One important distinction that Rule 23 makes between different types of class actions is that the rule does not require notice to the class or an opportunity to opt out for 23(b)(1) and (b)(2) classes, but notice and an opportunity to opt out are required for 23(b)(3) classes.  See Fed. R. Civ. P. 23(c)(2)(A), (B).  There are some important constitutional constraints on this, however, as illustrated by a recent Second Circuit decision.  The Second Circuit held last week that due process requires notice and an opportunity to opt out in a (b)(2) class action settlement where a claim for money damages predominates.  The court left open the possibility that notice and an opportunity to opt out might be required even where a claim for damages does not predominate, but is more than incidental.  The Second Circuit also held, unsurprisingly, that one advertisement in USA Today was insufficient notice to a class.  The take away I see here is that this decision  might make it more difficult to settle some smaller class actions where the costs of providing notice that will satisfy due process requirements can exceed the likely settlement value.  In such settlements the relief for the class will need to focus on (and in some cases perhaps consist entirely of) declaratory and injunctive relief.

In Hecht v. United Collection Bureau, No. 11-1327, 2012 U.S. App. LEXIS 17374 (2d Cir. Aug. 17, 2012), the defendant sought dismissal of the plaintiff’s complaint on the grounds that her claim under the Fair Debt Collection Practices Act (“FDCPA”) was barred by res judicata as a result of a prior class action settlement.  The plaintiff challenged the enforceability of the class action settlement on the grounds that the notice to the class was constitutionally inadequate in that it failed to satisfy due process.  The district court (Judge Kravitz of the District of Connecticut) dismissed the complaint, but the Second Circuit reversed.

This was a small class action settlement.  The named plaintiffs received $2,500 each in accordance with the FDCPA, and the class was awarded a mere $13,254, which was 1% of the defendant’s net worth, the maximum recovery available in this type of class action under the FDCPA.  The $13,254 was to be distributed on a cy pres basis.  Class counsel received $90,000 in attorneys’ fees and costs.  Id. at *5.  Notice to class members was limited to one advertisement in USA Today.

The defendant argued that notice was not required because the settlement class was certified under Rule 23(b)(2), which governs class actions seeking declaratory or injunctive relief and, on the face of the rule, does not require notice or an opportunity to opt out.  But the Second Circuit rejected that position.  The court explained that, under the Supreme Court’s decision in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), particularly footnote 3 of that opinion, there is a due process right to notice and an opportunity to opt out if money damages predominate.  The court further explained that “[a]fter the Supreme Court’s decision in Dukes, the right to notice and an opportunity to opt out under Rule 23 now applies not only when a class action is predominantly for money damages, but also when a claim for money damages is more than ‘incidental.’  The Dukes Court, however, avoided deciding the corresponding constitutional question – whether the due process right articulated in Shutts now extends to actions where money damages do not predominate.”  Id. at *9. 

The Second Circuit found that its “old” (pre-Dukes) standard for class certification under Rule 23(b)(2) was still useful for determining whether money damages predominated under Shutts.  The court found that money damages predominated in the FDCPA case at issue because the complaint did not even mention injunctive relief and the class was defined as persons who would be entitled to damages, but might not have standing to seek injunctive relief (which could depend on whether they would be subject to potential future harm).  Id. at *11-12.

The Second Circuit went on to hold that “certification of a class under (b)(2) does not excuse the due process requirement that unnamed class members in a class action predominantly for money damages receive the ‘best practicable’ notice,” and that a single publication in USA Today was insufficient to satisfy constitutional notice requirements.  Id. at *16-18.  (Another way to look at this is that the settlement class really should not have been certified under Rule 23(b)(2) to begin with, rather it was the type of issue that could only be certified under Rule 23(b)(3), at least post-Dukes.  But the class here likely was certified pre-Dukes, so and the court, in the context of this collateral attack on the settlement, was not actually reviewing the propriety of certification in the prior case.)

The reality here is that nationwide notice by publication in a form that would be satisfactory to the court probably would cost more than this settlement would ever warrant paying.  But here, the defendant has now paid 1% of its net worth plus several times that in attorneys’ fees in exchange for a release that did not hold up because of the inadequacy the Second Circuit found in the notice.  Rule 23(b)(2) class action settlements can be helpful in resolving small class actions where the costs of providing notice may exceed the settlement value.  But, as Hecht teaches, in order for a (b)(2) settlement without notice to be viable, the declaratory or injunctive relief must really predominate.  It might even make good sense, in some circumstances, to structure the settlement such that declaratory or injunctive relief is the sole form of relief for the absent class members.  As Hecht also demonstrates, if the settlement class is going to focus on (or exclusively obtain) injunctive or declaratory relief, the class should be defined in such a manner that the persons falling within the class definition have standing to seek such relief.