Theodore Frank v. Target Corporation ( 2020 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-3095
NICK PEARSON, et al.,
Plaintiffs-Appellees,
v.
TARGET CORP., et al.,
Defendants-Appellees,
v.
RANDY NUNEZ, et al.,
Objectors-Appellees,
APPEAL OF: THEODORE H. FRANK,
Objector.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:11-cv-07972 — John Robert Blakey, Judge.
____________________
ARGUED JUNE 4, 2020 — DECIDED AUGUST 6, 2020
____________________
Before ROVNER, WOOD, and HAMILTON, Circuit Judges.
2 No. 19-3095
HAMILTON, Circuit Judge. We address here a recurring
problem in class-action litigation known colloquially as “ob-
jector blackmail.” The scenario is familiar to class-action liti-
gators on both offense and defense. A plaintiff class and a de-
fendant submit a proposed settlement for approval by the dis-
trict court. A few class members object to the settlement but
the court approves it as fair, reasonable, and adequate under
Federal Rule of Civil Procedure 23(e)(2). The objectors then
file appeals. As it turns out, though, they are willing to aban-
don their appeals in return for sizable side payments that do
not benefit the plaintiff class: a figurative “blackmail” by self-
ish holdouts threatening to disrupt collective action unless
they are paid off. See Brian T. Fitzpatrick, The End of Objector
Blackmail?, 62 Vand. L. Rev. 1623, 1624 (2009).
That’s what happened here. Three objectors appealed the
denial of their objections to a class action settlement and then
dismissed their appeals in exchange for side payments. The
last time this case was here, we called such “selfish” objector
settlements “a serious problem.” Pearson v. Target Corp.,
893 F.3d 980, 986 (7th Cir. 2018) (Pearson II). The question be-
fore us now is whether, on motion of another class member,
the district court had the equitable power to remedy the prob-
lem by ordering the settling objectors to disgorge for the ben-
efit of the class the proceeds of their private settlements. The
district court held that it did not, finding that the objectors
had not intended or committed an illegal act nor taken money
out of the common fund.
We reverse. Falsely flying the class’s colors, these three ob-
jectors extracted $130,000 in what economists would call rents
from the litigation process simply by showing up and object-
ing to consummation of the settlement to slow things down
No. 19-3095 3
until they were paid. We hold that settling an objection that
asserts the class’s rights in return for a private payment to the
objector is inequitable and that disgorgement is the most ap-
propriate remedy. Objectors who settle their objections for
amounts in excess of their shares as class members are, in es-
sence, “not paid for anything they owned.” Young v. Higbee
Co., 324 U.S. 204, 213 (1945) (reversing denial of remedy in
comparable private settlement of class-based objections). The
objectors’ settlement proceeds here belonged in equity and
good conscience (ex aequo et bono, according to the old for-
mula) to the class and ought to be disgorged. We therefore
reverse the district court’s order denying disgorgement and
remand for further proceedings.
I. Factual and Procedural Background
In November 2011 named plaintiffs filed a putative class
action in federal district court in Illinois alleging that defend-
ants had made false claims about certain dietary supplements
they manufactured and distributed. In March 2013 the parties
negotiated a settlement and asked the district court to ap-
prove it. Over the objection of class member Theodore Frank,
the district court did so in January 2014. Frank appealed and
we reversed. The settlement was plagued by “fatal weak-
nesses” and amounted to a “selfish deal” between class coun-
sel and defendants that “disserve[d] the class.” Pearson v.
NBTY, Inc., 772 F.3d 778, 787 (7th Cir. 2014) (Pearson I), dis-
cussing in greater detail plaintiffs’ claims and the terms of the
disapproved “Pearson I settlement.”
In April 2015 the parties negotiated and submitted to the
district court for approval a new settlement known as “the
Pearson II settlement.” The agreement provided for a common
4 No. 19-3095
fund of $7.5 million and a permanent injunction against cer-
tain labeling statements. Before the district court, three class
members objected to the Pearson II settlement: Randy Nunez,
Steven Buckley, and Patrick Sweeney, who are all appellees
here.
In March 2013 Nunez had filed his own putative class ac-
tion against defendants in federal district court in California,
two months before the Pearson I settlement was submitted for
approval to the district court in Illinois. Nunez alleged de-
fendants had made false claims about one of the supplements
at issue in this case. Before defendants answered the com-
plaint, Nunez was stayed pending the Pearson I settlement ne-
gotiations. After we vacated the Pearson I settlement, Nunez
asked the district court in California to lift the stay and to
name his lawyers interim counsel of the Pearson subclass
Nunez hoped to represent. The court granted both motions.
The Pearson parties refused to include Nunez’s counsel in
their negotiation of the Pearson II settlement. Nunez moved to
intervene in Pearson, pointing to his counsel’s interim ap-
pointment order in Nunez. The district court denied interven-
tion but invited Nunez to object to the forthcoming Pearson II
settlement when it was presented. Nunez accepted the invita-
tion. In a four-page submission, he argued that his counsel
was the only counsel “with authority” to settle his proposed
class’s claims and that defendants should not be permitted to
auction off the case to the cheapest class counsel (without giv-
ing any reason to believe that had actually happened with the
Pearson II settlement).
In another four-page submission, Buckley argued that
class counsel were entitled to no more than 20 percent of the
No. 19-3095 5
settlement fund in fees, not the 33 percent the proposed set-
tlement promised them. According to Buckley, class counsel
were impermissibly seeking to bill time spent negotiating and
defending the inadequate Pearson I settlement, and also had
more expensive partners bill too many hours as compared to
less expensive associates and paralegals.
Sweeney objected pro se. In his four-page submission, he
suggested implementing several measures to improve over-
sight of the settlement distribution process. Sweeney
acknowledged this was not “the ‘usual’ procedure” but urged
its adoption nonetheless. He also advanced miscellaneous ob-
jections relating to class counsel’s fees, the notice of the pro-
posed settlement, and defendants’ failure to admit liability
under the Telephone Consumer Protection Act (which de-
fendants were never alleged to have violated).
The district court approved the Pearson II settlement. All
three objectors appealed. All three dismissed their appeals be-
fore briefing began. The dismissals struck Frank as suspicious
and possibly in bad faith. He sought to reopen the case in the
district court by filing a motion for disgorgement of any pay-
ments made to objectors in exchange for dismissing their ap-
peals. The district court denied the motion for lack of jurisdic-
tion. Frank appealed again, precipitating our decision in Pear-
son II.
There, we described Frank’s theory of the objectors’ possi-
ble bad faith as follows:
[A]n absent class member objects to a settlement
with no intention of improving the settlement
for the class. Instead, the objector files her objec-
6 No. 19-3095
tion, appeals, and pockets a side payment in ex-
change for voluntarily dismissing the appeal. A
potential benefit for the class—a better settle-
ment—is leveraged for a purely personal gain—
a side bargain.
893 F.3d at 982. We reversed, concluding that the district court
had jurisdiction to entertain Frank’s motion and that Frank
should have been allowed to pursue his theory. Id. at 983.
On remand, discovery showed that the three objectors had
indeed all received side payments in exchange for dismissing
their appeals—$60,000 each to Nunez and Buckley and
$10,000 to Sweeney, totaling $130,000—while the class had re-
ceived nothing. The district court, however, concluded that
“the record failed to confirm suspicions of blackmail or other
wrongdoing” and so denied disgorgement. Nunez, Buckley,
and their counsel asserted that they had pursued their objec-
tions in good faith, not for the purposes of blackmail. 1 The
court could not say the same for Sweeney but found the ques-
tion ultimately “irrelevant” because there was “no basis to
conclude that the side settlements harmed the class” by taking
money that had been earmarked for it. The district court
therefore denied Frank’s motion. Frank has appealed, and
Nunez and Buckley have appeared to defend their payments.
1 The colloquial term “objector blackmail” can cause confusion that
distracts from the relevant equitable principles. Proof of a crime or other
statutory violation is not required. Similarly, Frank complains that he has
been unfairly branded a “professional objector.” We have avoided that
pejorative phrase because the merits of an objection are relevant, not am-
ateurism or experience.
No. 19-3095 7
None of the original Pearson parties has participated in this
appeal, and neither has Sweeney.
II. Analysis
A motion for disgorgement is addressed to the equitable
discretion of the district court, and we review the court’s rul-
ing on the motion for abuse of that discretion. FTC v. Febre,
128 F.3d 530, 534 (7th Cir. 1997), citing Weinberger v. Romero-
Barcelo, 456 U.S. 305, 320 (1982). A district court abuses its dis-
cretion by applying an incorrect legal standard or by reaching
a clearly erroneous conclusion of fact. Salgado v. General Mo-
tors Corp., 150 F.3d 735, 739 (7th Cir. 1998). As explained be-
low, in finding that the money defendants paid to objectors
had not been earmarked for the class, the district court failed
to address a critical piece of evidence. More fundamental,
though, that factual question appeared relevant only because
the district legally erred by requiring some positive statutory
violation as a predicate for disgorgement.
A. Wrongfulness of Objectors’ Conduct
We base our decision here on long-established principles
of equity. It has long been axiomatic “that no person shall
profit by his own wrong.” Town of Concord v. Town of
Goffstown, 2 N.H. 263, 265 (1820); see also Liu v. SEC, 140 S. Ct.
1936, 1943 (2020) (same); Restatement (Third) of Restitution
and Unjust Enrichment § 3 (Am. Law Inst. 2011) (same). The
wrong may take any number of forms, of which fraud is per-
haps the paradigm. See, e.g., Liu, 140 S. Ct. at 1941–42.
A fiduciary’s self-dealing is treated as a “constructive”
fraud. 1 Joseph Story, Commentaries on Equity Jurisprudence
304 (1836). As a general rule, “wherever confidence is re-
posed, and one party has it in his power, in a secret manner,
8 No. 19-3095
for his own advantage, to sacrifice those interests, which he is
bound to protect, he shall not be permitted to hold any such
advantage.” Id. at 320; see also, e.g., Snepp v. United States,
444 U.S. 507, 515 (1980) (same); Restatement (Third) § 43
(same). We have little difficulty applying these principles to a
private payment made to an objector in exchange for with-
drawing the appeal of an objection asserting the interests of
the class.
1. Young v. Higbee Co.
Seventy-five years ago, the Supreme Court applied these
ancient principles to class litigation in Young v. Higbee Co.,
324 U.S. 204 (1945). In that case, Potts and Boag, two preferred
shareholders of the bankrupt Higbee Company, objected to
confirmation of the company’s bankruptcy plan. Id. at 206.
They argued that the company’s preferred shareholders
should have been given priority over a junior debt held by
Bradley and Murphy, two of the company’s directors. Id. The
district court confirmed the plan over their objection, and
Potts and Boag appealed. Id. While their appeal was pending,
they sold their preferred shares along with the appeal to Brad-
ley and Murphy for seven times the shares’ market value. Id.
at 207. Young, another preferred shareholder, moved in the
district court for an accounting of profits from the settlement.
Id. at 207–08. The motion was denied and Young appealed. Id.
at 208. The Supreme Court reversed the denial, finding that
Potts and Boag’s dismissal had been bought at the expense of
the class of shareholders they purported to represent. Id. at
214.
The Supreme Court based its decision not on formalistic
details of procedure but on the substance of the rights Potts
No. 19-3095 9
and Boag had asserted—on behalf of all shareholders simi-
larly situated. Potts and Boag argued that because they had
appealed as individuals, “they owed no duty to any stock-
holders but themselves.” Id. at 209. The Supreme Court disa-
greed. “Equity looks to the substance and not merely to the
form.” Id. In substance, their appeal had been taken on behalf
of all preferred shareholders, whose pro rata shares of the
bankruptcy estate would have increased if their appeal had
been successful. Id. As the only preferred shareholders to ap-
peal confirmation of the plan, Potts and Boag had taken it
upon themselves to decide the fate of every preferred share-
holder, id., even the fate of the company’s entire reorganiza-
tion. Id. at 212 n.12.
The critical step in the Court’s reasoning was to recognize
that the appellants had taken on a fiduciary duty to the other
shareholders similarly situated: “This control of the common
rights of all the preferred stockholders imposed on Potts and
Boag a duty fairly to represent those common rights.” Id. at
212. It was a breach of this duty to “trade in the rights of others
for their own aggrandizement,” as Potts and Boag had done
by privately selling their appeal. Id. at 213. Their profits from
that breach thus belonged in equity to all the preferred share-
holders. Id. at 214. Finally, the Court concluded, the account-
ing remedy Young sought was well within the district court’s
equitable powers. Id.
The private settlement of a class-based objection in Young
is not meaningfully different from the private settlements of
class-based objections in this case. As in Young, the objections
to the Pearson II settlement raised by Nunez, Buckley, and
Sweeney alleged defects which, if genuine, would have in-
10 No. 19-3095
jured every member of the class by binding them all to an un-
fair, unreasonable, or inadequate settlement. Named plain-
tiffs “by definition” had renounced any defense of the class
against such injuries. That’s why the three objectors were per-
mitted to take their appeals in the first place. Devlin v.
Scardelletti, 536 U.S. 1, 9 (2002). “The situation which enabled
them to traffic in the interests of others was created by a [rule]
passed to protect the interests of all of them.” Young, 324 U.S.
at 212; see Devlin, 536 U.S. at 8–9, citing Fed. R. Civ. P. 23(e).
These objectors were thus “bound to protect” the common in-
terests of the class which the rule at their own behest had en-
trusted to them, but they “sacrifice[d] those interests” to their
own advantage by selling their appeals without benefit to the
class. 1 Story, supra, at 320. Equity does not permit them to
keep that gain. Id.
As in Young, the three objectors’ “representative responsi-
bility” to the class in this case was “emphasized” by the fact
that they would have been entitled to seek compensation for
their services if their appeals had succeeded. 324 U.S. at 212–
13; see 1 Story, supra, at 450–51, 482–83 (contribution for ben-
efit to common fund) (“one shall not bear the burthen in ease
of the rest”); Restatement (Third) § 29 (same). On the same
principle, named plaintiffs each received $5,000 incentive
awards under the Pearson II settlement, and Frank was
awarded $180,000 in attorney fees for the substantial class
benefits he had achieved by objecting to the Pearson I settle-
ment. See Fed. R. Civ. P. 23(e)(5)(B) advisory committee’s note
(“Good-faith objections can assist the court . . . . It is legitimate
for an objector to seek payment for providing such assistance
under Rule 23(h).”).
No. 19-3095 11
As in Young, the objectors here had a duty to object only in
“good faith,” 324 U.S. at 210–11 & n.9, that is, not for an im-
proper purpose. See Vollmer v. Publishers Clearing House,
249 F.3d 698, 709 (7th Cir. 2001) (finding evidence that puta-
tive intervenor-objector “was put forward by his attorneys
solely to enable them to collect fees in this action”), applying
Fed. R. Civ. P. 11(b)(1). Buckley attempts to distinguish Young
on the basis of this statutory requirement, and more generally
as offering no more than a “narrow interpretation” of one sec-
tion of the bankruptcy laws. The asserted distinction is not
genuine and, as noted, Young’s reasoning was based not on
the details of bankruptcy procedure but on the general equi-
table principles cited above. It is squarely on point here.
Finally, in one important respect the facts here are even
more egregious than in Young. There, the Court observed that
the purposes of the bankruptcy laws would be flouted if Potts
and Boag, by selling out for seven times the market value of
their preferred shares, were allowed to receive “$7.00 for
every $1.00 paid to other preferred stockholders.” 324 U.S. at
210. Even less could the “fair, reasonable, and adequate” set-
tlement demanded by Rule 23(e)(2) be achieved in this case.
Sweeney’s settlement gave him $96, and Nunez and Buckley
$577, for every $1 received by other class members—in ex-
change for absolutely nothing. 2
We thus read Young to impose a limited representative or
fiduciary duty on the class-based objector who, by appealing
2 These estimates assume that every class member would receive $104,
the maximum recovery possible under the agreement before adjusting for
excess or deficiency of the settlement fund after all claims had been sub-
mitted.
12 No. 19-3095
the denial of his objection on behalf of the class, temporarily
takes “control of the common rights of all” the class members
and thereby assumes “a duty fairly to represent those com-
mon rights.” 324 U.S. at 212.
This case turns on a simple either/or proposition whose
logic flows directly from Young. These objectors made sweep-
ing claims of general defects in the Pearson II settlement. Ei-
ther those objections had enough merit to stand a genuine
chance of improving the entire class’s recovery, or they did
not. If they did, the objectors sold off that genuine chance,
which was the property of the entire class, for their own,
strictly private, advantage. If they did not, the objectors’ set-
tlements of meritless claims traded only on the strength of the
underlying litigation, also the property of the entire class, to
leverage defendants’ and class counsel’s desire to bring it to a
close. Either way, the money the objectors received in excess
of their interests as class members “was not paid for anything
they owned,” id. at 213, and thus belongs in equity to the class.
Id. at 214.
The record here indicates that merit was a matter of indif-
ference to these objectors. Compare what they said to what
they did. What they said was that the Pearson II settlement
was either entirely worthless or a collusive reprise of the Pear-
son I settlement. In his objection, Nunez asserted that his
counsel had “sole settlement authority” to settle the claims of
the Pearson subclass he sought to represent in Nunez. That
would have meant the Pearson II settlement was at best unen-
forceable as to that subclass and at worst void in its entirety.
See Brewer v. Nat’l R.R. Passenger Corp., 649 N.E.2d 1331, 1333–
34 (Ill. 1995) (settlement unenforceable if negotiated without
authority); Kepple and Co. v. Cardiac, Thoracic and Endovascular
No. 19-3095 13
Therapies, S.C., 920 N.E.2d 1189, 1193 (Ill. App. 2009) (entire
contract void if essential term unenforceable). Only a little less
sweepingly, Buckley contended that class counsel were being
overcompensated at the class’s expense to the tune of 13 per-
centage points of the common fund, or $975,000, in part as a
result of billing for hours spent defending the same “selfish
deal” we vacated in Pearson I. 772 F.3d at 787.
What the objectors did, however, was to advance these su-
perficially plausible objections in the space of four pages each,
light on citations to law and fact, and to sell them—before
speaking a word in their defense—at discounts from face
value ranging from 94 percent (Buckley) to 99.2 percent
(Nunez). For his part, Sweeney could not even correctly iden-
tify the subject matter of the litigation. The objectors’ conduct
testifies that, whatever merit their objections might have had,
the objectors themselves did not believe them or take them
seriously, from the day they were filed to the day they were
settled.
2. Nunez’s Arguments
Nunez’s arguments against disgorgement are not persua-
sive. He chiefly argues that his situation is unlike Buckley and
Sweeney’s because he was settling both his objection to the
Pearson II settlement and his own Nunez action in California.
If Nunez were right, he might be entitled to a more precise
accounting of his settlement proceeds that reflects the value
of any individual claim he might have been asserting. See
Safeco Ins. Co. of America v. AIG, Inc., 710 F.3d 754, 757 (7th Cir.
2013) (approving objector side deal where only objector’s in-
dividual claims were settled), discussed further in Pearson II,
893 F.3d at 985–86; compare Young, 324 U.S. at 209 (“The ap-
peal here . . . was not from a denial of any individual claim of
14 No. 19-3095
Potts and Boag.”), 214 (Potts and Boag liable to account only
for “money paid in excess of the stock value”). The problem
for Nunez is that the value of the Nunez action at the time it
was settled was zero.
Nunez was himself a member of the Pearson class. His op-
portunity to opt out had already passed when he filed his ob-
jection to the Pearson II settlement. By settling that objection,
Nunez ensured the Pearson II settlement would finally bind
him just as it bound every other class member. Maintaining
Nunez thereafter would have been sanctionably frivolous. In
any event, after the Pearson II settlement, securing dismissal
with prejudice of Nunez required only that defendants take
the basically ministerial steps of pleading accord and satisfac-
tion and moving for judgment on the pleadings. See Walton v.
United Consumers Club, Inc., 786 F.2d 303, 306–07 (7th Cir.
1986). Nunez’s argument that he was leveraging the class’s
claims to settle his own worthless case for $60,000 impairs ra-
ther than improves his position.
Nunez argues further that we have “no jurisdiction” to in-
terfere with his settlement of Nunez. It is not clear what kind
of jurisdiction he supposes us to lack but the supposition is
groundless. Nunez brought these issues before this court in
the first instance by filing his objection and appealing its de-
nial. Under Federal Rule of Appellate Procedure 42(b), we
had (but regrettably did not exercise) authority to scrutinize
Nunez’s dismissal of his appeal. See Pearson II, 893 F.3d at 987.
And the district court had jurisdiction to decide whether that
dismissal was part of a “class sellout.” Id. at 986. If Nunez had
wanted to avoid this scrutiny, he might have settled Nunez as
the entirely separate concern he now insists it was. We have
already suggested the likely reason he did not do so: after the
No. 19-3095 15
Pearson II settlement, the Nunez case was a dead letter, so
Nunez’s only settlement leverage, like Buckley and
Sweeney’s, was the value of being a nuisance, getting in the
way of defendants’ and other plaintiffs’ desires to put Pearson
itself to rest.
3. Buckley’s Arguments
Buckley’s arguments are also unpersuasive. He argues
first that Frank lacks standing to appeal. His theory is that be-
cause the district court found “nothing untoward about the
objector settlements,” Frank cannot “pursue the matter fur-
ther.” This argument confuses standing with the merits. Con-
tra, e.g., Arreola v. Godinez, 546 F.3d 788, 794–95 (7th Cir. 2008),
among many others. We would have little business as an ap-
pellate court if a party’s loss in the district court showed lack
of standing to appeal.
Buckley does no better to argue Frank never had standing
to file his motion in the first place. Frank had standing in the
district court and has standing now for the same reason that
Buckley and the other objectors had standing in the appeals
that precipitated Frank’s motion: a class member has standing
to defend the class, whose interest he shares, against sell-outs
by the self-appointed representatives who control the inter-
ests of all. See Devlin, 536 U.S. at 6–9; Young, 324 U.S. at 212
(without addressing standing); In re Subway Footlong Sandwich
Litig., 869 F.3d 551, 556 (7th Cir. 2017) (“as a class member
who is bound by the settlement, Frank clearly has standing to
appeal”). An equitable remedy for breach of the objectors’
limited representative, fiduciary duty is just one instance of
the “[m]any traditional remedies,” “such as for . . . unjust en-
richment,” which “are not contingent on a plaintiff’s allega-
tion of damages beyond the violation of his private legal
16 No. 19-3095
right.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1551 (2016)
(Thomas, J., concurring).
Buckley argues further that his fee-only objection would
not have increased defendants’ liability even if it had been
successful. That is correct, and it raises the question: why did
defendants pay Buckley to settle his objection? He pleads ig-
norance, but there is only one reasonable answer: the value to
defendants in paying off Buckley lay in finally being rid of the
Pearson litigation as a whole. And even if class counsel instead
of defendants had been the ones to settle with Buckley (on
which more in a moment), Buckley’s responsibility to the
class depended not on whether defendants would have been
required to pay more but on whether the class would have
been entitled to receive more. See Young, 324 U.S. at 212 (“the
appeal was taken on the assumption[] that the less the junior
claimants were awarded the more all the preferred stockhold-
ers would receive”). It would have, as Buckley himself
demonstrated by appealing the denial of his objection. See
Pearson I, 772 F.3d at 786 (“If the class cannot benefit from the
reduction in the award of attorneys’ fees, then the objector, as
a member of the class, would not have standing to object”).
That is because the Pearson II settlement took class counsel
fees out of the common fund, a feature correctly advertised at
the time of settlement approval as an improvement over the
Pearson I settlement. See id. (faulting earlier reversion clause
providing that “if the judge reduces the amount of fees . . . the
savings shall enure not to the class but to the defendant” as “a
gimmick for defeating objectors”). Sustaining Buckley’s ob-
jection would have directly benefited the class.
Buckley argues along parallel lines that defendants inde-
pendently paid him from their own pockets, without dipping
No. 19-3095 17
into the common fund. The district court relied heavily on this
contention in denying Frank’s motion. It would not alter our
analysis if it were true. (In Young, neither Potts nor Boag di-
rectly picked the pockets of the other preferred shareholders;
they held what was not theirs to hold. 324 U.S. at 213–14.) But
it is not true as a matter of fact. In the district court, class coun-
sel acknowledged that they had paid $22,500 out of their own
fees toward the total of $130,000 paid to settle with the three
objectors. Again, under the Pearson II settlement these fees
were taken from the common fund. Money that class counsel
were willing to part with to finally resolve the litigation con-
sisted of savings that ought to have enured to the class—not
to defendants, the three objectors, or their lawyers. See Pear-
son I, 772 F.3d at 786.
B. Remedy
We now turn to the question of remedy in this case, which
poses a practical challenge. Buckley makes the poison-pill ar-
gument that rescission of the entire settlement is the only ap-
propriate remedy in this case. That is certainly one remedy
Frank might have sought, perhaps if he thought there was real
merit to the objections. Buckley provides no support for his
claimed right, as the wrongdoer, to force an election under
these circumstances. See 2 Story, supra, at 506 (“where a trus-
tee, or other person, standing in a fiduciary relation, makes a
profit out of any transactions within the scope of his agency
or authority, . . . the beneficiary[] . . . has . . . an option to insist
upon taking the property; or he may disclaim any title thereto,
and proceed upon any other remedies”). So long as Frank did
not “insist upon opposite and repugnant rights,” id. at 507, the
choice was his or, more likely, the court’s. Rescission of the
18 No. 19-3095
entire Pearson II settlement also would have punished the
wrong parties.
A more intricate question is the proper form of the dis-
gorgement remedy Frank did seek. As the Supreme Court ob-
served in Liu, its most recent word on the traditional powers
of federal equity courts, the term “disgorgement” is of “rela-
tively recent vintage.” 140 S. Ct. at 1940 n.1. It is perhaps best
understood not as a freestanding remedy but as the last step
in a larger remedial process. See id. at 1942–46 (discussing his-
torical variety of settings and labels for orders to disgorge).
Like Young’s, Frank’s motion to discover the objectors’ books
and to wrest from them whatever settlement proceeds were
found there fits most comfortably within the framework of an
accounting for profits. See Young, 324 U.S. at 214; Newby v. En-
ron Corp., 188 F. Supp. 2d 684, 706 (S.D. Tex. 2002) (“account-
ing for profits developed . . . as a restitutionary remedy to
avoid unjust enrichment by reaching money owed by a fidu-
ciary . . . , including profits that should in ‘equity and good
conscience’ belong to the plaintiff”) (collecting authorities);
Restatement (Third) of Restitution and Unjust Enrichment
§ 51(4).
In theory, the best remedy for the objectors’ private appro-
priation of value that belonged to the class would be to pay
those sums into the common fund for direct distribution to all
class members. In this case, however, there is a practical prob-
lem. The parties appear to agree that distribution of the
$130,000 in settlement proceeds to their equitable owners, the
class, is no longer possible or would be self-defeating because
the administration costs would swallow the benefits. Liu
No. 19-3095 19
asked but did not answer “what traditional equitable princi-
ples govern when . . . the wrongdoer’s profits cannot practi-
cally be disbursed to the victims.” 140 S. Ct. at 1948–49.
This wrinkle, along with the fact that Frank has already
discovered specific funds wrongfully held by the objectors,
leads us to conclude that the appropriate remedial framework
here is the constructive trust. See Liu, 140 S. Ct. at 1944; In re
Mississippi Valley Livestock, Inc., 745 F.3d 299, 304–05 (7th Cir.
2014); Newby, 188 F. Supp. 2d at 703 (“A constructive trust has
long been used as a remedy for unjust enrichment obtained
from a fiduciary’s breach of duty.”) (collecting authorities);
Restatement (Third) of Restitution and Unjust Enrichment
§ 55. If disbursement of objectors’ proceeds to the class would
produce no benefit to the class, the trust’s purpose may in-
stead be accomplished as nearly as possible (cy pres) so that it
does not fail. See, e.g., Tauber v. Commonwealth ex rel. Kilgore,
562 S.E.2d 118, 128 (Va. 2002). As provided for by the Pear-
son II settlement, that would mean ordering payment to the
Orthopedic Research and Education Foundation.
Finally, neither objector argues that even if disgorgement
were ordered, he would still be entitled to deductions for
costs or attorney fees. This is a sound concession. See Liu,
140 S. Ct. at 1945–46; Snepp v. United States, 444 U.S. 507, 510
(1980) (no deductions) (“Snepp breached a fiduciary obliga-
tion and . . . the proceeds of his breach are impressed with a
constructive trust.” (emphasis added)); Young, 324 U.S. at 214
(no deductions) (“In the contemplation of the statute which
authorized the appeal, its fruit properly belongs to all the pre-
ferred stockholders.” (emphasis added)).
20 No. 19-3095
C. Consequences for Good-Faith Objectors
Ours is an adversary system of justice. When defendants
and class counsel seek to settle a class action, “the clash of the
adversaries” on which our system depends is lost. Eubank v.
Pella Corp., 753 F.3d 718, 720 (7th Cir. 2014). The district judge
must act as “a fiduciary of the class” in deciding whether to
approve a proposed settlement. E.g., Pearson I, 772 F.3d at 780.
Yet even the most faithful exercise of this duty cannot in itself
make up for the absence of adversary presentation. The judge
must still rely on the now-allied adversaries “to generate the
information that the judge needs to decide the case” faith-
fully. Eubank, 753 F.3d at 720. Genuine adversary presentation
is supplied, if at all, only by objecting class members. See id.;
see also Devlin, 536 U.S. at 9 (“once the named parties reach a
settlement that is approved over petitioner’s objections, peti-
tioner’s interests by definition diverge from those of the class
representative”). It is therefore critical that class members not
be deterred from raising reasonable and good-faith objections
to a class settlement. See, e.g., Pearson I.
We do not expect reasonable and good-faith objections to
be deterred or chilled by our holding here, particularly in
light of the 2018 amendments to Federal Rule of Civil Proce-
dure 23 addressing the problem of objector side deals. Rule
23(e)(5)(A) now requires that an objection “state whether it
applies only to the objector, to a specific subset of the class, or
to the entire class, and also state with specificity the grounds
for the objection.” New Rule 23(e)(5)(B)(ii) requires district
court approval specifically for “forgoing, dismissing, or aban-
doning an appeal” of denial in exchange for “payment or
other consideration.” If the appeal has already been docketed,
No. 19-3095 21
under new Rule 23(e)(5)(C) the district court is to issue an in-
dicative ruling under Rule 62.1.
Good-faith objectors should be able to say specifically why
the class or a part of it has been deprived of the fair, reasona-
ble, and adequate settlement to which it is entitled. By defini-
tion, such objectors expect to be able to improve the class’s
position, whether by compromise or favorable judgment, for
which equitable compensation is available. See Fed. R. Civ. P.
23(e)(5)(B) advisory committee’s note (“Good-faith objections
can assist the court . . . . It is legitimate for an objector to seek
payment for providing such assistance under Rule 23(h).”).
We do not expect any good-faith objector will fail to bring her
objection because she is prohibited from selling out the class
in exchange for private payment, where she may choose in-
stead not to sell out the class and still receive payment if she
brings the class a real benefit. And we trust no district court
will be misled by the facile expedient of dressing a class-based
objection in individual clothing to avoid scrutiny under Young
and our decision here.
Conclusion
The judgment of the district court is REVERSED and the
case is REMANDED for further proceedings consistent with
this opinion. Circuit Rule 36 shall apply on remand.