Ninth Circuit Recognizes Magistrate Judge’s Authority To Enter Class Action Judgment But Nixes Settlement That Did Not Benefit Absent Class Members

The Ninth Circuit Court of Appeals recently ruled a magistrate judge had the authority to preside over a nationwide class action settlement and order a final judgment in a Fair Debt Collection Practices Act (FDCPA) lawsuit involving improper voicemail messages left for consumers by a defendant debt collector. A plaintiff who opted out of the class had brought a separate class action lawsuit on behalf of a similar but narrower class in Florida that was stayed as a result of the nationwide action. She objected to class certification and the magistrate judge’s final judgment.

On appeal from that objection, the Ninth Circuit made three significant rulings: 1) it joined three other Circuits in finding that a magistrate judge who presided over settlement discussions and class certification had authority to enter final judgment under 28 U.S.C. §636(c) with consent of the named plaintiff and defendant; 2) it found that §636(c) does not violate Article III by permitting the magistrate judge to enter judgment without consent of the absent class members; and 3) it found that the magistrate judge abused her discretion under Federal Rule of Civil Procedure 23(e)(2) by ordering injunctive relief and a $35,000 cy pres award that offered no value to the absent class members.

The lawsuit was filed in 2009 by several named plaintiffs against a defendant debt collector after the collector left voicemail messages for consumers in an effort to collect a debt. The voicemail messages reached some four million people from approximately 2008 to 2011. The lawsuit alleged that the debt collector failed to properly identify itself as a debt collector calling to collect a debt, in violation of the FDCPA.

In January 2013, the magistrate judge certified the class and entered an order for a settlement that included damages awards for three named plaintiffs, attorneys’ fees for their counsel, injunctive relief preventing the defendant from continuing to make improper debt collection calls, and a cy pres award to a charity in lieu of other monetary relief.

The class objector represented a smaller class of Florida consumers who received the same voicemail from the defendant, but on behalf of a particular creditor. Her appeal to the Ninth Circuit required the Ninth Circuit to first determine if it had Article III jurisdiction to hear the case. The court held the magistrate judge had authority, under 28 U.S.C. §636(c), to preside over the settlement and enter a judgment. An aggrieved party may appeal such a judgment directly to the U.S. Court of Appeals, so the Court of Appeals had jurisdiction.

The court then joined three other circuits in holding that §636(c) does not require both the named plaintiffs and the absent plaintiffs in a class action case to provide consent to a magistrate judge entering judgment in a case. The court held that Congress did not intend absent class members to be treated as “parties” for the purpose of providing consent for a magistrate judge to enter a final judgment.

The court reversed and remanded the magistrate judge’s approval of the settlement, however, finding that the settlement terms were not reasonable and adequate under Federal Rule 23(e)(2). First, absent class members would receive no benefit from the injunctive relief prohibiting defendant from making improper calls going forward. The defendant had changed its voicemail practices by 2011 and began using a new debt collection voicemail message. The injunctive relief provided in the settlement did not benefit the absent class members, who had already received prohibited calls, because they would not necessarily benefit from not receiving the improper message prospectively.

Second, the absent class members would receive no financial benefit from defendant’s payment of a $35,000 cy pres award. That amount derived from a damages cap under the FDCPA that limits damages to the lesser of $500,000 or one percent of the defendant’s net worth. Defendant asserted that its net worth was $3.5 million, such that the maximum recovery for the rest of the class (other than the named class representatives) was $35,000. Because the remaining four million class members stood to recover less than a penny each in potential damages, the lower court had approved a payment to a veterans’ charity. The Court of Appeals rejected that ruling, finding that the charity had no nexus to the absent class members’ FDCPA injuries or to the defendant’s alleged violations.

Finally, the settlement required the absent class members to give up their rights to assert damages claims against the defendant in any other class action, which the Ninth Circuit found to be unfair under Rule 23(e)(2). The class objector as well as other class members still had some potentially valuable rights at the time of the settlement order, including possible state law claims, against the defendant. Accordingly, the Court of Appeals held that the settlement was unfair under Rule 23(e)(2), because it would cause absent class members to give up valuable claims to participate in a settlement that offered them no benefits.

Weiner Brodsky Kider regularly represents financial services industry clients nationwide in class action litigation matters.