United States: Magistrate Judge Had Authority To Enter Final Judgment Without Consent Of Absent Class Members But Abused Discretion In Approving Settlement

Last Updated: February 20 2017
Article by Gary M. Pappas

The Ninth Circuit held that a magistrate judge was not required to obtain the consent of absent class members to approve a settlement in a Fair Debt Collection Practices Act (FDCPA) case and to enter a final judgment after certifying a nationwide injunction class. In so ruling, the court joined the Third, Seventh and Eleventh Circuits. The court also held, however, that the magistrate judge abused her discretion in approving the settlement because the injunction was worthless and the absent members lost their right to a damages remedy in any other class action. Furthermore, no evidence existed that the absent members would derive any benefit from the settlement's cy pres award.

Three plaintiffs sued a debt collection agency for leaving voice mail messages dating back to 2008 that violated the FDCPA. During the pendency of the litigation in 2011, the agency adopted a new standardized message that complied with the Act. The parties then consented to conduct all further proceedings before a magistrate judge pursuant to 28 U.S.C §636(c), and the district court entered an order designating the magistrate to exercise jurisdiction over the entire case.

In 2013, the parties reached an agreement to seek certification of a nationwide, settlement-only class under Rule 23(b)(2). The proposed settlement class consisted of everyone in the United States who had received the agency's non-compliant voicemail from 2008 to 2011 — a total of four million people nationwide. The injunction required the agency to continue using the compliant voicemail it voluntarily adopted in 2011 for two more years. The agency agreed to pay each of the named plaintiffs $1,000, the maximum they could recover under FDCPA because none had suffered actual damages.

Under the FDCPA, the absent class members' collective damages were capped at $35,000 — 1% of the agency's claimed $3.5 million net worth. Given the impossibility of distributing less than a penny to four million people, the agency agreed to make a $35,000 cy pres payment to a San Diego veterans charity. The parties' proposed settlement required the absent members to forfeit their right to pursue damages against the agency in any other class action under federal or state law. However, under Rule 23(b)(2), the absent members would not receive notice of the settlement and would not be able to opt out.

One absent class member objected to the parties' proposed settlement at the fairness hearing. She became aware of the settlement when the parties moved to stay her own class action against the agency pending in the Southern District of Florida. The objector's complaint alleged the identical FDCPA violations against the agency but for a much smaller class consisting of only a few hundred Florida residents who owed money to a particular creditor on whose behalf the agency was trying to collect. The objector claimed that the parties' proposed settlement was unfair because it would require each of her absent class members to give up a damages claim worth about $100 in her case under the FDCPA damages cap. The magistrate judge approved the nationwide settlement nevertheless, and the objector appealed.

Before reaching the merits of the settlement, Ninth Circuit addressed its own appellate jurisdiction, which was dependent on the magistrate's authority to enter the final judgment. Under 28 U.S.C §636(c)(1), the magistrate's authority required "the consent of the parties", but the four million absent class members did not give theirs. The court observed that the phrase "the parties" does not have a fixed meaning in federal jurisprudence and that in some contexts had been interpreted to include absent class members. The court reviewed the provisions of §636(c)(2), which specifies the procedures for obtaining party consent under (c)(1), and concluded that Congress did not intend for "the parties" to include absent class members in this context.

For example, the court observed that (c)(2) requires the clerk to notify the parties of the availability of a magistrate judge, and it would be impossible for the clerk to undertake such notice at the time the action is filed and cost prohibitive at such time as the absent members could be identified through discovery. The court reasoned that this interpretation of the statute was also consistent with the general rule that named plaintiffs in class actions are charged with conducting the litigation on behalf of the absent members they represent, including matters of litigation strategy such as the claims to pursue or to drop, discovery to take and motions to file. According to the court, deciding whether to consent to a magistrate judge was litigation strategy of the same order — if not less consequential — than other strategy decisions and is binding on the absent class members even if made by the plaintiffs before the class is even certified.

The court also held that the Constitution does not impose a categorical prohibition on named plaintiffs waiving the right to proceed before an Article III judge on behalf of absent class members. The court reasoned that to serve as class representatives, the named plaintiffs must have claims typical of the class and must fairly and adequately represent the interests of the class. Therefore, the named plaintiffs and absent members' interests should be aligned in the decision whether to waive the right to have an Article III judge hear the case and proceed before a magistrate judge instead. The Due Process Clause, as enforced through Rule 23, ensures that the named plaintiffs interests are, in fact, aligned with those of the entire class and that they fairly and adequately represent the absent members' interests. These due process limits affect the enforcement of class judgments but not the magistrate judges' authority under §636(c) to enter the judgment in the first place.

Turning to whether the settlement terms were fair, reasonable and adequate under Rule 23(e)(2), the court first observed that a class settlement such as this one, which is entered before formal certification, requires heightened scrutiny because of the increased risk that named plaintiffs and their counsel will breach fiduciary obligations owed to absent class members. The court then had little trouble finding that the magistrate abused her discretion in approving this settlement.

According to the court, "the named plaintiffs and class counsel got what they wanted but the remaining four million class members got worthless injunctive relief." The court observed that the injunction merely preserved the status quo for two years because the agency had already adopted a FDCPA-compliant voicemail message. Moreover, the class was not defined to include those who were likely to be contacted by the agency in the future but only those who had suffered a past wrong at the agency's hands by receiving the non-compliant voicemail two to five years earlier. The parties made no showing, as was their burden at the fairness hearing, that the class members were likely to contacted by the agency after approval of the settlement such that they would benefit from the injunction.

The court found, similarly, that counsel presented no evidence the class would derive any benefit from the cy pres award. The court noted that longstanding precedent required the award to "be tethered to the objectives of the underlying statutes or the interests of the class members." Here, the award was a $35,000 donation to a San Diego veterans' organization, yet no evidence existed that it performed any work protecting consumers from unfair debt collection practices as proscribed by the FDCPA. Likewise, no evidence existed that the four million class members – who were scattered throughout the United States not concentrated in southern California — were disproportionately composed of veterans.

Finally, the Court blasted the settlement for its requirement that the absent class member forfeit their right to damages in any class action against the agency. "Because the settlement gave the absent class members nothing of value, they could not fairly or reasonably be required to give up anything in return." And while the parties disputed whether such rights had any real value under the damages caps of the FDCPA, the objector proved that the damages claims of her class members clearly had some value. Furthermore, the court observed that the class members were also giving up rights under state law claims that may not have the same damages caps as the FDCPA.

Koby v. Helmuth  No. 13-56964 (9th Cir. Jan. 25, 2017)

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