Today, in Booth Trust v. Crowley, No. 10-3285, in an opinion by Judge Frank Easterbrook, the Seventh Circuit threw out a case arising from the settlement of a shareholder derivative suit. And I mean Judge Easterbrook really threw it out.
Settling defendants often defend worthless settlements on the ground that the underlying claims also are (in their view) worthless. That argument has always struck me as one the courts should not accept, particularly where the settlement has a structural defect, such as one in which, for no good reason, some class members get something and others get nothing. (That's generally true of coupon settlements, because the value of the relief to each class member turns on a factor irrelevant to the case's merits: whether the class member wants or is able to use the coupon.)
My view has been that if a class suit is really worthless, a district court should not approve a worthless settlement (which of course will include attorney fees for plaintiffs' counsel); rather, it should dismiss the case for failure to state a claim. If a case is perceived as weak, but not worthless, however, the court should not approve a worthless settlement or one that irrationally provides some class members with something and others with nothing. Rather, it should insist that the settlement provide some real value and make sure that similarly situated class members are treated alike.
So, here's what Judge Easterbrook did in Booth Trust. He didn't just reverse a district court's settlement approval. In fact, the district court had itself disapproved the settlement, albeit on grounds that allowed the parties to fix things up and try again. (Indeed, the settling plaintiff's principal argument on appeal was that the appeal was moot in light of the district court's disapproval of the settlement.) Instead, Judge Easterbrook held that the case was meritless and sent the case back to the district court with instructions that the suit be dismissed. Whether that was an appropriate thing for an appellate judge to do is worth asking. (It is hard to see the basis for appellate jurisdiction over the merits given the lack of finality; the district court had disapproved the settlement and denied a motion to dismiss on the merits.) Throwing out the suit on appeal seems unusual for another reason: While the case was up on appeal, the parties had submitted a new settlement to the district court for approval.
Indeed, Judge Easterbrook seemed to acknowledge that throwing the case out was unusual given the posture of the case:
We could stop at this point and leave the parties to slug it out in the district court, with an appeal by whoever loses (or objects to a settlement). But this litigation is so feeble that it is best to end it immediately[.]
It may also be worth asking whether Judge Easterbrook's assessment of the merits of the underlying derivative suit -- which turns on antitrust issues -- was sound. (I have no way of assessing that.)
But I do think Judge Easterbrook's position is right in principle. An obviously meritless case should not benefit only lawyers and no one else.
Booth Trust also raised the question whether Devlin v. Scardelletti, 536 U.S. 1 (2002) -- which held that class action obejctors need not be intervenors to appeal a district court's approval of a class action settlement -- applies in the Rule 23.1 derivative suit context. Judge Easterbrook avoided answering the question simply by reversing the district court's denial of intervention to the appellant-objector before the court. He explained:
A district judge ought not try to insulate his decisions from appellate review by preventing a person from acquiring a status essential to that review. In Crawford v. Equifax Payment Services, Inc., 201 F.3d 877, 881 (7th Cir. 2000), we told district judges to grant intervention freely to persons who want to contest settlements in class actions under Fed. R. Civ. P. 23; that is no less true of derivative actions under Rule 23.1. ... We think it best to leave [the question whether Devlin applies to Rule 23.1 cases] to another day—a day that, if district judges grant party status to serious objectors as they should, need never arrive.
[Note: The original version of this post has been amended to clarify a few procedural points and to add links to two appellate briefs.]