Paul Watford
Paul Watford ()

A federal magistrate judge abused her discretion in approving a class action settlement that gave no compensation to a class of 4 million people and provided “worthless” injunctive relief, an appeals court ruled on Wednesday.

The U.S. Court of Appeals for the Ninth Circuit found that U.S. Magistrate Judge Karen Crawford in the Southern District of California had jurisdiction to approve a settlement against debt collector ARS National Services Inc. but unanimously reversed and remanded the agreement’s approval because it gave no benefit to the class.

“The magistrate judge abused her discretion by approving the settlement in this case,” wrote Judge Paul Watford, who was joined on the panel by Michelle Friedland and U.S. District Judge J. Frederick Motz of Maryland, sitting by designation. “The settlement should not have been approved for one primary reason: There is no evidence that the relief afforded by the settlement has any value to the class members, yet to obtain it they had to relinquish their right to seek damages in any other class action.”

The case alleged that ARS violated the Fair Debt Collection Practices Act by leaving voicemail messages that failed to disclose the callers worked for ARS, which was a debt collector, or that their intent was to collect a debt. The class involved anyone who got such a voicemail message from April 2008 to August 2011. The 2013 settlement also involved no notice to class members, who were prohibited from opting out and forfeited their right to pursue damages as a class.

“Cutting off access to a procedural tool that may offer the only realistic means of obtaining monetary relief deprived the absent class members of something of value here, even if it might be worth relatively little,” Watford wrote.

The panel also questioned the settlement’s $35,000 cy pres award and “worthless” injunctive relief—specifically, a requirement that ARS change its voicemail message to one it already had been using.

The case ended up before the Ninth Circuit after an objector appealed the settlement’s approval. The objector, represented before the Ninth Circuit by Jonathan Taylor of Washington, D.C.’s Gupta Wessler PLLC, is a named plaintiff in a similar class action in the Southern District of Florida against ARS.

“The decision makes clear that the rights of absent class members cannot be bargained away in exchange for worthless relief,” Taylor wrote in an email. “We hope that the decision puts an end to attempts to cut class actions off at the knees, on the cheap, and in the dark.”

Sean Flynn, a partner in the Irvine, California, office of Gordon Rees Scully Mansukhani, who represented ARS, did not respond to requests for comment.

The case also delved into the use of magistrate judges to oversee class action settlements. The National Association of Consumer Advocates, in an amicus brief, argued that the statute under which the parties waived their right to a district judge in favor of a magistrate judge was unconstitutional because it did not require the consent of unnamed class members.   

In a letter to the court, the Department of Justice backed the constitutionality of the statute, and the Ninth Circuit agreed.