With 5th Circuit split on class constitutionality, what’s next for BP?

January 14, 2014

Considering that BP’s resolution of claims stemming from the Deepwater Horizon oil spill in 2010 is the biggest single-defendant private settlement in U.S. history, it’s only fitting that the case has generated a spectacular – and procedurally peculiar – appellate record on the constitutionality of class actions. As you’ve probably heard, on Friday a divided panel of the 5th Circuit Court of Appeals upheld certification of the settlement class, rejecting BP’s argument that class certification must be reversed if the class includes uninjured claimants. Friday’s majority opinion by Judge Eugene Davis directly contradicts a previous analysis of the constitutionality of the BP class by his 5th Circuit colleague Judge Edith Clement in a distinct but overlapping BP appeal decided in October. Since both 5th Circuit appellate rulings on the BP class included dissents, we now have opinions from five different 5th Circuit judges on whether a settlement that dishes out money to uninjured class members can survive constitutional scrutiny. For us class action geeks, these BP appeals are a fascinating debate with enormous consequences. For BP, the conflicting decisions present a multibillion-dollar strategic turning point.

The abbreviated appellate backstory dates back to December 2012, when U.S. District Judge Carl Barbier of New Orleans granted final approval to a class action settlement between BP and a steering committee of plaintiffs lawyers, negotiated over the course of more than a year. The settlement, which replaced a claims facility BP established right after the spill, was designed to compensate several different sorts of victims, from the shellfishing and tourism industries directly impacted by the spill to businesses whose losses were indirect fallout. As the settlement defined it, the class included everyone whose losses resulted from the Deepwater Horizon disaster.

BP supported class certification and approval of the settlement. But the company developed qualms after Judge Barbier approved policy decisions by claims administrator Patrick Juneau that, in the company’s view, enabled businesses unharmed by the oil spill to recover money from BP through creative accounting tactics. As business loss claims mushroomed, BP’s lawyers from Kirkland & Ellis (which had negotiated the settlement) and Gibson, Dunn & Crutcher (which came in for the company after the deal was approved) appealed Barbier’s order to the 5th Circuit. That appeal led to Judge Clement’s opinion last October. Despite arguments by class counsel, represented on appeal by New York University law professor Samuel Issacharoff, that BP agreed to settlement terms that were open to the interpretation Barbier approved, Judges Clement and Leslie Southwick instructed Judge Barbier to reconsider his interpretation of deal terms. On her own, Clement went quite a bit further. If the BP settlement permitted claims by class members who had suffered no losses attributable to the oil spill, she said, then it was illegal. Uninjured plaintiffs don’t have standing under Article III of the Constitution, Clement wrote, and judges can’t create a cause of action that doesn’t otherwise exist – even if the defendant wants to buy global peace through a settlement.

Judge Southwick declined to join Clement’s conclusions about constitutional standing, though he said it was logical, because he found it unnecessary. The third judge on the panel, Judge James Dennis, dissented vigorously, arguing that Clement’s Article III analysis would erase the benefits of class action settlements by imposing expensive and unwieldy requirements at the class certification stage.

While BP’s appeal of Barbier’s order was under way, class members who objected to the approval of the deal proceeded with a separate appeal at the 5th Circuit. In September, BP filed an extraordinary brief in that case. Even though the company had backed approval of the settlement at the trial court and had pledged to defend the agreement against objections, BP said that it was prepared to argue alongside objectors for decertification of the class unless Barbier’s interpretation of the settlement agreement was reversed.

BP maintained that position after the Clement panel’s ruling in its appeal of Barbier’s order. In fact, the company filed a supplemental brief citing Judge Clement’s analysis to back its assertion that a class encompassing uninjured claimants does not pass constitutional muster.

That brings us to Friday’s 5th Circuit ruling, in which majority opinion writer Judge Davis was joined by Judge Dennis – yes, the same Judge Dennis who dissented from Clement’s opinion in the other appeal – in upholding the settlement. Federal circuit courts, the majority wrote, have developed two different standards to guide trial judges in the evaluation of class action settlements that may sweep in uninjured claimants. The so-called Kohen test, followed by the 3rd, 7th and 9th Circuits, holds that settlement approval hinges on the constitutional standing only of named plaintiffs; as long as they have a viable federal-court claim, courts need not consider the standing of absent class members. The 2nd and 8th Circuits follow the Denney test, which requires that classes be defined to include only claimants with constitutional standing but does not insist that every absent class member submit evidence of personal standing. (Interestingly, according to the 5th Circuit, the 7th and 9th Circuits have used both the Kohen and Denney tests in reviewing class certification decisions.)

According to the 5th Circuit majority, Judge Barbier’s approval of the BP settlement was justified under either test. Even BP has not challenged the standing of named plaintiffs in the case, which would satisfy the Kohen test. And the settlement agreement defined the class as those whose injuries were the result of the oil spill, which satisfies Denney. Judge Davis’s opinion conceded that in the previous appeal, Judge Clement said the BP settlement would fail the Denney test if it permitted claims by uninjured plaintiffs. “In Judge Clement’s view, if absent class members include persons who ‘concede’ that they have no ‘causally related injury,’ then a district court lacks jurisdiction to certify the class,” the opinion said. But Clement misread Denney, according to Davis’s opinion. By the agreement’s definition, the BP settlement class includes people injured by the spill, he said. “Accordingly, using Judge Clement’s formulation of the standard, the class in this case does not include any members who ‘concede’ that they lack any ‘causally related injury,'” the majority wrote. “This ends the Article III inquiry under the Denney test, which does ‘not require that each member of a class submit evidence of personal standing’ so long as every class member contemplated by the class definition ‘can allege standing.'”

BP’s arguments that Barbier’s post-approval interpretation of the deal rendered class certification unconstitutional were beside the point, according to the majority. The 5th Circuit’s review, the opinion said, was based on the evidence before Judge Barbier in December 2012. If BP had wanted a deeper review of individual claims, according to the opinion, then it should not have settled through a class action. The company might have obtained rulings on the evidentiary standards for economic loss claims through summary judgment or at trial, the 5th Circuit majority said, but it’s simply not part of the class certification inquiry to consider individualized claims.

Indeed, the majority said, BP knew (or should have known) that it was asking for something impossible. “In particular, BP’s arguments fail to explain how this court or the district court should identify or even discern the existence of ‘claimants that have suffered no cognizable injury’ for purposes of the standing inquiry during class certification and settlement approval,” the opinion said. “It would make no practical sense for a court to require evidence of a party’s claims when the parties themselves seek settlement…. Logically, requiring absent class members to prove their claims prior to settlement…would eliminate class settlement because there would be no need to settle a claim that was already proven.”

BP, like everyone who loses an appeal, has 14 days to decide whether to ask the 5th Circuit for en banc review of Friday’s ruling. That’s not a bad option for the oil company. In his dissent from Friday’s majority opinion, Judge Emilio Garza adopted Judge Clement’s view of Article III standing and class certification. Judge Southwick’s concurrence in the first BP appeal also suggested he agrees with BP. Since Judge Dennis sided against BP in both appeals, the scoreboard would seem to show three 5th Circuit judges already lined up with the oil company and only two against it. Or, BP could skip the en banc process and ask the U.S. Supreme Court to take up its cause. It has 90 days to file a petition for certiorari.

But there’s another option for BP that might be even better: It can rely again on Judge Clement.

Last month, after Clement’s panel ordered Judge Barbier to reconsider his interpretation of the settlement agreement, the trial judge basically stuck with his old holding on causation for business loss claimants (though he did modify his previous interpretation of accounting terms). BP raced back to Judge Clement’s panel at the 5th Circuit to ask the appeals court to make permanent a temporary injunction against payments to uninjured claimants. The 5th Circuit ordered expedited briefing on BP’s motion, which was completed last week. The Clement panel hasn’t scheduled oral arguments, but the judges are obviously making a priority of this latest appeal.

Sam Issacharoff, who represents class counsel, told me Monday that the Davis panel’s ruling Friday on Article III and class certification is the last word on the subject until an en banc 5th Circuit or the Supreme Court reviews the case. “I would hope that the (Clement) panel does not construe Article III in a way that conflicts with the Davis panel,” he said. But Judge Clement is already on record saying that a class that includes uninjured members is unconstitutional. If BP can show that Barbier’s order permits such claims – which Clement seems disposed to believe – will the judge really stand aside in the face of what she considers an illegal settlement?

If Clement and Southwick enjoin payments that class counsel believe to be legitimate under the terms of the settlement, we could wind up with parallel requests for en banc and Supreme Court consideration, one by BP of the class certification decision and the other by class counsel of the injunction.

Like I said, this record is as interesting as it is weird.

(This story has been corrected. An earlier version incorrectly reported that Judge Barbier’s order in December left intact his previous interpretation of accounting terms.)

(Reporting by Alison Frankel)

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