A Class Action Settlement Class is Reversed for Lack of Adequate Representation, But the Third Circuit Explains How to Cure the Problem

Dewey v. Volkswagen, A.G., 681 F.3d 170 (3d Cir. 2012). This class action case involved allegations that Volkswagen vehicles had defective sunroofs that allowed water to infiltrate into the interior of the vehicles. The parties reached a settlement that created two categories of vehicle owners or lessees: the “reimbursement group” and the “residual group.” The reimbursement group could submit claims on an $8 million settlement fund for reimbursable repairs, while the residual group could seek monies from that fund only if there were monies left after the reimbursement group had made its claims.

The district court certified a single settlement class, approved the settlement, and awarded attorneys’ fees to class counsel. A group of objecting class members appealed. In an opinion by Judge Smith, the Third Circuit applied the “abuse of discretion” standard of review for class certification decisions, reversed the certification of the settlement class, and remanded for further proceedings.

The panel concluded that the “adequacy of representation” requirement of Fed. R. Civ. P. 23(a)(4) had not been satisfied. This was because all of the named representative plaintiffs belonged to the reimbursement group. As a result, there was no one to speak for the residual group, and that group was not adequately represented by the named plaintiffs. “The problem is that the interests of the representative plaintiffs and the interests of the residual group aligned in opposing directions…. Put simply, representative plaintiffs had an interest in excluding other plaintiffs from the reimbursement group, while plaintiffs in the residual group had an interest in being included in the reimbursement group.”

However, Judge Smith gave the parties a roadmap as to how to cure the problem. He noted that, on remand, the parties could either “do away with the distinction between the reimbursement group and the residual group, and allow all members of the class to submit reimbursements with no difference in priority,” or “divide the groups into subclasses that would be certified separately.” The panel observed, in a footnote, that the parties had wrongly referred to the two categories of class members as “subclasses,” when in fact they were not separately certified subclasses, but merely sub-groups of the one certified class. But proper subclasses would overcome the problem that the Third Circuit found with the settlement class here.

The panel rejected a number of other arguments that the objectors made. For that reason, and because the judges essentially told the parties how to create a proper settlement class or classes, it may be inferred that the panel considered the essential points of the settlement itself to be fair, reasonable and adequate if all class members were properly represented in reaching that result. If the parties comply with the Third Circuit’s outline of remedial measures and objectors again contest the result, it appears likely that the settlement would be approved.

This decision also addresses a procedural point of interest in class action litigation. The decision below was made by a magistrate judge, since the named parties had consented to having the magistrate judge rather than the district judge rule on the settlement class and settlement approval. 28 U.S.C. §636(c)(1) requires the consent of “the parties” before a magistrate judge may exercise jurisdiction over a matter that is normally committed to a district judge. The objectors asserted that they too were “parties” whose consent was required before the magistrate judge could take action. Judge Smith rejected that argument, and properly so. Though absent class members are “parties” for some purposes, they are not parties whose consent is required for referral of an issue to a magistrate judge.