Case will test standing of settlement objectors

Class action practice is unique in that reaching a settlement often does not signal the end of litigation, but rather the beginning of a new phase of litigation with objectors as adversaries to the settling parties. Objections to class action settlements are commonplace. Although some may have merit and result in potentially beneficial modifications to an existing settlement, objections far more often are boilerplate and specious, certain to be denied and appealed as a means of attempting to extract a payoff from the settling parties. Absent a separate settlement to resolve the objection, the parties face delay, and additional expense, while the objection is resolved on appeal, often to the detriment of the class.

In June 2016, the California Supreme Court granted review in Hernandez v. Restoration Hardware, Inc., S233983, to decide whether an unnamed class member must first intervene, rather than simply object, before having standing to appeal a final judgment. [UPDATE: decided Jan. 29, 2018 -- see below for link to opinion.]

In its decision, the Court of Appeal rejected a settled line of California appellate cases that, at least in the class action settlement context, conferred appellate standing on nonparty class members who timely objected to the settlement. Nevertheless, the Hernandez court did not limit its holding only to litigated judgment cases, relying on a prior 75-year-old California Supreme Court decision, Eggert v. Pac. States S. & L. Co., 20 Cal. 2d 199 (1942), which reached a similar conclusion. Hernandez is fully briefed and expected to be set for oral argument soon. While the ultimate outcome is uncertain, the decision likely will have little practical impact on class action jurisprudence nor effectively stifle illegitimate objections.

In Hernandez, plaintiff sued Restoration Hardware, Inc. (RHI), alleging that RHI violated California's Song-Beverly Credit Card Act, Civil Code Section 1747.08, by improperly requesting and recording customers' ZIP codes during credit card purchases at RHI's California retail stores. After certifying the case as a class action and following a bench trial, the court found RHI liable, setting a penalty recovery of $30 per violation, for a maximum total of approximately $36 million. After trial, the parties agreed to treat the total award as a common fund inclusive of attorney fees and costs, and RHI agreed not to oppose class counsel's request for a fee award equal to 25 percent of the total judgment.

An unnamed class member, Francesca Muller, who previously entered an appearance through her attorney, but did not move to intervene in or join the case, responded to the fee motion. Muller did not to object to the amount of fees, but rather sought clarification regarding whether the class would receive notice of, and have the right to appear and comment on, the fee application. The trial court rejected Muller's position and granted the fee motion in full; Muller appealed.

The Court of Appeal dismissed for lack of standing, holding that Muller was not a "party" as required for standing under Code of Civil Procedure Section 902. In reaching its decision, the court relied on Eggert, which, like Hernandez, involved an appeal by class members, who were not parties of record, to a fee award in a case litigated to judgment. Finding Eggert controlling, the court held that, under Section 902, Muller was required to have been both a "party" of record and "aggrieved" by the judgment, in order to have standing to appeal. Simply objecting to the fee award after trial was not sufficient.

In so holding, the Court of Appeal disapproved of a long-standing line of California appellate cases, including Trotsky v. Los Angeles Fed. Sav. & Loan Assn., 48 Cal. App. 3d 134 (1975), and its progeny, all of which hold that objectors obtain appellate standing merely by objecting to a class settlement. The Hernandez court found Trotsky's analysis "flawed" because it failed to examine the "party" element of Section 902 and to reconcile its holding with Eggert. Finally, the court reasoned that the Eggert approach does not leave nonparty class members without recourse, as they can always intervene and then appeal, thereby preserving the "objectives of the class action: orderliness, efficiency, and fairness to other class members." Notably, although the Hernandez court recognized that the outcome might be different in the class settlement context, the court did not craft a narrow holding limited to cases taken to judgment.

The likelihood that the California Supreme Court will fully affirm seems low given that the majority of courts, including the U.S. Supreme Court, have rejected the argument that objectors must formally intervene to obtain appellate standing. See, e.g., Devlin v. Scardelletti, 536 U.S. 1 (2002).

Even if the California Supreme Court were to affirm, it is not likely to have a significant practical impact, other than to impose additional work for the trial court and parties as part of the settlement approval process. While this could serve as a means of vetting frivolous objections (particularly where the objector either is not a class member or entitled to relief, or the objection is untimely), it likely would not prevent them. As recognized in Devlin, assuming the objector is a member of the class and has standing to object, the objector will still have enough interest to intervene, supporting the notion that there is little value in requiring a formal intervention motion. Furthermore, if objectors are denied intervention, they could simply appeal that decision.

It appears the California Supreme Court granted review to address the conclusion in Eggert, reached before most class action jurisprudence existed, and to resolve the sudden split of authority creating a seemingly artificial distinction between class actions litigated to judgment rather than settled prejudgment. While the Supreme Court could affirm and extend the Hernandez holding to prejudgment class action settlements, this outcome seems unlikely.