5th Circuit’s BP opinion adds to hot debate on use of class actions

October 3, 2013

Can a defendant buy global peace in sprawling litigation through a class action settlement that benefits people who haven’t suffered any harm? Should courts permit class settlements that might sweep in uninjured claimants? And if not, what obligation do judges have to assure that settlements compensate only class members who meet the constitutional threshold to assert a claim?

In a remarkable dialogue in Wednesday’s ruling by the 5th Circuit Court of Appeals in BP’s challenge to the interpretation of some terms in its multibillion-dollar class action settlement with victims of the 2010 Deepwater Horizon oil spill, Judges Edith Clement and James Dennis expressed quite different answers to these questions. And though their discussion did not directly impact the majority holding that U.S. District Judge Carl Barbier must reconsider his interpretation of the settlement agreement’s definition of accounting terms for businesses that operate on a cash basis, the back-and-forth between Clement and Dennis raises important questions about the class action vehicle. We don’t often see appellate courts delve deeply into class action settlements (except those involving payments to charities in lieu of class members) because such agreements are rarely challenged. So the 5th Circuit’s clash of views on class membership and constitutional standing is noteworthy, especially in the context of the intensifying nationwide judicial reconsideration of class actions.

First, the 5th Circuit’s holding: Two members of the appellate panel, Judge Clement and Judge Leslie Southwick, agreed with BP and its lawyers at Gibson, Dunn & Crutcher that the settlement agreement cannot be interpreted to define monthly revenue as cash received and variable expenses as cash paid out. The majority ordered Judge Barbier to reconsider his approval of those definitions for business and economic loss claims by businesses purporting to have been affected by the Deepwater Horizon spill. Judges Clement and Southwick rejected arguments by class counsel, represented on appeal by New York University law professor Samuel Issacharoff, that BP agreed to terms that were open to the interpretation Judge Barbier gave them, so the company must be bound by the deal it signed. BP, as you probably recall, had run an intense public relations campaign claiming that it was being robbed of billions of dollar by uninjured claimants taking advantage of Barbier’s misinterpretation. I’m sure the majority holding will assuage concerns that BP’s experience will dissuade future mass tort defendants from agreeing to class action settlements. (I didn’t buy those concerns, but greater minds – including some terrific mass tort defense lawyers – were convinced.)

Judge Clement’s majority opinion veered away from the rather dry specifics of accounting terms in the BP settlement agreement in a section on purportedly fictitious claims by uninjured class members. And here’s where this ruling gets interesting, even if you don’t care about BP and cash-basis accounting. The threshold question for litigation in federal court, as you know, is whether a plaintiff has standing to sue under Article III of the U.S. Constitution. The U.S. Supreme Court said in its 1997 decision in Amchem v. Windsor that class actions must satisfy those Article III standing requirements: only injured parties can sue. According to Judge Clement, Judge Barbier may have run afoul of the Supreme Court’s holding on constitutional standing when he interpreted settlement terms in a manner that permitted claims by class members who had suffered no losses attributable to the oil spill.

A class action settlement, she said, cannot create a right of action that doesn’t otherwise exist. A trial court exceeds its powers, according to Clement, when it approves a settlement that allows “recovery from the settlement fund by those who have no case and cannot state a claim.” Even if defendants are willing to tolerate settlements that sweep in uninjured claimants for the sake of a global release, the judge said, such agreements should not pass judicial muster. “A class settlement is not a private agreement between the parties. It is a creature of Rule 23,” she said. “Courts do not have the authority to create a cause of action (and their corresponding subject-matter jurisdiction over it) and then give peace with regard to that cause of action.” In this case, she said, if the settlement permitted the class to include members who haven’t sustained losses due to the oil spill, “the settlement is unlawful.”

“The myth of ‘global peace’ through payment of admittedly non-spill-related claims is a legal nullity that cannot remedy this deficiency,” Clement wrote. “There is no need to secure peace with those with whom one is not at war.”

Judge Southwick shied away from Clement’s conclusions on these supposedly fictitious claims. He said her analysis was “logical,” and that he shared her concern about defendants using class actions to buy global peace. But he said there was no need for her to address the legality of the overall deal because no one asked this panel to do so. (Objectors to the overall deal have challenged the settlement framework in a separate appeal, which will be heard by a different 5th Circuit panel next month.) Southwick’s decision not to join this section of Clement’s opinion means that only Clement stands behind it.

Judge Dennis, meanwhile, stands squarely opposed. In a vigorous dissent, Dennis extended Clement’s reasoning to an extreme. She said that trial courts must be sure that class members have a colorable claim but how exactly, Dennis asked, would that work? “Should the district court require that every settlement beneficiary file a separate complaint consisting of individual allegations and that BP file separate motions to dismiss each of the complaints?” he wrote. “I do not think it wise to mandate such an unwieldy and expensive undertaking when the parties settled precisely to avoid that sort of costly litigation.” Dennis also said that Clement’s point about uninjured parties benefiting from class settlements is misplaced. Private agreements – which is what class action settlements are – direct recovery to third parties all the time, he said. Dennis also pointed out that Clement’s citation of the 3rd Circuit’s 2011 en banc ruling in DB Investments v. Sullivan actually quotes from a two-judge dissent. By contrast, the majority of the 3rd Circuit, Dennis pointed out, held in Sullivan that a class action settlement of antitrust claims against DeBeers was correctly approved even though indirect purchasers in some states couldn’t have sued DeBeers under their own state laws.

“In short, whether a settlement agreement arises in the class-action context or not, there seems to me no requirement that every beneficiary of the agreement have a ‘colorable’ cause of action against the defendant,” Dennis said.

NYU’s Issacharoff, who argued the Sullivan case at the 3rd Circuit as well as the BP case before Dennis and Clement, said he’s not unduly worried about Clement’s dicta. “Her rhetorical sweep was broad, but where she doesn’t go is to say the class must have proof everyone will win,” he told me. “She said you only need a colorable claim.” Her language may be yet another obstacle for plaintiffs seeking class certification, Issacharoff said, but defendants that want to settle should be able to work with class counsel to draft class definitions that satisfy what he called the “malleable standard” of a legally colorable claim. (BP, which had threatened to join settlement objectors in seeking to overturn the agreement if the 5th Circuit upheld Judge Barbier’s order on accounting definitions, told me in an email statement that it is reviewing Wednesday’s ruling and has no additional comment.)

Issacharoff said that Clement’s opinion could turn out to be more useful to class action settlement objectors than to defendants hoping to block certification. I checked that theory with appellate litigator Howard Bashman of the blog How Appealing, who argued the Sullivan case at the 3rd Circuit on behalf of an indirect diamond purchaser who objected to the DeBeers settlement. Bashman said Clement’s opinion could be useful to objectors. He also said he thinks she (and the dissenters in the en banc Sullivan ruling) is correct about standing requirements for class members. “Judges don’t have the luxury of ignoring” Article III, he said.

The BP case is already the biggest civil litigation in history, and even though the 5th Circuit temporarily stopped some claims payouts for Judge Barbier’s reconsideration of terms, it’s only going to get bigger. I suppose it’s only appropriate that the case make some interesting law along with way.

(Reporting by Alison Frankel)

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