Ninth Circuit Holds That Third-Party Intervenors Do Not Have Standing to Challenge Class Action Settlements

Earlier this month, the Ninth Circuit held in Sweet v. Cardona that although a third-party intervenor who wishes to object to a class settlement may have Article III standing based on an alleged reputational harm from the settlement, the intervenor nonetheless lacks standing to challenge a district court's final approval of the settlement if the intervenor is not a party to the settlement and will not be legally prejudiced by it. - F.4th --, 2024 WL 4675573 (9th Cir. Nov. 5, 2024).

In Sweet, a class of federal student loan borrowers sued the Department of Education, alleging that it violated the Administrative Procedure Act by failing to process and adjudicate hundreds of thousands of applications for borrower defense relief. The parties entered into a class settlement agreement and sought preliminary approval. One provision of the settlement provided that approximately 196,000 borrowers who attended 151 different universities would receive automatic debt forgiveness from the Department. Four of the universities moved to intervene, and both the plaintiffs and the Department opposed. The district court denied the motion to intervene as of right but allowed the intervenors to permissively intervene for the sole purpose of objecting to the class action settlement at the final approval hearing. After considering the intervenors' objections, the court approved the settlement.

The Ninth Circuit affirmed the denial of the motion to intervene as of right and dismissed the appeal for lack of standing. The court found that the schools had Article III standing because they faced a reputational injury, since their inclusion in the list of universities whose students were entitled to automatic debt forgiveness could give the "impression" that they had "engaged in unlawful conduct." Id. at *6. But the court nevertheless found that the intervening schools did not have prudential standing to object to the settlement (or to challenge the district court's approval on appeal) because they were not a party to the settlement. Id. at *5, *7. Although there is an exception to this rule-a non-settling entity may challenge a settlement when it demonstrates that it will sustain some formal legal prejudice as a result of the settlement-the schools did not qualify for it because the settlement did not compromise their rights or impose any obligations or liabilities on them. The settlement required the Department to discharge the debts plaintiffs owed the federal government, but it did not entitle the Department to recoup those funds from the schools. Id. at *5, *8. In short, "although the alleged reputational harm to the schools is concrete enough to support Article III standing, it does not rise to the level of plain legal prejudice" for the schools to have standing to object to the settlement. Id. at *9 (cleaned up).

Judge Collins issued a dissenting opinion in which he agreed that the intervening schools had Article III standing to challenge the settlement. Id. at *11. But he disagreed that the schools lacked prudential standing as non-parties to the settlement-he reasoned that the district court allowing the schools to permissively intervene showed that the interests of justice favored allowing a non-party to object to the settlement. Id. at *11-14. Because Judge Collins believed that the schools had standing and the merits of their objections should have been addressed, he then explained why he believed the Department lacked the necessary statutory authority to grant the relief provided in the settlement. Id. at *14-15.

The Ninth Circuit's ruling emphasizes the limited remedies that a non-party to a class action settlement agreement has to challenge the settlement. Even if the non-party may face some injury as a result of the settlement-such as the schools' alleged reputational injury in Sweet-the non-party may not be able to object to the settlement or appeal its approval unless the non-party can show formal legal prejudice as a result of the settlement.