Breaching the Contract Paradigm

Jasminka Kalajdzic

For the traditional civil proceduralist and legal ethicist, much of class action law is fitting a square peg in a round hole. Few of the principles or rules developed in the context of bilateral relationships apply neatly in representative litigation. For example, rules of conduct are ill-suited to the sui generis relationship class attorneys enjoy with the lead plaintiff and with the class. Cy près remedies common in class settlements provide for relief – payment to a non-party – that the underlying substantive law does not authorize. The presence of absent class members complicates the doctrine of standing, while the opt-out system disrupts expectations of basic due process rights. Add to this list the class action settlement. Its unique nature has to date been undertheorized and underexplored, although the features that distinguish class actions from their two-party counterparts are more pronounced at settlement: a deal binds absent class members who had no power to instruct counsel and no say in the deal’s terms. In these circumstances, is a settlement agreement a “contract” and should disputes arising from the settlement be resolved by resort to strict contract law principles?

Howard Erichson and Ethan Leib challenge the prevailing paradigm of the class action settlement as a contract between parties. Their thesis is that a class settlement agreement is a particular sort of contract and a unique kind of court judgment; it requires its own interpretive framework, one that borrows from the law of contracts and the law of judgments. Their distinctive approach respects the role of the certifying court as protector of class members’ interests in a way that blind adherence to settlement-as-contract ignores.

Erichson and Leib document the many ways in which courts have treated settlement agreements as simple contracts and thus have focused on giving effect to the parties’ intent when adjudicating disputes about the interpretation of such agreements. Class action procedural law encourages such an approach by, for example, prohibiting judges from altering the terms of the proposed settlement. The authors document numerous examples of courts invoking contract law to analyze disputes concerning the class settlement.

They then explain the many ways in which class settlement agreements differ from other contracts and why those differences matter. Class members are not parties to the litigation, let alone to the settlement agreement. What binds them to the deal is the certification order and the order approving the settlement, not that they negotiated or consented to it. A class member and class counsel do not enjoy a classic principal-agent relationship. Moreover, the parties are not free to settle the action on any terms they deem acceptable: by law, the court must approve the agreement after assessing its fairness to absent class members. The settlement agreement binds class members because a court entered a judgment giving effect to its terms. The rationale for court oversight is key: “Courts review class settlements because negotiated resolutions of class actions in fact present serious risks that class members’ interests will be disserved by those who purport to represent them in negotiations.” The inherent conflicts of interest alone should be sufficient to justify departure from the usual contract paradigm.

Part III makes the case for a distinct interpretive framework for disputes that arise concerning the interpretation or enforcement of settlement agreements. Erichson and Leib rightly point out that even within contract law, some contracts demand special rules. For example, contra proferentum is a first principle in interpreting insurance contracts, while consumer contracts invite a more flexible parol evidence rule. Like contracts of adhesion, class settlement agreements invite the court to adopt an approach that differs from that which applies to contracts based on mutual assent.

The authors’ framework consists of four questions that courts should ask when determining the principles to apply to a dispute:

1. In the pending dispute, who is to be bound by the terms of the class settlement? If the dispute involves an attempt to enforce the contract as against someone who participated in the drafting of the agreement – such as the defendant – then general “intent-of-the-parties” contract principles may reasonably apply. Conversely, binding a class member who neither negotiated the agreement nor appointed an agent to protect her interests calls for different principles. Here, contra proferentum has more relevance.
2. When was the opt-out right exercised? The timing of the opt-out is relevant to determining the nature of any assent to the terms of the settlement. If the opt-out process occurs when the terms of the settlement are known, for example, and when there was good notice and a substantial claim in issue, declining to opt out may amount to tacit assent on the part of a class member.
3. Does the dispute involve a matter on which the interests of the settlement drafters diverged from the interests of the class members? Where the dispute involves an interpretation of a term that presents a divergence of interests, contra proferentum and other principles protecting vulnerable parties should apply.
4. Is the judge who certified the class and approved the settlement also the judge who is evaluating the interpretive dispute? “Some deference should be given to the judge who is best positioned to speak to the meaning of that settlement and thus the meaning of the judgment that made the settlement binding.”

These questions will orient judges away from the private contract model toward the protective role mandated by the law of class actions. Courts are required to protect absent class members from unfair settlements, both at the time of settlement approval and at the time of implementation. Thus, faced with a dispute about the terms of an agreement, judges should think not only of what class counsel and defendants intended, but what a reasonable class member might have agreed to.

Like so much of class action law and procedure, class action settlement agreements belie the neat application of principles derived from a different paradigm. Class Actions Settlements as Contracts? convincingly explores why contract law principles designed to determine and give effect to the intent of the parties do not apply squarely to the class action context. More importantly, the authors provide an interpretive framework that respects the unique place of class members in the litigation and the court’s unique role in protecting their interests.