The U.S. Seventh Circuit recently addressed “a recurring problem in class-action litigation known colloquially as ‘objector blackmail.’ The scenario is familiar to class-action litigators on both offense and defense. 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.

“That’s what happened here. Three objectors appealed the denial of their objections to a class action settlement and then dismissed their appeals in exchange for side payments. The last time this case was here, we called such ‘selfish’ objector settlements ‘a serious problem.’  The question before us now is whether, on motion of another class member, the district court had the equitable power to remedy the problem by ordering the settling objectors to disgorge for the benefit of the class the proceeds of their private settlements. The district court held that it did not, finding that the objectors had not intended or committed an illegal act nor taken money out of the common fund.

“We reverse. 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. Objectors who settle their objections for amounts in excess of their shares as class members are, in essence, not paid for anything they owned.  The objectors’ settlement proceeds here belonged in equity and good conscience (ex aequo et bono, according to the old formula) to the class and ought to be disgorged.”

Before concluding, the Court felt it was appropriate to address, and distinguish, objections and appeals brought by legitimate and good faith objectors:

“We do not expect reasonable and good-faith objections to be deterred or chilled by our holding here, particularly in light of the 2018 amendments to Federal Rule of Civil Procedure 23 addressing the problem of objector side deals….  Good-faith objectors should be able to say specifically why the class or a part of it has been deprived of the fair, reasonable, and adequate settlement to which it is entitled. By definition, such objectors expect to be able to improve the class’s position, whether by compromise or favorable judgment, for which equitable compensation is available. We do not expect any good-faith objector will fail to bring her objection because she is prohibited from selling out the class in exchange for private payment, where she may choose instead not to sell out the class and still receive payment if she brings the class a real benefit.”

 

Pearson v. Target, No.19-3095, 2020 WL 4519053 (7^th Cir. Aug. 6, 2020).