Denying final approval of a $7 million class settlement with National City Bank for alleged discriminatory lending practices was the right move in light of intervening U.S. Supreme Court precedent, the Third Circuit has ruled.

In 2011, after having granted preliminary approval to the settlement the year before, U.S. District Judge Eduardo Robreno of the Eastern District of Pennsylvania denied final approval because of the U.S. Supreme Court's opinion in Wal-Mart v. Dukes that was issued that year, heightening the standard for establishing commonality among class members. When asked for briefings on Dukes' impact before Robreno ruled, both sides — the bank and the black and Hispanic plaintiffs who had alleged they were charged more for mortgages than similarly-situated white people — had continued to support class certification, as the settlement agreement had required them to do, according to the opinion.

The U.S. Court of Appeals for the Third Circuit agreed with Robreno's analysis, holding "the scope of the district court's inquiry was fully consistent with Dukes, as well as with our own precedent and Rule 23, and that the court rightly concluded that the putative class lacks commonality."

Third Circuit Judge Kent A. Jordan wrote the opinion on behalf of the three-judge panel, which included Judges Anthony Scirica and D. Michael Fisher.

The court recognized its own favor toward class settlements, made clear in its 2011 opinion in Sullivan v. DB Investments and its 2010 opinion in Ehrheart v. Verizon Wireless, but stressed that its preference for settlement doesn't trump the requirements of Rule 23, which includes the four threshold conditions for class certification — commonality, numerosity, typicality and adequacy of representation.

"Whether class action representatives are seeking certification for the purpose of settlement or with the intent to litigate, the members of the proposed class must meet the threshold requirements of Rule 23(a), and our policy preference for voluntary settlement cannot and does not alter that demand," Jordan said.

The plaintiffs had relied heavily on those two cases in arguing that the district court had ignored Third Circuit precedent favoring settlement.

The court plainly disagreed, stressing the import of the Rule 23 requirements and remarking, "The Rule 23 inquiry is certainly not meant to discourage settlement, but it is more than a rubber stamp, and thus it will sometimes result in the undoing of a settlement."

In examining the impact of Dukes on the case, the Third Circuit noted the similarity of that class to this one. In Dukes, a class of about 1.5 million women who worked at Wal-Mart stores across the country had alleged that they had been discriminated against for promotions, but the U.S. Supreme Court held that they failed to meet the commonality requirement because the decisions against promoting them had been made by different and unrelated supervisors for various unknown reasons. Here, the decisions to add fees and costs to loans for black and Hispanic customers were made by different and unrelated National City brokers across the country.

"The Dukes plaintiffs encountered different managers making different types of employment decisions for different reasons, many of them likely nondiscriminatory in nature. They therefore had not been subjected to a common harm, and the proposed class lacked commonality," Jordan said.

"This case bears a striking resemblance to Dukes," he said.

Jordan described this case, with just over 150,000 class members, this way: "Plaintiffs argue that National City granted brokers and loan officers the discretion to increase or decrease loan prices after an objective determination of loan eligibility, which discretion produced an overall disparate discriminatory impact. Therefore, in order to demonstrate that they have suffered a common harm, the putative class here must show that National City's grant of discretion to individual loan officers constitutes a 'specific practice' that affected all the class members in the same general fashion. In other words, plaintiffs must identify some 'common mode' in which those brokers exercised their discretion."

They didn't do that, he said.

Jordan also explained in a footnote that the decision of the court isn't a "death knell" to disparate-impact class actions, noting a 2011 opinion from the Third Circuit in Mount Holly Gardens Citizens in Action v. Township of Mount Holly, in which black and Hispanic residents brought a suit arguing that the city's redevelopment plan would have a disparate discriminatory impact on them.

David Pittinsky of Ballard Spahr represented the bank and said he was "gratified" with the Third Circuit's affirmation of Robreno's opinion and saw the basic thrust of the appeals court's opinion as affirming that a settlement doesn't diminish the requirements of Rule 23.

Peter Muhic of Kessler Topaz Meltzer & Check represented the plaintiffs and couldn't be reached for comment.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 31-page opinion in Rodriguez v. National City Bank, PICS No. 13-2346, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •