Ninth Circuit Refuses To Enforce Release in State Court Class Action Settlement
Last week the Ninth Circuit issued an opinion that highlights the fact that no matter how broadly you draft the release in a class action settlement, you can't necessarily count on a subsequent court enforcing it.
In Hesse v. Sprint Corp., No. 08-35235, Slip op. (9th Cir. Mar. 2010), plaintiffs brought a class action against Sprint, alleging that it improperly charged Washington State's business and operations tax as a line item to its customers when the law disallows such a pass-through and instead requires it to be part of the company's "operating overhead." Plaintiffs assert causes of action under Washington's Consumer Protection Act, breach of contract, and unjust enrichment.
Sprint moved for summary judgment in the trial court, holding that the action was barred by the release and judgment in a nationwide class action settlement entered by a Kansas state court (the "Benney Settlement") in 2006. The Benney Settlement involved a class of Sprint customers who were charged various federal regulatory fees between 2000 and 2006. The class in the Benney Settlement released:
any and all claims . . . that have been, could have been, or in the future might be asserted in the [Benney] Action[] or in any other court or proceeding which relate in any way to the allegations that . . . Sprint failed to properly disclose or otherwise improperly charged for surcharges, regulatory fees, or excise taxes, including but not limited to the [federal] Regulatory Fees; and all other causes of action . . . whether based on federal, state, or local statute . . . that have been, could have been, may be, or could be alleged or asserted by any Class member . . . against [Sprint] relating to . . . the subject matter of any of the claims alleged in the Benney Action.
Slip op. at 3852.
The plaintiffs in Hesse admittedly were members of the Benney class. The question, then, was whether the release in the Benney Settlement precluded plaintiffs' claims premised on Sprint's charging of a state-law tax (Washington's B&O tax) when the underlying claim in the Benney action had been the charging of federal regulatory taxes.
The Ninth Circuit held that "the release cannot preclude the Washington Plaintiffs' claims because the Benney Class Plaintiff did not adequately represent the Washington Plaintiffs and because the Washington Plaintiffs' claims are based on a set of facts different from those underlying the claims settled in the Benney Settlement." Id. at 3854.
The Ninth Circuit cited Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) to conclude that although the subsequent class could not mount an all-out collateral attack on the prior state court judgment, it could seek limited review of whether the procedures in the prior litigation afforded them due process. Slip op. at 3855. The Ninth Circuit found that the Kansas court had not made an explicit finding that the class representative in the Benney Settlement adequately represented class members who also had claims based on state taxes. Accordingly, the Ninth Circuit undertook its own analysis of the adequacy of representation in the Benney Settlement.
The Ninth Circuit held that because the named plaintiff in the Benney Settlement -- who, like me, hails from Missouri -- did not have claims based on Washington's B&O tax, he did not adequately represent the plaintiffs in the Hesse class. This was not only because he did not "vigorously prosecute the claims relevant to this case," but also because he "had an insurmountable conflict of interest with those members of the class." Id. at 3857-58.
The Ninth Circuit took care to indicate that it was not invalidating the Benney Settlement -- at least as to the release of all claims pertaining to the federal regulatory fees at issue in Benney. Instead, it held "only that any release of the B&O Tax Surcharge claims at issue in this case by the judgment approving the Benney Settlement would violate due process." Id. at n.5.
So are class action settlements only able to release the claims that the plaintiffs brought in the case? The Ninth Circuit said no, a release may be broader than the claims stated, but only to a point:
A settlement agreement may preclude a party from bringing a related claim in the future "even though the claim was not presented and might not have been presentable in the class action," but only where the released claim is "based on the identical factual predicate as that underlying the claims in the settled class action."
Id. at 3860 (quoting Williams v. Boeing Co., 517 F.3d 1120 (9th Cir. 2008)). The Ninth Circuit concluded that because "the Washington Plaintiffs' claims do not share an identical factual predicate with the claims resolved in the Benney Settlement," they were not derived from the same transaction or occurrence and thus could not be precuded by the Benney Settlement.
The Hesse opinion is an important read for all counsel who draft class action settlements.
