The Ninth Circuit Court of Appeals just threw out a proposed class-action settlement over inflated Hyundai mileage estimates, in a decision that also criticized the common practice of basing attorney fees on inflated estimates of what a settlement is worth.

Plaintiff lawyers are likely to request a full-court review of In Re Hyundai and Kia Fuel Economy Litigation, which was issued by a three-judge panel of the Ninth Circuit with one judge dissenting. If the decision stands, it will make life more difficult for class-action lawyers in the Ninth Circuit, especially in the case of “settlement class actions,” where plaintiff lawyers and defendants agree to settle litigation only if a judge blesses the deal by certifying a class.

The decision is also interesting because the judges take a swipe at the $9 million in fees lawyers were hoping to gain from the settlement, which they described as being worth $200 million. The trial judge accepted that value estimate but the Ninth Circuit judges were skeptical. Only 21% of class members had filed claims for a total of $44 million when the settlement was approved and two-thirds of them were already participating in a Hyundai program to pay them for excess fuel charges attributed to the lower-than-advertised mileage.

“Therefore, the portion of the class filing new claims accounted for only a small fraction of the$44 million in total value,” the judges concluded – meaning $9 million in fees may be too high. The judges also criticized the so-called “multiplier” the judge awarded plaintiff lawyers on top of the hours they said they devoted to the case. Multipliers are intended to compensate lawyers for pursuing risky cases, but in this case the Environmental Protection Agency had already done much of their work for them.

Hyundai and Kia were besieged with lawsuits after the EPA accused them of putting out mileage estimates that were inflated by tailwinds and other tactics. They were collected in a multidistrict litigation proceeding in California federal court and as often happens, Hyundai negotiated a settlement. The judge blessed it, even though objectors emerged including Virginia lawyers with a competing case who said consumers there were missing out on additional damages including statutory penalties of $500 per violation.

The judge rejected the objections and approved the settlement, despite wide variations in consumer laws across the country. The Ninth Circuit said that was a legal error, citing among other cases Amchem Products v. Windsor, a 1997 Supreme Court decision rejecting an asbestos settlement because it failed to differentiate among different classes of plaintiffs. Courts must determine whether differences in state law are too great to satisfy the requirement under Rule 23(b)(3) of the Federal Rules of Civil Procedure that common issues predominate.

“A court may not justify its decision to certify a settlement class on the ground that the proposed settlement is fair to all putative class members,” wrote Judge Sandra Segal Ikuta, in an opinion joined by two other judges. Despite the pressure from lawyers on both sides, and a judge’s own desire to remove a time-consuming case from the docket, the Ninth Circuit said

Judge Jacqueline Nguyen dissented, saying the decision “deals a major blow to multistate class actions” by shifting the burden of proof on the issue of predominance from objectors to the parties pushing for approval of a settlement.

The decision represents another example of how the Ninth Circuit, commonly considered to be liberal, has been pushing back against some of the abuses that plague class actions including collusive settlements that benefit plaintiff lawyers but not their clients. The court repeatedly cited a 2011 decision rejecting a proposed class-action settlement over Bluetooth headsets that would have paid consumers nothing but given plaintiff lawyers $850,000 in fees. Summarizing the conflict embedded in every class-action settlement, the court said the one-sided terms create a strong suspicion “that class counsel bargained away a benefit to the class in exchange for their own interests.”

The decision could imperil the far larger VW diesel settlement now being considered by the Ninth Circuit, reports Alison Frankel at Reuters, since Judge Charles Breyer also failed to give any weight to differing state laws in approving that agreement. But Frankel quotes attorney Elizabeth Cabraser as saying the VW deal isn’t in danger because it is based on federal law and is part of a coordinated effort by private lawyers and state and federal officials to fix the problem of polluting VW cars and compensate owners.

That may be, but it’s heartening to see the Ninth Circuit taking a harder line on judges who approve class-action settlements – and lucrative fee agreements between defendant companies and plaintiff lawyers – regardless of how they treat individual claimants.

Categories: Class actions