A recent Ninth Circuit decision emphasizes that it will vacate class settlement approvals whenever district courts fail to apply the proper legal standards to assess class settlements.  In Saucillo v. Peck, 2022 WL 414692 (9th Cir. Feb. 11, 2022), the underlying dispute concerned allegations that a trucking company failed to follow a California labor law requiring employers to reimburse employees for expenses incurred on the job.  After the court denied a contested motion for class certification, the parties agreed to a class settlement and the district court approved the agreement under Rule 23(e).  On appeal, an objector raised—for the first time—that the district court incorrectly analyzed whether the settlement was fair given that the court had not previously certified the class.

The Ninth Circuit agreed.  Relying on its decision in Roes, 1–2 v. SFBSC Mgmt., LLC, 944 F.3d 1035 (9th Cir. 2019), the Court reaffirmed that district courts must conduct a “heightened” fairness review of settlement agreements made before class certification.  By contrast, the district court in Saucillo merely presumed fairness—i.e. that negotiations were conducted at arm’s length and non-collusive—based solely on the fact that a qualified third-party mediated settlement discussions.  But this presumption was not warranted, the Court held, because class settlement negotiations that take place before a class has been certified raise the risk that class representatives and counsel will “disproportionate[ly] benefit at the expense of unnamed plaintiffs.”  Saucillo, 2022 WL 414692, at *9.

The Court further held that the objector did not waive arguments concerning the correct legal standard.  To preserve an issue for appeal, an objector to a class settlement generally must raise the issue before the district court.  But this rule does not apply where a district court fails to apply a legal standard until its final order.  Because the district court did not apply its erroneous fairness presumption until its final order, the objector “did not (and could not) waive his objection” to the incorrect standard.  Id.  “When a district court’s findings are based upon an incorrect legal standard, the appropriate remedy is to remand so that findings can be made in accordance with the applicable legal standard . . . . because factfinding is the basic responsibility of district courts, rather than appellate courts.”  Id. at *11.  Accordingly, the Ninth Circuit vacated the approval order and remanded the case. 

Saucillo serves as a reminder that practitioners should be attentive to the standards governing class settlement approval—even when objectors fail to raise the issue.  By proactively focusing judges on the correct standards, litigators can save time and avoid unnecessary expense.