OPINION
I. Introduction and Summary
The traditional norm of our legal system is the adversary trial by an individual plaintiff claiming redress for a particular wrong. The question before us is how far the courts should go in allowing class action, mass tort cases to deviate from that tradition. More specifically, this appeal asks us to interpret and apply the recent Supreme Court class action case of Ortiz v. Fibreboard Corp.,
In Ortiz the Supreme Court was again faced with a large class of asbestos claimants suing a manufacturer, which had in turn sued its two insurance carriers for funds to pay the claimants. Negotiations between the lawyers for the class and the manufacturer and the two insurance companies produced a settlement fund of $1.525 billion, contingent on certification under Rule 23(b)(1)(B) as a mandatory class, and approval of the settlement on a limited fund theory. The lower courts certified the claimants as a Rule 23(b)(1)(B) mandatory, non-opt-out class and approved the settlement because they believed that on balance it was in the best interests of the claimants who otherwise stood to lose the fund should the insurance companies win their pending no-coverage cases.
The Supreme Court reversed the Fifth Circuit in Ortiz by a 7 to 2 vote. The Court concluded that applicants for certification on a limited fund theory under Rule 23(b)(1)(B) “must show that the fund is limited by more than the agreement of the parties.” Ortiz,
One of the problems with compromising the rights of absent class members under Rule 23(b)(1)(B) through global mass tort settlements distributed on a mandatory basis arises from the perverse set of incen
While there are factual differences between the present case and Ortiz, the similarities with the structural problems identified in Ortiz make approval of the settlement in this ease inappropriate. Like Ortiz, the settlement herein varies greatly from the traditional model. Many aspects of the settlement undermine the protections for the class that are inherently guaranteed by the traditional model. In addition, this case presents a less appropriate case on the facts than Ortiz. TPLC’s corporate parents were released from liability without close scrutiny by the parties as to whether they might be liable. The facts that came out during the personal jurisdiction phase of the litigation below make it doubtful that they would have escaped all liability had they been forced to go to trial. District Judge Spiegel, who has given careful and intelligent consideration to this important case, so found at one point in his rulings on motions. There seems to be no dispute that the parent corporations have sufficient funds to undertake individual litigation and to pay any claims that might result. Their release, therefore, undermines the appropriateness of the settlement even more than the settlement in Ortiz. Like the settlement in Ortiz, the funds available are limited only by agreement of the parties, not because the funds do not exist as a factual matter, and the amount contributed by the parents is small compared to their potential liability.
II. Facts and Procedural History
This products liability class-action litigation was brought on behalf of individuals implanted with the Telectronics Accufix Atrial “J” pacemaker lead. The lead is implanted in the atrium of the heart as part of a pacemaker device used to restore normal heartbeat. It was determined in 1994 that some of the lead wires had a tendency to break, coming through the polyurethane coating and potentially causing injury to the heart and blood vessels. TPLC-manufactured leads of this type were implanted in about 40,000 persons world-wide, including about 25,000 persons in the United States.
Defendant TPLC, a Delaware corporation, manufactured and distributed these leads in the United States between 1988 and 1994. Defendant Telectronic Pacing Systems, also a Delaware corporation, is the sole owner of TPLC. Telectronic Pacing Systems’ sole business is to hold certain industrial property rights, real estate and the equity interest in TPLC. Additional named defendants are Pacific Dunlop, Ltd. and Nucleus, Ltd, both Australian companies. Nucleus is a holding company that owns companies that design, manufacture and sell medical products, including pacemakers and pacemaker leads. It was the holding company for TPLC and Telec-tronic Pacing Systems. Pacific Dunlop purchased Nucleus in 1988 and became the beneficial owner of TPLC and Telectronic Pacing Systems. Pacific Dunlop is a publicly-held Australian company consisting of over 225 separate corporate affiliates and subsidiaries. It has annual world-wide sales of about $5.5 billion. Nucleus and Pacific Dunlop were made defendants on the ground that they are alter egos or agents of their subsidiary, TPLC.
Numerous state and federal court actions were filed against defendants. Many of the suits .became part of a multi-district litigation proceeding in the Southern District of Ohio. The amended and consolidated master class action complaint asserted claims against TPLC, Nucleus and Pacific Dunlop for negligence, strict liability, failure to warn, breach of implied and express warranty, fraud, medical monitoring, fear of future product failure, intentional and negligent infliction of emotional distress, loss of consortium, misrepresentation and compensatory and punitive damages. A 17-member Plaintiffs Steering Committee was appointed by the district court to coordinate discovery and other pretrial proceedings on behalf of all transferred plaintiffs. The district court addressed the issue of class certification several times before entering the final decision that we review today. We will not review that procedural history here in detail.
The Australian defendants, Pacific Dun-lop and Nucleus, moved to dismiss for lack of personal jurisdiction. In February 1997, the district court denied the motion, finding that the companies maintained sufficient contacts with the United States for the court to exercise personal jurisdiction over them. In re Telectronics Pacing Systems, Inc.,
A one-week, nonbinding, summary jury trial was held in February 1998. The summary jury found TPLC liable under theories of strict liability, negligence and negligence per se and awarded class members between $150,000 and $3 million each, depending on the extent of their injuries. The summary jury did not award monetary damages to plaintiffs whose leads had not broken, but did find that TPLC should pay $265 million for medical monitoring of all implant recipients. The summary jury did not find Nucleus or Pacific Dunlop liable as alter egos of TPLC or under any agency theory.
Defendants and the Plaintiffs’ Steering Committee entered into settlement negotiations shortly after the summary trial. The parties filed a joint motion for certification of a mandatory class and approval of the proposed settlement. On July 22, 1998, the district court preliminarily approved the class action settlement proposed by the parties. TPLC’s assets, determined to be about $78 million, were divided into four funds: (1) a Patient Benefit Fund of about $47 million out of which class member would be compensated; (2) an Operating Fund of about $20 million that TPLC will use to pay operating expenses; (3) a Litigation Fund of about $7 million that TPLC would use to pay expenses related to non-lead-related litigation and (4) a Reserve Fund of $4 million to be used by defendants to pay expenses in other, unrelated litigation. Pacific Dun-lop agreed to contribute $10 million to the Patient Benefit Fund, raising that fund to $57 million and the parties agreed that any unused funds from the other three funds would be added to the Patient Benefit Fund. The defendants and Plaintiffs’
The district court approved the settlement and ultimately certified the class as a mandatory, non-opt-out class under Rule 23(b)(1)(B) as requested by the parties. The district court certified the no-opt out class because it found, based on economic information provided by TPLC, that there was a “limited fund” from which injured plaintiffs could be paid. The district court stated that it did not take into account the assets of Nucleus or Pacific Dunlop in determining the total assets available to the settlement fund because (1) it believed that the court was unlikely to obtain jurisdiction over the Australian companies, (2) the time and cost of litigating against a foreign defendants made litigation infeasible and (3) the jury in the summary trial had not found the two Australian companies liable.
As required by Rule 23(e), the district court held a fairness hearing. It reviewed the settlement for fairness, reasonableness and adequacy and found that the settlement as a whole satisfied the standards of Rule 23(e). Fifty-three class members objected to the settlement.
The district court also approved an award of 28%, or about $19 million, of the net Patient Benefit Fund as attorney fees. As part of the settlement agreement, defendants did not object to this fee request. The attorney fee amount was objected to by various unnamed class members.
Five different groups of class members have appealed the approval of the settlement and their appeals have been consolidated: (1) Unnamed class member-objector Harold Reed (No. 99-3476); (2) Bruce Hopkins, et al. (No. 99-3477) is comprised of 67 class members who, prior to the settlement, had filed suit against defendants in the Southern District of New York; (3) Class members-objectors Miriam Beasley, et al. (99~3478);
Among them, the appellants raise essentially five issues on appeal: (1) whether the district court abused its discretion in certifying the class as a “limited fund” class action under Federal Rule of Civil Procedure 23(b)(1)(B) where solvent and potentially liable companies were released from liability; (2) whether the settlement and certification violates due process because it does not allow plaintiffs with claims for money damages to opt-out of the settlement; (3) whether the class representatives and class counsel adequately represented the interests of all class members; (4) whether the district court erred in awarding class counsel fees of 28% of the total settlement fund; and (5) whether the district court abused its discretion in denying the motions to intervene by various class members/objectors.
III. Discussion
Applying the characteristics of appropriate limited fund actions after Ortiz, we are compelled to reject certification of the class under subsection (b)(1)(B) and hold that approval of the settlement was
While Rule 23 speaks to “the risk of impairment” of future claims, courts have long recognized that the meaning of subsection (b)(1)(B) is not as broad as the plain language implies. Ortiz,
Drawing from the paradigmatic examples identified above, the Ortiz Court articulated three “common characteristics” of limited fund class actions that the drafters of Rule 23(b)(1)(B) “must have assumed would be at least a sufficient set of conditions to justify binding absent members of a class.” Ortiz,
Significantly, the Ortiz Court explicitly refused to decide the ultimate issue of whether, even if these three requirements were met, Rule 23(b)(1)(B) may ever be used to aggregate individual tort claims. Because we find that the settlement in the instant case fails to satisfy all three characteristics of limited fund actions, we need not answer the ultimate question either. We note, however, that the applicability of Rule 23(b)(1)(B) to a fund purporting to liquidate actual and potential tort claims is “subject to question.” Id. at 2323. As the
Release of the Parent Companies
The primary problem with this settlement is that it fails to meet the first “traditional” characteristic set out by the Court in Ortiz: “the totals of the aggregated liquidated claims and the fund available for satisfying them, set definitely at their máx-imums, demonstrate the inadequacy of the fund to pay all the claims.”
Specifically, the objectors contend that this is not a true “limited fund” case because the Australian defendants — the parent companies of TPLC — are solvent and potentially liable and their assets should not be excluded when determining the amount available to class members as redress for their injuries.
Although we have no factual findings from the district court on the matter, it appears undisputed that the two companies do not have “limited funds” in the traditional sense and would be able to bear the expense of litigation and pay damages if found hable. TPLC informed the district court, however, that it would not settle without the two Australian companies being dismissed. The district court, believing that the settlement was in jeopardy if it did not agree to this part of the settlement, approved it. The district court acknowledged that only TPLC was a limited fund, but held that because TPLC would not settle unless Pacific Dunlop and Nucleus were released, “the loss of settlement can constitute a ‘risk’ within the meaning of Rule 23(b)(1)(B)” justifying certification under that subsection. Without settlement, the district court worried that some class members might be unable to recover for their injuries because TPLC might run out of funds before all class members could be compensated for their injuries and the parent corporations might not be found liable.
The settlement reached by the Plaintiffs Steering Committee and the defendants released the Australian parent companies from any liability, now or in the future. In justifying its approval of the settlement that does not hold the parent companies accountable, the district court found a “serious question” as to whether the court could exercise personal jurisdiction over Pacific Dunlop and Nucleus. In re Telectronics Pacing Sys., Inc.,
In a lengthy and well-reasoned order denying the motion to dismiss of the Australian defendants for lack of personal jurisdiction, the district court stated that “the Australian defendants exercised a great deal of control over [TPLC and Telectron-ics Pacing Systems].”
Furthermore, on two occasions, Pacific Dunlop signed indemnification agreements with TPLC suppliers to ensure that TPLC could continue to operate. The district court concluded that this action “demonstrates that [Pacific Dunlop] is willing, when it so desires, to accept responsibility for the obligations of its subsidiaries.” Id. at 920-21. Finally, the court found Pacific Dunlop’s involvement in the controversy about the leads to be “especially telling” as to the “intimate affiliation” between parent and subsidiary. It was the managing director of Pacific Dunlop that corresponded with officials from the FDA concerning problems with the lead.
The district court found these facts to “create an inference that the absent parent and the subsidiary are in a fact a single legal entity” for the purpose of exercising jurisdiction. Id. While we recognize that the court limited its analysis to examining the due process limits to personal jurisdiction and did not conclude that the corporate veil could be pierced, the facts that came out during this inquiry demonstrate the unfairness of releasing the Australian defendants through a parties-created settlement.
The district court does not explain how it came to change its findings on the court’s personal jurisdiction over the Australian companies. The district court apparently based its decision to approve a settlement releasing the parent companies from all liability primarily on the summary jury’s finding that the companies would not be liable on an alter ego or agency theory, thereby increasing the risk that the first-arriving plaintiffs would deplete the admittedly limited funds of TPLC, leaving the later-arriving plaintiffs without a remedy. The problem with the district court’s approach is that it confuses the ability of plaintiffs to prevail on the merits with the ability to pay a judgment. The issues are separate. If not for the settlement, there would be no limited fund because the class members could pursue their claims against the Australian defendants individually if they chose, as well as against TPLC. We can only conclude that in its desire to approve a settlement and conclude the case by providing some money to class members, the court ignored its earlier findings. We cannot approve a settlement that releases these parent companies from all liability and leaves class members with no recourse against them.
Although not entirely clear, the district court also may have been suggesting that the assets of all three companies — TPLC, Nucleus and Pacific Dunlop — together constituted a limited fund due to the risk that the latter two companies would not be held liable by a jury. In Ortiz, the Supreme Court explained the ways in which the insurance assets at issue in that case could have been limited. First, “[t]he insurance assets would obviously be ‘limited’ in the traditional sense if the total of the demonstrable claims would render the insurers insolvent, or if the policies provided aggregate limits falling short of that total.” Ortiz,
Threat of Bankruptcy
In addition, the threat of bankruptcy alone, an argument put forth by TPLC as a primary reason to approve the limited fund settlement, cannot be the basis for finding a limited fund. Presumably all companies have limited funds at some point — there is always the possibility that a large mass tort action or other litigation will put a company into bankruptcy. Should that eventuality threaten, we have a comprehensive bankruptcy scheme in this country for just such an occurrence. Simply demonstrating that there is a possibility, even a likelihood, that bankruptcy might at some point occur cannot be the basis for finding that there is a “limited fund” in an ongoing corporate concern. The district court cannot discharge the debt in advance of the occurrence, thereby usurping the bankruptcy scheme through settlement, even it believes such an avenue to be in the best interests of most of the plaintiffs. See In re Asbestos Litigation,
Moreover, bankruptcy would require vigorous examination of administrative expenses, including attorney fees, and would provide for a creditors’ committee that would examine all claims and could object to any claim it found excessive. It is difficult to believe that administrative expenses in bankruptcy would amount to more than 25% of the total estate, or almost $20 million, the approximate amount of attorney fees and costs to be deducted from the amount of funds to be paid out to injured plaintiffs. Compare Barbara J. Houser, Chapter 11 as a Mass Tort Solution, 31 Loy. L.A.L. Rev. 451 (1998) (bankruptcy proceeding efficient way to handle mass tort claims) with Joseph F. Rice & Nancy Worth Davis, The Future of Mass Tort Claims: Comparison of Settlement Class Action to Bankruptcy Treatment of Mass Tort Claims, 50 S.C.L. Rev. 405 (1999) (transaction costs higher in bankruptcy proceeding than settlement class actions). See also Report on Mass Tort Litig.,
Lack of arms-length negotiations
We also cannot approve this settlement because it appears not to be the result of arms-length negotiation among the parties. A significant aspect of this settlement appears to be to limit the liability of the parent companies. The bootstrapping of a Rule 23(b)(3) class into a Rule 23(b)(1)(B) class is impermissible and highlights the problem with defining and certifying class actions by reference to a proposed settlement. Ortiz makes clear that subsection (b)(1)(B) was not intended for the lawyers representing the parties essentially to “create” a limited fund by threatening that there would be no settlement unless the deepest pockets are totally released from liability. We therefore agree with the objectors that the Australian parent companies should not be totally released from liability based solely on agreement of the parties and for that reason alone this settlement cannot be approved.
We do not decide whether the other two traditional characteristics of a limited fund
Constitutional Considerations
The Supreme Court in Ortiz also articulated several constitutional considerations compromised in a non-opt-out class action regarding a mass tort. Both Seventh Amendment jury trial rights and the Fifth Amendment due process principle regarding the right to a “day in court” are implicated in aggregating individual claims sounding in tort.
Class certification, whether mandatory or not, necessarily compromises various rights of absent class members. Rule 23(b)(3), with its notice and opt-out provisions, strikes a balance between the value of aggregating similar claims and the right of an individual to have his or her day in court. Certification under subsection (b)(1)(B), which does not include these protections, must be carefully scrutinized and sparingly utilized. The Supreme Court also stressed that in a proper interpretation of Rule 23, principles of sound judicial management and constitutional considerations of due process and the right to jury trial all lead to the conclusion that in an action for money damages class members are entitled to personal notice and an opportunity to opt out.
Generally, due process requires that class members bringing particularized tort claims for money damages be provided an opportunity to opt-out of the class. Shutts,
Denial of Motions to Intervene
Although not necessary to our holding herein, we wish briefly to address the denial of the motions to intervene by the district court. Various unnamed class members filed motions to intervene in the district court pursuant to Federal Rule of Civil Procedure 24.
The settlement notice was sent out to class members in September 1998, giving notice of the terms of the settlement and the date of the fairness hearing in November 1998. The motions to intervene were all filed before the fairness hearing. Given that motions to intervene can be filed as late as 10 days after judgment, it does not appear that the motions were untimely. The district court indicated that because the litigation was ongoing for two years at that point, the objectors should have known about their interest in the case before September 1998. However, many of them had cases pending in other districts and did not have reason to intervene until after they received notice of the settlement and found reason to object. Unnamed members of the class will rarely suspect a shortfall in the adequacy of representation before learning the terms of the settlement or problems in defining the class. In addition, class members here had every reason to believe that they would be given an opportunity to opt out right up until the settlement was finalized. We believe it was error for the district court to deny the motions on the ground of untimeliness.
IV. Conclusion
In light of our disposition, all other issues are pretermitted. Our holding here does not end the matter or foreclose injured plaintiffs from recovery. If TPLC is or becomes insolvent, then, as discussed above, bankruptcy is a partial solution. This would leave open for adjudication the liability of the parent companies, which all parties recognize to be the defendants with the deepest pockets. Our decision here, therefore, should not adversely affect the members of the class who have real injuries to be redressed and compensated.
While there are differences between the settlement in Ortiz and the one at issue here, the settlement as approved strays too far from the traditional model and undermines many of the protections built into Rule 23. Moreover, the form of the settlement calls into question its fairness and raises constitutional concerns. While we do not decide if a limited fund class, or any type of class certification, can work in this case, the settlement cannot deprive class members of the protections available under Rule 23 generally and the traditional model of limited fund cases set forth by the Supreme Court in Ortiz. For that reason we reverse and remand to the district court.
Notes
. Rule 23(a) provides:
One or more members of a class may sue ... only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. Rule 23(b)(1)(B) then provides for a mandatory class as follows:
An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition: (1) the prose*873 cution of separate actions by or against individual members of the class would create a risk of ... (B) adjudications with respect to individual members of the class which would as a practical matter be dis-positive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests.
Except for Rule 23(b)(1)(B) limited fund, mandatory class actions, Rule 23(c)(2) provides in class action suits for damages notice to the class members and opt-outs as follows:
In any class action maintained under subdivision (b)(3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can identified through reasonable effort. The notice shall advise each member that (A) the court will exclude the member from the class if the member so requests by a specific date....
. A company by the name of Cordis was also a named defendant in some of the suits filed,
. The Hopkins and Reed Objectors filed a combined brief with this Court in which Miriam Beasley, et al., joined.
. Some of the class members in this group were part of the multi-district litigation, others were part of an action that was removed from Louisiana state court to the Eastern District of Louisiana and then stayed after the class was certified in the multi-district litigation and others have not filed suit but are members of the putative class.
. A limited fund exists when a fixed asset or piece of property exists in which all class members have a preexisting interest.... Classic illustrations include claimants to trust assets, a bank account, insurance proceeds, company assets in a liquidation sale, ... and others. 1 NEWBERG ON CLASS ACTIONS § 4.09, at 4-33 (cited in In re Asbestos Litigation,
. Pacific Dunlop agreed "voluntarily” to contribute $10 million to the settlement.
. Federal Rule of Civil Procedure 24(a)(2) provides:
(a) Intervention of Right. Upon timely application anyone shall be permitted to intervene in an action: ... (2) when the ap*882 plicant claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action may as a practical matter impair or impede his ability to protect that interest, unless the applicant's interest is adequately represented by existing parties.