Friday, January 15, 2010

Northern District Holds that Settlement Objector’s Failure to Opt-out of Settlement Class Undermined Standing to Challenge Adequacy of Notice in Separate Lawsuit

In Skilstaf, Inc. v. Cvs Caremark Corp., 2010 U.S. Dist. LEXIS 2662 (N.D. Cal. Jan. 13, 2010), the Court granted summary judgment brought against the named plaintiff on the grounds that it was bound by a prior action settlement containing “a court-approved covenant not to sue any other person or entity for a claim based on the same facts.” See id., at 9. The Court’s decision was unique in that it was limited specifically to the named plaintiff, which had actually filed an objection to the covenant at the settlement action on the grounds that the covenant was not disclosed in the notice. Significantly, the trial court in the previous action had stated on the record that it did not believe that the covenant would withstand challenge on due process grounds, and concluded that a due process challenge to the release could be raised before another court if placed at issue. See id., at 12. Yet, despite being provided additional time to opt-out, the plaintiff failed to do so. As reasoned by the Court, the failure to opt-out under such circumstances eliminated the plaintiff’s ability to challenge the validity of the covenant in the subsequent lawsuit:
If Skilstaf's notice of the terms of the settlement agreement had come solely from these two documents, the Court would likely share Skilstaf's and the New England Carpenters court's due process concerns. Skilstaf's argument regarding the deficiencies in the class notice procedures described above, however, fails to mention its unique position in the settlement process. Skilstaf's counsel, apparently through its own diligence, discovered the broad scope of the release provision and specifically applied to the district court for clarification. At the final approval hearing, the court, defense counsel, class counsel, and Skilstaf's counsel had an extensive discussion regarding the provision, after which Skilstaf was given another opportunity to opt out of the settlement. Skilstaf acknowledges in its brief that it chose not to opt out or appeal the district court's decision because it "did not want to prevent the New England Carpenters class from immediately receiving the monetary benefits of the McKesson settlement." Pltf. Oppo. at 8. n5 Skilstaf's own actions undermine its contention that it lacked sufficient notice of the scope of the release. Having made an informed and strategic decision to remain in the New England Carpenters class in order to reap the benefits of the settlement with McKesson, Skilstaf cannot now attempt to circumvent the limitations that attended those benefits.
See Skilstaf, 2010 U.S. Dist. LEXIS 2662, at 17-18.

Thereafter, the Court declined the plaintiff's request for leave to amend to locate a replacement plaintiff, reasoning that pre-certification dismissal deprived the court of an Article III case or controversy that would permit class member substitution:
the Court is not persuaded that it would be appropriate to permit the substitution of another class representative at this stage. Ordinarily, substitution of class representatives is permitted only after a class has already been certified. This is because, when the named plaintiff's claim is dismissed at the pleading stage, there is no longer an Article III "case or controversy" between the parties, and the action must be dismissed. See, e.g., Kremens v. Bartley, 431 U.S. 119, 132-33 (1977); Bd. of Sch. Comm'rs of City of Indianapolis v. Jacobs, 420 U.S. 128, 129 (1975) (per curiam); Lierboe v. State Farm Mut. Auto Ins. Co., 350 F.3d 1018, 1022 (9th Cir. 2003). Skilstaf cites two cases in which substitution of the named class representative was permitted prior to certification. Both of these cases are factually distinguishable and do not present grounds for departing from the usual rule in this action. See December 22, 2008 Order, Strickrath v. Globalstar, Inc., No. 07-1941 (Docket No. 146), at 11 (where the named plaintiff's claim was found to be time-barred just prior to the class certification hearing, court allowed 28 days for substitution in the interest of judicial economy); Wiener v. The Dannon Co., 255 F.R.D. 658 (C.D. Cal. 2009) (after class certification hearing and issuance of order finding that all certification requirements had been met other than typicality, court allowed approximately two weeks for substitution of class representative).
Skilstaf, 2010 U.S. Dist. LEXIS 2662, at 19-21.

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