by Scott Nelson
What if a class action settlement defined a subclass that had no class representative and no separate representation by counsel, and it purported to release the claims of all members of the subclass for nothing while giving valuable benefits to other subclasses? And what if the settlement notice didn't mention that members of this subclass had nothing to gain by staying in the settlement, and no reason not to opt out? And what if the rest of the class, and class counsel, had an obvious reason to minimize opt-outs by the members of the take-nothing class, because the settlement allowed the defendant to walk away if too many class members opted out?
Does it sound like there might be a problem?
That's what appears to be going on in a proposed settlement in a pair of consolidated cases in the U.S. District Court for the District of New Jersey called Dewey v. Volkswagen AG and DelGuercio v. Volkswagen Group of America (Nos. 07-CV-2249 and 07-CV-2361). The settlement is set for a fairness hearing in July, with objections/opt-outs due for some members of the class next week (opt-outs must be postmarked by June 15) and others a little later because of a problem with misdirected notices. (The settlement website is here.)
The case is about a problem with a number of models of Volkswagens and Audis over a number of years: They leak around their fresh air vents and sunroofs, especially when their drain systems get clogged with leaves or other debris. The result can be water damage to the vehicles, expensive cleanups and repairs, and loss of value.
The plaintiff class in the cases consists of owners and lessees of a large number of Volkswagen and Audi models spanning the years 1997-2009 and covering millions of vehicles and even more millions of class members. And for some of the class members, at least, the proposed settlement appears to provide some valuable benefits. Some vehicle owners who've incurred repair costs in the past will get to share in an $8 million fund that will reimburse them for their out-of-pocket expenditures, and owners of some vehicles are entitled to free services, including modifications to drain systems, from dealers. So far, so good (at least, maybe: I can't speak to the adequacy of the reimbursements, because the class notices and other settlement documents don't provide estimates, as far as I can tell, of how many class members are thought to have incurred repair costs and how much of the costs will be covered by the $8 million fund).
But the settlement agreement defines one subclass, consisting of owners of various models of Volkswagens and Audis for different ranges of model years, who aren't entitled to share in the reimbursement fund and aren't eligible for any free repairs. What do they get? Nothing but a one-page insert for their vehicle's maintenance manual advising them to inspect their drains every 40,000 miles and clean them if necessary (at the owner's expense, of course).
And, oh, by the way -- the free advice in the revised maintenance schedule isn't really a benefit of the settlement, because the members of the subclass get to keep it whether the settlement is approved or not, and whether they opt out of the class or not. But if the settlement is approved, and the members of this subclass don't opt out, they are bound by a very broad release of all claims against Volkswagen relating to the subject of the lawsuit.
In other words, if you're in this subclass, you don't get anything by staying in the settlement, but you give something up -- your potentially valuable claims against Volkswagen. If you stay in, VW gets something for nothing, which is a pretty neat trick.
To be sure, the members of the no-recovery subclass can opt out. But the settlement notice doesn't explain clearly that they have nothing to gain by staying in the class, and nothing to lose by opting out. For starters, it has a section headed "THE SETTLEMENT BENEFITS - WHAT YOU GET" with another heading immediately following it that says, "What does the Settlement provide to you?" The headings suggest that the settlement actually does give members of the subclass something, though if you read the paragraph that follows, that "something" just turns out to be the new manual page attached to the settlement notice, which, whatever value it may have, everyone in the subclass gets to keep regardless of whether they stay in or opt out of the settlement. That paragraph is immediately followed by another that is headed "What does the Settlement provide to the Entire Class?" But that paragraph spends most of its time describing benefits that go not to the "entire class," but only to the other subclasses and class representatives. That the valuable benefits it describes are only for other people is somewhat obscured by the fact that the paragraph says that "certain" class members will be entitled to reimbursements and free services from dealers, without making clear that the members of this particular subclass are by definition not among those "certain" class members. You have to go and read the actual settlement agreement to figure that out.
The bottom line is that the notice never tells members of the no-recovery subclass, in plain English, that they get nothing more by staying in than by opting out and that failing to opt out thus amounts to releasing potentially valuable claims for absolutely nothing. But of course the notice would never say that, because it would be contrary to the interests of the other subclasses, the class representatives (who get $10,000 bonuses if the settlement goes through), and class counsel, all of whom have an interest in holding down the number of opt-outs so that Volkswagen can't back out of the settlement. And, of course, it's in Volkswagen's interest to get as many people to release claims as it can, since each additional release from this subclass comes with no marginal cost to VW. In short, because the subclass has no representatives and no separate attorneys, everyone involved (VW, the class representatives, and class counsel) has an interest in keeping them in the class even though they receive no benefit from staying in.
It may well be, of course, that the claims of the no-recovery subclass aren't as good as the claims of the owners of the vehicles for which the settlement provides a potential monetary benefit. Maybe the claims of this subclass are terrible. If their claims are so much worse, though, it suggests that the claims of the class representatives are not typical of those of this subclass, as required by Federal Rule of Civil Procedure 23(a). And there certainly appears to be a question of adequate representation by both class representatives and class counsel when a subclass that has no named representative and no separate counsel is placed in the position of releasing claims for no consideration, especially when they are not clearly told that they have no reason not to opt out.
But the fundamental problem is not one of typicality, adequate representation, or notice, though those are all part of the picture. It is that this subclass is being asked to release claims for nothing so that other class members can get more substantial benefits from the settlement. Even if there had been clearer notice, or separate representation, how is a settlement that has people giving up something for nothing fair? As the D.C. Circuit likes to say, "something outweighs nothing every time." Or, as the Second Circuit put it years ago in National Super Spuds v. New York Mercantile Exchange, 660 F.2d 9, 19 (1981), "An advantage to the class, no matter how great, simply cannot be bought by the uncompensated sacrifice of claims of members, whether few or many ...."
That the members of the subclass can opt out doesn't make the deal fair. Why should they be put to any burden to avoid an entirely gratuitous release of claims? In any event, the reality is, as VW well knows, that most people, out of inertia, or lack of full information, or apathy, won't bother to opt out. And every subclass-member who doesn't opt out is one more person whose claim VW has extinguished gratis. Such a deal.
Again, I don't know about the adequacy or fairness of this settlement for the rest of the class -- the ones who at least have a chance to get something out of it. But for the subclass that gets nothing beyond the free advice VW has already sent out, any approval of the settlement should at a minimum be conditioned on its revision so that it does not release their claims. They shouldn't have to be put to the burden of opting out to avoid having someone else bargain away their rights.
To be sure, VW may be unwilling to do a settlement that doesn't release the claims of the no-benefit subclass. But if the settlement really reflects a reasonable compromise of the claims of the other class members, will VW really refuse to settle unless it can get free releases from the no-benefit subclass? It seems highly doubtful that being denied such an obvious overreach would be a deal-breaker for VW. Nor does it seem likely that the court's evaluation of class counsel's fee request ($22.5 million) will turn substantially on whether this subclass is included in the settlement.
The fee request, by the way, is another interesting story here. Class counsel seek to have fees awarded from Volkswagen on a "common fund" theory based on their valuation of the total package of benefits their efforts have brought to the class, including some benefits that are outside the settlement, such as service actions instituted before settlement but apparently as the result of the litigation. Volkswagen is resisting and insisting on a much lower lodestar-based fee. I'm not here discussing the merits of the issue, but if class counsel are right that the court can consider the value of benefits that are not part of the settlement, presumably it could also consider the "value" of the maintenance schedule inserts mailed to the no-benefit subclass even if the subclass were ultimately excluded from the settlement and the release of claims. There's no reason to subject the subclass to an uncompensated release.
In any event, however beneficial this settlement may be for other members of the class, however meritorious counsel's claim for fees may be, and however much VW may want to get releases from class members for no more than the already sunk costs of mailing out maintenance inserts, the bottom line is that a subclass shouldn't be included in a settlement that provides it no arguable benefit.