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Seventh Circuit Rejects “Blackmail”: Settlement Objectors Who Were Paid Off to Release Appeal Forced to Hand Back the Dough [EXPLAINED]

Here’s a remarkable start to an appellate opinion:

A plaintiff class and a defendant submit a proposed settlement for approval by the district court. A few class members object to the settlement but the court approves it as fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e)(2). The objectors then file appeals. As it turns out, though, they are willing to abandon their appeals in return for sizable side payments that do not benefit the plaintiff class: a figurative “blackmail” by selfish holdouts threatening to disrupt collective action unless they are paid off.

Talk about telling it like it is.

Having served as lead counsel in ~200 TCPA class actions now I have certainly been party to a classwide settlement or two. I am gratified to say that my more recent class resolutions have sailed through without drawing objection, but my earliest settlements did attract objectors who were–as the Seventh Circuit rendition explains in Pearson v. Target Corp., No. 19-3095, 2020 U.S. App. LEXIS 24797 (7th Cir. June 4, 2020)–paid off (by the Plaintiff’s counsel– not my client) to release their appeal after the objections were overruled by the lower court.

So what are objectors and how do they come to demand a slice of the pie?

When a class action settles the class members have a choice– they can remain in the settlement class (usually by doing nothing), they can opt-out of the settlement (usually with an affirmative opt out effort), or they can object to the settlement.

Remaining in the settlement means a class member receives the benefit of the resolution–whatever it is–but waives the right to sue in the future and releases their claim. Opting out of the settlement means, rather obviously, that the class member elects not to be part of the settlement and maintains their claim, losing nothing in the process. Straightforward enough.

The third option–objecting to the settlement–is a little odd. Essentially a class member elects to stay in the settlement but complains about it to the Court. Weird right?

The concept is that if a class member elects to opt out of the settlement they are no longer impacted by it, so they lack standing to complain. So in order to object to a class settlement a class member has to remain bound by it. But why would anybody risk being caught up in a bad settlement when they could just as easily (actually far more easily) opt out from participation in the resolution?

Well, theoretically, because the class member is so upset by some aspect of the settlement that they are willing to retain a lawyer and go to court to complain about it. In reality, however, it often occurs that so-called “professional objectors” hire so-called “professional objector counsel” (it is always a mystery who found who and how) to assert ticky tack objections to a settlement in a bid to get paid off by the settling parties.

Here’s how it works. Ever so rarely an objector actually raises a valid objection resulting in the court ordering the parties to clean up the settlement in some manner, and the class settlement is greatly enhanced. That’s why the objection process even exists. In those (rare and increasingly rarer) instances, an objector has added value to the class and a Court may order the payment of fees or incentives to the objector.

Ok. Nice work objector.

In most cases, however, the objection is overruled because the settlement was just fine (a fact that is often well-known to the objector and his/her counsel when the objection is lodged). And what comes next is the gross part. The objector appeals the denial of the objection (knowing full well that the appellate court will overrule the objections) for the sole purpose of jamming up the settlement. And while that generally means class members will have to wait to receive a buck or two, it also means class counsel might have to wait years to recover a million bucks or two.

This might put class counsel in a tight spot– they have worked hard (keep the snickering to a minimum) to obtain their millions in attorneys fees, but they cannot access those funds until the appeal is resolved. So class counsel must sit and wait for the appeal process to wind its way to conclusion. Poor class counsel.

But we all know what happens next. Objector’s counsel calls class counsel and offers a deal. “Ahem, dear friend my client might be willing to dismiss our appeal if you might be willing to carve us off a slice of the turkey.”  Class counsel opens their wallet a bit (it is an enduring mystery on the defense bar just how much these folks get paid but I have heard whispers that objections have been settled for north of $500k!) and the appeal is dismissed, along with the objection. Class counsel gets their millions. Class members get their tens (if their lucky). And the (TCPA)world moves on.

And then came the Pearson decision.

Yesterday, the Seventh Circuit Court of Appeals held that this entire icky business will no longer be a business, at least not within its footprint. To wit:

Falsely flying the class’s colors, these three objectors extracted $130,000 in what economists would call rents from the litigation process simply by showing up and objecting to consummation of the settlement to slow things down until they were paid. We hold that settling an objection that asserts the class’s rights in return for a private payment to the objector is inequitable and that disgorgement is the most appropriate remedy.  

Translation: the objectors and their counsel have to give back the money they skimmed off class counsel.

There is an interesting backstory as to how this issue even ended up in front of the court–indeed it was a legitimate objector complaining about the tactics of illegitimate objectors that brought us this ruling–but the key is that objector “blackmail” will no longer be tolerated by courts within the Seventh Circuit.

Notably, the federal rules were recently amended to make it more difficult for an objector to work side deals, but Pearson is an important case for TCPA class litigants to keep in mind.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 220

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About this Author

Eric Troutman Class Action Attorney
Of Counsel

Eric Troutman is one of the country’s prominent class action defense lawyers and is nationally recognized in Telephone Consumer Protection Act (TCPA) litigation and compliance. He has served as lead defense counsel in more than 70 national TCPA class actions and has litigated nearly a thousand individual TCPA cases in his role as national strategic litigation counsel for major banks and finance companies. He also helps industry participants build TCPA-compliant processes, policies, and systems.

Eric has built a national litigation practice based upon deep experience, rigorous...

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