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Second Circuit: Insufficient Notice of Class Action Settlement Means That Class Members Can Bring Copycat Class Actions

Posted in Appeals, Class Action Settlements, Class Certification, Rule 23(b)(2), Superiority

The Second Circuit’s recent decision in Hecht v. United Collection Bureau, Inc., No. 11-1327 (2d Cir. Aug. 17, 2012), should sound alarm bells for any business that attempts to settle a class action.  The takeaway from the decision is to make sure that  notice of the settlement to absent class members is adequate. Under some circumstances, a single notice in the USA Today won’t cut it. And if it doesn’t, the release in the settlement won’t be worth the paper it’s printed on, and other plaintiffs will be free to bring the exact same class action against you.

In Hecht, a class action under the Fair Debt Collection Practices Act (FDCPA), the parties entered into a settlement agreement that called for the putative class to be notified solely by the one-time publication of a notice in the USA Today. It’s understandable why the parties sought to keep notice costs economical: The fact that the class recovery was capped by law at one percent of the defendant debt collector’s net worth—or $13,254 (15 U.S.C. § 1692k(a)(2)(B)(ii))—made it wildly impractical to provide individualized notice (such as attempting to mail postcards to each one of the more than two million class members). In any event, the parties justified the notice plan on the ground that they were asking for certification of the settlement class under Federal Rule of Civil Procedure 23(b)(2)—usually reserved for injunction-only class actions—which doesn’t permit class members to opt out, and thus makes notice to the class less important. The district court went along with this seemingly pragmatic solution.

And then every business’s worst nightmare happened: A class member filed an identical class action, and—although the district court dismissed the second class action as barred by the settled one—the Second Circuit reversed, holding that the previous settlement did not successfully release the claims.

The Second Circuit explained that the plaintiff in the second class action had been deprived of his due process right to adequate notice of the prior class settlement, and so he wasn’t bound by the settlement. The court noted that it’s an open question whether notice and the right to opt out is constitutionally required in Rule 23(b)(2) class actions. But notice and opt-out rights are definitely required in Rule 23(b)(3) class actions—and the settlement class should have been certified under Rule 23(b)(3) because the claims were predominately about monetary damages, and thus under Wal-Mart Stores Inc. v. Dukes, can’t be brought under Rule 23(b)(2). The court then held that a single notice published in the USA Today was constitutionally inadequate under the circumstances of the case. Even if mailing postcards to every class member would have been impractical, the court concluded that the parties could have published notices in local newspapers and sent emails or text messages to absent class members. Thus, the court held, the copycat class action should be allowed to proceed.

One question that neither the district court nor the Second Circuit appears to have addressed is whether either lawsuit should have been brought as a class action at all. As mentioned above, the FDCPA limited the potential class recovery to less than $14,000, or less than seven-tenths of one cent to each of the approximately 2 million putative class members. For this reason, the parties to the first settlement agreed to donate the damages at issue to charity under the much-criticized cy pres doctrine.  (Read our report on the Ninth Circuit’s recent decision in Dennis v. Kellogg Co., which invalidated a settlement because of an improper cy pres award.)  When individual class members get nothing—so that the only winners are the lawyers—there is good reason to  question whether a class action truly is superior to individual lawsuits, and thus whether a class properly may be certified under Rule 23(b)(3).