Civil Procedure. Class Actions. Seventh Circuit Reverses Lower Court's Approval of Class Action Settlement, Citing Evidence of Collusion. Reynolds v. Beneficial National Bank, 288 F.3d 277 (7th Cir. 2002)

Abstract

Class actions have the potential to increase the efficiency of litigation by eliminating duplicative lawsuits and improving plaintiffs' attorneys' investment incentives. But this potential efficiency gain comes at a cost. For instance, the divergence of plaintiffs' lawyers' interests from those of the class can lead to collusive settlements; for this reason, among others, class action settlements require judicial approval. In Reynolds v. Beneficial National Bank, the Seventh Circuit reversed a lower court's approval of such a settlement, reasoning that the settlement was collusive and inadequate. While the Seventh Circuit was probably right given the facts of this case, only the most egregious cases lend themselves to this kind of analysis. In most cases, the present system of judicial oversight of class settlements is fundamentally unworkable. The market for legal services, not judges' second-guessing, should regulate class action settlements. Rather than attempting the impossible task of valuing an entire litigation to determine whether a settlement is adequate, judges should concentrate on aligning plaintiffs' lawyers' incentives with those of the class through fee regulation or, even better, by letting lawyers buy plaintiffs' claims outright at auction.