A federal appeals court has overturned a lower court and reinstated litigation filed by a consumer who objects to side settlements reached by three plaintiffs in a class action, in a ruling that also laments side settlements that may be a “sellout” of other plaintiffs.

Tuesday’s decision by the 7th U.S. Court of Appeals in Chicago in Nick Pearson, et al. v. Target Corp., NBTY Inc. and Rexall Sundown Inc., appeal of Theodore H. Frank, involves a settlement of litigation filed by consumers who purchased glucosamine, a dietary supplement advertised for its benefits to joint health. The class alleged the defendants had violated consumer protection laws by making false claims about the supplement’s efficacy.

The litigation has a complex history. After an initial settlement was rejected by the 7th Circuit because it “provided outsized benefits for class counsel,” a second settlement was approved. According to court papers, this settlement totaled $9 million plus an additional $1.5 million in administrative fees and costs of notice.

Three class members objected to the settlement and filed appeals. All three dismissed their appeals before briefing began and the District Court in Chicago issued a “post-appeal judgment” that superseded the settlement judgment “and was not accompanied by any order effectuating the settlement.”  Mr. Frank moved to disgorge any side settlements reached by the three objectors, but the District Court rejected the motion.

On appeal, a three-judge appellate court panel reinstated Mr. Frank’s case. “Relief was appropriate to ensure that no class sellout had occurred,” said the ruling, in referring to the side settlements reached by the objectors.

“By superseding the Settlement Judgment, the Post-Appeal Judgment constructively revised the settlement agreement itself. Without the agreed-upon court monitoring of the settlement, the class could no longer enforce the injunctive relief embodied in the settlement agreement or resolve issues with common fund distributions.”

“We do not know whether class counsel intended to bargain away rights with the stipulated dismissal, or merely do so accidentally. But whatever the reason, the class was disadvantaged by the Post-Appeal Judgment and received no offsetting benefit,” said the decision.

The ruling said, “By all accounts, selfish Settlements by objectors are a serious problem.” It adds however, that the Supreme Court has transmitted to Congress an amendment to the Rules of Civil Procedure concerning class actions “designed to prevent this problem from recurring.”

If Congress allows the new rule to go into effect it “may solve the problem prospectively,” although “that does nothing for the case before us,” said the decision, in remanding the litigation.