class actions settlements

• Groupon settlement rejected on cy pres grounds last week after our objection. The attorneys would have received $2.125 million, the class maybe a twentieth of that.
• I argued the Baby Products case in the Third Circuit, and am cautiously optimistic for a good precedent in a case where the attorneys collected over $14 million and the class was due less than $3 million. Briefing.
• The fairness hearing in Johnson & Johnson has been postponed until October 18. We filed two expert reports demonstrating that the plaintiffs had failed to present Daubert-satisfactory expert evidence in support of a claim that the $0 settlement provided "substantial benefit" to shareholders.
• The Ninth Circuit, relying on opinions from two CCAF victories, struck down a settlement on cy pres grounds in Dennis v. Kellogg September 4, also holding that an attorneys' 38.9% share of a settlement ($2 million in this case) would be "clearly excessive."
• The Center filed with the IRS for stand-alone 501(c)(3) status. I'd like to express tremendous gratitude to everyone at Donors' Trust for all they did to incubate us.

Alison Frankel recently asked whether it's the end of "money-for-nothing" class actions; Ronald Barusch asks a similar question. The Center for Class Action Fairness is putting that question to the test in In re Johnson & Johnson Shareholder Derivative Litigation by asking the District of New Jersey to dismiss shareholder litigation that makes cosmetic changes to corporate governance, and then presents a $10.45 million bill to shareholders—150% of the already high "lodestar"—for the involuntary consulting arrangement. As in Robert F. Booth Trust v. Crowley, the suit "serves no goal other than to move money from the corporate treasury to the attorneys' coffers.... It is an abuse of the legal system to cram unnecessary litigation down the throats of firms ... and then use the high costs ... to extort settlements (including undeserved attorneys' fees) from the targets." As I noted then:

Under FRCP 23.1(a) and its state-law equivalents, a shareholder derivative suit isn't supposed to proceed unless the shareholders bringing the suit adequately represent the shareholders. If the suit is meant to profit the plaintiffs' lawyers at the expense of the corporation (and thus the shareholders), how can the bringers of a strike suit be adequate representatives of the shareholders? I've thus argued that the correct role for courts in such situations is to throw these cases out entirely (or approve the settlement but award only a token amount in attorneys' fees).

Good coverage at Forbes.com (noting that the lawsuits themselves are free-ride piggybacking off of J&J self-disclosure and government investigations) and Reuters (quoting plaintiffs' lawyers calling the motion "frivolous").

On July 31, district courts substantially reduced attorney fees in two class action settlements where Center for Class Action Fairness attorneys objected.

In the Nutella litigation in the District of New Jersey, Judge Wolfson agreed with our objection that the parties overstated the value of the injunctive relief, and reduced the fee award from $3,725,000 to $1,125,000. More discussion at Point of Law.

And in the remand of the Bluetooth class action settlement in the Central District of California, the court reduced the requested fee award from $850,000 to $282,729.05. The National Law Journal covered without asking me for a quote. The precision of the nickel seems a poor use of court resources, and demonstrates why we argue for recovery based on benefit to the class with lodestar to be used only as a cross-check ceiling. We also think that the court erred in failing to consider the substantial evidence that the injunctive relief was not only worthless but harmful to the class. But we're obviously less dissatisfied with a $282 thousand mistake than a $850 thousand mistake.

Unfortunately, both courts disagreed with us that the "kicker" provision in the settlement combined with the reversion to the defendant meant that the settlement was unfair because of the class attorneys' breach of fiduciary duty to the class, and granted settlement approval. We think this is legal error. When defendants are willing to put $6 million on the table complete a "clear sailing" clause to settle a lawsuit, but only have to pay a little more than half of that because of self-dealing by the class counsel, the unfairness to the class seems fairly clear to us. As the Ninth Circuit said in our Bluetooth win, there is "no apparent reason" for such a reversion. But the Center already has an appeal pending in the Ninth Circuit addressing just this issue, so will likely forgo appeals here unless a cross-appeal is necessary.

Related: district court citing Bluetooth throws out $0 Fraley v. Facebook settlement.

The Class Action Fairness Act puts limitations on coupon settlements. In In re Online DVD Rental Antitrust Litigation, however, the district court approved a settlement that would pay $5.2 million in cash and $8.9 million in Walmart.com coupons to the class and held CAFA did not apply because the parties called the coupons "gift cards." Does the Class Action Fairness Act regulate semantics or something more? I argue the latter in a Ninth Circuit opening brief filed today.

The district court also awarded a disproportionate $8.512 million to the attorneys. Our appeal addresses that issue as well. And because I miss Lionel Hutz, the brief cites the classic case of Homer Simpson v. The Frying Dutchman Restaurant.

Over the years, we have gotten lots of inquiries about objecting to bad shareholder derivative settlements. We'd largely passed, because we had high hopes for our pending case in the Seventh Circuit, and wanted to have that precedent in hand before we asked courts to recognize the issue of Rule 23.1 adequate representation. Now that we do, we are very interested in expanding our work objecting to bad shareholder derivative settlements. However, we face two barriers to entry that make objecting difficult.
First, the law has developed in a bad way so as to give very substandard notice to individual shareholders who hold their certificates through brokers. The settling parties typically wait until the last minute to notify brokers, asking them to comply with unrealistic deadlines, and the individual shareholders who work with Schwab or Merrill Lynch or the like don't get notice until a few days before the objection deadline, and sometimes after the objection deadline. That's often not enough time to investigate and handle the logistics of representation, especially if one needs to hire local counsel and request pro hac vice status. One of our long-term goals is to move the precedent in this area, but, until that happens, we need institutional-investor clients—hedge funds, pension funds—who get notice well in advance of objection deadlines and would like to work with us to end the problem of rent-seeking shareholder-derivative strike suits that hurt shareholders.

The second problem is that local-counsel requirement we just mentioned. I'm licensed in California, Illinois, D.C., and a couple of other federal courts that offer reciprocity, but many of these shareholder suits are in state courts or federal courts with burdensome local counsel requirements. (I also suspect we'll be seeing many fewer shareholder suits in Illinois federal courts as plaintiffs forum-shop.) Large law firms are frequently unwilling to represent us for conflicts reasons; many other firms don't want to alienate the powerful shareholder-plaintiffs' bar. We could very much use attorneys licensed in Delaware and D. Delaware to assist us. We'd obviously prefer pro bono help, but budget to pay reasonable fees for local counsel where necessary.

When attorneys affiliated with CCAF first objected on behalf of Professor Michael Krauss in the Classmates.com settlement, that case paid $52,000 to class members and over a million dollars to the attorneys and the class representatives (while falsely characterizing it as a $9.5 million settlement); Gregg Easterbrook of ESPN called it the worst class action settlement of the year. We objected, and the court struck down the settlement. The parties went back to the drawing board without including us in the process, and they came back with a settlement that guaranteed $2.5 million for class members, while still paying the attorneys over a million dollars. The settlement, as we pointed out in a second objection, still overpaid the attorneys and had Bluetooth reversion problems to boot: any fee reduction, notwithstanding clear sailing, would go to the defendant rather than the class. The parties quickly eliminated the kicker: now any fee reduction would go to the class, and the judge agreed with us at the fairness hearing that there should be a fee reduction.
Given that we had won over $2 million for the class, we thought we might be entitled to a token fee award; given our non-profit status, we planned to ask for something in the $40,000 to $50,000 range, reflecting both the benefit to the class and a sub-lodestar amount for multiple rounds of briefing, two trips to Seattle for fairness hearings, and the cost of hiring local counsel. But before we even put pen to paper on the fee request briefing, class counsel retaliated against us for our success in objecting by hitting us with super-burdensome fishing-expedition subpoenas, on, inter alia, a conspiracy theory of cross-referencing our donors with donors to institutions where Professor Krauss had performed work, such that someone paid Cato ten years ago to have Krauss write a paper so that he would successfully object ten years later represented by attorneys affiliated with CCAF to a settlement of a lawsuit against a company that didn't even exist yet. (Dozens of class members contacted us about this bad settlement. As we were figuring out who would be the best objector, Professor Krauss contacted us, and we agreed to represent him within minutes because he taught legal ethics, which added a modicum of ethos to our objection.) We were already overextended with appellate briefing schedules, so we had a choice: we could spend tens of thousands of dollars on outside counsel to resist facially invalid subpoenas requiring a response over the Christmas holidays, and be faced with an additional discovery bill of tens of thousands of dollars if we lost (and thus be put in a position where we might be worse off for requesting fees) or drop the fee request rather than prejudice our other clients. Professor Krauss was generous enough to give us permission to drop the fee request, and we did so. But we asked the court to award sanctions against class counsel on behalf of the class for the abuse of the discovery process to deter future abuses against objectors.

As both Daniel Fisher and the Economist documented recently, the percentage of M&A transactions worth over $500 million that result in shareholder derivative suits has risen from 39% to 96%. [Fisher; Economist; Reuters (quoting me); OL; see also Johnson @ SSRN]

It's surely not the case that every merger is the result of a breach of fiduciary duty. What's happening is that entrepreneurial lawyers have discovered a profitable means of rent-seeking: with the help of a cooperative shareholder, bring a meritless shareholder derivative suit on some technical ground or the other, threaten to impose millions of dollars of discovery expenses and hassle on the officers and directors of the company, and collect an attorneys' fee for settling the case for a token change of no benefit to the shareholders. As I told Reuters in 2011, "Judges should consider whether these provisions actually create value for shareholders, or amount to a rearranging of the deck chairs to create the illusion of value to justify attorneys' fees."

Under FRCP 23.1(a) and its state-law equivalents, a shareholder derivative suit isn't supposed to proceed unless the shareholders bringing the suit adequately represent the shareholders. If the suit is meant to profit the plaintiffs' lawyers at the expense of the corporation (and thus the shareholders), how can the bringers of a strike suit be adequate representatives of the shareholders? I've thus argued that the correct role for courts in such situations is to throw these cases out entirely (or approve the settlement but award only a token amount in attorneys' fees).

I found myself the "beneficiary" of one of these $0 strike-suit settlements in Robert F. Booth Trust v. Crowley; the settlement would have paid the attorneys $925,000 under a clear-sailing clause, and, when the district court rejected my attempt to intervene to dismiss the suit, I appealed to the Seventh Circuit. 

Yesterday, I won a complete victory with a landmark Frank Easterbrook opinion that I hope will provide protection for shareholders against future shareholder derivative strike suits. The suit, the Court said, "serves no goal other than to move money from the corporate treasury to the attorneys’ coffers.... It is an abuse of the legal system to cram unnecessary litigation down the throats of firms ... and then use the high costs ... to extort settlements (including undeserved attorneys’ fees) from the targets." It thus reversed the district court's denial of my motion to intervene, and remanded with instructions to dismiss the case, as I had asked below. [Reuters; Fisher @ Forbes; analysis by Wolfman; WSJ Law Blog (failing to recognize that the case involves a lawyer they profiled in October); Bashman; Overlawyered; Litigation Daily ($) ("Ted Frank, the indefatigable scourge of underwhelming class action settlements, scored a remarkable win on Wednesday"); Volokh on a punctuational quirk] 

This is the fifth federal appellate opinion in a CCAF case; CCAF is now 4-1 in federal appeals, which is remarkable, given that CCAF-affiliated attorneys represent the appellant in each case and there are rarely as many as four reversals of class action settlement-related district court opinions in a single year from all objectors combined.

CCAF is assisting an objector in a Texas-state-court strike suit currently on appeal, and we hope to extend this precedent to other state courts. The main difficulty we face is that individual investors rarely get adequate notice of these bad settlements: courts condone notice provisions that virtually guarantee that an investor who uses a broker will not get notice in time to file an objection. (In the Sears case, I benefited because of a rare agreement to extend notice at the district court level.) We would like to work with institutional investors to promote this precedent and put an end to the practice of rent-seeking strike suits that hurt shareholders. Please contact me if this describes and interests you.

On Tuesday, the First Circuit issued a landmark decision on cy pres, In re Lupron Marketing. Though odd litigation decisions by the objectors led to affirmance in that case, the First Circuit (quoting CCAF's victory in Nachshin v. AOL) made clear that it had "unease" with cy pres, and set a precedent generally requiring compliance with §3.07 of the ALI Principles of the Law of Aggregate Litigation. [Legal Newsline; FindLaw]

Coincidentally, the same day, the Center for Class Action Fairness filed its opening brief relating to the yet-to-be-proposed multi-million-dollar cy pres distribution in In re Baby Products, asking the Third Circuit to adopt §3.07; the district court held that the class wasn't even entitled to an opportunity to object to the as-yet-to-be-proposed recipients. Baby Products presents the additional problem of the sort of settlement where class members were artificially deterred from making claims to expand the amount available for cy pres; indeed, under the district court's order, the class counsel will walk away with over $14 million of the $35.5 million fund, and the class millions of dollars less, likely less than half of what the attorneys got.

• If you listen to one oral argument from March 27, well, I have to say that you need to listen to Paul Clement's performance in HHS v. Florida. But if you have time for a second oral argument, and you have a hankering for Third Circuit class action action, I'd be curious about your thoughts of the argument in Dewey v. Volkswagen. See also.
• Following up on our earlier post, the Third Circuit denied the motion for sanctions without comment, or permitting us to file a reply brief. (Mazie Slater had no explanation for the misquote; they used the passive voice in describing its mysterious appearance in the brief, and didn't explain how citecheckers missed it.) Having been given such carte blanche, Mazie Slater then proceeded to lie to the court about the terms of the settlement and settlement notice during the oral argument. I simply don't understand why courts aren't willing to do more to police the attorneys who appear before them. If the only consequence for inventing a citation out of whole cloth is the need to file an errata deleting an invented citation (i.e., the brief that should have been filed in the first place), what incentive does the Holmesian "bad actor" have to get the law right in the first place? After all, if there's a 5% chance that the fictionalized version will swing the case, 5% times $9 million in fees is a $450,000 incentive to lie to the court. If the bad actor isn't facing a proportionate downside, you can expect the bad actor to act badly.
• We renewed our objection in Bluetooth. Details at Point of Law.
• The Apple MagSafe settlement—$600,000 for the class, $3.1 million for the attorneys—was rubber-stamped by the district court. We plan to appeal to the Ninth Circuit.
• In the Online DVD Rental Antitrust Litigation settlement with Wal-Mart for a class of Netflix customers, the district court agreed with the settling parties that a coupon isn't a coupon if they call it a "gift card" instead, and that the restrictions on coupon settlements in the Class Action Fairness Act didn't apply, and rejected my objection. We believe this contradicts CAFA, as well as Seventh Circuit precedent, and plan to ask the Ninth Circuit to address this problem.

It had been a few years since I took a deposition, so it was refreshing to see that I wasn't as rusty as I was worried I'd be. Here's the plaintiffs' expert testifying about the value of the injunctive relief.

Q: So it is your opinion that only a trained audiologist with experience knows whether or not it is unsafe to listen to a device at a high volume level?

MR. HART: I object to the form of the question.

A: It’s my opinion that outside of those rare individuals who are able to educate themselves to such a high degree that no one would be able to determine whether the level at which they’re listening is relatively safe or relatively unsafe.

Q: So even after you’ve warned your patients, they might be listening to the Bluetooth device at unsafe levels?

A: No, because I would be able to provide them with detailed enough information to help them to use the device in a safe manner.

Q: What is that detailed information that is required for them to use the device in a safe manner?

A: The actual output level of the device in their ear at a given volume control setting, which is something that I can measure with my equipment and my -- in my clinic.

Q: And do the warnings provided in this settlement provide that detailed information?

A: To my knowledge, they don’t.

• Shareholder derivative suits present interesting conflicts of interest. The suit is purportedly brought on behalf of shareholders, but when the case settles, the corporate defendant—i.e., the plaintiff shareholders—are the ones paying the bill. Thus, if the suit does not actually extract any wealth from directors or officers for their supposed breaches of duty, shareholders are frequently worse off. This is the case in Robert F. Booth Trust v. Crowley, a derivative suit against Sears Holding Corp. where the alleged breach was failure to recognize the risk of Clayton Act litigation. The irony, of course, is that the actual shareholder derivative suit is far more expensive than the possibility of Clayton Act litigation. I objected; the posture is muddied by some procedural issues relating to the Seventh Circuit's intervention requirement, as you can see, but the fundamental point—shareholder derivative suits should not be permitted to be maintained when they are designed to benefit the attorneys, rather than the shareholders—remains valid, and we believe this is the first case to present this principle in the shareholder derivative context. The case is No. 10-3285, Robert F. Booth Trust v. Crowley (7th Cir.).
• Claims-made settlements are the successor to coupon settlements in structuring settlements to divert the lion's share of relief to the attorneys, rather than the class. The parties typically structure a claims process that will reward less than a tenth of the class (in this case, less than 3% of the class), hide the claims rate from the lower court by scheduling the fairness hearing well before the claims deadline (though that evasion didn't happen in this case), and then ask for attorneys' fees on the illusion that the entire class got relief. Thus, we have cases like Brazil v. Dell, where the class got less than $500,000, but the attorneys received $7 million. We think that is per se unfair, and have asked the Ninth Circuit to weigh in. The case is No. 11-17799, Brazil v. Dell (9th Cir.).