IN RE: VANGUARD CHESTER FUNDS LITIGATION, 2:22-cv-00955

Background

The case involves a putative class of investors harmed by a decision Vanguard made in 2020 to lower the minimum investment for its Institutional Funds, causing certain investors to incur unexpected capital gains taxes.
Plaintiffs allege that Vanguard breached fiduciary duties by selecting a course of action that caused these harms when viable, less costly alternatives were available.
After discovery and mediation, the parties negotiated a $40 million class action settlement, with about $13 million allotted to attorneys’ fees, pending court approval.
Before approval, Vanguard settled related regulatory charges with the SEC, requiring it to pay $135 million in restitution; $40 million of this could be offset if the class action settlement was approved, but if rejected, Vanguard must pay the extra $40 million to a Fair Fund for investors.
An objecting class member pointed out that, under these terms, the class would get more money if the settlement were rejected, since the SEC Fair Fund payout would not be reduced by attorneys’ fees.
The court was therefore tasked with deciding whether to approve a settlement that undeniably left the class worse off than rejection.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Does the proposed settlement provide real value to the class given the SEC Fair Fund offset?	Plaintiffs argued the settlement offers real value, factoring in the time value of money and earlier payment.	Vanguard argued that the SEC settlement's guarantee/offset provisions supported approval and did not make the class action settlement meaningless.	Court held the settlement provided no real value, since rejection would guarantee a larger payment to the class via the SEC Fair Fund.
Should the court consider only the gross settlement amount, or the net after attorneys’ fees, in assessing adequacy?	Plaintiffs argued gross value should suffice, as in other settlements.	Vanguard similarly claimed the gross amount should be considered.	Court held that the real, net value to the class is what matters, and deducting attorneys’ fees is required to assess true benefit.
Does the time value of money justify approval of the settlement (i.e., is earlier payment at a lower amount preferable)?	Plaintiffs claimed that Fair Fund distributions take years, so the proposed settlement is more valuable even though it is less in total dollars.	Vanguard did not strongly contest this but generally supported the settlement's adequacy.	Court found that even after adjusting for time value, evidence showed class would still be better off rejecting the settlement.
Can public policy or contract interpretation justify approval of a settlement that is plainly worse for the class?	Plaintiffs argued that rejecting the settlement undermines settlements and disregards the party’s efforts; changes after settlement negotiations should not be considered.	Vanguard argued that the guarantee/offset language should be read in a way to preserve the possibility of offsets, favoring settlement.	Court found the settlement text unambiguous, refused to rewrite it, and held that public policy does not justify approving an economic loss to the class.

Key Cases Cited

In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) (court must independently analyze whether settlements are in class members’ best interests)
In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liability Litig., 55 F.3d 768 (3d Cir. 1995) (adequacy of settlement turns on real, net value provided to class)
Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975) (outlines factors for assessing fairness and adequacy of class action settlements)
In re Fine Paper Antitrust Litig., 617 F.2d 22 (3d Cir. 1980) (class counsel must avoid conflicts of interest with the class)
Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., 619 F.2d 1001 (3d Cir. 1980) (contract interpretation should follow the plain language)