Time to rethink limits on appeals by class action objectors

Not long ago, I predicted that the California Supreme Court would reverse Hernandez v. Restoration Hardware and allow class members to appeal when their objections to class action settlements are overruled. (See my previous Daily Journal column, "Simple fix could cut down on class action settlement objections," Nov. 5, 2016.) I smelled a reversal coming because barring objector appeals, as the Court of Appeal did in Hernandez, invites unfair settlements.

The Court of Appeal's rule would have let named parties enter inadequate class settlements without fear of an appeal from objecting class members, and would have given cover for trial courts to rubber-stamp bad settlements knowing that there is a slim chance of reversal. (I also felt good about my prediction because when Hernandez went up, the only precedent barring appeals by unnamed class members was a 75-year-old decision which the Courts of Appeal had routinely ignored for decades.)

As it turns out, my prediction was wrong. Earlier this year, the state Supreme Court sided with "Justice [Roger] Traynor's 75-year-old decision" in Eggert v. Pacific States Savings and Loan Co., 20 Cal. 2d 199 (1942), and held that class members can't appeal from an order overruling their objections to a class settlement, or from a judgment entered after settlement approval. 2018 DJDAR 998 (Jan. 29, 2018). The Hernandez court strictly interpreted the statute governing appellate standing -- Code of Civil Procedure Section 902 -- which allows appeals only by a "party aggrieved." Unnamed class members may be "aggrieved," but they aren't "parties." Unless they become named parties by intervening or moving to set aside the judgment, Hernandez says they have no standing to appeal.

In light of Hernandez, there are good reasons for the California Legislature to revisit the "party aggrieved" standard when it comes to class action objectors. The Hernandez standard may comply with the textual mandates of Section 902, but it is impractical and, as Justice Goodwin Liu recognized in his concurrence, changes in class action practice since Eggert require more nuanced rules in line with the federal courts.

First, the Hernandez standard requiring intervention or a motion to set aside the judgment makes it hard to get substantive review of a settlement's adequacy. A complaint in intervention is "filed by leave of the court." Requiring intervention as a prerequisite to appeal puts objectors in the precarious position of asking permission to intervene from the same judge who they fear will rubber stamp the settlement they are trying to challenge. Making the same judge whose opinion is being challenged also the gatekeeper of the right to appeal stands to chill appellate review of legitimate challenges to class action settlements.

Hernandez recognized that "intervention after a judgment is possible" as well, but at that point a judge is even less likely to grant leave to intervene because the only reason a class member would want post-judgment intervention is to secure the right to appeal. Granted, an objector can appeal an order denying intervention (which is directly appealable), but the Court of Appeal's time would be better spent considering the merits of the challenged settlement itself, not the merits of a motion to intervene.

There are also problems with pinning the right to appeal on "filing an appealable motion to set aside and vacate the class judgment." There's no good reason for making objectors overcome this additional hurdle. As Justice Liu noted, a class action objection itself "puts the parties on sufficient notice regarding the nature of the objections and creates a record for appeal." Not to mention, requiring post-judgment motions will delay the appeal and strengthen the hand of a frivolous objector using delay tactics to hold up a class settlement.

As a legal matter, it's also curious that Code of Civil Procedure Section 663 only lets a "party aggrieved" move to set aside a judgment, yet unnamed class members don't qualify as "parties" under Hernandez. It's true that case law deems any aggrieved person who loses a motion to set aside a judgment to be a "party aggrieved" under Section 663, but this broader interpretation is seemingly at odds with the strict interpretation of "party aggrieved" in Hernandez. If a non-party objector can be considered a "party aggrieved" with authority to bring a motion to vacate, it is strange to deny him the same status when it comes to filing an appeal.

It goes without saying that objectors are not always a positive force in class action settlements, and that some objectors pursue appeals for the wrong reasons. But there are ways of addressing problematic objectors without barring appeals or placing unnecessary hurdles in front of class members with legitimate grievances. For one, as I suggested in my 2016 article, policymakers should require court approval for payoffs that the settling parties make to objectors or to their counsel. This would prevent so-called "professional objectors" from demanding an unfair payoff in order to withdraw an objection or dismiss an appeal, and it would likely prevent some frivolous objectors from coming forward in the first place. Other options, as noted in Justice Liu's concurrence, include sanctions for frivolous appeals, expediting appeals, or requiring objectors to post a bond before taking an appeal.

While these more balanced approaches hold promise, as Justice Liu put it, "categorically denying objectors the right to appeal may not offer the best solution." If the California Supreme Court feels bound by Eggert's 1942 interpretation of the "party aggrieved" requirement, then the burden falls on the Legislature and rules committees to strike the right balance.