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In re General Motors Corp.


decided: February 26, 1979.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. MDL 308 - Frank J. McGarr, Judge.

Before Fairchild, Chief Judge, and Bauer and Wood, Circuit Judges.

Author: Wood

In 1976 the defendant, General Motors (GM), began substituting engines produced by its Chevrolet Division in many of the 1977 model year cars produced by its Oldsmobile Division. The discovery of the engine switch culminated in the commencement of a plethora of lawsuits against GM in the state and federal courts. The Judicial Panel on Multidistrict Litigation transferred those actions which had been filed in the federal courts to the United States District Court for the Northern District of Illinois for consolidated pretrial proceedings with several actions which were already pending there. See 28 U.S.C. § 1407. The district court certified that the actions could be maintained as a class action and later approved the settlement of the actions as to one of two subclasses of Oldsmobile purchasers.

This appeal is from the order of the district court approving the subclass settlement. Although the facts are lengthy, the litigation's history complex, and the resolution of the issues difficult, the issues may be stated with relative simplicity:

First, is the district court's order approving the subclass settlement appealable?

Second, should counsel prosecuting the appeal be limited to representing the interests of those class members who objected to the settlement before the district court?

Third, did the district court err by refusing to permit appellants' counsel to inquire into the conduct of the negotiations that led to the settlement?

Fourth, did the district court err by dismissing with prejudice the federal claims of those class members who declined to release their state law claims pursuant to the settlement agreement?

We find that this court does have jurisdiction to entertain the appeal and hold that the trial court erred in approving the subclass settlement. Consequently, we reverse and remand the order of the district court with instructions.

I. Facts

A. The Engine Interchange Litigation

Beginning in 1974, GM planners began considering the manufacturing requirements for GM cars for the 1977 model year. By 1976 various GM management committees began planning for extensive interdivisional engine exchanges. Because the Chevrolet Division had a significant surplus production capacity, GM planners decided to rely on Chevrolet produced engines to meet part of the engine requirements of GM's Buick, Oldsmobile and Pontiac Divisions.

To institute the engine interchange in the Oldsmobile Division, GM used codes to identify the different engines that would be used in its 1977 Oldsmobiles. The Rocket 350 V-8 engine produced by Oldsmobile, for example, was given the code name "L34"; the Chevrolet engine used in place of the Rocket was given the code "LM1."*fn1 Moreover, GM, over some objections by the Chevrolet Division, decided to adopt a common engine color for all of its engines. Thus, the distinctive red Chevrolet engine became blue. Despite the planned Oldsmobile-Chevrolet engine change, GM's advertising, EPA gas mileage disclosures and communications to Oldsmobile dealers referred to the changes by the use of the codes.

The switch from standard components to different components in Oldsmobiles was not confined to engines. GM used different components than it had used in previous years for other parts of the power train (the engine, transmission, and drive axle) in some of its Oldsmobiles. For reasons which do not appear with clarity in the record, GM decided in 1976 to install in all 1977 Oldsmobile Delta 88 coupes and sedans the THM 200 transmission instead of the THM 350, the transmission traditionally used in those cars. The THM 200, like the THM 350, is produced by GM's Turbohydramatic Division. The THM 200, originally designed for use in the subcompact Chevette, was used in all 1977 Delta 88 coupes and sedans regardless of whether they contained Oldsmobile or Chevrolet engines. The appellants maintain that GM's advertising materials nevertheless indicated that the THM 350 was standard equipment in all 1977 Deltas.

The case before this court is a subset of the Oldsmobile litigation spawned by the discovery of the engine interchange. After filing suit in the Cook County Circuit Court alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 1211/2, §§ 261-272, the Illinois Attorney General filed suit in the federal court for the Northern District of Illinois on behalf of the State of Illinois, which had purchased a 1977 Oldsmobile with a Chevrolet engine, and more than 100 other Oldsmobile purchasers.*fn2 The complaint alleged that the sale of the Oldsmobiles without disclosure of their engine source violated the Magnuson-Moss Act, 15 U.S.C. §§ 2301-2312, and sought certification of the action as a nationwide class action.*fn3 The Oswald and Miller actions were later brought to the federal district court and consolidated with the State of Illinois action before Judge McGarr. Upon GM's petition, the Judicial Panel on Multidistrict Litigation transferred seven actions then pending in other federal courts to the Northern District for consolidated pretrial proceedings.*fn4

On July 22, 1977, the district court entered an order adopting an agreement of the numerous counsel for the plaintiffs in the consolidated cases. The order created an executive committee of six attorneys to represent the plaintiffs in all pretrial proceedings. See generally Manual for Complex Litigation §§ 1.92-1.93.*fn5 Although the committee was given broad power in the pretrial proceedings, the order provided that the committee could conduct settlement negotiations only with the consent of all counsel for the named plaintiffs.

On October 13, 1977, the district court certified the consolidated cases as a class action. The order defined the class as "(all) persons . . . who purchased 1977 Oldsmobile automobiles which without their knowledge or consent, contained V-8 engines manufactured by the Chevrolet Motor Division . . ." The court dismissed all federal claims except the Magnuson-Moss claim and declined to exercise its power to take pendent jurisdiction over the related state law claims. The trial court recognized that parallel state court actions were pending, but rejected GM's position that the state proceedings should prevent class certification on the Magnuson-Moss claim. Despite the certification of the class, no notice to class members was mailed to inform them of the pendency of the class action at that time.

B. The Settlement

Sometime during the fall of 1977, General Motors entered into settlement negotiations with representatives of the various state Attorneys General who had filed or were contemplating filing actions against GM.*fn6 A representative of the Illinois Attorney General who was also a member of the executive committee participated in the negotiations without leave of the district court or other counsel for the plaintiffs in the federal class action. On December 13, 1977, one of the counsel for the plaintiffs received word that a tentative settlement agreement had been reached by GM and the Attorneys General. The attorney, in essence, requested the district court to order immediate disclosure of the progress of the settlement negotiations or any agreements that had been reached. The trial court, however, regarded the motion as premature. Unwilling to interfere with communications between GM and the Attorneys General before an agreement was reached, the district court declined to order the requested relief. The trial judge remarked that he believed he had sufficient power over the approval of any settlement to protect the interests of class members.

Six days later on December 19, the Illinois Attorney General in his capacity as one of the class counsel moved that the district court consider the settlement agreement between GM and all but five of the fifty state Attorneys General.*fn7 The proposed settlement provided that GM would provide to each consumer who had purchased a 1977 Oldsmobile, Buick or Pontiac equipped with a Chevrolet engine on or before April 10, 1977, $200 plus a 36-month or 36,000-mile extended warranty on the power train. In return each purchaser would be required to sign a release of all state and federal claims concerning the substitution of engines, components, parts, and assemblies in the car. GM also agreed to disclose the source of all engines of new GM cars for the next three years. The Attorneys General, in turn, promised to secure dismissals with prejudice of all actions prosecuted by them.

The district court showed itself willing to consider the agreement as a basis for settling the class action. Although the court afforded private counsel time to conduct discovery to determine whether the settlement was fair, it denied the motion of some of plaintiffs' counsel for discovery into the negotiations between the Attorneys General and GM. The court maintained that the negotiation process was irrelevant to the central issue of the fairness of the settlement.

Furthermore, the district court entertained GM's motion to redefine the class to include only those Oldsmobile purchasers to whom the settlement agreement contemplated payment. The class originally included all 1977 Oldsmobile purchasers who bought their cars before October 13, 1977, without knowledge that the cars had Chevrolet engines. The settlement agreement contemplated narrowing the class to purchasers before April 11, 1977. In an order dated March 14, 1978, the trial court denied GM's motion to redefine and narrow the class. The court did, however, designate "for purposes of sending the settlement notice" a subclass of pre-April 11 purchasers.*fn8 Notices informing class members of the pendency of the class action were sent out shortly thereafter. The notice to settlement subclass members, in addition to informing them of the pendency of the action, informed them of the proposed settlement and gave them the opportunity, Inter alia, to opt-out of the action or to object to the proposed settlement. The notice to class members not in the settlement subclass merely provided notice of the action and the opportunity to opt-out.

In May 1978, pursuant to its authority under Fed.R.Civ.P. 23(e), the district court held a fairness hearing to determine whether it should approve the settlement. Because some of the private counsel objected to the settlement, the hearing was contested and lasted twelve days. The order of proof was irregular. Both sides submitted numerous exhibits. The plaintiff-objectors presented, among others, several 1977 Oldsmobile owners who objected to the settlement and two mechanics who testified that the substituted power train was inferior to the one GM allegedly warranted. GM relied largely on exhibits and the testimony of a Chevrolet staff engineer who testified that the power trains warranted and those provided were comparable.

On July 17, 1978, after considering post-hearing memoranda of the various sides in the litigation, the district court entered an order approving the subclass settlement as fair. Adopting GM's proposed findings of fact almost verbatim, the district court found that the engines and other parts included in the Oldsmobiles were "comparable" to those warranted. Resolving most of the other contested issues in favor of GM, the district court ordered the action dismissed as to all members of the subclass and directed GM to send an approved notice of settlement to each member of the subclass. Before the notice could be mailed, however, some of the plaintiff-objectors prosecuted this appeal.*fn9

II. Appealability

The plaintiff-objectors prosecuting this appeal and GM agree that this court has jurisdiction to hear this appeal. The attorney for one of the plaintiffs and an objector to the settlement before the trial court, however, maintains that the trial court's order approving the settlement is neither a final decision nor a collateral order within the meaning of 28 U.S.C. § 1291.*fn10 Of course, we cannot determine this court's jurisdiction by majority vote of counsel appearing before us and, even if the parties unanimously agreed to appeal the order, we would be required to raise the issue Sua sponte. Levin v. Baum, 513 F.2d 92 (7th Cir. 1975).

There is only one apparent obstacle to our hearing this appeal. The trial court's division of the class into two subclasses arguably makes this a multi-party action subject to the requirements of Fed.R.Civ.P. 54(b).*fn11 In an order following its approval of the subclass settlement, the trial court refused to make a determination that there was no just reason for delay and to direct entry of judgment. We hold that, despite the refusal of the trial court to enter judgment pursuant to Rule 54(b), we have jurisdiction to review the order approving the subclass settlement as a collateral order.*fn12

The Supreme Court has taken an "intensely practical" approach when deciding whether judgments are appealable. Mathews v. Eldridge, 424 U.S. 319, 331 n. 11, 96 S. Ct. 893, 47 L. Ed. 2d 18 (1976). In close cases the determination must be made by balancing the "inconvenience and costs of piecemeal review" against "the danger of denying justice by delay." Gillespie v. United States Steel Corp., 379 U.S. 148, 152-53, 85 S. Ct. 308, 311, 13 L. Ed. 2d 199 (1964). We are cognizant that the federal policy against piecemeal review admits no exception merely because the judgment appealed from affects the conduct of a class action. See Coopers & Lybrand v. Livesay, 437 U.S. 463, 98 S. Ct. 2454, 57 L. Ed. 2d 351 (1978) (striking the death knell for the death knell doctrine); Weit v. Continental Illinois National Bank & Trust, 535 F.2d 1010 (7th Cir. 1976) (order requiring notice to class members is not a collateral order). We believe, however, that although the federal courts have narrowly interpreted the collateral order doctrine established in Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S. Ct. 1221, 93 L. Ed. 1528 (1949), that this case falls within "that small class which finally determine claims of right separable from, and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated." Id. at 546, 69 S. Ct. at 1226.

The first requirement of the collateral order doctrine is that the matter appealed from must have been finally determined by the district court.*fn13 This does not require that the trial court be without power to reverse its ruling; it only requires that no further consideration be likely. 15 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3911 at 470 (1976). The record amply indicates the trial judge's resolve not to reconsider the fairness of the subclass settlement. After the long fairness hearing, the trial court approved the settlement in an order with fairly extensive findings of fact. The order purported to immediately dismiss the claims of all subclass members. Afterward, the trial court on two occasions declined to reconsider its decision. Moreover, although the trial court retained jurisdiction over the settlement subclass action to supervise the implementation of the settlement, this left the trial court with only the ministerial task of executing its judgment. The trial court's order, therefore, is not tentative and it finally determines the matter appealed to this court.

The second requirement of the collateral order doctrine is that the matter appealed must be "separable from, and collateral to, rights asserted in the action" and neither affect nor be affected by decision on the merits. 337 U.S. at 546, 69 S. Ct. at 1225-1226. Application of this requirement to appeals from decisions on the fairness of a settlement presents some difficulties. Ordinarily settlements of civil litigation are not reviewed by federal courts. Thus, the issue is raised almost exclusively in class or derivative actions.*fn14 One court of appeals, however, has held that a refusal of a trial court to approve a class action settlement to be "collateral," Norman v. McKee, 431 F.2d 769 (9th Cir. 1970), Cert. denied, 401 U.S. 912, 91 S. Ct. 879, 27 L. Ed. 2d 811 (1971), and another has reviewed such a refusal without expressly considering the appealability issue, In re International House of Pancakes Franchise Litigation, 487 F.2d 303 (8th Cir. 1973).*fn15

Although in Norman the court maintained that appellate review of the initial determination of the settlement's fairness was completely divorced from the merits of the claim, adequate review of the fairness of a settlement necessarily requires some examination of the underlying cause of action. 15 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3911 at 385 (1976); See Manual for Complex Litigation § 1.46 at 56. See also Coopers & Lybrand v. Livesay, 437 U.S. at 469, 98 S. Ct. at 2458 ("the class determination generally involves considerations that are "enmeshed in the factual and legal issues comprising the plaintiff's cause of action' "). Nevertheless, several factors bring this appeal within the separateness requirement. First, the Supreme Court has not applied the requirement that the issue be "separate" from the merits to require the precise division of the issues presented on appeal and the elements of the underlying cause of action that a semanticist might expect. See National Socialist Party v. Village of Skokie, 432 U.S. 43, 97 S. Ct. 2205, 53 L. Ed. 2d 96 (1977). Moreover, to the extent that this appeal raises issues about the regularity of the conduct of the settlement negotiations or the fairness hearing, consideration of the merits of the plaintiffs' cause of action is unnecessary. Similarly, because appellate courts will reverse a trial court's determination on the fairness of a settlement only if there is a clear abuse of discretion, consideration of the merits is necessarily something less than penetrating.

Finally, the order approving the settlement is, in one sense, completely separate from the merits of the action. The trial court's approval of the settlement precludes any decision on the merits of the settlement subclass' claim because the claim will never go to trial.

The third requirement of the collateral order doctrine is that the rights asserted would be lost, probably irreparably, if review were delayed until the conclusion of proceedings in the district court. It is unlikely that the claims of the post-April 10, 1977, Oldsmobile purchasers will be decided any time soon. GM has made clear its intention not to settle with that subclass. Therefore years of litigation before the entire class action is concluded is possible. In the meantime, the settlement, if executed, contemplates the release of state and federal claims by those class members who accept the settlement package and dismissal of the Magnuson-Moss claims for those who do not. If the settlement is later undone on appeal, ordering reimbursement by those who accepted the $200 and received benefits under the mechanical insurance policy would be practically impossible.*fn16 Those signing releases might also lose their state claims against GM because of the running of the statutes of limitation. Conversely, those who decline to sign the release, may file and pursue state claims. Any judgment in the state courts may possibly bar subsequent action on their Magnuson-Moss claims.

We conclude that "delay of perhaps a number of years in having (their) rights determined might work a great injustice" to the subclass members. Gillespie v. United States Steel Corp., 379 U.S. 148, 153, 85 S. Ct. 308, 311, 13 L. Ed. 2d 199 (1964). They "cannot make important decisions about . . . further participation in this suit without having (their) rights determined now." Diaz v. Southern Drilling Corp., 427 F.2d 1118, 1123 (5th Cir.), Cert. denied, 400 U.S. 878, 91 S. Ct. 118, 27 L. Ed. 2d 115 (1970).*fn17 The possibility that later appellate review would be effective is simply too slight.

A final requirement of the collateral order doctrine is that the order must present "important and unresolved legal questions." Weit v. Continental Illinois National Bank & Trust Co., 535 F.2d 1010, 1015 (7th Cir. 1976); Weight Watchers, Inc. v. Weight Watchers International, Inc., 455 F.2d 770, 773 (2d Cir. 1972). We think this appeal raises at least two important questions concerning the proper balance between the general policy of encouraging settlements and a court's specific duty to insure the fairness of class action settlements. The first question involves the scope of discovery which should be afforded to objectors to proposed class settlements which were negotiated under questionable circumstances. Because adequate representation is the foundation of all representative actions, See Fed.R.Civ.P. 23(a)(4), Hansberry v. Lee, 311 U.S. 32, 61 S. Ct. 115, 85 L. Ed. 22 (1940), we think this question is appropriately reviewed at this time. The second question concerns the nature of the "settlement" that Rule 23(e) authorizes the trial court to approve. Because this question goes to the power of the district court in the settlement of representative actions, we believe it is sufficiently important to receive appellate consideration now.

In conclusion, the trial court's order is not tentative; it is capable of review without extensive examination of the merits; it raises issues which could not be effectively reviewed later; and it presents important, unresolved legal questions for consideration by this court. We hold that the trial court's order approving the subclass settlement is an appealable collateral order.

III. Motion to Limit the Appeal

Before oral argument, the attorney representing the State of Alabama in this litigation presented to this court a "motion to limit appeal to certain named appellants." The motion seeks to have the effect of this court's decision limited to (1) only the named plaintiffs, Oswald and Miller, the plaintiff-objectors prosecuting this appeal or, alternatively, (2) only those class members who filed objections to the proposed settlement in the district court. We consider the arguments in support of the second alternative first.

It is argued that this court's decision in Research Corp. v. Asgrow Seed Co., 425 F.2d 1059 (7th Cir. 1970), compels this court to restrict the representative standing of the named plaintiffs who prosecute this appeal to those class members who objected to the settlement in the trial court. In Research, the appellants were members of a defendant class represented in the district court by numerous named defendants. Despite adequate notice, the appellants failed either to request exclusion from the defendant class or to object to a proposed settlement negotiated by the named defendants; the appellants attacked the fairness of the settlement for the first time on appeal. This court held that the failure of the appellants to intervene in the action foreclosed their right to appeal. Here it is argued by analogy that each individual subclass member who failed to object to the settlement before the trial court has waived the right to appeal and the right to be represented by others on appeal. We think the argument is without merit.

There is no doubt that the named plaintiffs, Oswald and Miller, preserved the right to appeal. They are parties to the lawsuit; intervention was obviously unnecessary. Moreover, through their attorneys they vigorously objected to the settlement in the district court and created a record adequate for appellate review. Thus, the issue raised by the motion may be refined to whether Oswald and Miller through their counsel may represent the interests of absent subclass members on this appeal.

We would be reluctant to hold that absentee class members waive appellate review merely because they failed to take affirmative action when their interests were already being adequately represented by participants in the lawsuit. Cf. Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 32-33 (3d Cir. 1971) (objectors' failure to opt-out of a class action does not preclude appellate review). To do so would unnecessarily restrict the representational character of all class actions. We need not reach the issue here, however, because the notice of the proposed subclass settlement informed subclass members that if they neither opted out of the subclass nor intervened in the lawsuit that "attorneys for the named plaintiffs will represent your interest in these suits." We think subclass members who received the notice could reasonably rely on class counsel to protect their interests by prosecuting an appeal from the judgment of the district court if necessary. See Gonzales v. Cassidy, 474 F.2d 67 (5th Cir. 1973) (failure to appeal approval of an unfair settlement constitutes inadequate representation). We therefore decline to hold that absentee subclass members waived their right to have the settlement reviewed by this court.

The second argument advanced in favor of limiting the representative capacity of the plaintiff-objectors on this appeal is that the pretrial order of the trial court vested the power to conduct all pretrial actions on behalf of the class in the attorneys' executive committee. Because the executive committee did not authorize the prosecution of the appeal, it is argued, the authority of counsel for the plaintiff-objectors must be confined to representing the individual named plaintiffs before this court.

We question initially the premise that it is the attorney, not the named plaintiff, who possesses the power to appeal the approval of a settlement. "(T)he decision to appeal a class action judgment must rest with the class plaintiffs," not class counsel. Pettway v. American Cast Iron Pipe Co., 576 F.2d 1157 at 1177-78 (5th Cir. 1978), cert. denied, 439 U.S. 1115, 99 S. Ct. 1020, 59 L. Ed. 2d 74 (1979). Since the pretrial order did not purport to restrict the representative capacity of the named plaintiffs prosecuting this appeal, it would seem that the argument misses the mark. The court in Pettway, however, acknowledged that "no clear concept of the allocation of decision-making responsibility between the attorney and the class members has yet emerged." Id. at 1176. Consequently, assuming Arguendo the premise that the class attorney is the Dominus litus, we consider and reject the argument that the pretrial order prohibits counsel for Oswald and Miller from representing the interests of the class before this court.

The pretrial order does not on its face vest the power to appeal in the executive committee. The order itself only lists the committee's various duties and powers relating to pretrial proceedings. We would be extremely reluctant to imply a provision that restricts the right to appeal decisions of the trial court. Furthermore, even if the pretrial order contemplated giving the executive committee the power to prohibit individual attorneys from appealing, whether the executive committee has done so is unclear. The minutes of the committee meeting show that the committee did pass a motion that no appeal be taken from the trial court's approval of the settlement. Nevertheless, those minutes also indicate that before passage of the motion "(t)he chair ruled that the motion does not proclude (Sic ) anyone from appealing but states the position of the majority of plaintiffs' counsel."

We believe that the question of whether an appeal should be made and the scope of that appeal should be answered by determining the best interests of the class. The plaintiff-proponents maintain that the settlement is fair, that the approval of the trial court is correct, and that the matter is best left unreviewed by this court. Plaintiff-objectors, of course, disagree. The purpose of Fed.R.Civ.P. 23(e) is to protect the interests of absentee class members; the danger of abuse is high and the protection of their interests cannot be left to class counsel alone. Rule 23 imposes on the trial court in the first instance, and on this court eventually, the duty to examine the fairness of proposed settlements. Limiting the representative capacity of the appellants on this appeal would effectively negate this court's obligation to act as the guardian of the class. We do not believe that the interests of class members are best served by leaving the settlement unreviewed. Cf. McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 417 n. 1 (7th Cir. 1977) (permitting briefs and oral arguments by parties who failed to file a separate notice of appeal because the case involved "issues inextricably bound up with" those properly before the court). Restricting the appeal would only leave the door open to additional individual appeals by those who decline to accept the settlement offer. A series of individual and possibly conflicting appellate decisions on the propriety of the settlement would undermine the representative nature of class actions significantly and sacrifice the public's interest in judicial economy unnecessarily. We hold that plaintiff-objectors Oswald and Miller are parties who through their counsel will fairly and adequately protect the interests of the class in this appeal. See Fed.R.Civ.P. 23(a)(4) (requirement for class certification).

We do not hold "that each individual plaintiff and lawyer must be permitted to do what he pleases in litigation as complex as this, and can behave in total disregard of the interest of other litigants and of the class . . . ." Farber v. Riker-Maxson Corp., 442 F.2d 457, 459 (2d Cir. 1971). We note the following factors which convince us that the interests of the class will be well represented on this appeal. Cf. Pettway v. American Cast Iron Pipe Co., 576 F.2d 1157, 1178-80 (5th Cir. 1978), Cert. denied, 439 U.S. 1115, 99 S. Ct. 1020, 59 L. Ed. 2d 74 (1979) (discussing factors relevant to determining whether the named plaintiff may appoint new counsel to appeal the approval of a settlement negotiated by former class counsel). First, the named plaintiffs and their counsel were among the first to file engine switch suits against GM. Second, counsel for the appellants was a member of the class executive committee and is well acquainted with the litigation. Despite suggestions and innuendoes of ulterior motives in some of the briefs which we can only regard as symptoms of "the "brief writer's hyperbole' syndrome," United States ex rel. Sims v. Sielaff, 563 F.2d 821, 824 n. 6 (7th Cir. 1977), nothing in the record indicates that appellants' counsel has acted with other than the best interests of the class in mind. Third, although vocal objection to the settlement among class members was not widespread, "the sentiment of the class is but one factor in our analysis of the appealability question." Pettway, 576 F.2d at 1178. In Patterson v. Stovall, 528 F.2d 108 (7th Cir. 1976), this court heard the appeal of objectors to a class action settlement even though the objectors constituted only .0018% Of all class members and their claims constituted only .0022% Of all claims. Id. at 109 n. 1. See also Mandujano v. Basic Vegetable Products, Inc., 541 F.2d 832 (9th Cir. 1976) (reversing settlement even though only 4% Of the class was in active opposition to it). Fourth and finally, we find that the issues raised on appeal are far from meritless.*fn18

We conclude that the best interests of the class warrant that this court review the fairness of the settlement as it affects the entire class. Consequently, we consider the merits of the objections to the trial court's approval of the proposed settlement.

IV. Conduct of the Settlement Negotiations

The plaintiff-objectors challenge the refusal of the trial court to permit them to conduct discovery into the settlement negotiations. They contend that the trial court's order prohibiting discovery and the court's limitation of examination of the Assistant Illinois Attorney General during the fairness hearing prevented them from being able to determine whether the proposed settlement was fair, reasonable and adequate. The trial court's order limiting discovery evidences its belief that how the settlement was reached was irrelevant to the issue of the fairness of the settlement.*fn19 The court's findings of fact, although finding the irregular method of negotiating the settlement did not prejudice subclass members, reaffirmed the court's belief that the objection was irrelevant to the adequacy of the settlement "and would not constitute sufficient grounds to withhold an otherwise fair settlement from consideration by the subclass members."

We think that the conduct of the negotiations was relevant to the fairness of the settlement and that the trial court's refusal to permit discovery or examination of the negotiations constituted an abuse of discretion.*fn20 In addition, we do not think that the record adequately supports the court's conclusion that the seemingly irregular conduct of the negotiations did not prejudice the interests of the class. We must, therefore, reverse the trial court's order approving the settlement.

This court has several times commented on the trial court's continuing duty to undertake a stringent examination of the adequacy of representation by the named class representatives and their counsel at all stages of the litigation. McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 419 (7th Cir. 1977); Susman v. Lincoln American Corp., 561 F.2d 86, 89-90 (7th Cir. 1977). The trial court's duty to undertake such an inquiry arises from the requirement that it find that "the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4). The trial court's duty is heightened by its responsibility to review the fairness of any compromise of the class action. Id. 23(e).*fn21

The Manual for Complex Litigation provides that inquiry into the conduct of settlement negotiations is pertinent to the court's examination of the settlement. Manual for Complex Litigation § 1.46 at 53-54.*fn22 It recommends that before sending a notice to class members of a proposed settlement and before considering the substantive fairness of the settlement, the trial court should conduct a preliminary hearing to determine whether the proposed settlement is "within the range of possible approval." Id. Among the questions which merit judicial examination at the "probable cause hearing," the Manual lists:

Who were the negotiating parties and to what extent were they authorized to proceed with the settlement of their class' claims and possibly those of other classes?*fn23

Among the reasons for examining whether settlement negotiations were authorized is the danger of defendant "attorney-shopping."

(A) person who unofficially represents the class during settlement negotiations must be under strong pressure to conform to the defendants' wishes . . . . (An) individual, lacking official status, knows that a negotiating defendant may not like his "attitude" and may try to reach a settlement with another member of the class.

Id. at 59 Quoting Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971). Thus, unauthorized settlement negotiations create the possibility of negotiation from a position of weakness by the attorney who purports to represent the class.*fn24 In addition, the prestige attendant upon negotiating a large settlement against a corporate defendant and thereby acquiring reputations as consumer advocates may place public attorneys in a situation analogous to private counsel who hope to win large fee awards.*fn25 The possibility of such a conflict of interest as a general rule warrants judicial scrutiny of unauthorized settlement negotiations. Furthermore, settlement negotiations with less than all class counsel weaken the class' tactical position even if the attorney who enters into the negotiations attempts to represent the class' interests vigorously.*fn26

Finally, unauthorized settlement negotiations deny other class counsel access to information about the negotiations which is helpful in evaluating the fairness of the settlement. "(T)he options considered and rejected, the topics discussed, the defendant's reaction to various proposals, and the amount of compromise necessary to obtain a settlement"*fn27 were all matters which class counsel excluded from the negotiations needed to consider before exercising their fiduciary duties to the class by accepting the settlement.*fn28

The record before this court contains facts which cast some doubt on the adequacy of the representation of the class during the settlement negotiations and the fairness of the resulting settlement. These facts warranted in this instance more probing into the conduct of the settlement negotiations than the trial court permitted.

The record establishes that the settlement presented to the court by the Illinois Attorney General was either (1) negotiated without the permission of the other class counsel in the federal action as required by the court's first pretrial order or (2) negotiated by the Attorney General's office in a capacity other than class counsel In this action. The pretrial order prohibited the class counsel executive committee from entering into settlement negotiations without the consent of all plaintiffs' attorneys. The Attorney General's Assistant was a member of the committee and therefore subject to the pretrial order's restrictions. Nevertheless, he participated in negotiations with GM without the consent of other counsel.

If the negotiations did proceed in violation of the trial court's pretrial order,*fn29 we think that the plaintiff-objectors were entitled to discovery to determine whether the negotiations may have prejudiced the interests of the class. Moreover, even if discovery failed to reveal identifiable prejudice, the exclusion of the private counsel from the settlement negotiations should weigh heavily against approval of the settlement. "(T)he excluded plaintiff might well have improved the settlement terms, and while this may be hard to demonstrate, the proponents of the compromise should not be helped by a difficulty of proof created by their improper conduct." Haudek, The Settlement and Approval of Stockholders' Actions Part II: The Settlement, 23 Sw.L.J. 765, 770 (1969).*fn30

The Assistant Illinois Attorney General maintains, however, that his participation in negotiations between the state Attorneys General and GM did not violate the pretrial order because he was not negotiating as a class representative in the action in the federal court but rather was negotiating as a representative of the State of Illinois in the parallel state proceedings in the Circuit Court of Cook County.*fn31 The motion of the Illinois Attorney General for leave to file the settlement took this position also, although the motion's first paragraph based the Attorney General's capacity to present the motion on his status as counsel for the State of Illinois, one of the designated class representatives in the federal action. Also consistent with his position that he did not participate in the settlement negotiations as a federal class representative, the Assistant Attorney General admitted during the fairness hearing that the Illinois Attorney General's office did not obtain consent to the settlement from the over 100 named private plaintiffs that the Illinois Attorney General represented in the federal action.

The State of Illinois is a representative party in this suit solely because it purchased a 1977 Oldsmobile with a Chevrolet engine. The Illinois Attorney General's ability to maintain the suit on Illinois' behalf as a class action is governed solely by Rule 23.*fn32 In the absence of statutory authorization, Illinois cannot maintain this action in federal court as a Parens patriae action.*fn33 Assuming Arguendo that the Attorney General's office did not violate the pretrial order and thus participated in the negotiations solely as a representative in the parallel state court action, we believe, nevertheless, that the trial judge should have opened up the negotiations to scrutiny, if only to dispel the questions which naturally arise from the unusual posture of the case. If the settlement was not negotiated by authorized class counsel in the capacity of class counsel in this action, then it was negotiated in the name of, at best, only one of the named plaintiffs in the federal action, the State of Illinois. This stretches the theory of representation of absentee interests by the named plaintiff to its limit*fn34 and warrants searching judicial examination of the circumstances surrounding and the matters discussed during the settlement negotiations before acceptance of the proposed settlement for possible approval.

Several additional facts suggest that the representation of the class during the negotiations was less than vigorous. The class settlement was reached relatively early in the course of the action.*fn35 The federal action had been filed about nine months before; the class had been certified only two months before; and notice to class members of the pendency of the action had not even been mailed. Although discovery had commenced, GM's answers to many of the requests were less than completely responsive. Moreover, because the proposed settlement contemplated the release of all claims relating to component substitutions, not just the engine interchanges, the range of possible damages to class members was unclear. It is not possible to tell from the record how fully informed the Attorneys General may have been about the value of the claims they were surrendering.*fn36

Not only was the settlement arguably hasty, but also the settlement agreement contemplated the abandonment of the prosecution of the claims of post-April 10 class members.*fn37 The settlement agreement entered into by the Attorneys General obligated them to seek settlement of the entire class action even though the agreement obligated GM to offer payments to only part of the certified class. The agreement contemplated narrowing the class certified to those who purchased Oldsmobiles before April 11, 1977, despite the original certification of the class to include those who purchased before October 13. GM subsequently formally moved the court for such a revised class definition to conform to the settlement agreement. The court denied GM's motion, but did decide to create a subclass for settlement purposes. Although the abandonment by the Attorneys General of the claims of post-April 10 purchasers does not by itself warrant the reversal of the settlement of the claims of the pre-April 11 purchasers, it does indicate that the representation during the negotiations may have been inadequate as to all Oldsmobile purchasers who constituted the original class.*fn38

One final matter casts doubt upon the circumstances in which the settlement was negotiated by the Attorneys General. The settlement agreement contains GM's promise to compensate the Attorneys General $150,000 "for all the expenses they have incurred in connection with the subject matter of this Agreement." Allocation of the proceeds is left solely to the Attorneys General. The agreement also commits GM to pay private attorneys' fees in the federal action "in an amount no greater than the amount of documented time actually expended . . . multiplied by the hourly fee prevailing . . . in the community." These amounts were in addition to the amounts promised class members accepting the settlement. The notice to subclass members informed them of even less than was provided by the agreement,*fn39 and the record does not provide any reliable estimate of the aggregate amount of attorneys' fees and expenses that GM will eventually pay.*fn40 We think the proposed settlement's estimate of attorneys' fees and expenses is so vague that subclass members could not determine the possible influence of attorneys' fees on the settlement in considering whether to object to it.*fn41

Aside from some doubt about whether Attorneys General who, of course, are compensated by the public may ever recover attorneys' fees and expenses,*fn42 we believe that the method by which the GM-Attorneys General agreement contemplates payment of private attorneys' fees and expenses is questionable. The Manual condemns settlement agreements which provide

that the fees and sometimes expenses of plaintiffs' counsel are to be paid separately by the defendant(s) over and above the settlement. Frequently, the amount thereof is not disclosed at the time the settlement is proposed. Such an arrangement should not be permitted. All amounts to be paid by the defendant(s) are properly part of the settlement funds and should be known and disclosed at the time the fairness of the settlement is considered.

The effect of such an arrangement is to neutralize the court's power and responsibility to pass upon the reasonableness of the amounts to be paid to plaintiffs' counsel since any reduction by the court in the amount counsel agree upon after the class settlement has been approved will simply go to reduce the aggregate amount defendant(s) will pay and will not increase the amount to be paid to the plaintiffs. As a result, there is little incentive for the judge to reduce the agreed upon fees. On the other hand, the effect of such an arrangement may be to cause counsel for the plaintiffs to be more interested in the amount to be paid as fees than in the amount to be paid to the plaintiffs. Only if the aggregate of all payments to be made by defendants is disclosed in the proposed settlement can the class members and the court make any intelligent judgment as to the fairness and reasonableness of a proposed settlement.

Manual for Complex Litigation § 1.46 at 62. This court has previously declined to upset a settlement agreement merely because some problems regarding fees and expenses remained unresolved. See McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 426 (7th Cir. 1977). We do not overrule that decision, but do regard the questionable provision made for expenses and attorneys' fees as one factor requiring examination of the settlement negotiations.

In conclusion, we hold that the trial court abused its discretion by failing to undertake a careful examination of the conduct of the settlement negotiations and by preventing the plaintiff-objectors from showing that the negotiations prejudiced the best interests of the class. Regardless of which of the two possible capacities the Illinois Attorney General's office assumed in negotiating the proposed settlement, the conduct of the negotiations was irregular and the record contains too much evidence tending to indicate prejudice to the class to permit us to allow the trial court's order to stand. Because, however, our decision upsets a settlement of considerable magnitude and because complex class actions are often, although not always, settled before trial, we conclude with a discussion of what we do not hold.

We do not hold that irregular settlement negotiations may never form the basis for a judicially acceptable class action settlement. In fact, a prior decision of this court has approved a settlement negotiated in somewhat similar circumstances. See McDonald v. Chicago Milwaukee Corp., 565 F.2d 416 (7th Cir. 1977).*fn43 We realize that the system of state and federal courts often generates simultaneous litigation over the same subject matter. We recommend that an attorney who is counsel in both state and federal actions request leave of court before entering into settlement negotiations. In addition, the trial court should probably require as a condition to such leave at least that the attorney inform other counsel in the proceedings of the matters discussed during the separate negotiations. Although this practice is preferable, the failure to follow it is not necessarily reversible error if the record clearly indicates that representation of the class during the negotiations was adequate and that the settlement itself is fair.*fn44

Similarly, we do not hold that the failure of the trial court to hold a preliminary hearing prior to the mailing of the notice of the proposed settlement is inevitably reversible error. Although we believe such a hearing is better practice and the Manual for Complex Litigation recommends it, this court has gone as far as to affirm the approval of a settlement when no evidentiary hearing on its fairness was held before or after the notice to the class. See Patterson v. Stovall, 528 F.2d 108 (7th Cir. 1976). We do hold the record in this case raises so many questions about the adequacy of representation during the settlement negotiations that we cannot say the record clearly supports the trial court's conclusion that the negotiations did not prejudice the interests of the settlement subclass.*fn45

We noted in McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 422 (7th Cir. 1977), that "Per se rules often represent the abdication of judicial discretion rather than its informed exercise." Consequently, this court has declined to adopt Per se rules rigidly confining the trial court's exercise of its discretion in the supervision of class actions. This does not relieve us, however, of our duty to reverse the trial court's judgment when we are convinced that there has been a clear showing of an abuse of that discretion. On the facts of this case, the irregular conduct of the negotiations, the failure of the trial court to examine the irregularities thoroughly, and the evidence in the record indicating that the irregularities may have damaged the interests of the class convince us that such a clear showing has been made. The judgment of the trial court approving the settlement, accordingly, must be reversed.

V. Form of the Settlement

Even if we were not constrained to reverse the trial court's approval of the settlement because of the circumstances surrounding its negotiation, we would have to find the settlement defective in another respect. Although the defect may affect only a small portion of those to whom GM's offer would be extended, convenience and expediency cannot justify the disregard of the individual rights of even a fraction of the class. As an appellate court we are without power to rewrite the settlement of the parties. We only have the authority to approve or disapprove the settlement in the form it is presented to us.*fn46

The settlement order gives subclass members two options. If the subclass member signs a release he will receive the settlement package and his Magnuson-Moss claim will be dismissed.*fn47 But even if the subclass member refuses to accept GM's offer and refuses to sign the release, the order nevertheless dismisses With prejudice the subclass member's federal claim.*fn48 The subclass member is presented with an accept-or-else situation: if he does not accept, his federal claim is lost even though he cannot receive the benefits of the settlement package. We have searched the reported decisions in vain for precedent for such a settlement. Finding none and being of the opinion that the dismissal of the action is fundamentally unfair to nonconsenting subclass members, we cannot permit the settlement in its present form to stand.

GM argues that the form of the settlement is not unusual. It argues that nonconsenting class members are bound by a class settlement even if it is approved over their objections. Moreover, it argues, the very purpose of the 1966 amendments to Rule 23 was to eliminate the spurious class action in which potential class members could obtain the rewards of a favorable suit, but escape being bound by an unfavorable outcome. Thus, GM would have us hold that the dismissal of the Magnuson-Moss claims of nonconsenting subclass members is permissible. Finally, GM goes on to argue that "(t)he settlement does allow class members, even at this late stage, to reject it and pursue state law remedies. To the extent nonconsenting class members are allowed to pursue any future litigation rights by the settlement . . . it is more favorable to them than federal law or policy require." We do not disagree with GM's arguments in the abstract. In the context of the particular settlement here which attempts to settle both state and federal claims, however, we must disagree.

We consider GM's last argument first. A fundamental characteristic of the federal courts is their limited jurisdiction. In the same pretrial order in which the trial court certified the class, it also expressly declined to take pendent jurisdiction over the state claims presented by the pleadings. Therefore GM's contention that the settlement was more favorable than federal law requires presumably because the trial court could have forced subclass members to accept the settlement package in return for all state and federal claims is without merit. The trial court, having declined jurisdiction over the state claims, was without power to extinguish them. The form of settlement with its unusual use of individual releases was apparently agreed to by GM and the Attorneys General in recognition of the federal court's inability to settle the state claims of subclass members.*fn49 The opt-out provision which permits nonconsenting subclass members to pursue state remedies is a necessary consequence of the limited jurisdiction of the federal courts.

We do not disagree with GM's statement that class members can be bound by a settlement over their objections and that the same is true of objecting named plaintiffs.*fn50 Similarly, we agree that Rule 23 was amended to eliminate the spurious class action. We do not think that it follows, however, that the trial court has the power under Rule 23 to dismiss with prejudice the Magnuson-Moss claims of those subclass members who refuse to accept the settlement package. As to them, the "settlement" is not a settlement; it is merely an offer to settle with a penalty, the dismissal of their federal claims, if they do not accept. We decline to put every subclass member to such an unfair choice.

This court on two occasions has noted that the essence of a settlement is a bilateral exchange. "The inherent nature of a compromise is to give up certain rights or benefits in return for others." McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 429 (7th Cir. 1977). "A settlement by its very nature is an agreement where both sides gain as well as lose something." Patterson v. Stovall, 528 F.2d 108, 115 (7th Cir. 1976). By the terms of the order of the trial court, subclass members who do not sign the release give up their Magnuson-Moss claims and the opportunity to be represented in the class action in return for nothing.*fn51 The right to pursue state remedies is not a benefit, because, as discussed above, the class members possessed state causes of action against GM independently of the federal litigation and the federal court is without power to extinguish those state-created remedies. GM gains the dismissal of each subclass member's federal claim, but surrenders nothing in return.

The federal claims of individual class members cannot be extinguished with neither adequate consideration in return nor a hearing on the merits of their claims. The dismissal of nonconsenting subclass members' claims would serve solely to benefit GM or those subclass members who accept the settlement. Reconciling such a "settlement" with notions of fair play and justice is impossible. To permit the trial court to exercise its power to approve class action settlements in this manner would contravene the Rules Enabling Act, 28 U.S.C. § 2072, by abridging the substantive rights of those who did not accept the settlement offer.

Our objection to the form of settlement in this case is similar to the Second Circuit's objection to "fluid class recovery." See Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973), Vacated and remanded on other grounds, 417 U.S. 156, 94 S. Ct. 2140, 40 L. Ed. 2d 732 (1974); Van Gemert v. Boeing Co., 553 F.2d 812 (2d Cir. 1977). See also In re Hotel Charges, 500 F.2d 86 (9th Cir. 1974). In Eisen the Second Circuit's rejection of the use of fluid class recovery rested at least in part on the court's concern that that form of recovery would drastically increase the class action defendant's substantive liability. Cf. Beecher v. Able, 575 F.2d 1010, 1016 n. 3 (2d Cir. 1978) (defendant may agree to a settlement which provides for fluid class recovery). In this the converse situation, the form of settlement drastically reduces, in fact extinguishes, the subclass member's substantive cause of action under the Magnuson-Moss Act.*fn52 We hold the trial court's approval of the form of settlement here was unauthorized by the Federal Rules and was inconsistent with the trial court's responsibility to act as the protector of the interests of absentee class members.

We cannot hold that the dismissal of the federal claims of those who refuse to accept the settlement offer was insignificant because it merely closed one of the two avenues of recovery against GM. Relegating the nonconsenting subclass member to his state remedies severely reduces his chances of obtaining an adequate recovery on his claim.

The nonconsenting subclass member loses the advantages and economies of having his interest represented in the class action. This tends to defeat the purpose of the class action device to vindicate the interests of the victims of mass production wrongs. "Generally, unless the anticipated recovery exceeds the sum of the measure of the injury and the cost of litigation, multiplied by the probability of a successful decision, the aggrieved person will not seek to vindicate his rights." Note, Judicial Prerequisites to Class Actions in Illinois: Policy, Practice, and the Need for Legislative Reform, 1976 U.Ill.L.F. 1159, 1167. The letters of those subclass members who objected to the settlement proposal indicate the illusory value of the right to pursue their claims individually:

I will go along with the majority. I can't afford to spend any money on a personal law suit.

Reguardless (Sic ) of the decision of the Court, I will accept it, because I cant (Sic ) whip a giant like General Motors, but you do have the powers of your Judgeship and your Court to set things stright (Sic ) as they should be.

This is not to be accepted as notice of withdrawal of Class or Subclass membership.

These letters also refute GM's argument that we can countenance the dismissal of the Magnuson-Moss claim of a nonconsenting subclass member because he was aware of the settlement's terms at the time he made his election to remain in or opt-out of the subclass. The opportunity to opt-out was not a very realistic one. Furthermore, we fail to see that a subclass member's knowledge that he may be treated unfairly excuses committing the injustice.

Even if the subclass member does pursue his state remedies, he is still prejudiced by the dismissal of his Magnuson-Moss claim. "From a consumer protection point of view, the Warranty Act is clearly preferable to the Uniform Commercial Code, which is difficult to apply to consumer sales transactions and is full of pitfalls for consumers seeking recovery for defective products." Smith, The Magnuson-Moss Warranty Act: Turning the Tables on Caveat Emptor, 13 Cal.W.L.Rev. 391, 429 (1977). In addition to providing a more certain path to recovery, the Magnuson-Moss Act provides the consumer with a more adequate remedy. It provides that the successful plaintiff may also recover the costs of litigation (subject to the court's discretion not to award attorneys' fees). 15 U.S.C. § 2310(d)(2). Thus, the dismissal of the subclass member's Magnuson-Moss claim, leaving him to pursue his state remedies individually, reduces both the probability that the consumer will pursue those remedies and, if he does, the probability that his remedy will be adequate.*fn53

GM maintains that we should approve the settlement because it has the "overwhelming" support of the settlement subclass members. GM argues that because only fifteen subclass members or .03% Of the subclass opted out of the action or objected to the settlement after notification of its terms, 99.97% Of the subclass members support the settlement. Although the support of class members is one factor which should be considered in determining the fairness of a settlement, See Manual for Complex Litigation § 1.46 at 56, we are not as willing as GM to infer support from silence.

When a court evaluates the settlement of a class action brought on behalf of individual shareholders or consumers, it should be reluctant to rely heavily on the lack of opposition by alleged class members. Such parties typically do not have the time, money or knowledge to safeguard their interests by presenting evidence or advancing arguments objecting to the settlement.

Factors Considered in Determining the Fairness of a Settlement, 68 Nw.U.L.Rev. 1146, 1153 (1974). Accord, Developments in the Law Class Actions, 89 Harv.L.Rev. 1318, 1567-68 (1976); Cf. Simon, Class Actions Useful Tool or Engine of Destruction, 55 F.R.D. 375, 377-79 (1973) (discussing the tendency of class members not to respond to court communications.*fn54 Acquiescence to a bad deal is something quite different than affirmative support.*fn55 In any event, even if a majority of the subclass did favor the settlement, we do not believe that the preferences of the majority can justify the substantial injustice to the individual rights of the minority that the form of settlement proposed here would work.

VI. Directions on Remand

In response to a question from the bench at oral argument, GM represented to the court that even if the Settlement of the federal class action is not effectuated, GM may still seek to extend its Offer to individual members of the class.*fn56 Local Rule 22 appears to require the trial court's approval of any such communication.*fn57 The question thus presented is whether the trial court can approve the communication of the offer, despite our reversal of the court's order approving the settlement.

We think that the trial court can. GM's offer to settle, if accepted by individual class members, would not amount to a settlement of the class action itself. Individual class members would be free to reject it and continue to have their interests represented in the federal class action. Thus, the communication falls outside the language and the purpose of Rule 23(e).*fn58 See Weight Watchers, Inc. v. Weight Watchers International, Inc., 455 F.2d 770 (2d Cir. 1972)*fn59; Rodgers v. United States Steel Corp., 70 F.R.D. 639 (W.D.Pa.), Appeal dismissed, 541 F.2d 365 (3d Cir. 1976); Dickerson v. United States Steel Corp., 11 Empl.Prac. Dec. P 10,848 (E.D.Pa.1976); Vernon J. Rockler & Co. v. Minneapolis Shareholders Co., 425 F. Supp. 145 (D.Minn.1977); 7A C. Wright & A. Miller, Federal Practice and Procedure § 1797 at 238-39 (1972). But see In re International House of Pancakes Franchise Litigation 1972 Trade Cas. P 73,864 (W.D.Mo.1972); Developments in the Law Class Actions, 89 Harv.L.Rev. 1318, 1548 n.66 (1976). Rule 23(e) requires judicial approval of class action settlements to guard against possible ineffective representation of absentees' interests by the representative parties. This danger does not inhere in offers to settle with individual class members, which the class members are free to accept or reject. Accordingly, a proposed offer to settle with individual class members requires a lesser degree of judicial scrutiny than a proposed settlement of a class action.

The Manual for Complex Litigation provides no standards for judicial approval of communications with individual class members, but we think that the degree of judicial review should be concomitant with the potential for abuse that such communications create. The danger that the offer to settle individual claims would create is the possible misleading of class members about the strength and extent of their claims and the alternatives for obtaining satisfaction of those claims. Thus, an offer to settle should contain sufficient information to enable a class member to determine (1) whether to accept the offer to settle, (2) the effects of settling, and (3) the available avenues for pursuing his claim if he does not settle. In contrast to judicial examination of a proposed class action settlement which entails consideration of the fairness of the settlement itself, judicial examination of the offer to settle individual claims largely entails only consideration of the accuracy and completeness of the disclosure.*fn60 See, e. g., Vernon J. Rockler & Co. v. Minneapolis Shareholders Co., 425 F. Supp. 145 (D.Minn.1977) (tender offer which met with preliminary approval of SEC contained sufficient information to allow shareholders-potential class members to make an informed and intelligent decision); American Finance System, Inc. v. Harlow, 65 F.R.D. 572, 576 (D.Md.1974) (permitting the defendant to send only "a neutrally worded notice of settlement containing no more than the terms of the proposed compromise, the position of both parties and a copy" of the court's order).*fn61 Whether the offer to settle should contain a statement by the plaintiff-objectors of their opinion of the adequacy of the settlement package in order to make the communication a full and complete disclosure is a matter left to the trial court's discretion. We do believe, however, that the trial court should insist that the notice state that the court's permission to communicate the offer does not indicate any opinion or finding by the trial court that the settlement package is fair or adequate consideration for the release of a subclass member's claim. See American Finance System Inc. v. Harlow, 65 F.R.D. at 576 n.5.

We do not intend to recommend individual settlements as preferable to a fair settlement of the action for all class members. Given the present posture of this litigation, however, we recommend that the district court consider the advisability of permitting the communication if GM decides to extend its offer to individual members of the class. This procedure would provide those class members who wish to settle the benefit of the settlement package already negotiated, minimize further litigation and discovery on issues collateral to the merits of the Magnuson-Moss claim,*fn62 and permit those who desire to prosecute their claims to do so. Our discussion here is not intended to resolve all questions raised by GM's offer, these matters are best left to the district court for determination in the first instance.*fn63

VII. Conclusion

Our reversal of the district court's approval of the proposed settlement is a decision that we reach with considerable reluctance. We do not seek to discourage a full settlement of this litigation. More than a year has passed since the Illinois Attorney General presented the settlement agreement to the district court for its consideration. Most likely little has been done since then, aside from some additional discovery, to advance toward a trial on the merits. In the meantime, members of the settlement subclass must be wondering whatever became of the $200 and the mechanical insurance policy each had been promised. Our reluctance to unscramble on review what has been accomplished in the trial court, however, must yield when what has been done not only creates a substantial doubt about whether the interests of the class were adequately represented during the settlement negotiations, but also unjustifiably prejudices the rights of individual members of the class. We believe that approval of what has been done here would establish a precedent inconsistent with the proper functioning of the class action device.

We do not question in the least the good faith of the group of state Attorneys General who negotiated the settlement. We are well aware of the increasingly important role that state Attorneys General have taken in protecting consumers' rights.*fn64 We are also acutely aware of the difficulties which confront litigants attempting to settle consumer class actions based on the Magnuson-Moss Act. The Act by adopting in substantial part, but not preempting state law remedies provides a legal environment conducive to competing state and federal court actions. The myriad lawsuits make settlement desirable, but simultaneously make achieving an acceptable settlement extraordinarily difficult for all concerned. We hold merely that the method of reaching a settlement that GM and the Attorneys General chose warranted greater scrutiny than the trial court permitted and that the form of effecting the settlement permitted by the trial court was unauthorized. Accordingly, the order of the district court is


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