Third Circuit Rejects Volkswagen Class Settlement for Fundamental Intra-Class Conflict in Consumer Fraud Class Action
In a precedential opinion issued on May 31, 2012, the Third Circuit in Dewey v. Volkswagen AG, et al., reversed an order granting final approval of a nationwide class action settlement on the ground that the class representative plaintiffs could not adequately represent the interests of the entire class, as required by Fed. R. Civ. P. 23(a)(4).
In Dewey, the District Court approved a settlement, reported to be valued at $142 million, in a warranty/products liability and consumer fraud action alleging that several models of Volkswagen and Audi vehicles had defective sunroofs that, when clogged by debris, allowed water to leak into the vehicle. The Court approved the settlement and certified a single class of vehicle owners in which class members were divided into two groups: (i) a “reimbursement group” comprised of class members who had a right to reimbursement from an $8 million fund for certain qualifying damages; and (ii) a “residual group” comprised of class members who could make claims on the remaining money in the fund, but only after the reimbursement group made their claims.
Objectors successfully argued that there was a fundamental intra-class conflict between class members in the reimbursement group and class members in the residual group, and since all of the class representative plaintiffs were in the reimbursement group, the class representatives failed to satisfy the adequacy of representation requirement of Fed. R. Civ. P. 23(a)(4). The Court found that the “structure of the settlement agreement itself, which divides a single class into two groups of plaintiffs that receive different benefits, supports the inference that the representative plaintiffs are inadequate.”
Specifically, the reimbursement group had “priority access” to the $8 million fund, and it was only after their claims were satisfied that the residual group could make a claim. The class representative plaintiffs divided class members into these two groups based upon the claims rates of various models, essentially drawing a boundary line where “model runs with claims rates above the line were placed in the reimbursement group” and those “with a claims rate below the line were placed in the residual group.” The Third Circuit noted that the fundamental intra-class conflict was “allocative in nature” in that it “concerns the representative plaintiffs’ incentive to shift the dividing line between the residual and reimbursement groups in order to maximize their own recovery, at the expense of other members of the class who lacked a representative to protect their interests.” Therefore, the Court explained that “representative plaintiffs had an interest in excluding other plaintiffs from the reimbursement group, while plaintiffs in the residual group had an interest in being included in the reimbursement group. This is precisely the type of allocative conflict of interest that exacerbated the misalignment of interests in [Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997)].”
The Circuit Court went on to suggest two alternatives to satisfy Rule 23(a)(4) on remand: (1) eliminate the distinction between the two groups; and (2) “divide the groups into subclasses that would be certified separately. . . .” For example, the class might be divided into a reimbursement subclass and a residual subclass, each with representative plaintiffs to ensure that their interests are being accommodated. The lesson of Dewey is that class representatives must represent all members of a class. While a defendant naturally has an incentive to minimize an outlay of cash to a settlement cash fund, caution should be exercised to ensure that subclasses are created to avoid intra-class conflicts that might derail an otherwise favorable settlement.