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February 27, 2005

Does Stephenson limit the benefits of CAFA?

Reader Mark Arnold adds an important caveat to my earlier post on the desirability of federal vs. state class actions:

I respectfully disagree with Ted Frank's assertion that CAFA will make certain that a class action settlement really binds the class. The problem in the Bank of Boston case was that the Vermont Supreme Court found the Alabama named plaintiffs to be inadequate class representatives, precisely because they did not object to the attorneys' fee request. As a result of their inadequacy, it would violate due process to hold that absent class members were bound by the judgment.

Settlements of federal class actions are subject to precisely the same kind of collateral attack, most notoriously in the agent orange case Stephenson v. Dow Chemical, 273 F.3d 249 (2nd Cir. 2001), aff'd by an equally divided Court, [Dow Chemical v. Stephenson,] 156 L.Ed.2d 106 (2003). Judge Weinstein pressured the chemical manufacturers into paying $180 million to settle the case; many veterans objected on the grounds, among others, that the named plaintiffs were inadequate. The district court overruled those objections; the Second Circuit affirmed; and the defendants duly paid the $180 million.

In 2001, the Second Circuit held -- with the aid of 20 years worth of hindsight on both the facts and the law -- that the named plaintiffs really weren't adequate, so the settlement didn't bind anybody else. Unless and until overruled, Stephenson means that no class settlement, regardless of the venue, is ever guaranteed to bind the class.

Mr. Arnold is correct: I did oversimplify somewhat by restricting my comments to collateral attacks on settlements by different states because the 2001 decision in Stephenson permits federal collateral attack of federal class action settlements. (An affirmance by the Supreme Court due to a equally divided court does not bind lower courts to the affirmed opinion's holding or reasoning, so other federal courts may still disagree.) However, there is one important post-Stephenson development. In 2003, Federal Rule of Civil Procedure 23 was amended to create a new Rule 23(e). Under the new Rule 23(e), a federal court may not approve a class action settlement without taking additional steps that effectively ensure the due process rights of settlement participants. There has yet to be collateral attack of a settlement approved under the Rule 23(e) procedures, but it is arguable that the additional protections of that Rule satisfy Stephenson in most instances. In any event, even if collateral attack of post-amendment federal settlements remains possible, I believe it is fair to say that federal settlements have two advantages over state settlements. First, there is still the issue of the Supremacy Clause; a state court collateral attack remains impossible, and there is considerably less danger of forum-shopping to find a court that will give plaintiffs a second bite at the apple. Second, the new federal procedures provide sufficient due process protections that I believe it is fair to say that collateral attack of a post-amendment federal class action settlement will be at least somewhat more difficult than it was in Stephenson.

On the other hand, there are those who would say the Second Circuit went so far in Stephenson that no class action settlement is safe. For further discussion on this question on both sides, see the amicus briefs filed in the Supreme Court case by ATLA and, on the other side, the Washington Legal Foundation and the Chamber of Commerce.

One thing is clear: Stephenson is yet another reason why industry wants asbestos litigation reform.

Posted by Ted Frank at 10:01 AM | TrackBack (0)

Class Actions



Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.