• Third Circuit Reverses District Court’s Vacation of Preliminary Approval of Class Action Settlement Related to Claims Covered by the Clarification Act
  • July 29, 2010 | Author: Marc Kirkland
  • Law Firm: Strasburger & Price, LLP - Frisco Office
  • Ehrheart v. Verizon Wireless, 2010 U.S. App. LEXIS 12174 (3d Cir. Pa. June 15, 2010)

    Facts: Appellants, a class of consumers, claimed that Verizon violated § 1681c(g) of the FCRAby failing to properly truncate the credit card numbers and expiration dates on receipts. The Parties then participated in court-ordered mediation, starting in January of 2008. During this time, legislation was pending before Congress -- the Credit and debit Card Receipt Clarification Act of 2007 (“Clarification Act”), § 1681n(d) -- which would amend the FCRA, effectively eliminating the Appellants’ cause of action.  On April 22, 2008, after completing mediation, the parties arrived at settlement which they submitted to the district court for approval pursuant to Federal Rule of Civil Procedure 23(e). The district court entered a preliminary order approving the settlement two days later. The Clarification Act was signed into law on June 3, 2008. Six days later Verizon filed a motion asking the district court to vacate its order granting preliminary approval of the settlement. The district court granted Verizon’s motion. On appeal, the Third Circuit reversed the district court’s order.

    • Class Action Settlement. Under Rule 23(e) a district court’s primary role is to determine whether settlement is fundamentally fair, reasonable and adequate. The purpose of Rule 23(e) is to protect the unnamed members of a class from unjust or unfair settlements. 
    • Class Action Settlement. There are two steps in reaching settlement in a class action. First, the parties reach an agreed to settlement. Second, the district court evaluates the agreement as a fiduciary for absent class members. This fiduciary duty does not extend to defendants in a class action, who are in a position to protect their own interests during negotiation. The Third Circuit found that the parties entered into an enforceable settlement agreement and that the district court erred in vacating its preliminary approval of that agreement. Such action would render the settlement process meaningless since either party to a class action settlement could back out of an agreement anytime before court approval and avoid any legal repercussions for breaching the earlier offer and acceptance.  In negotiating settlement, Verizon bet on the certainty of settlement instead of gambling on the uncertainties of future legislative action. Verizon lost and the district court erred by letting it replay its hand.
    • Class Action Settlement. There is a strong presumption in favor of voluntary settlement agreements. This presumption is especially strong in class actions and other complex cases where substantial judicial resources can be conserved by avoiding formal litigation. By vacating its preliminary approval of settlement, the Third Circuit found that the district court permitted Verizon to void its settlement agreement when it became unpalatable and digressed from the federal policy of encouraging class action settlement agreements.
    • Class Action Settlement. The Clarification Act eliminated the Appellants’ cause of action and retroactively encompassed Appellants’ claims. However, the Clarification Act does not moot the settlement agreement the parties executed while that legislation was pending before Congress. Changes in the law after settlement do not affect the validity of the agreement and do not provide a legitimate basis for rescinding settlement. Specifically, the Court found that Verizon could avoid its independent contractual obligations simply because a change in the law confers upon it a benefit that could have altered the settlement calculus.