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Legal Update

California Court of Appeal Confirms Limits on Role of Objectors to Class Settlements—And Warns That an Extraordinary Writ Petition May Provide the Only Practical Avenue for Appellate Review of Some Interlocutory Orders

8 January 2010
Mayer Brown Legal Update

On December 31, 2009, the California court of appeal reaffirmed the limited role of unnamed class members in class action settlements and cautioned that in some cases a party that does not immediately petition for an extraordinary writ in response to a plainly interlocutory order may effectively waive appellate review. See In re Cellphone Termination Fee Cases, Nos. A122765/A122768. 

The case involved the settlement of a class action against Sprint Spectrum, L.P., and Wirelessco, L.P. (Sprint). As part of the settlement agreement, the parties agreed to submit the amount of the attorney fee award to binding arbitration, with a minimum award of $500,000 and a maximum of $2,950,000. Over the objection of two class members, the trial court found that the settlement was fair and that the range of attorney fees authorized by the fee arbitration provision was reasonable. Nonetheless, the trial court concluded that the fee arbitration provision was “‘void in its entirety’ because it did not provide for the participation of objecting class members in the arbitration.” The trial court subsequently awarded almost $2.5 million in attorney fees and costs. Sprint appealed, contending that the trial court erred in refusing to approve the fee arbitration provision.

The court of appeal held that the trial court abused its discretion because there was no legal basis to require unnamed class members to participate in the arbitration. The court of appeal concluded that “the key consideration for the trial court is the substantive fairness of the settlement terms”—not “the transparency of the process by which the terms of the settlement were accomplished.” As a general matter, unnamed class members play only a “limited role” in class action settlements. So long as the “objectors have had an opportunity to present their views” in light of adequate documentation, the trial court’s review was confined to determining that the settlement was reasonable and not collusive. Because the unnamed class members here had an opportunity to object to the settlement, including the fee range in the arbitration provision, they had no right to further participation, especially since their relief would be unaffected. At most, a trial court facing a similar fee arbitration provision might consider “delay[ing] final approval of the settlement” until after the fee arbitration has concluded. 

The court of appeal nonetheless affirmed the judgment because Sprint failed to carry its “very onerous” burden to establish actual prejudice. It was not enough “to show that a different reasonable decision maker could have rendered a more favorable fee determination.” In the absence of evidence of bias or unfairness, the showing of prejudice was “entirely speculative.”

Although the court of appeal recognized “the difficulty of showing prejudice in the circumstances of this case,” it emphasized that “[i]mmediate review by extraordinary writ was an available vehicle” to challenge the trial court’s refusal to approve the fee arbitration provision. As a practical matter, by failing to seek interlocutory appellate review of a decidedly non-final order, Sprint had waived its ability to receive the agreed-upon arbitration. 

The decision in Cellphone Termination Fee Cases highlights a procedural trap. Although extraordinary writs are more widely available for interlocutory appellate review in California than in most other court systems, there have been fewer indications that a failure to seek a writ may waive review of a discretionary interlocutory decision on an appeal from the final judgment. A writ petition in this case might have had particular force: the court of appeal recognized the California “public policies favoring arbitration and the settlement of complex class actions.” The Federal Arbitration Act, if applicable, might have provided another substantive ground for interlocutory relief. In any event, the decision makes clear that parties litigating in California state court must be vigilant to preserve appellate remedies by petitioning for an extraordinary writ whenever the future prejudicial effect of an erroneous ruling may be difficult to establish in retrospect. 

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