Suing Subway: When Does a Class Action Settlement Benefit Only the Lawyers?
Legal Sidebari
Suing Subway: When Does a Class Action
Settlement Benefit Only the Lawyers?
December 12, 2017
In 2013, an Australian teenager measured a sandwich he purchased from a Subway restaurant and
discovered that his “footlong” sandwich was missing an inch. After the teen posted his discovery on
social media, his post went viral, and a group of consumers commenced a class action lawsuit against the
restaurant chain alleging that its sandwiches were shorter than advertised.
The parties ultimately agreed to settle their dispute on the condition that Subway (1) inspect and measure
its baked rolls to ensure that its sandwiches were at least 12 inches in length; and (2) pay plaintiffs’
counsel over half a million dollars in attorney fees.
In a recent decision, however, the U.S. Court of Appeals for the Seventh Circuit rejected this proposed
settlement. The Court ruled that the settlement violated the Federal Rules of Civil Procedure’s
requirement that class action settlements be “fair, reasonable, and adequate” because the settlement did
not meaningfully benefit Subway’s customers, but instead solely benefited plaintiffs’ counsel.
The Subway decision reflects a growing (but not universal) trend of courts increasingly scrutinizing class
action settlements to evaluate whether they provide meaningful benefits to class members or instead serve
predominantly to enrich class counsel. This Sidebar explores the Subway ruling and its broader
significance to class action litigation, tort reform, and consumer rights.
Class Actions and the Underlying Debate
As background, a class action is a mechanism by which a class of persons affected by a defendant’s
allegedly unlawful practice challenges that practice in a single lawsuit, rather than through numerous,
separate suits initiated by individual plaintiffs. A proposed “class representative” may sue on behalf of
many other similarly situated persons—including persons who are not named parties to the lawsuit—as
long as the proposed class action satisfies prerequisites established by the Federal Rules of Civil
Procedure.
Class actions have been the subject of much debate. As one court has explained, “the class action is a
worthwhile supplement to conventional litigation procedure ... but it is controversial and embattled ... in
part because it is frequently abused.”
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On the one hand, proponents defend class action litigation as a method for individual plaintiffs to hold
defendants accountable for unlawful practices that inflict comparatively small injuries to a large number
of people. As the Supreme Court has noted,
The policy at the very core of the class action mechanism is to overcome the problem that small
recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or
her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries
into something worth someone’s (usually an attorney’s) labor.
So, for instance, a customer who buys a 12-inch sandwich for $6.00 but receives an 11-inch sandwich will
likely not pay an attorney to recover the fifty cents for the missing inch. Few (if any) attorneys would be
willing to file suit for such a “paltry” sum. However, if that single customer can instead represent a class
of one million customers, every one of whom has allegedly paid fifty cents for an inch of sandwich she
never received, then the total potential damages for that entire class of consumers would equal $500,000.
If the class is ultimately victorious, a large portion of that $500,000 damages award could be divided
among class counsel and the class representative to compensate them for their efforts in challenging the
defendant’s allegedly unlawful actions, while the remainder could be split amongst the other class
members. Proponents of class actions therefore contend that class action litigation provides plaintiffs an
incentive to challenge unlawful behavior that might otherwise go unpunished.
On the other hand, critics argue that class actions are subject to abuse. Because class certification allows
the plaintiff to aggregate the damages suffered by a large number of people, a defendant who opts to
defend rather than settle a class action may face, in the words of the advisory notes to the Federal Rules of
Civil Procedure, “potentially ruinous liability.” Thus, as a 2012 Seventh Circuit opinion noted, “even if a
class’s claim is weak, the sheer number of class members and the potential payout that could be required
if all members prove liability might force a defendant to settle a meritless claim in order to avoid breaking
the company.” Critics therefore maintain that class actions encourage the filing of meritless lawsuits in the
hopes of securing a settlement.
Judicial Scrutiny of Class Action Settlements and the Subway Case
In this vein, because a class representative purports to represent class members who are not named parties
to the lawsuit (and therefore “have no control over class counsel”), some courts have expressed concern
that a class representative and her counsel may negotiate a settlement that is not in the class’s best
interests. In the words of one Seventh Circuit opinion, class counsel’s “incentive to negotiate settlements
that enrich themselves but give scant reward to class members,” coupled with the defendants’ “burden of
responding to class plaintiffs’ discovery demands,” creates “an incentive” for both parties “to agree to an
early settlement that may treat the class action lawyers better than the class.”
To reduce the risk that the parties will negotiate a settlement that disfavors absent class members, the
Federal Rules of Civil Procedure require “court approval of all class action settlements, which may be
granted only after a fairness hearing and a determination that the settlement taken as a whole is fair,
reasonable, and adequate” to the class members. Courts weigh a variety of factors to evaluate whether a
proposed settlement is “fair, reasonable, and adequate,” including:
The strength of the plaintiff’s case;
The risk, expense, complexity, and likely duration of further litigation;
The amount offered in settlement;
Whether the proposed settlement was fairly and honestly negotiated;
The parties’ judgment that the settlement is fair and reasonable; and
The reaction of the class members to the proposed settlement.
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The Seventh Circuit ruled that the proposed settlement in Subway failed this test. As noted above, Subway
had agreed as a condition of settlement to inspect and measure its bread rolls to ensure that its sandwiches
were at least 12 inches in length. However, the Seventh Circuit concluded that these inspection
procedures would not affect the amount of food customers would receive because, among other things,
“all loaves are baked from the same quantity of dough” and any “sandwich roll that fails to bake to a full
12 inches actually contains no less bread than any other.” Having determined that a Subway customer
would receive the exact “same amount of food” for her money with or without the settlement agreement,
the Seventh Circuit held that the proposed settlement “provided no meaningful benefits to the class.”
The proposed settlement did, however, provide plaintiffs’ counsel with over half a million dollars in
attorney fees. Opining that “a class settlement that results in fees for class counsel but yields no
meaningful relief for the class ‘is no better than a racket,’” the Seventh Circuit held that the lower court
“should not have … approved” the settlement.
Key Takeaways
The Subway case is one of several recent cases rejecting proposed class action settlements because of
their lack of value to class members. The Seventh Circuit has been particularly aggressive in overseeing
proposed class action settlements, and the Sixth and Ninth Circuits have also invalidated settlements that,
in the view of those courts, afforded substantially greater benefits to class counsel than to class members.
That is not to say, however, that judges reject the majority of proposed class action settlements that come
across their desks, as several federal courts have approved proposed class action settlements and attorney
fee awards within the past few months alone.
Moreover, not all courts appear equally skeptical of settlement agreements that provide only modest
benefits to class members. The Tenth Circuit, for instance, recently approved a settlement that awarded
“millions of dollars in attorney’s fees” to class counsel yet provided only non-economic “informational”
benefits to class members. In that same case, the Tenth Circuit also explicitly refused to adopt the Seventh
Circuit’s rule that any attorney fees award that exceeds “a third ... of the total amount of money going to
class members and their counsel” is presumptively unreasonable.
The aforementioned cases take place against the backdrop of broader legislative debates regarding
whether class actions confer meaningful benefits to the public or if they instead primarily benefit the class
action bar. These debates have resulted in proposed legislation in the 115th Congress, such as the Fairness
in Class Action Litigation and Furthering Asbestos Claim Transparency Act of 2017 (H.R. 985), which,
among other things:
Limits attorney fee awards to a “reasonable percentage” of any payments provided to the class;
Prohibits attorney fee awards that “exceed the total amount of money directly distributed to and
received by all class members”; and
Prohibits the payment of attorney fees until the completion of the “distribution of any monetary
recovery to class members” and an “accounting of the disbursement of all funds paid . . . pursuant
to the settlement.”
The House passed H.R. 985 on March 9, 2017, and, as of the date of publication, the bill is pending
before the Senate’s Judiciary Committee. If ultimately enacted, this statute could alter the availability of
attorney fees in class action litigation, and, by extension, implicate the willingness of courts to approve
class action settlements.
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Author Information
Kevin M. Lewis
Legislative Attorney
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