In In re Heritage Bond Litigation, 2008 WL 4415172 (9th Cir. Oct. 1, 2008), the United States Court of Appeals for the Ninth Circuit held that a class action settlement bar limits only contribution, indemnity or other comparative fault claims against settling defendants where damages are calculated based on the amount of the non-settler’s liability to the class. The appeal arose from a partial settlement in a securities fraud class action. The district court’s broad bar order precluded non-settlers from bringing any future claims against settlers “arising out of or related to . . . any of the transactions or occurrences alleged.” A non-settling defendant later brought breach of fiduciary duty, negligence, labor law and other claims against several settling defendants, including his former employer, and sought “both economic and reputational” damages. The district court determined that its bar order precluded such claims. The Ninth Circuit disagreed, vacating the order and remanded the matter to the district court. The decision offers greater clarity on the scope of settlement bar orders, important mechanisms designed to encourage partial settlements but, at the same time, protect non-settlers’ rights.
Settlement bar orders encourage partial settlements in cases with multiple defendants by protecting the settling defendants from contribution and other similar claims while ensuring that non-settling defendants do not incur more than their proportionate share of liability. In the Ninth Circuit, Franklin v. Kaypro Corp., 884 F.2d 1222, 1231 (9th Cir. 1989), established the use of settlement bar orders under federal common law to ensure that liability is equitably distributed among settling and non-settling defendants. Such orders both protect settling defendants from future claims of contribution and limit non-settling defendants’ liability to their proportionate share of the amount of total damages determined at trial. Congress later codified this concept in the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) by making the entry of a bar order against future claims for contribution mandatory upon a court’s approval of a partial settlement in a securities fraud class action. 15 U.S.C. § 78u-4(f)(7)(A). The Reform Act does not address the proper scope of the bars. The district court entered its order pursuant to the Reform Act and an equivalent state law statute.
The appeal in Heritage challenged only the scope of the order. The Ninth Circuit determined that the district court erroneously imposed the Eleventh Circuit’s overly restrictive “interrelated” standard, precluding factually related but nevertheless independent claims. It rejected that standard in favor of the Second Circuit’s approach, one that looks to the nature of the damages sought by the claims. That approach limits the scope of settlement bars to claims for contribution or indemnity and those disguised as such. In doing so, the Ninth Circuit held that, to avoid preclusion, a non-settling defendant’s claim must assert independent damages, i.e., damages not based on defendants’ liability to plaintiff or calculated based on the amount of the non-settling defendants’ liability to plaintiffs.
Under the Ninth Circuit’s new test, claims arising out of the same facts as those underlying the litigation can be brought provided the non-settling defendant’s liability to the class is not the metric for calculating damages under those claims. By this refinement, the Ninth Circuit arguably maintains a standard that continues to encourage settlements while carefully avoiding undue prejudice to non-settling defendants.