Judicial review of pre-certification settlements: it’s time to put some district courts’ continued reliance on the Ninth Circuit’s Diaz rule to rest
Most potential class actions are resolved before class certification. Often courts dismiss cases at the pleadings stage or grant early summary judgment. Sometimes plaintiffs choose to dismiss their cases rather than continuing to pursue them. And often class actions settle on an individual basis at an early stage.
The benefits are obvious. Early settlements offer individual plaintiffs relatively quick payments. They allow defendants the opportunity to end cases early without the need to pay the high costs—including often burdensome discovery-related costs—to defend against class litigation. And they benefit the court system by avoiding needless litigation that can clog court dockets. When permitted by law, parties frequently choose to settle on a confidential basis, thereby avoiding the risk of adverse publicity—something that benefits both defendants and plaintiffs.
The current federal rules facilitate this practice. As written, they give parties autonomy to settle claims early and without judicial intervention. First, Federal Rule of Civil Procedure 41(a)(1) allows a plaintiff to voluntarily dismiss the lawsuit prior to the filing of an answer or motion for summary judgment; alternatively, parties may stipulate to dismissal. This process is efficient. It allows parties to negotiate settlements quickly and without barriers. There is one potential twist—Rule 41 is subject to Rule 23(e), which was amended in 2003 and again in 2018 to provide that “[t]he claims, issues, or defenses of a certified class—or a class proposed to be certified for purposes of settlement” may be settled or voluntarily dismissed “only with the court’s approval” (emphasis added). But the text makes clear that prior to class or proposed settlement certification, court approval is not needed. As the Wright & Miller treatise puts it, “settlements or voluntary dismissals that occur before class certification are outside the scope of subdivision (e).” 7B Charles Alan Wright & Arthur R. Miller, Federal Prac. & Proc., Settlement, Voluntary Dismissal, or Compromise of Class Actions-Purpose and Scope of Rule 23(e) § 1797 (3d ed. 2021). In those instances, the settlement binds only the proposed class representative and the defendant—the claims of absent members of the potential class are not affected. See 2 Joseph McLaughlin, McLaughlin on Class Actions § 6:1, Voluntary Dismissal (18th ed. 2021).
Despite the plain language of Rule 41 and the 2003 amendment to Rule 23(e), some district courts, notably including those in the Northern District of California, continue to insist upon review of pre-certification class settlements. Rather than litigate over whether such review is necessary, parties commonly continue to file motions for judicial approval of the settlement “as a cautionary step.” Houston v. Cintas Corp., 2009 WL 921627, at *1–2 (N.D. Cal. Apr. 3, 2009). And a number of judges in the Northern District of California continue to review proposed settlements prior to class certification. See e.g., Dunn v. Tchrs. Ins. & Annuity Ass’n of Am., 2016 WL 153266, at *3 (N.D. Cal. Jan. 13, 2016) (explaining that “courts in this district continue to follow Diaz to evaluate the proposed settlement and dismissal of putative class claims”); Castro v. Zenith Acquisition Corp., 2007 WL 81905 (N.D. Cal. Jan. 9, 2007) (applying Diaz to review a pre-certification settlement); Singer v. Am. Airlines Fed. Credit Union, 2006 WL 3093759 (N.D. Cal. Oct. 30, 2006) (same).
This outmoded treatment of pre-certification settlements stems from a three-decade-old decision, Diaz v. Trust Territory of the Pacific Islands, 876 F.2d 1401 (9th Cir. 1989). The Ninth Circuit decided Diaz under an earlier version of Rule 23(e), prior to the 2003 amendment. At that time, the federal rules did not specifically address whether a settlement reached prior to class certification required judicial approval. In Diaz, the Ninth Circuit confronted that question after plaintiffs’ counsel bit off more than they could chew and reached an agreement that narrowed a proposed class. Specifically, plaintiffs’ and defendant’s counsel reached an agreement to “eliminate certain categories of plaintiffs.” Id. at 1403. The district court granted the parties’ proposed order dismissing certain class claims from the suit without providing notice to the putative class members or determining whether they would be prejudiced. Id. Individuals dropped from the proposed class then sought to intervene and vacate that order.
On appeal, the Ninth Circuit in Diaz joined the then-majority of jurisdictions holding that pre-certification settlements require judicial approval under Rule 23(e)—albeit through less stringent procedures than those that apply to post-certification settlements. Diaz, 876 F.2d at 1408 (stating that “[t]he court’s duty to inquire into a settlement or dismissal differs before and after certification.”). Despite its holding applying Rule 23(e) to pre-certification settlements, the Diaz court recognized some of the very reasons that Rule 23 was later amended to expressly clarify that court approval is not required for pre-certification settlements: that is, “[b]efore certification, the dismissal is not res judicata against the absent class members” such that “the court does not need to perform the kind of substantive oversight required when reviewing a settlement binding upon the class.” Id. Nonetheless, the Diaz court reviewed the settlement to determine whether Rule 23(e) required notice to absent class members, and concluded that notice was necessary to prevent the potential for prejudice. Id. at 1409-11. It accordingly vacated the district court’s order.
Perhaps this holding made sense under the prior version of Rule 23(e). As the advisory committee notes explain, by referring merely to “a class action,” the prior version of Rule 23(e) was ambiguous as to whether a pre-certification settlement required judicial approval. But the amended Rule 23(e) is clear: court approval and notice is only required when parties settle the claims, issues, or defenses of “a certified class” or a proposed “settlement class.” Fed. R. Civ. P. 23(e). As one treatise has explained, the amended Rule 23(e) “overruled” Diaz and other cases. 2 Joseph McLaughlin, McLaughlin on Class Actions § 6:1, Voluntary Dismissal (18th ed. 2021). Under the amended rules, where a class is not certified, Rule 41 allows for the parties to negotiate a speedy dismissal. The approach taken by courts that continue to require judicial approval fails to recognize that Diaz is no longer the law in light of the 2003 amendment to Rule 23.
To be sure, in practice courts generally don’t withhold approval of pre-certification individual settlements of class actions. But the approval process itself erects unnecessary barriers to early settlement, and might in some cases reduce the value of a settlement or impede settlement altogether. More important, requiring judicial approval of such settlements contradicts the right to voluntary or stipulated dismissals without court intervention provided under Rule 41. Courts that continue to apply Diaz should reconsider their approach.
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