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How Not to Settle a Class Action

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Settling a workplace class action is far more complicated than resolving other types of litigation. Yet, the fundamental building blocks of settling a case—an offer, acceptance of precise terms, and substantiation of the agreement—are equally as important in resolving a simple as well as a complex piece of litigation.

On Sept. 23, Judge Amy St. Eve of the U.S. District Court for the Northern District of Illinois in Craftwood Lumber Co. v. Interline Brands, Inc., drove home this point. The court held that, despite creating a “term sheet” outlining certain terms of a purported class action settlement, the parties had not reached an enforceable settlement.

This ruling illustrates that although parties may be bound to a class settlement prior to the creation of the final agreement, which is what occurred in the Tenth Circuit decision of Miller v. Basic Research, LLC, covered here, that in order to be bound, the parties must have at least reached an agreement to the materials terms of the contract and exhibit the intent to be bound.

Although it is not an employment-related case, Judge St. Eve’s ruling in Craftwood Lumber ought to be required reading for any employer entering into settlement negotiations relative to a class action.

Background

Plaintiff, Craftwood Lumber, brought a putative class action alleging that the defendant, Interline Brands, Inc., violated the Telephone Consumer Protective Act of 1999, by sending at least 1,500 advertisements in at least 735,000 facsimile transmissions, some of which were received by the plaintiff. The parties attempted to settle the case through mediation. At the end of the one-day session, the parties and counsel hastily signed a one-page document titled “Term Sheet.”

In the following weeks the parties unsuccessfully attempted to negotiate a written settlement agreement. The defendant brought a motion to enforce the settlement, and in support, it provided the court with a copy of the Term Sheet, arguing that the parties had entered into a settlement agreement. The plaintiff’s counsel objected, asserting that there was no agreement and that it was a violation of the confidentiality agreement to produce the Term Sheet to the Court.

The Court’s Opinion

Judge St. Eve held that the Term Sheet failed to include several terms that were material to the class action settlement. The most significant omission was the amount per claim—what the defendant would pay any class member for each fax recipient or each fax transmission. Additionally, the Term Sheet lacked any release terms and settlement class definition. The court reasoned that the provisions upon which the defendant was basing its assertion that an agreement had been reached were insufficient to reasonably imply the missing terms. Judge St. Eve determined that she was unwilling to select those terms from the wide range of potential possibilities. Ultimately, the court held that in addition to lacking materials terms, it was unclear whether the parties intended to be bound by the Term Sheet. On this basis, the court held that the parties did not enter in to an enforceable settlement agreement.

Implications for Employers

This ruling illustrates what can go awry in terms of documenting an enforceable class action settlement. In order to secure an enforceable settlement agreement, the parties must reach an agreement on the material terms and evidence an intent to be bound. Normally, this situation is not a problem, given that the parties normally will strive to achieve these ends in the settlement agreement. This translates into investing significant time and effort to craft a precise Term Sheet; covering all of the key terms of the settlement (such as the class definition, the class pay-out distribution formula, and myriad other bells and whistles that make up a Rule 23 class-wide settlement); and not leaving the settlement/mediation session unless and until all of these issues are covered and both parties express their intent to be bound. Simple, but critical.

This column previously appeared on the Seyfarth Shaw website.

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