Plaintiffs in this consolidated class action allege copyright infringements arising from defendant publishers' unauthorized electronic reproductions of plaintiff authors' written works. The United States District Court for the Southern District of New York (George B. Daniels, Judge) certified the class for settlement purposes and approved a settlement agreement ("Settlement") over the objection of ten class members ("objectors"). In this appeal, objectors contend that (1) approval of the Settlement was impermissible because it released claims beyond the factual predicate of the case, (2) class certification was improper because subgroups within the class have conflicting interests, and (3) the district court committed procedural errors in certifying the class and approving the Settlement. Although we reject objectors' arguments regarding the release, we conclude that the district court abused its discretion in certifying the class and approving the Settlement, because the named plaintiffs failed to adequately represent the interests of all class members. We do not reach the procedural challenges, which are moot in light of our class certification holding.
We therefore vacate the district court's order certifying the class and approving the Settlement, and remand for further proceedings consistent with this opinion.
Plaintiffs are freelance authors ("authors") who sold written works to print publishers for publication in newspapers, magazines, and other periodicals. With the rise of the Internet, print publishers like The New York Times began to reproduce authors' works electronically by placing them in their own online databases and licensing them to appear in electronic databases such as LexisNexis. In response, authors sued the original print and subsequent electronic publishers, alleging in three independent class actions that the unauthorized electronic publication of their works infringed upon their copyrights.
In June 2001, the Supreme Court endorsed authors' theory of liability, holding in another case that publishers violate the Copyright Act when they reproduce freelance works electronically without first securing the copyright owners' permission. N.Y. Times Co. v. Tasini, 533 U.S. 483, 488, 121 S.Ct. 2381, 150 L.Ed.2d 500 (2001). Authors' three lawsuits, which had been suspended pending Tasini, were consolidated and coordinated with a fourth action in the Southern District of New York. The consolidated class action is brought by 21 named plaintiffs — each of whom owns at least one copyright in a freelance article — and three associational plaintiffs: the National Writers Union, The Authors Guild, Inc., and the American Society of Journalists and Authors. Defendants include electronic database operators such as Reed Elsevier Inc. (owner of LexisNexis) and Thomson Corporation (owner of Westlaw), as well as newspaper publishers that maintain their own archival databases, such as the New York Times Company and Dow Jones & Company, Inc. (collectively "publishers"). The district court referred the parties to mediation, which began in January 2002. In March 2005, with the assistance of mediators Kenneth Feinberg and Peter Woodin, authors and publishers reached a comprehensive settlement agreement.
The Settlement creates a damages formula for each category. Authors holding Category A claims are paid "$1,500 for the first fifteen Subject Works written for any one publisher; $1,200 for the second fifteen Subject Works written for that publisher; and $875 for all Subject Works written for that publisher after the first thirty Subject Works." Authors of Category B works are paid "the greater of $150 or 12.5% of the original sale price of the Subject Work." For each Category C claim, authors are paid "[t]he greater of $5 or 10% of the original price of the Subject Work," except for works sold for amounts over $249. Compensation for any Category C work sold for more than $249 depends on the amount for which it was originally sold: $25 per Subject Work sold for $250 to $999; $40 per Subject Work sold for $1,000 to $1,999; $50 per Subject Work sold for $2,000 to $2,999; and $60 per Subject Work sold for $3,000 or more.
The Settlement caps publishers' total liability through a provision that the parties refer to as the "C reduction." If the total of all claims — plus the cost of notice, administration, and attorney's fees — exceeds $18 million, then the Settlement reduces compensation for Category C claims pro rata until the total compensation is $18 million. If compensation for Category C claims reaches zero but the claims and fees still exceed $18 million, then the Settlement reduces compensation for Category A and B claims pro rata until the claims and fees total hits the $18 million limit.
The Settlement releases publishers from further litigation. The release prohibits authors from barring publishers' future use of the Subject Works, including the selling or licensing of the works to third-party sublicensees. A class member may choose to opt out of the release for future use and only grant a release for past use; however, any authors who fail to affirmatively opt out of the future-use release will be deemed to have granted it. Authors who only grant a past-use release receive 65% of the compensation that those who grant past and future releases receive.
In March 2005, upon reaching the Settlement, authors and publishers moved the district court to certify the class
In October 2005, objectors appealed that order and judgment on numerous grounds. Over a dissenting opinion, In re Literary Works in Electr. Databases Copyright Litig., 509 F.3d 116, 128 (2d Cir.2007) (Walker, J., dissenting), a majority of this panel concluded sua sponte that the registration requirement imposed by Section 411(a) of the Copyright Act is jurisdictional, and that the district court lacked subject-matter jurisdiction to approve the settlement of claims for the infringement of unregistered copyrights. Id. at 121-22. Authors and publishers joined in asking the Supreme Court to review that decision.
The Supreme Court issued a writ of certiorari and, in March 2010, reversed the judgment of this court, holding that the district court had jurisdiction over the Settlement because Section 411(a) imposes only a nonjurisdictional precondition to filing a claim. Reed Elsevier, Inc. v. Muchnick, ___ U.S. ___, 130 S.Ct. 1237, 1247, 176 L.Ed.2d 18 (2010). On remand, we ordered the parties to file letter briefs addressing any supplemental authority relevant to the merits, to which we now turn.
Objectors appeal several aspects of the district court's decision. They argue (1) that the Settlement impermissibly releases claims beyond the factual predicate of the case; (2) that class certification was improper because subgroups within the class have conflicting interests; and (3) that the district court erred procedurally in reaching its decision. Although we reject the objections to the release provision, we agree with objectors that not all class members were adequately represented. We decline to reach the procedural issues, which are moot in light of our class certification holding.
The Settlement prohibits claimants from barring future use of the Subject Works, including the selling and licensing of the works to third parties, unless the class member either opts out of the Settlement altogether or exercises his right to bar future use. Objectors assert that this "`irrevocable, worldwide, and continuing' license" impermissibly releases claims that are not based on the same factual predicate underlying the claims in this class action.
"Plaintiffs in a class action may release claims that were or could have been pled in exchange for settlement relief." Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 106 (2d Cir.2005). Parties often reach broad settlement agreements encompassing claims not presented
Objectors argue that releasing future claims arising from licensing the Subject Works to third-party sublicensees is impermissible in two ways. First, future infringements are distinct harms giving rise to independent claims of relief, with factual predicates that are different from authors' past infringement claims. Second, future claims may be against a sublicensee who is not a party to the Settlement, which means that infringement could not be grounded in the factual predicate of this case. We find both of these arguments unavailing because future use of the Subject Works, whether by publishers or by sublicensees, falls squarely within the factual predicate underlying authors' claims.
Objectors' first argument fails to recognize that the consolidated complaint seeks injunctive relief for future uses, and therefore contemplates these alleged future injuries. Put another way, a trial of this case would determine whether it is permissible for publishers to continue to sell and license the works. See Nat'l Super Spuds, Inc. v. N.Y. Mercantile Exch., 660 F.2d 9, 17-18 (2d Cir.1981) (assessing permissibility of release by looking to possible remedies if that case had proceeded to trial). Accordingly, regardless of whether future infringements would be considered independent injuries, the Settlement's release of claims regarding future infringements is not improper.
Objectors' second argument — that the Settlement impermissibly releases claims against persons and entities not involved in this case — takes an overly narrow view of the factual predicate of authors' claims. The consolidated complaint alleges that publishers electronically displayed, sold, and distributed the Subject Works. In response, publishers have maintained that the rights that the print publishers purchased from authors include the rights to maintain their issues online and to sublicense those issues to third-party databases. Apart from their argument, rejected in Tasini, that this right exists pursuant to Section 201(c) of the Copyright Act, publishers argued throughout the settlement process that freelance contributors — who knew that the print publications for which they wrote published their content online and delivered it to database publishers —
The party seeking to certify a class bears the burden of satisfying Rule 23(a)'s four threshold requirements: (1) numerosity ("the class is so numerous that joinder of all members is impracticable"), (2) commonality ("there are questions of law or fact common to the class"), (3) typicality ("the claims or defenses of the representative parties are typical of the claims or defenses of the class"), and (4) adequacy of representation ("the representative parties will fairly and adequately protect the interests of the class"). Fed.R.Civ.P. 23(a). The district court must also find that the action can be maintained under Rule 23(b)(1), (2), or (3). Before approving a class action settlement, the district court must assess its substance and conclude that it is "fair, reasonable, and adequate." Fed.R.Civ.P. 23(e)(2). The district court did so here, approving a settlement-only class under Rule 23(b)(3) after concluding that common questions predominate over individual ones and that a class action is superior to other methods of adjudicating the matter.
We review a district court's decision to certify a class for abuse of discretion. Joel A. v. Giuliani, 218 F.3d 132, 139 (2d Cir.2000). A district court "`abuses' or `exceeds' its discretion when (1) its decision rests on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding, or (2) its decision — though not necessarily the product of a legal error or a clearly erroneous factual finding — cannot be located within the range of permissible decisions." In re Holocaust Victim Assets Litig., 424 F.3d 158, 165 (2d Cir.2005) (quoting Zervos v. Verizon N.Y., Inc., 252 F.3d 163, 169 (2d Cir.2001)). When a court is asked to certify a class and approve its settlement in one proceeding, the Rule 23(a) requirements designed to protect absent class members "demand undiluted, even heightened, attention." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997).
Objectors argue that the Settlement contravenes Rule 23(a)(4) because the named plaintiffs failed to adequately represent the interests of class members who hold only Category C claims ("Category C-only plaintiffs"). "The adequacy inquiry under Rule 23(a)(4) serves to uncover conflicts of interest between named parties and the class they seek to represent." Amchem, 521 U.S. at 625, 117 S.Ct. 2231. To satisfy Rule 23(a)(4), the named plaintiffs must "possess the same interest[s] and suffer the same injur[ies] as the class members." Id. at 625-26, 117 S.Ct. 2231 (quoting E. Tex. Motor Freight Sys., Inc. v. Rodriguez, 431 U.S. 395, 403, 97 S.Ct. 1891, 52 L.Ed.2d 453 (1977)) (internal quotation marks omitted). "Adequacy is twofold: the proposed class representative must have an interest in vigorously pursuing the claims of the class, and must have no interests antagonistic to the interests of other class members." Denney v. Deutsche Bank AG, 443 F.3d 253, 268 (2d Cir.2006). Not every conflict among subgroups of a class will prevent class certification — the conflict must be "fundamental" to violate Rule 23(a)(4). See In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 35 (2d Cir.2009). Where such a conflict does exist, it can be cured by dividing the class into separate "homogeneous subclasses ... with separate representation to eliminate conflicting interests
According to objectors, there was such a conflict here: the named plaintiffs, who hold combinations of all three categories of claims, favored the fewer and more lucrative Category A and B claims over the Category C claims. A subclass of plaintiffs owning unregistered claims should therefore have been carved out of the class, objectors argue. Publishers and authors vigorously defend the Settlement and the adequacy of named plaintiffs' representation.
We begin our analysis by turning to a pair of Supreme Court decisions that set the contours of the adequacy of representation inquiry in the settlement-class context. In Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997), the Supreme Court affirmed the Third Circuit's decision to vacate a class certification intended "to achieve global settlement of current and future asbestos-related claims." Id. at 597, 117 S.Ct. 2231. The proposed settlement-only class encompassed hundreds of thousands, and possibly even millions, of individuals who had been exposed to asbestos products manufactured by any of 20 companies. Id. Objectors to the settlement opposed the aggregation into a single class of both class members who had already manifested asbestos-related injuries and those who had been exposed to asbestos but had not yet shown signs of injury. Id. at 607-08, 117 S.Ct. 2231. The Court agreed that "the interests of those within the single class" were "not aligned": holders of present claims were interested in "generous immediate payments," whereas holders of future claims sought to ensure "an ample, inflation-protected fund for the future." Id. at 626, 117 S.Ct. 2231.
The two subgroups in Amchem had competing interests in the distribution of a settlement whose terms reflected "essential allocation decisions designed to confine compensation and to limit defendants' liability." Id. at 627, 117 S.Ct. 2231. Some of those allocation decisions — for example, to cap the annual number of opt-outs, and not to adjust for inflation — disadvantaged exposure-only plaintiffs. Although the named parties all "alleged a range of complaints," none exclusively advanced the particular interests of either subgroup; "each served generally as representative for the whole, not for a separate constituency." Id. That flaw, in light of the conflict, was fatal to class certification. Even if the class representatives "thought that the Settlement serves the aggregate interests of the entire class[,] ... the adversity among subgroups requires that the members of each subgroup cannot be bound to a settlement except by consents given by those who understand that their role is to represent solely the members of their respective subgroups." Id. (quoting In re Joint E. & S. Dist. Asbestos Litig., 982 F.2d 721, 742-43 (2d Cir.1992), modified on reh'g, 993 F.2d 7 (2d Cir.1993)). In the absence of any "structural assurance of fair and adequate representation for the diverse groups and individuals affected," the class could not satisfy Rule 23(a)(4)'s standard for fair and adequate representation. Id.
Two years later, in Ortiz v. Fibreboard Corp., 527 U.S. 815, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999), the Supreme Court rejected a proposed settlement class that was divided along two fault lines: first, as in Amchem, "between holders of present and future claims," and second, between
The ingredients of conflict identified in Amchem and Ortiz are present here. The Settlement before us "confine[s] compensation and ... limit[s] defendants' liability" by setting an $18 million recovery and cost ceiling, and distributes that recovery by making "essential allocation decisions" among categories of claims. See Amchem, 521 U.S. at 627, 117 S.Ct. 2231. Although named plaintiffs collectively hold all three categories of claim, "each served generally as representative for the whole, not for a separate constituency." Id. In addition, individual Category A and B claims are "more valuable" than Category C claims,
There are, however, clear differences between the case before us and Amchem and Ortiz. The conflict in Amchem could hardly have been more stark: class members fell into one of two mutually exclusive camps, those injured by asbestos and those with only potential future injuries. Here, by contrast, class members can and do hold claims in all three categories. Although the record does not establish the precise distribution of claims among named plaintiffs, that they hold a combination of registered and unregistered claims is undisputed. The conflict alleged by objectors is therefore between class members who hold Category C claims alone, and those who hold Category A and B claims in addition to Category C claims. Such overlap with respect to some claimants suggests, at least superficially, the absence of a fundamental conflict.
Despite the intuitive appeal of that conclusion, we cannot endorse it. Owning Category C claims in addition to other claims does not make named plaintiffs adequate representatives for those who hold only Category C claims. Although all affected members of the plaintiff class are interested in maximizing their individual compensation, severally they accomplish that goal in different ways. To authors who own works in all three categories, how their compensation is allotted among their claims is irrelevant; what matters is the bottom line. Class members who hold only Category C claims, on the other hand,
The selling out of one category of claim for another is not improbable here. Because the Settlement capped recovery and administrative costs at $18 million, named plaintiffs owning claims in all three categories cannot have had an interest in maximizing compensation for every category. Any improvement in the compensation of, for example, Category C claims would result in a commensurate decrease in the recovery available for Category A and B claims. Further, given that Categories A and B amount to approximately 1% of the total number of claims, named plaintiffs would receive a greater share of a given amount of compensation allocated to Categories A and B, compared to what they would receive if that compensation were spread over the far greater quantity of Category C claims. Named plaintiffs' natural inclination would therefore be to favor their more lucrative Category A and B claims. That named plaintiffs hold claims in all categories does not, as the dissent asserts, eliminate the risk of fundamental conflict among subgroups.
Even if some named plaintiffs have only Category C claims, that is not enough to protect the Category C-only plaintiffs, because each named plaintiff represented the entire class. See Amchem, 521 U.S. at 627, 117 S.Ct. 2231. Without subclasses, named plaintiffs with only Category C claims were obligated to advance the collective interests of the class, rather than those of the subset of class members whose claims mirrored their own. Only the creation of subclasses, and the advocacy of an attorney representing each subclass, can ensure that the interests of that particular subgroup are in fact adequately represented. "[W]here differences among members of a class are such that subclasses must be established, we know of no authority that permits a court to approve a settlement ... on the basis of consents by members of a unitary class, some of whom happen to be members of ... distinct subgroups," without creating subclasses. In re Joint E. & S. Dist. Asbestos Litig., 982 F.2d 721, 743 (2d Cir.1992), modified on reh'g, 993 F.2d 7 (2d Cir.1993).
To be sure, the negotiation of this Settlement featured protections that were lacking in Amchem. The Settlement was the product of an intense, protracted, adversarial mediation, involving multiple parties and complex issues. The mediators were highly respected and capable, and their participation provided some assurance that "the proceedings were free of collusion and undue pressure." D'Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir.2001). Furthermore, associational plaintiffs advanced the interests of all authors, the largest contingent of which we can reasonably assume — given that 99% of the total claims fall into Category C — are Category C-only plaintiffs. While we recognize that these features offered some "structural assurance of fair and adequate representation," Amchem, 521 U.S. at 627, 117 S.Ct. 2231, we cannot conclude that they did enough to satisfy Rule 23(a)(4).
The Supreme Court's decision in Amchem was motivated in part by its conclusion that the settlement's terms disfavored the exposure-only plaintiffs. Amchem therefore allows courts, in assessing the adequacy of representation, to examine a settlement's substance for evidence of prejudice to the interests of a subset of plaintiffs. Objectors, pointing to Category C's inferior recovery, urge that we do so here. Category C works receive significantly
That Category C claims recover less than Category A and B claims tells us little about adequacy of representation, however, because the Category C claims individually are indisputably worth less than Category B claims. Given that registration of a copyright is a prerequisite to suit, unregistered Category C claims would face a substantial litigation risk if the case went forward. Indeed, had the Settlement failed to account for this weakness, the "very decision to treat [claims] all the same [would] itself [have been] an allocation decision" unfair to the interests of those who had authored registered works. See Ortiz, 527 U.S. at 857, 119 S.Ct. 2295. It was not only appropriate but also necessary for Category C claims to recover less than Category A and B claims. We therefore disagree with objectors to the extent that they cite Category C's inferior recovery as determinative evidence of inadequate representation.
The problem, of course, is that we have no basis for assessing whether the discount applied to Category C's recovery appropriately reflects that weakness. We know that Category C claims are worth less than the registered claims, but not by how much. Nor can we know this, in the absence of independent representation. The Supreme Court counseled in Ortiz that subclasses may be necessary when categories of claims have different settlement values. The rationale is simple: how can the value of any subgroup of claims be properly assessed without independent counsel pressing its most compelling case? It is for this reason that the participation of impartial mediators and institutional plaintiffs does not compensate for the absence of independent representation. Although the mediators safeguarded the negotiation process, and the institutional plaintiffs watched out for the interests of the class as a whole, no one advanced the strongest arguments in favor of Category C's recovery. Even in the absence of any evidence that the Settlement disfavors Category C-only plaintiffs, this structural flaw would raise serious questions as to the adequacy of representation here.
In addition to the structural flaw discussed above, the Settlement itself contains terms that illustrate a lack of adequate representation of Category C-only plaintiffs. The "C reduction" places the risk that total claims and fees exceed the $18 million cap exclusively on Category C. Although we disagree with objectors as to the import of Category C's inferior compensation, we regard the "C reduction" in a different light. The "C reduction" cannot be justified as a reflection of Category C's lower value, because the Settlement's recovery formulae already account for that difference. The "C reduction" is not designed to reflect the claims' value at all, but rather is a safety valve meant to preserve the integrity of the Settlement in the event the cap is exceeded.
The settling parties argue that the "C reduction," as a contingent provision they reasonably believed was unlikely to be triggered, cannot reflect on the adequacy of representation. We disagree. Those negotiating the Settlement identified a risk and placed that risk on a single category of
Even if we were to conclude that, as a matter of deferential review, the Settlement fairly compensates Category C claims, we cannot rely on that fact to affirm class certification, because doing so would conflate Rule 23(a)(4)'s adequacy of representation analysis with Rule 23(e)(2)'s fairness, adequacy, and reasonableness analysis. "Rule 23 requires protections under subdivisions (a) and (b) against inequity and potential inequity at the precertification stage, quite independently of the required determination at postcertification fairness review under subdivision (e) that any settlement is fair in an overriding sense." Ortiz, 527 U.S. at 858, 119 S.Ct. 2295; accord Amchem, 521 U.S. at 621, 117 S.Ct. 2231. The possible fairness of a settlement cannot eclipse the Rule 23(a) and (b) precertification requirements. Ortiz, 527 U.S. at 858-59, 119 S.Ct. 2295. Thus, the adequacy of representation cannot be determined solely by finding that the settlement meets the aggregate interests of the class or "fairly" compensates the different types of claims at issue. See In re Joint E. & S. Dist. Asbestos Litig., 982 F.2d at 743. In the Rule 23(a)(4) context, we must ask independently whether the interests of all class members were adequately represented.
We find that they were not. We agree with objectors that the interests of class members who hold only Category C claims fundamentally conflict with those of class members who hold Category A and B claims. Although all class members share an interest in maximizing the collective recovery, their interests diverge as to the distribution of that recovery because each category of claim is of different strength and therefore commands a different settlement value. Named plaintiffs who hold other combinations of claims had no incentive to maximize the recovery for Category C-only plaintiffs, whose claims were lowest in settlement value but eclipsed all others in quantity. The interests of Category C-only plaintiffs could be protected only by the formation of a subclass and the advocacy of independent counsel. We therefore hold that the district court abused its discretion in certifying the class based on its
The decision to require subclassing here is consistent with our precedent. In Central States Southeast & Southwest Areas Health & Welfare Fund v. Merck-Medco Managed Care, L.L.C., 504 F.3d 229, 246 (2d Cir.2007), a plaintiff class of trustees and beneficiaries of employee welfare benefit plans sued their pharmaceutical benefits manager, Medco Health Solutions, Inc. ("Medco"), alleging that it breached its fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") by favoring the products of its parent company, Merck & Co. The district court approved a settlement agreement and class certification over the self-funded plans' objection that a conflict of interest necessitated the certification of a subclass. The objectors argued that the self-funded plans needed independent representation because they "were more damaged by Medco's conduct by virtue of paying Medco the entire cost of their beneficiaries' drugs," as compared to insured plans, which paid set premiums to Medco and were therefore more insulated from the effects of Medco's conduct. Id. at 245. The district court rejected this argument, observing that the settlement properly accounted for this disparity by applying a 55% discount to the claims of the insured plans, a figure determined by counsel with the assistance of expert opinion and a special master. Id. at 237, 245.
Although all class members "advanced similar theories of liability against Medco predicated on the same or similar facts" and all wished to "obtain the highest possible recovery," the Second Circuit sided with the objectors. Id. at 245-46. Without deciding "whether the self-funded Plans in fact suffered greater injury," we thought it "proper to allow them to raise their claims as part of a separate subclass." Id. at 246. Finding that "the antagonistic interests apparent in the class should be adequately and independently represented," we remanded to the district court "for certification of a subclass encompassing the self-funded plans in order to better protect their claims in this litigation." Id.
Central States is parallel to the instant case in several key respects. First, the settlement agreement established a fund ($42.5 million) that would "allocate[] an amount to the settling class members" based on "the nature of [each] Plan's relationship with Medco." Id. at 236. Second, the settlement recognized and accounted for a disparity in the strengths of two discrete categories of claims: the recovery for insured plans was discounted by 55% to reflect that they were more insulated from Medco's improper conduct. Third, class counsel had the benefit of an impartial special master in determining that allocation.
Having concluded that a fundamental conflict exists, we turn now to the question of subclassing. Objectors demand that the unregistered copyright holders be defined as a subclass to provide structural assurance of fair and adequate representation. Remedying this conflict may not be so simple, however. Will the subclass be limited to the Category C-only plaintiffs, or should it also include those class members who own registered (Categories A and B) in addition to unregistered (Category C) copyrights? However the subclass is defined, who will advance the interests of the remaining class members? Can Category C counsel sit across the negotiating table from counsel representing "everyone else," or will everyone else's interests be sufficiently divergent to require further subclassing? These questions greet us as soon as we open the door to subclassing, and we must at least acknowledge them before we can enter.
We would ordinarily allow the district court to work out the details of subclassing and leave these questions to be resolved in that process. We recognize, however, that "at some point there must be an end to reclassification with separate counsel." Ortiz, 527 U.S. at 857, 119 S.Ct. 2295. It would be imprudent to require subclassing if subclasses were administratively impracticable. We now, therefore, assess whether
The simplest and most logical approach may be to create a subclass for every category of claim, with separate counsel representing the interests of Categories A, B, and C. The different claim categories are, after all, the fault lines along which the conflict runs. These categories, each of different strength, must compete with one another over the allocation of the capped Settlement fund. Designating each a subclass, and assigning counsel to represent their interests, would protect each category's interests.
This case is more complicated than most, however. Plaintiffs cannot all be neatly segregated into one of three categories, because some class members hold claims in more than one category. Although many plaintiffs only authored Category C works, and some plaintiffs may assert claims only in Category A or B, the remaining class members have claims in two or three categories. Structuring the subclasses so that no class member falls into more than one subclass could require as many as seven subclasses: plaintiffs holding (1) only A claims, (2) only B claims, or (3) only C claims, or a combination of (4) A and B, (5) A and C, (6) B and C, or (7) A, B, and C claims. That is surely beyond the point at which "reclassification with separate counsel" must end.
Creating only three subclasses — one for each category of claim — would, by contrast, be efficient and straightforward. This approach satisfies objectors' concerns, as the Category C — only plaintiffs will all fall within the Category C subclass and have their own counsel. Separate counsel will also advance the interests of Categories A and B, respectively, giving each category a voice advocating for a share of the Settlement commensurate with their value. This structural protection will provide a substantial guarantee that the values assigned to each category of claim resulted from merits-based negotiation, greatly reducing the risk that a deficiency in representation for one or more subgroups will affect the outcome.
Although some class members would fall into more than one subclass, we can see no reason why that would be fatal to such a structure. It is certainly not precluded by the language of Rule 23(c)(5), which allows a class to "be divided into subclasses that are each treated as a class under this rule." Fed.R.Civ.P. 23(c)(5). And it makes sense from a practical perspective. All class members are interested in receiving the maximum possible recovery for their claims. Having a separate subclass representative advocate exclusively for each of those claims is the most effective means of achieving that result. A plaintiff who holds claims in Categories B and C would, for example, be represented by different subclass representatives and counsel with respect to each category. Each subclass representative would, in turn, represent plaintiffs' interests with respect to only that category of claim.
We intend by no means to bind the district court or the parties to the subclass structure we have outlined. We address this issue only to ensure that we are not asking the district court to carry out instructions that are impracticable to implement. Satisfied that the conflict here can be remedied within the practical limits of "reclassification with separate counsel," Ortiz, 527 U.S. at 857, 119 S.Ct. 2295, we remand to the district court for subclassing while recognizing that another solution may be more appropriate than the one we have proffered.
Because the named plaintiffs are inadequate representatives for class members who hold only Category C claims, we VACATE
STRAUB, Circuit Judge, dissenting in part, concurring in part:
The majority observes that the Settlement in this case "was the product of an intense, protracted, adversarial mediation" with "highly respected and capable" mediators that provided assurance that the "`proceedings were free of collusion and undue pressure.'" Maj. Op. at 252 (quoting D'Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir.2001)). While conceding this point, however, as well as that the Settlement offered "some `structural assurance of fair and adequate representation,'" Maj. Op. at 256 (quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 627, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997)), the majority holds that the District Court abused its discretion in certifying the class because not "enough" was done to "satisfy [Federal] Rule [of Civil Procedure] 23(a)(4)," Maj. Op. at 252. I disagree. I respectfully dissent because it is my view that the named plaintiffs adequately represent the interests of all class members as required by Rule 23(a)(4) and that the District Court was well within its discretion to certify the class and approve the Settlement. I do concur with the majority that the Settlement's release provision is permissible.
We review a district court's decisions to certify a class and approve a settlement for abuse of discretion. In re Nassau County Strip Search Cases, 461 F.3d 219, 224 (2d Cir.2006) (applying standard to class certification); Joel A. v. Giuliani, 218 F.3d 132, 139 (2d Cir.2000) (applying standard to settlement approval). In assessing the reasonableness of a proposed settlement of a class action, "[t]he trial judge's views are accorded great weight because he is exposed to the litigants, and their strategies, positions and proofs. Simply stated, he is on the firing line and can evaluate the action accordingly." Joel A., 218 F.3d at 139 (internal quotation marks and ellipses omitted); see also TBK Partners, Ltd. v. W. Union Corp., 675 F.2d 456, 463 (2d Cir.1982) ("It is well settled that great weight must be accorded the views of the trial judge because exposure to the litigants and their strategies makes him uniquely aware of the strengths and weaknesses of the case and the risks of continued litigation."). As the Supreme Court has observed, however, "a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold." Amchem, 521 U.S. at 620, 117 S.Ct. 2231. Therefore, "where, as here, the district court simultaneously certifies a class and approves a settlement of the action, we will more rigorously scrutinize the district court's analysis of the fairness, reasonableness and adequacy of both the negotiation process and the proposed settlement." In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir.1992).
The party seeking to certify a class bears the burden of satisfying Rule 23(a)'s
The majority finds that the District Court exceeded its discretion in certifying the class because the "interests of class members who hold Category C claims fundamentally conflict with those of class members who hold Category A and B claims," Maj. Op. at 254, and therefore concludes that the class members holding Category C claims are not adequately represented in the Settlement. Relying principally on Amchem and Central States, the majority contends that "[o]nly the creation of subclasses, and the advocacy of an attorney representing each subclass, can ensure that the interests of that particular subgroup are in fact adequately represented." Maj. Op. at 252. Looking to these cases and the record before us, I find this conclusion unavailing.
In Amchem, the class representatives, some of whom had medical conditions as a result of asbestos exposure and some of whom had not yet manifested any asbestos-related condition, "sought to act on behalf of a single giant class rather than on behalf of discrete subclasses." Amchem, 521 U.S. at 626, 117 S.Ct. 2231. In finding their representation inadequate, the Supreme Court looked to whether the interests of the class members conflicted in
In Central States, a case in which "a capped settlement fund was allocated differently among categories of claims of different strength without separate counsel to protect each category's interests," Maj. Op. at 256, we held that it was an abuse of discretion for the district court to certify the class without subclasses. Cent. States, 504 F.3d at 246. The class members in Central States maintained employee benefit plans, though some were self-funded and others were insured with set premiums. See id. at 245. We found that "[s]elf-funded Plans differ[ed] significantly from insured or capitated Plans because only self-funded Plans assumed the direct risk of absorbing any increases in prescription drug costs that were caused by [the defendant's] conduct." Id. at 246. We explained that the conflict among the different types of "Plans [did] not represent a simple disagreement over potential differences in the computation of damages, since the relationship of the Plans to [the defendant] and its effect on each Plan [went] to the very heart of the litigation." Id.
The concerns that drove Amchem and Central States are not present in this case. First and foremost, there is no fundamental conflict between class members here, as there was in Amchem and Central States. The named plaintiffs, like all class members in this case, had the same basic relationship with the defendants. They are all freelance authors who sold written works to print publishers for publication in newspapers, magazines, and other periodicals. They also each suffered similar injuries in that their works were reproduced in electronic and Internet databases without the plaintiffs receiving additional compensation. The only differences between A-, B-, and C-class plaintiffs — and the resulting allocation of the Settlement funds — are found squarely in the comparative strengths and weaknesses of the asserted claims. In re Holocaust Victim Assets Litig., 413 F.3d 183, 186 (2d Cir.2005) (per curiam) (holding that the district court did not exceed its discretion in allocating the bulk of class action settlement funds to one group of claimants because "allocation of a settlement of this magnitude and comprising such different types of claims must be based, at least in part, on the comparative strengths and weaknesses of the asserted legal claims"). And, even if a conflict exists due to the comparative strengths of the claims in this case, the District Court's decision to certify the class was not an abuse of discretion because the conflict does not rise to such a level as to be "fundamental," Denney, 443 F.3d at 268; see In re Pet Food Prods. Liab. Litig., 629 F.3d 333, 347 (3rd Cir.2010) ("The fact that the settlement fund allocates a larger percentage of the settlement to class members
Second, the named plaintiffs in this case "have an interest in vigorously pursuing the claims of the class," Denney, 443 F.3d at 268, as many of them hold a variety of A-, B-, and/or C-class claims. To the extent that the existence of some class representatives holding only registered copyrights creates a conflict, such conflict is significantly mitigated by the presence of other named plaintiffs holding unregistered copyrights and is not "fundamental," id. Named plaintiffs Letty Pogrebin, James Gleick, and Marie Winn each hold at least some unregistered copyrights and had an incentive to secure the best settlement for all three classes of claims and the highest possible compensation in each category. Moreover, the associational plaintiffs that participated in the negotiations certainly have members who hold unregistered copyrights and they had an incentive to "advance[] the interests of all authors." Maj. Op. at 252-53. The fact that class representatives here hold a variety of claims across the spectrum eliminates the risk of fundamental conflict among subgroups within the class, precisely because there are no easily defined subgroups. See, e.g., In re Pet Food Prods. Liab. Litig., 629 F.3d at 347 (observing that "the fact that the fund was allocated so that a greater percentage of the settlement value was designated for certain class members [need not] demonstrate[] a conflict between groups," especially when "many class members were members of both ... groups"). This is underlined by the majority's discussion of the difficulty in creating subclasses in this case. See Maj. Op. at 256-58.
Despite the lack of fundamental conflicts between the named plaintiffs and the class as a whole, the majority attempts to craft "simple[]," "logical," and "efficient and straightforward" subclasses to guide the District Court on remand. Maj. Op. at 257. It suggests creating three subclasses, each representing the unique interests of Category A, B, and C plaintiffs. While it recognizes that "some class members would fall into more than one subclass, [the majority] can see no reason why that would be fatal." Maj. Op. at 257. Of course I agree, should the parties and the District Court follow this suggestion, that such a structure would not be fatal because, at bottom, plaintiffs holding Category A-, B-, and C-class claims all want the same thing: as much compensation as possible for the same injury. It may be that the current scheme allows for some competition among the subgroups, but our cases do not hold that all competition must be eliminated, and, moreover, the majority concedes that even its suggested alternative would present conflict amongst subclass members because many of the plaintiffs possess more than one type of claim. In noting its suggested subclasses' deficiencies as well as admitting that it is not normally the province of our court to offer these types of suggestions in the first instance, the majority exposes why the District Court's approval of the Settlement was the correct course of action: The District Court was "uniquely aware of the strengths and weaknesses of the case and the risks of continued litigation," TBK Partners, Ltd. v. W. Union Corp., 675 F.2d 456, 463 (2d Cir.1982), and properly concluded that the plaintiffs need not be segregated into subclasses because any conflicts that could be eased by division into subclasses were not "fundamental," Denney, 443 F.3d at 268.
Third, unlike the settlement terms in Amchem and Central States, this Settlement does not unfairly disadvantage one portion of the class. No claims unique to a
The "C-reduction" and the different award structures for registered and unregistered copyright holders reflect the relative strengths and weaknesses of the respective claims as well as the practical fact that the overwhelming majority of claims at issue in this case — 99% — are C-class claims. Unregistered copyright holders may not maintain a suit for copyright infringement.
Finally, "the structure of negotiations" in this case provided assurance that the named plaintiffs adequately represented the interests of A-, B-, and C-class claimants. Unlike the attorneys in Amchem, who lacked any ongoing attorney-client relationship with exposure-only claimants, see Amchem, 521 U.S. at 601-02, 117 S.Ct. 2231, and in Ortiz v. Fibreboard Corp., 527 U.S. 815, 857 n. 31, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999), where the named plaintiffs were not even "named [until] after the agreement in principle was reached," the attorneys conducting the negotiations here represented holders of all three species of claims from the outset. Further, unlike Amchem, which was never intended to be litigated, see Amchem, 521 U.S. at 601, 117 S.Ct. 2231, there is no
In sum, Amchem and Central States both turned on the existence of a fundamental conflict between class members that was never mitigated.
Beyond their challenge to the District Court's certification of the class, the objectors to the Settlement also contend that (1) approval of the Settlement was impermissible because it released claims beyond the factual predicate of the case and (2) the approval process denied them procedural due process. As I find that the Settlement's release pertaining to future uses by publishers and their sublicensees was permissible, I join the majority's opinion in that respect. Because I would affirm the District Court's decision to certify the class, I now turn to the objectors' procedural challenges to the Settlement.
First, the objectors claim that the District Court lacked sufficient information to evaluate the Settlement at the preliminary approval stage. Second, they claim that because the parties did not produce their damages study until six days before the final approval hearing, after the deadlines for objecting and opting out, the objectors were denied the opportunity to properly frame their objections and to opt out in a timely fashion. Third, they claim that the District Court improperly required objectors to appear in person at the fairness hearings. These arguments are all meritless.
The objectors assert that the District Court had before it "no evidence of the Settlement's adequacy presented with the motion for preliminary approval." In particular, they claim that because the District Court lacked a damages report, it could not evaluate, as required by City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir.1974), whether the Settlement was reasonable in light of (1) the best possible recovery and (2) all the attendant risks of litigation.
It is true that the District Court had scant information at the preliminary approval phase. In connection with the original motion for preliminary approval, the parties only cursorily briefed the issue of how the risks of litigation impacted the Settlement. Although the parties submitted twenty-two declarations with their motion, none addressed the issue of the Settlement's fairness; instead, they all concerned efforts by defendants to locate records as to the identity of class members. The hearing itself was quick and fairly non-inquisitive.
However, our standard of review does not focus on whether a specific piece of information was present at any single stage of proceedings. Instead, we focus more generally on whether, at the end of the process, the District Court had before it sufficient information to grant final approval. In a nutshell, "[t]he question becomes whether or not the District Court
In this case, it is clear that by the time the District Court approved the Settlement, it had before it sufficient materials to evaluate the Settlement thoroughly and intelligently. Over the course of the litigation, it held three hearings and reviewed exhaustive briefing, much of which was authored by the objectors' counsel and thus raised the very issues presented on appeal. The District Court had ample materials to evaluate both the class certification decision and the Settlement, and the record includes numerous declarations by the parties and their experts describing the strengths and weaknesses of the claims and potential amounts of recovery, as well as two declarations by mediator Feinberg describing the settlement process. The objectors themselves concede that the parties "filed a veritable avalanche of pleadings to support the settlement, including arguments, declarations, and exhibits."
In response to the objectors' motion to vacate the preliminary approval, the parties submitted a declaration from mediator Feinberg in which he asserted that "$18 million is absolutely the most that good-faith negotiators acting at arms length could agree upon," and that the sum was "substantially in excess" of what "defendant companies were willing to pay at the outset of the mediation." The District Court then held a substantial hearing on the motion to vacate the preliminary approval, during which counsel for the objectors was heard at length on the substance of their objections, including those going to the fairness of the Settlement. See, e.g., TBK Partners, Ltd. v. W. Union Corp., 675 F.2d 456, 463 (2d Cir.1982) (affirming district court order approving Settlement when "[t]he District Court approved the Settlement only after giving comprehensive consideration to all relevant factors and listening carefully to each contention of the objectors").
Following the hearing, the Court received several written objections in declaratory form, including objections as to the fairness of the Settlement. Thereafter, when it was discovered that new infringements had occurred during the pendency of the suit, the District Court held a second round of preliminary approval briefing and a second preliminary approval hearing. At that hearing, which was lengthy, counsel for the objectors again discussed the objections to the Settlement's fairness.
In addition, on the motion for final settlement approval, the parties submitted extensive briefing on the issues of whether the Settlement was fair in light of the total possible recovery and the risks of litigation. They also submitted another twelve declarations. Included within these submissions was defendants' original mediation brief, in which they specifically cataloged their view of the legal weaknesses of plaintiffs' claims and their view of actual damages. In addition, mediator Feinberg submitted another declaration describing the adversarial negotiating process. Further, before it granted final approval, the District Court received the damages study that the objectors reference, in which bulk damages were measured using three different
Given the extensive process and copious submissions below, it is of no moment that the District Court had few materials before it at the first preliminary approval hearing. Prior to final approval, the Court received and reviewed "sufficient materials to evaluate the Settlement" and to determine, among other things, that the Settlement was reasonable in light of possible recoveries and the risks of litigation. Malchman v. Davis, 706 F.2d 426, 434 (2d Cir.1983).
The objectors assert that because the damages study was submitted to the District Court after the deadline for objecting to the Settlement, class members were deprived of the opportunity to base their objections on the study. However, the objectors did file objections based on the damages study, which the District Court accepted, even though they were untimely. Accordingly, class members had the opportunity to base objections on the study, and any argument to the contrary fails.
In Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985), the Supreme Court held that "minimal procedural due process protection" within the context of class actions required that plaintiffs receive "notice plus an opportunity to be heard and participate in the litigation, whether in person or through counsel," and the opportunity to opt out of the settlement. Here, the District Court attempted to satisfy that standard by allowing class members the opportunity to appear, in person or through counsel, and to object to the Settlement, as well as to opt out. The District Court's requirement that objectors appear in person or through counsel at the fairness hearing does not rise to the level of a due process violation. See, e.g., Spark v. MBNA, 48 Fed.Appx. 385, 391 (3d Cir. 2002) (unpublished opinion) (holding that personal appearance requirement did not violate due process).
In sum, the District Court was well within its discretion, even when reviewed at a heightened level, to certify the class and approve the Settlement. As the majority notes, "at some point there must be an end to reclassification with separate counsel," Maj. Op. at 256 (citing Ortiz v. Fibreboard Corp., 527 U.S. 815, 819, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999)), and it is especially unnecessary to require such reclassification and subclasses where, as in this case, any conflict that exists is not "fundamental," Denney v. Deutsche Bank AG, 443 F.3d 253, 268 (2d Cir.2006). Today's opinion may seriously hamper settlement negotiations in complex class action lawsuits, as parties that participate in "intense, protracted, adversarial mediation" with proceedings "free of collusion and undue pressure," Maj. Op at 256 (internal quotation marks omitted), will fear being told by our Court at the conclusion of their work that they have not done "enough," Maj. Op. at 252-53, to satisfy Rule 23(a)(4)'s requirement that the "representative parties ... fairly and adequately protect the interests of the class," Fed.
