Keeping Tabs on the Ninth Circuit
June 04, 2021 - This Week at the Ninth

This Week at the Ninth: The IGRA “Two-Step” and Class Action Collusion

This Week at the Ninth: The IGRA “Two-Step” and Class Action Collusion

This week: the Ninth Circuit elaborates on the Indian Gaming Regulation Act’s “two-step determination” regarding the effects of a new casino on tribal land and clarifies when a post-certification class action settlement agreement is unfair and collusive.

The Court holds that the Secretary of the Interior may approve an Indian Tribe’s application for an off-reservation casino under the Indian Gaming Regulation Act even if the new casino would have a detrimental impact on another nearby Tribe, so long as that impact is offset by benefits to the entire surrounding community. It also holds that the Secretary’s decision to grant the Spokane Tribe’s application in this case did not violate the Administrative Procedure Act.

Panel: Judges Berzon, Christen, and Bade, with Judge Christen writing the opinion

Key Highlight: “A showing that additional gaming may be detrimental to some members of the surrounding community, including an Indian tribe, does not dictate the outcome of the Secretary’s two-step determination.”

Background: In 2001, the Spokane Tribe sought a permit from the Department of the Interior under the Indian Gaming Regulation Act (IGRA) to enable them to open a casino in Airway Heights, WA. The nearby Kalispel Tribe of Indians objected to the proposed casino, as it would be located only two miles away from their Northern Quest Resort and Casino. Competition with the new Spokane casino, Kalispel argued, would reduce the revenue the Tribe derived from Northern Quest, seriously impairing its ability to pay its debts and provide for its members. In 2015, the Secretary of the Interior granted the Spokane Tribe’s permit. As required by the IGRA, the Secretarial Determination found that the new casino 1) “would be in the best interest of the [Spokane] tribe” and 2) “would not be detrimental to the surrounding community.”

The Kalispel Tribe sued the Secretary of the Interior in federal court in 2017, alleging that the decision to grant the Spokane Tribe’s permit—and in particular the Secretary’s “two-step determination” that the proposed casino “would not be detrimental to the surrounding community”— violated the IGRA and the Administrative Procedure Act. The Spokane Tribe intervened in the matter, and both sides moved for summary judgment. The district court rejected Kalispel’s claims and granted summary judgment in favor of the Secretary and Spokane.

Result: The Ninth Circuit affirmed the district court’s decision, upholding the Secretary’s approval of the new Spokane Tribe casino.

Kalispel argued that “any detriment to a nearby Indian tribe” precluded the Secretary from finding that a new casino “would not be detrimental to the surrounding community.” The Court disagreed, holding that benefits to certain segments of the community can offset harm to other community members. The Court pointed to Bureau of Indian Affairs regulations defining “surrounding community” to include more than just nearby Indian tribes, and it reasoned that “requiring a complete alignment of interests in the surrounding community” would “frustrate Congress’s purpose for enacting IGRA.” Though harm to one entity could be so severe as to render it a net detriment to the community, “[a] showing that additional gaming may be detrimental to some members of the surrounding community . . . does not dictate the outcome of the Secretary’s two-step determination.”

The Court also rejected Kalispel’s claim that the Secretary had not adequately considered the threat to the Tribe and had put forward “implausible explanations that were inconsistent with the record.” Rather, the Secretary’s formal decision repeatedly referenced the possible loss of revenue by the Kalispel Tribe—it had just found that they were outweighed by benefits to the rest of the community. And though Kalispel had submitted two private reports supporting its predicted economic injuries, the Secretary sided with the Department of Interior’s own studies of the situation, which projected that the Kalispel Tribe’s revenue would rebound after the new casino opened. Especially in light of the deference given to predictive judgments within an agency’s area of expertise, the Court held that, though Kalispel’s asserted injuries were “real and cognizable detriments,” the Secretary’s two-step determination was not arbitrary and capricious under the APA.

The Court extends its precedent in In re Bluetooth Headset Products Liability Litigation to post-certification class action settlement agreements, holding that such agreements are subject to heightened scrutiny for unfairness and collusion.

The Panel: Judges Owens, Lee, and Ezra (W.D. Tex.), with Judge Lee writing the opinion

Key Highlight: “While courts should not casually second-guess class settlements brokered by the parties, they should not greenlight them, either, just because the parties profess that their dubious deal is ‘all right, all right, all right.’ We reverse the district court’s approval of the class settlement because the agreement raises a squadron of red flags billowing in the wind and begging for further review.”

Background: The plaintiffs in this case filed a class action lawsuit against ConAgra, alleging that its branding of Wesson Oil as “100% Natural” was misleading (since it contained ingredients from genetically modified organisms) and that the plaintiffs overpaid for the product because of that misleading label. The district court granted class certification under Rule 23(b)(3).  Shortly thereafter, the parties reached a settlement agreement. The agreement contained a so-called “clear sailing” provision, under which ConAgra agreed not to contest the $6.75M in attorney’s fees for class counsel, and a “kicker” clause, stipulating that any reduction in the amount of attorney’s fees would revert to ConAgra rather than augmenting the award for the class. And though the parties represented that the settlement was worth $100M, ConAgra actually only paid $8M, seven-eighths of which went to class counsel. A member of the class—law professor M. Todd Henderson—objected to the settlement, but the district court nonetheless accepted the agreement. Henderson appealed.

Result: The Ninth Circuit reversed. The Court held that its standard for assessing the fairness of pre-certification class settlement agreements, set forth in the 2020 In re Bluetooth Headset Products Liability Litigation case, also applies to post-certification settlement agreements. The Court noted that Rule 23(e)(2), which requires courts to ensure that class settlements are “fair, reasonable, and adequate,” draws no distinction between pre-certification and post-certification settlement. And though the incentive for class counsel to collude with the defendant “reaches its apex pre-class certification,” even after certification “class counsel still has the incentive to conspire with the defendant” while the defendant has every reason to go along “because it cares only about the total payout, not the division of funds between class and class counsel.” In light of these incentives and Rule 23(e)(2)’s broad language, the Court held that the heightened scrutiny of the Bluetooth test also applies to post-certification settlements.

Applying Bluetooth, the Court found that this settlement agreement “features all three red flags of potential collusion that we warned about in Bluetooth”: counsel receiving a disproportionate amount of the settlement; a clear sailing provision; and a kicker clause. Though the Court clarified that these “red flags” are not per se unfair and may just “be elements of a good deal,” district courts “must scrutinize them where they appear . . . . to ensure that the parties have not colluded at class members’ expense.” Accordingly, it remanded the case to the district court for further proceedings.

The Court also found that the injunctive relief included in the settlement agreement was “virtually worthless” and that the district court committed reversible error “by placing even ‘some value’” on the remedy. The injunction in question prohibited ConAgra from marketing Wesson Oil as “100% Natural.”  But not only had ConAgra already stopped that practice well before the settlement agreement was reached, ConAgra did not even own Wesson Oil anymore. “ConAgra,” the Court commented, “essentially agreed not to do something over which it lacks the power to do.” The promise was illusory, and thus the injunction was “practically worthless.”

Finally, the court disagreed with Henderson that the district court had improperly shifted the burden to him to prove that the settlement was unfair. The Court reaffirmed that “Rule 23(e)(2) presumes that a class action settlement is invalid” and that applying the opposite presumption is reversible error, but it found that the district court had not made that error here (despite some infelicitous wording suggesting otherwise).