Seventh Circuit Declines to Adopt the “Reasonable Indication” Rule for Opting Out of a Class Action Settlement

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On March 11, 2021, the Seventh Circuit held that when a district court delineates clear instructions for how class members can opt out of a class action settlement, a class member’s continued prosecution of claims in parallel litigation does not provide proper notice of their intent to be excluded from the binding settlement. The Navistar court declined to adopt the “reasonable indication” standard for opting out of a class action settlement—a test previously endorsed by the Second and Tenth Circuits—on the grounds that such a standard would be impractical and impossible for district courts to administer. However, when a district court has not issued detailed instructions concerning the opt-out process, a judge is free to accept any “reasonable indication” of class members’ desire to opt out.

  • A class of truck owners sued Navistar for selling trucks with allegedly defective engines. The court granted preliminary approval of a class settlement in June 2019. Prior to approving the settlement, the district court outlined a detailed opt-out procedure for class members who wish to exclude themselves from the settlement.
  • Two members of the class (collectively “Drasc”), who had brought a separate suit in Ohio state court, did not follow the opt out procedures outlined by the district court. After the district court entered a final judgment implementing the settlement and ending the litigation, Drasc moved to intervene and argued it should not be bound by the settlement because (1) it never received class notice and (2) the court should deem Drasc’s ongoing litigation in Ohio a “reasonable indication” of its desire to opt out.
  • With respect to Drasc’s first argument, the Seventh Circuit agreed with the district court that Drasc had actual knowledge of the need to opt out and could not show excusable neglect justifying extension of the opt-out deadline:
    • First, two first-class letters containing class notice had been sent to Drasc. While Drasc contended that the letters were not in its files and its president could not recall receiving them, the court held that “mailing is evidence of receipt” and “a disclaimer of memory does not refute receipt.”
    • Second, Drasc’s lawyers in the Ohio suit had actual notice of the settlement and even sent a letter to Navistar’s counsel the day after the preliminary hearing. Further, Drasc’s lawyers “must have known about the need to opt out” because “no modern lawyer is unaware of the procedures for managing class actions.”
  • In the alternative, Drasc argued that its continued suit against Navistar in Ohio state court should suffice as “reasonable indication” to the district court that Drasc intended to opt out. The “reasonable indication” standard arises from the lack of specificity in the text of Rule 23(c)(2)(B)(v), which provides that “the court will exclude from the class any member who requests exclusion.” Both the Second and Tenth Circuits have adopted reasoning from Wright & Miller that the Rule provides district courts with “considerable flexibility in determining what constitutes an effective expression of a class member’s desire to exclude himself and any written evidence of it should suffice.” See In re Four Seasons Securities Laws Litigation, 493 F.2d 1288, 1291 (10th Cir. 1974); Plummer v. Chemical Bank, 668 F.2d 654 (2d Cir. 1982). The Seventh Circuit noted, however, that neither the Tenth nor Second Circuits considered what should happen when the district court issues a more precise directive to class members and insists that it be followed.
  • It was in this distinction that the Navistar court rested its opinion. When a district court has not provided instructions to class members about how to opt out, “the judge is free to accept as adequate any ‘reasonable indication’ of such desire.’” When, however, a district judge has specified “in excruciating detail” how opting out is to be accomplished, as the district court in Navistar had done, a judge is not required to accept a different means of opt out.
  • The court enumerated several reasons why adopting the “reasonable indication” standard would be impractical and inefficient:
    • First, the standard would improperly allow class members to engage in wait-and-see behavior, permitting a class member to collect more than a suit’s “actuarial value” based on hindsight determinations concerning which suit provided a larger recovery. Instead of permitting such “one-way interventions,” courts should require class members to “make an irrevocable choice: take their share of whatever the class receives, or take the outcome of a separate suit.”
    • Second, the “reasonable indication” standard would render class actions “difficult if not impossible to administer,” given that classes may have thousands or even millions of members.
    • Third, rejecting the “reasonable indication” standard in favor of a more predictable and mechanical opt-out procedure will help inform a district court’s decision concerning whether to approve a settlement “as a substantive matter,” since the court will have greater clarity concerning the number of opt-outs (and whether the settlement value should be reduced accordingly).
  • The decision will help class action defendants in the Seventh Circuit preserve the binding character of class settlements and protect against collateral attacks from class members in parallel and follow-on suits. It also underscores that class litigants should draft proposed preliminary approval orders that provide clear and explicit rules concerning opt-out procedures and timing, with no exceptions. Otherwise, district courts will have greater leeway to permit belated opt-outs under a “reasonable indication” standard.
  • The case is In the Matter of Navistar Maxxforce Engines Mktg, Sales Practices, & Prod. Liab. Litig., and the opinion is available here.

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