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Conflicting Ideologies of Group Litigation: Who May Challenge Settlements in Class Actions and Derivative Suits?

The article discusses the rights of unnamed class members in class actions and shareholders in corporate derivative suits to appeal court orders approving the settlement of their claims. As representative actions, class actions and derivative suits by definition necessarily determine the rights and duties of absent parties. Unnamed class members and shareholders must rely on the named plaintiff representative to protect their interests, especially when the case is settled prior to a judgment on the merits. The federal courts are sharply divided over the question whether absent parties who are dissatisfied with the class action or derivative suit settlement may subsequently appeal the court's approval of the settlement. This article provides a summary of the historical development of the class action and derivative suit devices. It then examines the federal courts' conflicting approaches with respect to unnamed members' standing to appeal orders approving class action and derivative suit settlements. The article addresses the collective action and agency cost problems inherent in representative litigation. The article critiques the Seventh Circuit's approach in Felzen v. Andreas, which held that unnamed shareholders in derivative suits must formally intervene as parties in order to preserve their appellate rights. The court's approach reflects a misunderstanding of the true nature of derivative litigation. This article argues that a more flexible approach be adopted: unnamed shareholders who appear before the court to object to a proposed settlement in a derivative suit should be granted the right to subsequently appeal an order approving that settlement, whether or not they have formally intervened.