Erie and Aggregate Settlement in Diversity Jurisdiction Suits

John D. Spengler, Jr.*

INTRODUCTION

Over the last decades, United States federal courts have sharply curtailed the ability of parties to reach a global resolution, including through voluntary settlement, in mass tort and similar class action lawsuits.[1]  As a result, the multidistrict litigation (MDL) statute[2] continues to play an ever-increasing role in the resolution of these mass claims.  Primarily, this is because the MDL process forgoes the more strenuous requirements for class certification under Federal Rules of Civil Procedure 23(a) and 23(b).[3]  In an MDL proceeding, the Judicial Panel on Multidistrict Litigation (JPML) can order individual cases, either sua sponte or on the request of one or more parties to the litigation, to be consolidated in a single transferee district court for pretrial proceedings, including settlement negotiations.[4]  The JPML can then decide when to remand the cases back for trial in the original transferor court for each individual claim.[5]  By some recent estimations, claims aggregated for pretrial proceedings pursuant to the MDL statute make up a staggering portion of the federal docket, with a reported 437,102 claims pending in an MDL proceeding as of June 2024.[6]  A clear plurality of pending MDL proceedings sound in products liability and tort law[7]—claims whose substantive standards and rules of decision, outside of certain particular circumstances, will be governed by state law.[8]  Despite its rise in popularity as an alternative forum for mass tort, products liability, and other aggregate dispute resolution, MDL proceedings lack a unique and valuable protection for plaintiffs and defendants alike—the Rule 23(e) class action settlement fairness hearing.[9]  Rule 23(e) grants broad authority for the trial court to conduct a sweeping inquiry as to whether the class settlement is “fair, reasonable, and adequate.”[10]

Neither the MDL statute nor the federal rules contain a provision authorizing trial courts in non–class action proceedings to exercise the formal procedural power to review aggregate settlements for both procedural and substantive fairness.[11]  Nevertheless, judges presiding over MDL and other aggregated proceedings have asserted such a procedural power despite a lack of formal authority.[12]  There is no shortage of existing critiques of this approach, with the primary issue being the lack of a positive, enacted source of procedural authority for the trial judge to conduct a fairness inquiry into settlements between present, private parties.[13]

There are two distinct issues that arise with the use of the federal judicial power to review non-class settlements.  First, if not from the federal rules, then where does the procedural authority for a judge to review (and ultimately approve or disapprove) a private, non-class settlement come from?  Second, if that procedural authority exists, then what substantive standards determine whether the settlement meets some threshold level of fairness such that it can be approved?  Part I of this Note will examine that first question and argue that the procedural authority to approve settlements in non-class aggregate proceedings is justifiable under existing models of federal common law.  Part II will analyze the substantive standards that govern settlement approval and ultimately conclude that, under the broad guidelines of Erie Railroad Co. v. Tompkins,[14] trial courts must apply state law in determining the fairness of aggregate settlement agreements in diversity jurisdiction suits.  The overall fairness of a settlement agreement is a product of its procedural fairness (i.e., the fairness of the settlement contract’s formation) and its substantive fairness (i.e., the fairness of the settlement contract’s terms).[15]  Part III will survey potentially adequate sources of state law for such findings if trial courts choose to assert the procedural authority to police aggregate settlements.  Finally, Part IV will briefly offer a practical work-around applicable to some high-profile, non-class aggregate settlements as tested in the recent 3M earplug litigation.[16]

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*J.D. Candidate, Notre Dame Law School, 2025; B.A., University of Wisconsin-Madison, 2022.  Thank you to my parents, without whom none of my accomplishments would be possible.  Thank you to Professor Jay Tidmarsh for his invaluable guidance throughout the writing process and to Dr. Tladi Marumo for spurring my interest in complex civil litigation.  A final thanks to the staff and editors of the Notre Dame Law Review for their tireless work.  All errors and opinions are my own.  Ad Majorem Dei Gloriam.

[1]See, e.g., Ortiz v. Fibreboard Corp., 527 U.S. 815, 864–65 (1999) (overruling a grant of settlement class certification to plaintiffs bringing personal injury claims stemming from asbestos exposure under Federal Rule of Civil Procedure 23(b)(1)(B)); Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 624–25 (1997) (denying settlement class certification to plaintiffs bringing similar asbestos-based personal injury claims for failure to comply with Federal Rules of Civil Procedure 23(a)(4) and 23(b)(3)); see also Principles of the L. of Aggregate Litig. § 1.02 cmt. b(1)(B) reporters’ note (Am. L. Inst. 2010) (“[T]he class action has fallen into disfavor as a means of resolving mass-tort claims arising from personal injuries.”).

[2]28 U.S.C. § 1407 (2018).

[3]Compare Fed. R. Civ. P. 23(a)(requiring that a putative class establish numerosity, commonality, typicality, and adequacy of the named plaintiff’s representative ability as necessary prerequisites for class certification), with § 1407(requiring that claims aggregated for pretrial proceedings merely “involv[e] one or more common questions of fact”).

[4]See § 1407(a).

[5]Id.

[6]U.S. Jud. Panel on Multidistrict Litig., MDL Statistics Report—Distribution of Pending MDL Dockets by Actions Pending (June 3, 2024).

[7]See U.S. Jud. Panel on Multidistrict Litig., MDL Statistics Report—Docket Type Summary (Aug. 1, 2024).  Products liability actions alone comprised 67 of the 178 individual MDL proceedings before district courts as of August 2024.  Id.

[8]But see E. River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 865 (1986) (incorporating products liability law, “including strict liability, as part of the general maritime law”); Magnuson-Moss Warranty—Federal Trade Commission Improvement Act, 15 U.S.C. §§ 2301–2312 (2018) (establishing federal standards for consumer product warranties and providing for federal resolution of claims stemming from breaches of those standards).

[9]See Fed. R. Civ. P. 23(e) (creating a rare requirement that private settlements may be entered into “only with the court’s approval”).  For other scenarios in which judicial review of private settlements is required, see Rule 23.1 (derivative suits) and Rule 66 (receiverships).  Fed. R. Civ. P. 23.1, 66.

[10]Fed. R. Civ. P. 23(e)(2).

[11]But see Fed. R. Civ. P. 23(e)(2)(B) (requiring that the class settlement be “negotiated at arm’s length”); Fed. R. Civ. P. 23(e)(2)(C) (requiring that the monetary “relief provided for the class is adequate”).

[12]See, e.g., In re Zyprexa Prods. Liab. Litig., No. 04-MD-01596, 2005 WL 3117302, at *1 (E.D.N.Y. Nov. 22, 2005) (approving a global settlement in an MDL products liability action); In re World Trade Ctr. Disaster Site Litig., 124 F. Supp. 3d 281, 283 (S.D.N.Y. 2015) (describing how Judge Hellerstein “rejected the [previous] settlement” because it “gave too much money to attorneys and not enough to those who were injured”).

[13]See, e.g., United States v. City of Miami, 614 F.2d 1322, 1330 (5th Cir. 1980) (“If the [private] parties can agree to terms, they are free to settle the litigation at any time, and the court need not and should not get involved. . . . [T]he trial court plays no role in overseeing or approving any settlement proposals.”); Jeremy T. Grabill, Judicial Review of Private Mass Tort Settlements, 42 Seton Hall L. Rev. 123, 165 (2012) (“[N]o statute or rule authorizes or requires judicial review of private mass tort settlements.”); Alexandra N. Rothman, Note, Bringing an End to the Trend: Cutting Judicial “Approval” and “Rejection” out of Non-Class Mass Settlement, 80 Fordham L. Rev. 319, 353 (2011) (“[J]udges should embrace non-class mass litigation as a private contract in which the parties, and not the judges, choose when and how to settle.”); Robert J. Pushaw, Jr. & Charles Silver, The Unconstitutional Assertion of Inherent Powers in Multidistrict Litigations, 48 BYU L. Rev. 1869, 1958 (2023) (describing the review of private settlements as an unconstitutional exercise of a “beneficial power” as opposed to the use of an inherent power strictly necessary to the exercise of the Article III judicial power).

[14]Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).

[15]The procedural fairness of a settlement contract is distinct from the procedural authority that a court possesses to conduct a settlement fairness inquiry in the first instance.  The former is discussed inPart II.  The latter is discussed inPart I.

[16]The 3M Combat Arms Earplug litigation was comprised of over 240,000 active claims as of August 2023.  In re 3M Combat Arms Earplug Prods. Liab. Litig., No. 19-md-02885, 2023 WL 8609280, at *3 (N.D. Fla. Aug. 29, 2023) (case management order).  In an innovative move, the trial judge asserted the authority to approve or disapprove the settlement under 15 U.S.C. § 77c(a)(10) given that the proposed settlement involved the transfer of stock into a settlement fund.  See In re 3M Combat Arms Earplug Prods. Liab. Litig., No. 19-md-02885, 2023 WL 9034299,at *1–3 (N.D. Fla. Dec. 31, 2023).