Securities Class Actions and Due Process

Monday, January 1st, 1996 at 12:00 am by G. Chin Chao
G. Chin Chao, Securities Class Actions and Due Process, 1996 Colum. Bus. L. Rev. 547

The past few years have seen a rise in the number of class action settlements being rejected by federal judges. In the month of April 1996 alone, federal judges in two separate class actions rejected their respective settlements. The first class action involved unfair pricing claims by 30,000 pharmacies against the major pharmaceutical companies. Although tentatively approved in February, U.S. District Judge Charles Kocoras rejected the $408.9 million negotiated settlement package. He noted the settlement failed to mention future pricing practices and called for a commitment on the part of the pharmaceutical companies to fairness in future pricing. Only after the parties addressed these issues in their settlement did he later approve it. The same pattern occurred in another class action, this one involving faulty home siding. The presiding federal judge rejected a proposed settlement because it did not provide for how homes would be inspected and who would be covered. He later approved a revised settlement which resolved these concerns. Increased scrutiny is also infiltrating the federal shareholder class action. In 1995, Judge Walker of the Northern District of California threw out a settlement in the California Micro Devices securities litigation because it placed class counsel over plaintiff investors. The settlement offered shareholders a package of stock and cash worth approximately $13 million (but only $1 million in cash) while plaintiff attorneys would have received $2.8 million in fees. This case has since gone back to the drawing board. Federal judges may be subjecting class action settlements to greater scrutiny because of increased criticism of the process. Within the last five years, studies have indicated that while plaintiff attorneys often get big fees for settling, plaintiffs often get little if any compensation. Some question whether the merits even matter. Now, even plaintiff attorneys are complaining about class actions, stating that companies are using them to end all claims and to cap their liability. By closely examining settlement offers, federal judges may be simply reigning in abuses in the settlement process. But how have companies and attorneys responded to this increased federal scrutiny? Most have continued on with business as usual but some have advocated the use of state courts as an alternative, and, in the case of shareholder class actions, may now have greater incentive to do so. This paper tells a story of why state courts should see an increase in shareholder class actions and what safeguards exist to protect class members from abuses in the process.

Author Information

Associate, Fenwick & West LLP.