this fate by scrupulously complying with the notice requirements:

Who must be notified?

Notice must be provided to the Attorney General of the United States or, in cases involving banks, the federal official with primary regulatory or supervisory responsibility for the matters alleged in the class action. 

Class-action defendants must also notify the primary state regulator, supervisor, or licensing authority for the defendant, assuming that the class allegations are subject to regulation or supervision by that person.  If there is no such official, or the matters alleged are not subject to regulation or supervision by that person, then notice should be provided to the state attorney general.  Notice must be provided to the appropriate state officials for each state in which a class member resides. 

What must the notice include?

Each defendant must serve upon the appropriate state and federal officials the following: 

–           the class complaint and any material filed with the class complaint;

–           notice of any scheduled hearing;

–           any proposed notice to class members concerning the settlement;

–           the proposed settlement agreement;

–           any contemporaneous agreement between counsel;

–           any final judgment or notice of dismissal;

–           any written judicial opinion relating to the settlement, the settlement notice, or the final judgment; 

In addition, “if feasible,” each defendant must serve upon each state official the names of the class members who reside in that state and their estimated proportionate share of the settlement.

What is the notice deadline?

The notice, including the above-listed items, must be served upon the appropriate state and federal officials no later than 10 days after the proposed settlement is filed in court.  Id. § 1715(b).  Moreover, notice must be served at least 90 days before the order giving final approval of the settlement issues.  Id. § 1715(d). 

The lesson?  When you settle a class action, make sure you put the claims to rest.  Provide the notice required by section 1715. 

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Now that you know where some hidden traps lay, you can fine-tune your strategy and traverse the class-action minefield with confidence. 

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**Ellis & Winters’s Best in Class Blog covers developments in class actions in courts across the United States, focusing on insights for class-action defense.**

November 16, 2021 Joseph D. Hammond
Posted in  Class Action Basics