ABA Section of Business Law

The changes proposed by the advisory committee dealt almost exclusively with Rule 23(b)(3) class actions. Under this provision, the additional findings necessary to maintain the class are predominance ("questions of law or fact common to the class predominate over any questions affecting only individual members"); and superiority ("a class action is superior to other available methods for the fair and efficient adjudication of the controversy"). The current rule then lists four factors a court should look to in making its findings on predominance and superiority.

The proposals submitted for public comment were:

Rule 23(b)(3) would be amended to add factors to the list of matters pertinent to the predominance and superiority findings. New factors emphasized the practicality of, or the class members' interest in, maintaining separate actions, the "maturity of any related litigation," and the weighing of small claims against the costs and burdens of class litigation. In the public hearings, this series of proposed changes became known as the "Goldilocks factors"; the class members' claims should not be too large or too small, but should be "just right." The theory was that if the claims were individually large, they could be pursued by individual actions; if the claims were too small, they created too great a burden on the court without corresponding reward to the individual class members.

Rule 23(b)(4) would permit certification of a 23(b)(3) class for settlement even if it would not be certified for trial. A case, for example, could be entirely unmanageable for trial, but manageable in the context of a settlement. Thus, if viewed as if the case were to be tried, a court would conclude that it failed to meet the Rule 23 requirements, even though it was being certified as a settlement class. Case law was split on this issue. The proposal also would formalize the procedures normally used in effecting class settlements.

Rule 23(c) would change the requirement that a class certification decision be made "as soon as practicable" to "when practicable." There was concern that the existing phrase could lead to premature class certification decisions.
Rule 23(e) would codify existing practice and require a fairness hearing before the dismissal or settlement of a class action is approved.
Rule 23(f) would authorize a permissive interlocutory appeal from an order granting or denying class certification. There was concern that in some particularly large cases that the class certification order gave the prevailing side an almost extortionate advantage in settlement negotiations. Since class certification orders are currently nonappealable, the only appellate review was by a petition for a writ of mandamus — a very burdensome and uncertain way to obtain appellate review of a class certification order.

Comments to these proposals were numerous and contentious. As noted above, the working papers of the advisory committee consist of four volumes. Indeed, before the proposed changes to Rule 23 were even presented to the Standing Committee, (and before the explanatory note was drafted) a letter signed by a large group of law professors urged that the Standing Committee not even approve the proposals for publication. The committee note, once drafted, alleviated or addressed some of the expressed concerns. This unsolicited advice of the professors' group was not followed by the Standing Committee, and publication ensued in August 1996. While some argued that the proposals made only modest changes, without fundamental alteration of the nature of a class action or its requirements, others took a more stridently negative view. The negative comments objected to the limitation on small claims classes, arguing that such claims can only be effectively heard when aggregated in a class setting. In addition, some commentators suggested the authorization of settlement classes openly encouraged collusive settlements. Perhaps the paradigm, giving example to both arguments, was the Sandeo case in Texas. The allegations were that the defendants had rounded up insurance premium charges to the nearest whole dollar, thereby overcharging policyholders. Each individual policyholder was overcharged only a small amount, but the aggregate of the overcharges came to tens of millions of dollars. The case settled as a class settlement. Each class member received a $5.50 refund, while the lawyers were awarded more than $10 million in fees.

On one side of the debate were those arguing that Sandeo was an entirely appropriate use of the class action device, serving societal goals by forcing reform of the insurance overcharges. In essence, they argued, Rule 23 allows enforcement of laws by private lawyers acting de facto as private attorneys general. The other side submits that Sandeo was an abuse of Rule 23, and was instituted by the lawyers instead of the litigants — who cared little about such a small refund. This side of the debate also argues that Rule 23 is merely a procedural device for aggregating claims for judicial efficiency, and is not intended to turn private lawsuits into public policy issues. Considerable controversy was also raised by the settlement certification proposal. However, while the Sandeo-type arguments broke down mostly along plaintiff/defendant lines, the settlement certification issue did not, with both plaintiff and defense bar on both sides of the issue. Those favoring the settlement provision argued it merely clarified existing case law. Opponents, however, exhorted that it was an open invitation to "purchasing res judicata" and encouraged collusive settlements. Examples included competing nationwide class actions in different courts, some where the plaintiffs were somewhat more agreeable or less aggressive in settlement demands, so long as their attorneys' fees were paid.

The settlement certification debate was also complicated by the pendency in the Supreme Court of the Georgine case from the Third Circuit. The Third Circuit had overturned certification of a settlement class consisting of hundreds of thousands, if not millions, of asbestos claims, finding that a settlement class must meet the same criteria under Rule 23(b)(3) as a litigation class.

As a result of the controversy surrounding its rather modest proposals, the advisory committee concluded that there were deep philosophical divisions on many of the issues. Thus, it ultimately only sought Standing Committee approval of two changes to Rule 23: the permissive interlocutory appeal and the change to making a class determination "when practicable." In an unusual move, the committee voted in June 1997 to approve the proposed new Rule 23(f) on interlocutory appeal, and send it to the Judicial Conference, but failed to approve the "when practicable" change.

The Rule 23(f) proposal was approved by the full Judicial Conference in its meeting in September 1997, and the proposed rule was submitted to the Supreme Court for its consideration in November 1997. The court had until May 1 to decide whether to submit the proposed change to Congress. It will do so with a formal public announcement. The rule changes will become effective as announced by the Supreme Court, unless Congress acts to alter or amend them by Dec. 1.