Seventh Circuit Orders Disgorgement of Settlement Proceeds Paid to Bad-Faith Objectors to Class Action Settlements, Ending “Objector Blackmail”

Seyfarth Shaw LLP

When a class action settlement is proposed for approval, the class members have three options, (1) they can remain in the settlement class, (2) opt-out of the settlement to preserve their individual claims, or (3) they can object to the settlement if they believe it to be in some way unfair or inequitable. The latter option has been abused in the recent past, seeing class members filing frivolous objections to a class settlement, appealing decisions approving those settlements over their objections, and then soliciting the payment of individual settlements for dismissal of the appeal. This phenomenon, coined as “objector blackmail,” has possibly been brought to an end in the Seventh Circuit after the appellate court issued its ruling in Pearson v. Target Corp., No. 19-3095 on Aug. 6, 2020.

In Pearson, consumers brought a class action against the sellers of a dietary supplement for violations of consumer protection laws based on alleged false claims about the supplement’s efficacy. Three class members objected to a proposed class settlement submitted to the district court for approval. The district court, however, approved the settlement over their objections pursuant to Federal Rule of Civil Procedure 23. The objectors, however, appealed the denial of their objections to the class action settlement and then dismissed their appeals prior to any briefing in exchange for side settlement payments. Following dismissal of their appeals, a fellow class member sought to reopen the case in the district court by filing a motion for disgorgement of any payments made to the objectors in exchange for dismissing their appeal. After obtaining discovery, the record demonstrated that the three objectors had in fact received side payments in exchange for dismissal of their appeals while the class had received nothing. However, the district court did not provide the relief requested because there was no basis to conclude that the side settlements harmed the class by taking money that had been earmarked for it.

This ruling was thereafter appealed, and the Seventh Circuit considered whether a district court has the equitable power to order settling objectors to disgorge the proceeds of their private settlements for the benefit of the class. The Seventh Circuit reversed the district court’s ruling. The Court explained that the objectors had a duty to object only in “good faith, and imposed a limited representative or fiduciary duty on a class-based objector who, by appealing the denial of his objection on behalf of the class, temporarily takes “control of the common rights of all” the class members and thereby assumes “a duty fairly to represent those common rights.” money the objectors received in excess of their interests as class members “was

The Court stated:

These objectors made sweeping claims of general defects in the [settlement]. Either those objections had enough merit to stand a genuine chance of improving the entire class’s recovery, or they did not. If they did, the objectors sold off that genuine chance, which was the property of the entire class, for their own, strictly private, advantage. If they did not, the objectors’ settlements of meritless claims traded only on the strength of the underlying litigation, also the property of the entire class, to leverage defendants’ and class counsel’s desire to bring it to a close. Either way, the money the objectors received in excess of their interests as class members “was not paid for anything they owned,” and thus belongs in equity to the class.

Thus, the Court determined that disgorgement was the most appropriate remedy to right the objectors’ inequitable conduct.

This ruling is important when defending class cases because prior to the Court’s ruling in Pearson, a class member could file frivolous objections to a class action settlement, appeal the court orders overruling those objections in the hope of “extorting” or “blackmailing” class counsel to obtain side settlements to resolve the appeals, and dismiss the appeal prior to any briefing or ruling. The Seventh Circuit’s ruling in Pearson, however, provides the framework to reverse these settlements and disincentive this practice of “objector blackmail” moving forward. As a result of this ruling, it will be less likely these serial objectors will be able to interfere with class settlements and extort money from defendant or run up the litigation costs associated with having to defend against a meritless appeal of a diligently negotiated settlement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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