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Objectors to class-action lawsuit settlements should not be allowed to engage in “blackmail” for their own financial benefit, said a federal appeals court Thursday in reversing a lower court ruling.
“We address here a recurring problem in class-action litigation known colloquially as ‘objector blackmail’,” says the ruling by the 7th U.S. Circuit Court of Appeals in Chicago in Nick Pearson, et al. v. Target Corp. et al. v. Randy Nunez. et al., Appeal of: Theodore H. Frank.
The ruling is the latest development in litigation first filed in 2011 alleging that defendants had made false claims about certain dietary supplements they manufactured and distributed, according to the ruling.
After a first settlement was rejected, a second, $7.5 million settlement in the case was reached. After that settlement was approved, three objectors to the settlement removed their objections after they were paid a total of $130,000, according to the ruling.
A class member in the case, Mr. Frank, filed suit in U.S. District Court in in Chicago over the payments, moving to disgorge any side settlements reached by the three objectors. His motion was rejected by the district court, but in 2018, the 7th Circuit reinstated Mr. Frank’s lawsuit.
In its latest ruling, the district court held the objectors had not committed an illegal act, nor taken any money out of the common fund.
The ruling was overturned by a unanimous three-judge appeals court panel. “The scenario is familiar to class-action litigators both offense and defense,” said the ruling.
“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,” the ruling said.
“The objectors then file appeals. As it turns out though, they are willing to abandon their appeals for sizable size 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,” the ruling said. “Three objectors appealed the denial of their objections to a class action settlement and then dismissed their appeals in exchange for side payments.”
“Falsely flying the class’s colors, these three objectors extracted $130,000 in what economists would call rents for the litigation process simply by showing up and objecting to consummation of the settlement to slow things down until they were paid,” the ruling said.
“The objectors’ settlement proceeds here belong in equity and good conscience…to the class and ought to be distorted,” it said.
It states, however, that the remedy in this case “pose a practical challenge.” Return of the $130,000 to the class “is no longer possible or would be self-defeating because the administration costs would swallow the benefits.” The ruling said the funds should be paid to a foundation.
The case was remanded for further proceedings.
Attorney M. Frank Bednarz, of the Hamilton Lincoln Law Institute-Center for Class Action in Chicago, said the “7th Circuit made life harder for bad faith objectors and the court should not allow corporate defendants or plaintiff attorneys to buy out appeals with cynical side deals.” He said, “When objectors must benefit the class in order to get paid the class is going to benefit.”
Other attorneys in the case had no comment or could not be reached.
A group of law firms together filed six class-action lawsuits against insurers in federal courts from California to New York on Friday on behalf of commercial policyholders seeking business interruption coverage for coronavirus-related losses.