class actions settlements

Our earlier post continues to update the docket, most notably with our reply brief filed today.

It's hard to believe that multiple millionaire lawyers from multiple law firms all asked the court to apply the wrong legal standard for deciding a dispute over a consent decree accidentally. I'll take it as a good sign that they didn't think they could win if the court applied the correct legal standard and that their only hope was to obfuscate. It is of some concern that lawyers think they can obfuscate like that and get away with it without getting sanctioned.

What is most remarkable is the shamelessness of the contrasting claims by NVIDIA and Milberg. When asking the court to disregard objections to the settlement, the settling parties argued that there would be hundreds of thousands of claims worth at least tens (and probably hundreds) of millions of dollars. (Milberg actually argued that there would be "exponentially" more than hundreds of thousands of claims, but I presume that was because they don't know what "exponentially" means rather than because they were arguing that there would be tens of billions of claims.)

But push has come to shove, and only 30 thousand class members have taken the preliminary steps of asking for relief—and the Settling Parties have the gall to argue that this response rate (which will correspond to less than $10 million of class benefit, less than the $13 million attorney fee) demonstrates the popularity of the settlement administration, because one couldn't reasonably expect any more claims than that. We didn't even ask for those numbers: NVIDIA shamelessly volunteered them as evidence of the success of the settlement.

This case is a poster child for why courts should not award attorneys' fees until after the claims period has ended. If we hadn't intervened in this case, no one would have ever disclosed that Milberg exaggerated class recovery twenty- to fifty-fold, and this would be recorded in some empirical study as evidence of attorneys generously restricting themselves to fees of less than 10% of class recovery, rather than 130% of class recovery.

Update: Court rules for NVIDIA. If you're a class member with questions about the case, and why your attorneys argued against your own recovery, you need to talk to your attorneys at Milberg; I cannot help you.

If there was ever any question of whether Milberg was going to side with its putative clients or its putative adversary, we now have an answer from this Litigation Daily story (behind a subscription wall, but now available for free):

Lead class counsel Jeff Westerman of Milberg said in a statement that Frank is "working against the interests of consumers who deserve to get their computers replaced."

"This settlement is providing class members with repairs and replacement computers, and thousands have already submitted claims," Westerman said in the statement. "When it comes to the replacement computers, we hired an independent expert who confirmed that we were adhering to the terms of the settlement. [Frank's] claims to the contrary reveal an anti-consumer agenda aimed at stopping the settlement from proceeding."

Three obvious points:

1. Millions of HP owners were subject to the settlement; "thousands have already submitted claims." Or, in other words, less than 1% of the class has submitted claims. And that's aside from the fact that "submitting a claim" doesn't indicate approval of the settlement administration, just an understanding that half a loaf is better than none. All of my clients have "submitted claims"; none are happy with the settlement.

2. In case it wasn't clear from my briefs, I fully support "consumers [getting] their computers replaced." One can readily look at my proposed order, and see that I am not trying to "stop[] the settlement from proceeding." There is already an existing court order for the settlement to proceed, and no one has moved to stay that order.

3. I've heard of spin, but it's remarkable that demanding that consumers get what their attorneys promised them in a class action settlement and notice is considered "an anti-consumer agenda." To review: it's the tort reform advocate who has filed papers with the court asking for consumers to get what they were promised; it's the trial lawyers who have announced their intent to file papers with the Court siding with the defendant and alleged wrongdoer insisting that the consumers—their clients—get less than what the Court has already ordered.

Leading tech blog Engadget caught wind of our motion:

Ted Frank of the Center for Class Action Fairness says that NVIDIA has no business passing off cheap laptops, and we think he might have a case -- after all, the judge ordered that NVIDIA provide "a replacement computer of like or similar kind and equal or similar value," and it doesn't take a lawyer to see that the $400 [sic] Compaq Presario CQ56-115DX that the company's offering doesn't come close to compensating owners of faulty machines. We joked that you might be better off selling your old laptop for parts on eBay, and that might not be far from the truth.

So did leading law blog Above the Law.

Update: Court rules for NVIDIA. If you're a class member with questions about the case, and why your attorneys argued against your own recovery, you need to talk to your attorneys at Milberg; I cannot help you.

Our January 13 post on the NVIDIA GPU settlement, where class members were promised a “replacement HP notebook computer … of similar kind and value as their eligible malfunctioning notebook computer" as part of a settlement, but are instead getting a $330 Compaq CQ56 notebook, has generated several updates and over 100 comments. Though class counsel suggested to me that patience would result in a fix to the settlement, it did not for the vast majority of aggrieved class members, and we ended up losing five weeks. I've started this post now that the court filings have started, and will update as new filings come in. The court granted our motion to expedite the hearing schedule, but expediting means a March 28 hearing. Over 100 HP owners have asked for the opportunity to provide a declaration to the court. One of my clients has a website with more information: fairnvidiasettlement.com.

• 343. HP Owners' emergency motion to shorten time
• 344. Frank declaration in support of emergency motion
• 345. Plaintiffs' status report and response to emergency motion
• 346. NVIDIA response to emergency motion (Note: NVIDIA says I was not authorized to represent their non-opposition. That's my fault: I incorrectly assumed that when Robert Varian of Orrick e-mailed me to say that there was an "Agreement not to oppose" the motion, that meant there was an agreement not to oppose the motion. Similarly, plaintiffs surprised me when they sat on my proposed schedule for over 24 hours without telling me they changed their minds not to oppose. Live and learn.)
• 347. Court order scheduling briefing and hearing
• 348. Motion to enforce settlement
• 349. Memorandum in support of motion to enforce settlement
• 349-12. Proposed order
• 350. Frank declaration in support of motion to enforce settlement
• 351. Ram/Edelson objectors kibitz on motion
• 352. Brown class members' response to Ram/Edelson objectors
• 353. [Transcript ordering relating to objectors' appeal; not relevant to this motion]
• 354. NVIDIA response to [348] motion
• 355. Jon Peddie (NVIDIA) declaration
• 356. Keith Katchor (NVIDIA) declaration
• 357. Dan Rosenthal (NVIDIA/settlement administrator) declaration
• 358. Milberg response to [348] motion
• 358.1. Westerman declaration
• 358.2. Bagherzadeh declaration
• 358.4. Laratro declaration
• 359. Certificate of service
• 360. Unrelated docket entry regarding procedural step in objector appeal
• 361. Lichterman (NVIDIA/Orrick) declaration
• 362. Reply brief in support of motion to enforce settlement
• 363. Zilles declaration
• 364. Frank supplemental declaration
• 365. Vlastone supplemental declaration and report
• 366. Notice of settling parties' alteration of settlement website
• 367. NVIDIA response to notice of settling parties' alteration of settlement website
• 368. Supplemental Bagherzadeh declaration
• 369. Supplemental Laratro declaration
• 370. Certificate of service
• 371. Supplemental Zilles declaration
• 372. Supplemental Frank declaration
• 373. Docket entry noting hearing and motion under submission
• 374. Horton declaration

You will recall that a class action is pending in Kansas over gasoline retailers' failure to disclose the laws of physics to customers, i.e., gasoline, like all other liquids, expands in higher temperatures. Since a "gallon" is a measure of volume rather than power, someone buying gasoline when it's warm is getting less mileage than someone who buys the same volume of gasoline when it's cool. To some extent, the retailers are being hoist by their own petard, because they pulled the same class action nonsense on wholesalers, but it's still socially wasteful litigation that benefits no one but the lawyers; when I argued at a fairness hearing in Kansas City last April, I had several dozen witnesses, likely each billing an average of over $400/hour. Costco decided to get the uncertainty off of its books, and agreed to pay the lawyers to go away. But the class members, the ones putatively injured by Costco's conduct, got nothing. The plaintiffs had the chutzpah to claim that Costco's agreement to "temperature-adjust" their fuel sales was a benefit to consumers, but that's clearly not so. If Costco's average "gallon" happens to increase in size a cubic inch or two, that doesn't mean that consumers are getting free gas any more than it would mean that consumers would get free eggs if the government suddenly mandated that a "dozen" was now equal to eighteen.

The court threw out the settlement on a technicality, and the parties are now back with an amended settlement that fixes the technicality, but still doesn't do anything for the class. So my clients renewed their objection to the settlement. Last time around, we challenged the quack economic report that plaintiffs submitted that claimed changing the size of a gallon would magically result in consumers getting tens of millions of dollars of free gasoline; the other side protested that I was just a mere lawyer who wasn't qualified to use big words like "cross-subsidization." Over the last few months, I've discussed this case with several economists, many of whom fell over laughing as I described the testimony of Dr. Andrew Safir; the distinguished Dr. David Henderson was kind enough to charge us a reduced rate to provide a simple rebuttal on short notice this time around.

When is injunctive relief a benefit to the class? So many plaintiffs' lawyers seem confused about this issue: they forget that they represent clients, and the injunctive relief needs to benefit their clients if one is to count it towards determining the fairness of the settlement. Few courts consider the issue because few objectors raise it, but the ones that do consider it consistently distinguish between retrospective injunctive relief (say, a recall that fixes an automobile or a computer) and prospective injunctive relief (a company agrees to change its business practices). Even when there is consumer fraud, prospective injunctive relief doesn't benefit consumers unless they engage in new business with the vendor. And even then, the consumers will not benefit if the vendor simply raises its prices to account for the new costs in the change in business practices.

I'm quoted in a Reuters story about merger lawsuits and their quick settlements:

Settlements often come fast, and plaintiffs' lawyers share in the spoils -- $500,000 in a typical lawsuit, Advisen said.

"The real problem, I think, is in cases where lawyers win a few extra sentences of disclosure and walk away with $1 million of fees," said Ted Frank, who founded the Center for Class Action Fairness and often challenges proposed
Settlements.
Lawyers and researchers say the proliferation of lawsuits reflects increased competition among firms.

"There are some bottom feeders on the plaintiffs' side," said Adam Savett, a director at the Claims Compensation Bureau LLC, which monitors Class Action claims for investors. "Their modus operandi is throw up a lot of stuff on the wall and try to get a quick Settlements, and move on."

REARRANGING DECK CHAIRS

Typically, an individual or institutional investor sues a target company or its directors, seeking Class Action status and alleging a breach of fiduciary duty to shareholders.

...

"Defense lawyers benefit from this game," Travis Laster, a vice chancellor in Delaware Chancery Court, said at a December hearing. "They get to bill hours without any meaningful reputational risk from a loss. They then get to get a cheap settlement for their client. Disclosures are cheap."

Frank, of the Center for Class Action Fairness, said it was up to judges to decide if these Settlements have much benefit.

"Judges should consider whether these provisions actually create value for shareholders," he said, "or amount to a rearranging of the deck chairs to create the illusion of value to justify attorneys' fees."

Update: Court rules for NVIDIA. If you're a class member with questions about the case, and why your attorneys argued against your own recovery, you need to talk to your attorneys at Milberg; I cannot help you. Please do not contact me about this case asking how you can get your computer fixed.

In the NVIDIA GPU settlement, owners of HP notebook computers affected by a defective chip had to be thrilled: the settlement notice promised them that, with proper documentation, they would receive a “replacement HP notebook computer … of similar kind and value as their eligible malfunctioning notebook computer.” But after the settlement was approved, they learned,much to their displeasure, that their class counsel, Milberg LLP, negotiated that they could only receive an entry-level Compaq CQ50, often worth over a thousand dollars less than the computer they would be replacing. Let's hope this is an oversight, rather than a deliberate attempt to deceive the class and the court: I senta letter to the settling parties' counsel today asking for clarification.

Update, January 16: I'm getting dozens of emails from class members because of a couple of posts on HP-related message boards from class members suggesting that I be lobbied. Please understand that I am not in a position of power to unilaterally do anything about the settlement. I am an attorney who represents consumers pro bono in similar situations where attorneys try to rip off class members in settlements. I am certainly interested in this case based on what I've heard, and I am investigating at the request of a class member. I agree that the current settlement claims process is inconsistent with the notice given the class; you don't need to try to convince me of that fact. If the settling parties don't do anything to fix the problem, and can't satisfy me that they have a legal basis to do what they did, and research determines that legal intervention has a chance of fixing the matter, I'll write back a few of you to see if you can generate a signed declaration for the court proceedings to help the court understand the extent of the breach of the class counsel's promise to the class. But I amnot your attorney unless you and I agree to a signed retention agreement that I am your attorney. The fact that I wrote a letter to the class counsel about this question does not mean that you should not investigate the possibility of legal representation for yourself.

Update, January 18, 4:15 PM Eastern: I have not received anything in writing as of this afternoon. I called the Milberg firm, and they claim that the information on the website is "premature" and not the "final" version of the settlement. This is mysterious, given that Milberg has control over the website. Worse, Milberg refuses to provide anything in writing that the website will be updated with different information, so Milberg can deny that they told me this later. Still, there is a claim that there will be a "meeting" tonight to discuss modifications to the claims process. One would hope that any such modifications includes corrective notice to the class and an extended claims process to make up for the inaccurate information previously given. I will check the settlement website next week. The low level person I spoke to did not seem to understand the difference between an objection to a judge's decision and asking Milberg to comply with the judge's order, and kept asking me if I thought the judge had made a mistake. Class members thinking of writing me should instead politely call Milberg at 213.617.1200 and get an answer about whether and when the Milberg NVIDIA settlement website is up to date, and why inaccurate or "premature" information has been posted to the website. If Milberg tells you something different than they told me, leave a comment here.

Update, January 26, 7 PM Eastern: I finally spoke with Mr. Westerman at Milberg. He's asked me for more time to negotiate with NVIDIA to work through some of these issues. Depending on whether the settlement administration procedure changes, at the end of the day, we may or may not agree whether the parties are in compliance with what the settlement and the class notice promised, but I'm willing to give him the chance: my preference is for the parties to make this right without me getting involved by filing papers with the court. If I sign up clients, I will not be signing up dozens of clients: I will be working with two to five people who have very clear-cut cases where the CQ50 or the Asus EEE T101MT-EU17-BK is self-evidently to a layperson not a “replacement HP notebook computer … of similar kind and value as their eligible malfunctioning notebook computer” and ask for classwide relief; I may contact a few other class members and ask for them to provide declarations supporting the argument. That said, you should not view my participation in the case as a reason not to retain a lawyer on your own: I am not your lawyer unless we have a signed retention agreement. While I am happy to receive spec sheets describing the model of your computer and comparing it to the replacement computer, please do not contact me asking me for updates or for personalized legal advice: I will update this blog post as new information comes in; if you've read the blog post, you know everything I know and can tell you.

Update, February 1: After another conversation with Mr. Westerman today, I will reevaluate the situation on February 9.


Update, February 10. The settlement website has been finally modified: claimants deemed ineligible between January 10 and January 22 are encouraged to resubmit claims; the replacement computer remedy for HP notebook computers will be a Compaq Presario CQ56 computer, rather than a CQ50. That still doesn't address the tablet problem; leave your comments on your thoughts about the CQ56. Mr. Westerman has asked me to refrain from action this week (and, frankly, the press of other commitments in existing cases would mean that I would need to do that anyway). Please remember that I am not your attorney and cannot provide individualized advice on how to respond to the settlement, and please do not rely upon me as your only recourse; there may be other attorneys willing to look into this. In particular, I encourage you to contact the consumer division of your state attorney general's office (and city/county office as well, if you have one). I will check back in with Mr. Westerman February 15.




Update, February 16 - The settlement has been modified, though in ways that do not solve the grievances earlier discussed for most class members. A number of class members have formally retained me; we'll be filing some sort of papers with the court before the end of the month asking for the court to intervene to enforce the promises made to the class, though I'm still doing research as to what form those papers will take, and whether we're proceeding against just NVIDIA or both NVIDIA and class counsel. (NVIDIA counsel never responded to my letter.) I did not speak to Mr. Westerman on February 15, and he's in court today, but I'll try to reach him tomorrow to determine class counsel's position on our petition to the court, and whether they'll cooperate with us or oppose us. (I would view any opposition as a breach of fiduciary duty to the class.) One thing I know we'll want is declarations in support of our motion. If you're interested in submitting such a declaration (under oath, under penalty of perjury) to the court expressing your thoughts on why the computers are not of like kind and value, leave information in this thread with a way to contact you, and someone may be in touch with you next week (though we probably will not have the chance to get declarations from everyone who offers to issue one). Please continue to note: (1) if we do not have a retainer agreement, I am not your attorney in this case; (2) I cannot offer individualized advice about how to respond to the settlement; and (3) if you do submit a declaration to the court, you do so voluntarily to help the cause of your fellow HP owners: it does not make me your attorney.

Update, February 22 - One of my clients has established the website http://fairnvidiasettlement.com/ to summarize what's happening and collect potential declarations from other class members. While he is doing the declaration data collection on my behalf, he is not speaking for me, but the site is a useful compendium of information. We may end up with dozens of declarations, but I am not going to want to overwhelm the court, and will likely only use six to twelve of them. I am currently negotiating a briefing schedule with the settling parties in the hopes of getting a hearing date with the court before the claims period expires; without court approval for expedition, there wouldn't be a hearing before April.

If I were to buy a three-pack of color ink for my inkjet printer today, it would cost me $42.99 at HP.com and $36.99 at Amazon.com. That's not a big deal—unless HP is trying to settle a class action by giving class members $2 coupons that can only be used at HP.com (and can't be transferred or stacked, and expire in six months). And even if the coupon was larger (some class members get $7 coupons) HP makes much more money selling ink at HP.com than at Amazon.com, all else being equal: this is a marketing program for them. And the attorneys are claiming that they're entitled to $2.9 million for such a lame settlement because the coupons are "worth" $5 million. And even if one attributed full face value to the coupons (which the parties try mightily hard to not call coupons), I strongly suspect far less than $5 million of coupons will be claimed or redeemed.

The Center filed an objection today in the Northern District of California. Kabateck Brown Kellner, who we've seen before in the $0 AOL settlement and the $117k Classmates.com settlement, are among the lead attorneys in this ripoff as well.

Objections are due January 3. If you're a class member (and most people who purchased HP inkjet printers in the last nine years are, and there are tens of millions of them out there), you can file a claim or object at the settlement website; this settlement nicely permits emails if you prefer objecting that way.

When Apple introduced its iPhone into a smartphone market where it had 0% market share, it cut a deal with AT&T Mobility to make it the exclusive provider of cell phone service.  In exchange, ATTM subsidized the price of every iPhone by $450, thus ensuring that more consumers would be able to purchase iPhones, and introducing additional competition into the smartphone market. 

Nonetheless, trial lawyers sued, bringing a class action alleging that this basic business arrangement violated the antitrust laws because it threatened to monopolize the previously non-existent market for "iPhone telephone service." 

This is ludicrous on its face.  The smartphone market is more competitive than ever: in addition to the longstanding Blackberry, there's new entrants Droid and HTC Evo (and vis-a-vis the latter, see this NSFW, but very funny, video).  Without the phone carrier subsidization, many iPhone owners (including me) would be unable to afford an iPhone, and are clearly better off because of the exclusivity deal.  Nonetheless, the Northern District of California has certified a class action over the practice—and not just any class, but a Rule 23(b)(2) mandatory class, meaning that every iPhone owner with an AT&T Mobility two-year contract is now involuntarily represented by attorneys that apparently care more about the possibility of extortionate settlement profit than the clients they purportedly represent. 

The Center for Class Action Fairness is in talks with a number of iPhone owners who are concerned about being represented by class counsel who don't have their best interest at heart, and considering filing papers moving to intervene and decertify the class.  But economic experts willing to go on the record to refute quack antitrust analysis are not cheap; before we blow a good chunk of our annual budget on one, we're curious if there's anyone out there willing to work for a discount rate or, better yet, pro bono.  (In the alternative, if there's another public-interest law firm out there who'd like to take the lead role on this, I am happy to serve pro bono as both the client class member iPhone owner and as the expert witness, as well as assist on the legal side.  Unfortunately, legal rules prohibit me from serving as both lead attorney and as a witness.)

A tiny percentage of Volkswagen and Audi sunroofs will leak into the vehicle unless care is taken to keep the plenum clear of debris; a class action was brought over this.  Let's assume for the moment that plaintiffs are correct that this is something that Volkswagen is liable for, and that there are contractual remedies for VW not foolproofing the cars against this problem.  What's remarkable is how the parties settled the case in such a way so that wildly inefficient remedies would maximize attorneys' fees at the expense of the class.  The settlement is structured as follows:

1. A million class members will get nothing but a letter telling them to check the plenum when they go for their 40,000-mile service.
2. VW will perform an expensive preventative service action on some, but not all, VWs that might suffer this problem.
3. An $8 million settlement fund is set up to pay damages for some, but not all, VWs that have suffered damage

The economic expert for the plaintiff made some remarkable calculations.  For example, he valued the letter at over $29 million.  After all, if you get a letter informing you of a potential benefit, that letter is worth just as much as the benefit itself—never mind that Volkswagen dealers charge $400 to $800 for 40,000-mile service, and can easily choose to raise the price $30 to account for the extra labor in performing the extra task during the maintenance service.  So if Apple ever settles a class action by sending you a letter telling you you can buy a $700 iPad for $700, that is, according to the expert, indistinguishable from Apple writing each consumer a check for $700.

Let's look at #2 for a second.  According to the plaintiff's own expert, VW will spend $55 million on that service action.  According to the same expert, if VW does not perform the maintenance, those vehicles will suffer $24 million in damage.  (The expert then remarkably triple-counts this as a benefit to the class: the $24 million in damage avoided, plus $55 million in VW expenses for the service action, plus another $24 million for the avoided diminution of value of the vehicle that would have occurred if the vehicles suffered damage and then weren't repaired.  Thus, according to the expert, this component of the settlement is worth over $103 million.)  Spending $55 million to avoid $24 million in damage is the very definition of economic inefficiency. 

But consumers lose out.  Some of the class members who are getting nothing but a letter—including one of my clients—have suffered actual damage from sunroof leakage.  They're not getting paid under this settlement and are being forced to release their claims, which are no less meritorious than the claims that are getting paid.

The only possible reason for plaintiffs' attorneys to insist upon this convoluted remedy is to increase attorneys' fees.  By making Volkswagen engage in wasteful spending, they pump up the alleged value of the settlement and then argue that they're entitled to over $23 million in attorneys' fees and costs, to be paid separately by Volkswagen.

It would have been very easy to structure a settlement so that Volkswagen created a $48 million fund to cover repairs to every vehicle that suffered water damage from a sunroof leak.  Every VW owner who had the problem in the past or in the future would be able to collect; Volkswagen would be out of pocket $48 million instead of $70-$90 million; the attorneys could have made a plausible claim for $10 million in attorneys' fees and costs from the fund, which would still be close to twice an exaggerated lodestar.  Instead, the parties negotiated a settlement that made everyone—consumers and Volkswagen—worse off.  Well, everyone except the attorneys, if Judge Patty Shwartz buys the quack economic testimony and awards the full fee request.

Under Rule 23(e), a judge is not to approve a settlement unless it is "fair, adequate, and reasonable."  It is hard to see how this settlement is fair or reasonable; and it demonstrates the failure of legal ethics that the class attorneys could structure this settlement and make that fee request without fear of sanction, even as they put their own interests ahead of their clients.

The four-hour fairness hearing, consisting mostly of the economic expert rationalizing his calculation and the attorneys arguing over fees, was last Monday in a Newark federal courtroom.  I look forward to seeing how the judge will rule.

Tuesday, the Center filed its opening brief appealing the approval of a class action settlement against AOL.  We focused our appeal on the problematic cy pres award in that case:

This appeal presents a straightforward application of the Ninth Circuit precedent Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9th Cir. 1990)—a precedent that the district court entirely failed to apply. For a cy pres award to a third party to be permissible it must actually be “cy pres”—as near as possible to actual class recovery. Id. at 1308. Here, there was a nationwide class of tens of millions of AOL members allegedly victimized by AOL practices, but the vast majority of the cy pres distribution went to local charities in the Los Angeles and Oklahoma areas; all of the cy pres was entirely unrelated to the class and unrelated to the claims of the case.

The potential of cy pres to create conflicts of interest and ethical dilemmas for the judiciary have garnered increasing attention in recent years. See, e.g., Adam Liptak, Doling Out Other People’s Money, N.Y. TIMES (Nov. 26, 2007) (available at http://www.nytimes.com/2007/11/26/washington/26bar.html); Martin H. Redish, et al., Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 FLA. L. REV. __ (forthcoming 2010) (available at SSRN: http://ssrn.com/abstract=1485047); Sam Yospe, Cy Pres Distributions in Class Action Settlements, 2009 COLUMBIA BUS. L. REV. 1014 (available at SSRN: http://ssrn.com/abstract=1492105); Amanda Bronstad, Cy pres awards under scrutiny, NAT’L L. J. (Aug. 11, 2008) (available at http://is.gd/dyFk0-). If courts are going to countenance cy pres distributions in class actions settlements at all, such distributions must be strictly tethered to the standard of class benefit, lest cy pres become a slush fund for plaintiffs, defendants, attorneys, and judges that creates the appearance of impropriety—or worse, actual impropriety.

The problems of potential conflicts of interest are not just a hypothetical concern in the case at bar. Neither the court nor the class was informed of the conflict of interest that one of the plaintiffs was the assistant director of development for one of the cy pres recipients. And yet still another cy pres recipient was a local charity where the spouse of the district court judge sits on the board. It is not exaggerating to say that this case is a poster child for the problem of cy pres abuse: indeed, in a story on the issue, the Wall Street Journal singled out the very settlement in this case as an example. Nathan Koppel, Proposed Facebook Settlement Comes Under Fire, WALL ST. J. (Mar. 2, 2010) (available at http://is.gd/dyl7A-).

For both precedential and sound public-policy reasons, this court should reverse the approval of the proposed class action settlement as an abuse of discretion.

Parties in a class action agree to submit to the jurisdiction of an Article I magistrate under 28 U.S.C. § 636(c).  Then they settle the case.  Objectors show up, but have not consented to have the case heard by a magistrate.  Does the magistrate still have jurisdiction or does an Article III judge have to weigh in? 

Section 636(c) requires consent by "parties."  Are unnamed class members parties under § 636(c)?  One can't just give the answer of a blanket "no"; the statute and federal rules are silent, and Devlin v. Scardelletti, 536 U.S. 1 (2002), says that class members are sometimes "parties," and sometimes not. 

The problem, of course, is the possibility of heads-I-win/tails-you-lose gamesmanship, with an objector throwing a wrench into the proceedings by protesting after the fact that the court didn't have jurisdiction.  See, e.g., Mark I, Inc. v. Gruber, 38 F.3d 369, 370 (7th Cir. 1994) (vacating final decision of magistrate made after two years of litigation on jurisdictional grounds). To a certain extent, the Mark I problem has been eliminated by Roell v. Withrow, 538 U.S. 580, 590 (2003), which allows a court to infer consent by acquiescence. More worrying is the possibility that an objector in good faith appeals a magistrate's ruling to an appellate court, only to learn that the appellate court does not have jurisdiction and she missed the deadline for appealing to the district court.

It's an interesting academic question, but litigants don't like the uncertainty of academic questions.  It's come up in an objection CCAF made, and we've asked the court for clarification—since no one else seems to have even thought of the issue.

Well, perhaps someone did think of it.  A so-called professional objector has the incentive to sandbag, since the business model is to lose at the district court level and then threaten a colorable appeal that would delay the class counsel payday unless paid off; a defendant is likely indifferent to delay.  What astonishes me most, however, is that plaintiffs' attorneys asking the court for $2900/hour, and presumably concerned about "professional objectors" coming in and holding up the settlement and their attorneys' fees, didn't anticipate this potentially fatal flaw.  If the attorneys who think they're worth $2900/hour are missing this basic issue-spotting that I caught, maybe I'm worth $3000/hour and even more underpaid than I thought.  (And in that case, you, loyal reader, have just benefited from $1500 worth of my time.)

If you're a Sears Holding Corporation (SHLD) shareholder like me, there's a pretty big chance that you got a letter in the mail informing you of a derivative shareholder settlement where the attorneys got $925,000 and the shareholders got the privilege of paying the attorneys $925,000.  The deadline for objecting was June 25.

All well and good, except that my particular notice letter arrived on June 28.  That's because, though the settlement occurred on April 28, and the court approved notice on May 11, the parties didn't bother to ask brokers to provide a list of shareholders until June 1, and then, after receiving the list, didn't bother to mail the notice to tens of thousands of shareholders until June 22 or June 23. 

I was in Chicago yesterday to object to the problematic notice.  While there I met another shareholder who didn't object to the appalling settlement because she also got her notice after the deadline.

The parties initially argued that it was alright to structure notice so that half the shareholders would receive it only after the fact, but after they gauged the judge's reaction to my argument, the parties volunteered to send new notice.  The http://www.searsholdingsderivative.com/ website has not been updated as of Saturday morning, but the new deadline will be August 20, with a new fairness hearing August 27.

The law firm involved, Vianale & Vianale, brings zero-damages lawsuits against corporations alleging technical violations of Section 8 the Clayton Act antitrust law but seeking injunctive relief, and threatens to cost the defendants millions of dollars in litigation expenses if they don't settle.  This is of no benefit to shareholders, because the law in question, when it is enforced, results in the FTC politely requesting a corporation to correct the technical violation; there has not been a government fine issued for "interlocking directorates" in my adult lifetime, and for at least several years before.  The Center will be objecting to this settlement: how can attorneys claim to represent the shareholders when rational shareholders would never agree ex ante to bring a lawsuit that is guaranteed to make them worse off, win or lose?

It generally seems that the majority of my readers are plaintiffs' law firms checking up on me, but if you happen to stumble across this post and happen to own SHLD, you might get a postcard letting you know that you have another opportunity to object.  Of course, unless you own hundreds of thousands of dollars worth of stock, it might be economically irrational to spend two 44-cent stamps to object; and if you did own that much stock, the opportunity cost of the time you spend objecting is probably pretty high, even if it's just to say "My name is X, my address and phone is Y, I own Z shares of stock, and I join in the objection of Theodore H. Frank."  But unfortunately, plaintiffs' attorneys regularly ask courts to view the rational silence of class members or shareholders as acquiescence in their extortionate theft of shareholder money.

I've previously written about the problem of cy pres, charitable donations used to expand the apparent value of class action settlements that often serve as double-compensation for the trial lawyers. One particular Ohio law firm, Dworken & Bernstein, has demonstrated this problem first-hand by regularly negotiating for cy pres awards in settlements that otherwise are pretty lackadaisical in terms of class benefits, getting the settlement approved by claiming the cy pres award is a benefit to the class (even when it benefits a charity affiliated with the judge, or is a local charity despite the fact that the money is supposed to be going to a national class), and then taking personal credit for the donation in ceremonies with oversized checks, as if the money being donated was the law firm's rather than that of their clients. (The website's stock photo of the grateful child with the flower is particularly compelling.)

Public choice aficionados would be fascinated by recent Ohio developments where the Dworken firm has lined up multiple charities to support pernicious legislation, HB 427, that would enshrine this conflict of interest and breach of fiduciary duty to one's clients into Ohio law. On May 18, I testified before an Ohio House committee on the subject. class action settlements

I'm quoted in a May 23 Maryland Daily Record story on professional objectors (and don't miss the correction at the bottom of the story).

Because class action settlements bind class members absent from court proceedings, and because class action attorneys are negotiating their fees as part of the same settlement as the class settlement (even when they engage in the fiction of negotiating seriatim), Fed. R. Civ. Proc. 23(e) requires class action settlements to receive court approval as "fair, adequate, and reasonable" to ensure that class attorneys are not breaching their fiduciary duty to the class.

This permits legitimate objections to the settlement. But it also permits holdups. If class attorneys are awarded a $4 million fee, but appeals of a class action settlement approval take two to three years, the time-value of money means that it's worth hundreds of thousands of dollars to the class attorneys to pay the objectors to go away. This leads to rent seeking.

A reform to the Federal Rules of Civil Procedure was meant to address this problem: an objection cannot be withdrawn in district court without court approval. This certainly rids the system of the more blatant holdup payments that do nothing to benefit the class—though, given that the resulting proceeding will be non-adversary and any approval will not be appealed, there's little incentive for district courts not to rubber-stamp objection withdrawals.

Of more concern is that there is no parallel rule in the Federal Rules of Appellate Procedure. Simply by filing a notice of appeal, a holdup objector can avoid the need for court approval: indeed, appellate court mediators will formally encourage settlement to lighten the appellate court's docket. There's some reduction in the value of the objection, because the buyoff comes later rather than sooner, affecting the time-value of money for both the objector and the class counsel, but there's no real reduction in the incentive for rent-seeking.

Worse, the structure leads to perverse incentives: a rent-seeking or "professional" objector is likely to be financially better off if the district court denies the objection, permitting an immediate appeal—especially since many district courts are reluctant to award attorneys' fees to objectors even if the objection improved the settlement.

This can lead to low-quality objections. Of course, even professional objectors can make legitimate objections: they object to bad settlements as well as reasonable settlements, and even win occasionally: see, e.g., Synfuel Tech. v. DHL Express, 463 F.3d 646 (7th Cir. 2006). But low-quality objections hurt consumers in four ways: first, poor objections lead to poor precedent that encourages judges to rubber-stamp bad settlements over objections; second, one would expect that class counsel anticipates the expense of buying off professional objectors, and builds that into the settlement fee, increasing the cost of class action litigation to the detriment of consumers; third, to the extent the settlement legitimately provides class members with benefits, rent-seeking delays reduce the value of the settlement to the class if the class counsel has not negotiated interest-bearing escrow accounts (which is why courts should condition findings of fairness on the establishment of such accounts); and fourth, there is a signaling problem whereby it is difficult for legitimate objections to be treated as legitimate objections because the objector cannot distinguish himself from rent-seeking objectors. (Indeed, an intelligent Bayesian would expect most objectors to be rent-seeking: for the same reasons we have class actions to aggregate litigation, an objector has no financial incentive to spend time and money petitioning the court over an unfairness to a settlement where an excessive attorneys' fee might deprive the class member of a few dollars or even less. This is why thoughtful courts do not equate lack of formal objections with class members' approval of the settlement.)

The Center for Class Action Fairness resolves the signaling problem in a unique way: we announce in advance that we refuse to settle unless the settlement results in an objectively fair and reasonable settlement, and we refuse to request a fee for more than 4.4% of the additional pecuniary benefit to consumers resulting from our objections (with that fee coming from class attorneys' fees, rather than from consumers); to date, we've never settled an objection. Our interests are to put consumer welfare first. This hasn't stopped class counsel from trying to tar us with the "professional objector" brush, but we can demonstrate that they're being dishonest if they accuse us making a bad-faith objection for profit.

The attorneys in the case of Bachman v. A.G. Edwards, Inc. negotiated what they call a $60 million settlement. Which sounds good, until you actually look at the settlement:

• The attorneys are asking for $21 million of the $60 million, or 35%;
• 35% is actually an underestimate, because $34 million of the $60 million consist of $8.22 coupons, issued in sets of three to be used once a year to pay for mutual fund fees--assuming that the class members remember to use an $8.22 coupon in 2012;
• the attorneys' fees get paid immediately, while the class does not get paid until ninety days after all appeals are resolved;
• and even if the court reduces the attorneys' fees, the reduction goes to a charity run by A.G. Edwards's successor, Wells Fargo, rather than to the class.

In reality, the class is getting more like $8 million, and the attorneys will be getting more than twice that. This settlement is similar to a settlement against Edward D. Jones of a couple of years ago negotiated by a similar group of attorneys; I asked a co-lead counsel who was involved in both cases for evidence of the redemption rate of the Edward D. Jones coupons. Needless to say, he refused to provide a response.

Today, we filed an objection on behalf of a class member who was justifiably appalled by the settlement. And I see many others are unhappy as well. The AG Edwards Settlement Fairness Hearing will be held on May 14, 2010 at 9:30 a.m., central time at the St. Louis City Circuit Court, Civil Courts Building, 10 North Tucker Boulevard, St. Louis, MO 63101-2044.

Some 60,000 cell-phone users who had signed up to receive "promotional messages" from Nextones.com in order to get a free ringtone got just such a text message on January 18, 2006 advertising a cell-phone-related Stephen King book. This resulted in a class action that was thrown out on the grounds that plaintiffs had agreed to "terms and conditions" permitting such cell-phone advertising; moreover, the federal law prohibiting the use of an automatic telephone dialing system applied only to systems that dialed numbers randomly or sequentially, and the defendants were operating off of a list of opt-in telephone numbers.




The Ninth Circuit reversed. The issue, it said, was not whether phone numbers were sequentially dialed, but whether the equipment used could hypothetically sequentially dial telephone numbers. It also held that there was a disputed issue of fact whether King's publisher, Simon & Schuster, counted as an "affiliate."




Faced with the prospect of going to trial and the risk of $500 to $1500 damages assessed for each call (i.e., $30 to $90 million in damages) defendants have settled. There is a settlement fund of $10 million established, plaintiffs can submit claims that will pay $175 (or a pro rata amount if the fund is exhausted) and plaintiffs' attorneys will ask for $2.725 million from that fund.




This is superficially all well and good, but if the claim response is the all-too-typical 1%, the attorneys may well collect 27 times as much as the class will get. Indeed, assuming that $1 million for notice and administration disappears from the fund, the full $10 million won't be paid out unless over half the class signs up. There is also a mysterious $250,000 "cy pres" award whose destination is not specified in the notice or in the settlement.




If you're a class member who received the text message in 2006, congratulations, you can get free money: fill out a claim form before September 20 (and kudos to the parties for allowing claimants to do it online); if you're a class member who has concerns about the settlement, contact me.

Our objection to the AOL Footer case (currently on appeal) was covered in the March 2 Wall Street Journal:

Late last year, in a class action claiming that tech giant AOL LLC improperly inserted footers in its users' emails, Los Angeles federal judge Christina Snyder awarded $25,000 in settlement funds to a Los Angeles legal-aid organization that has the judge's husband on its board. The mediator in the case recommended the organization, along with other charitable groups that received settlement funds, said Mark Litvack, counsel to AOL.
The Virginia-based [sic] Center for Class Action Fairness objected, claiming the settlement raised a conflict of interest. Ted Frank, president of the group, said that to avoid potential conflicts, it would be better to require unclaimed settlement funds to be deposited into state coffers. "The problem is that parties can now give money to a judge's preferred charity in the hopes that it will prompt the judge to rubber stamp a settlement," he said.
Judge Snyder declined to comment. "It did not seem logical to anyone," Mr. Litvack said, "to split a $110,000 settlement among 60 million class members."

Quotes from the court's order. On the appropriateness of disparate class treatment (pp. 25-29):

Courts generally are wary of settlement agreements
where some class members are treated differently than
others. See, e.g., In re General Motors Corp. Pick-Up
Truck Fuel Tank Prods. Liability Litig. (“In re GMC Pick-
Up Litig.”), 55 F.3d 768, 808 (3rd Cir. 1995) (“One sign
that a settlement may not be fair is that some segments
of the class are treated differently from others.”).
Compare Hanlon, 150 F.3d at 1021 (rejecting objection to
settlement where settlement “does not propose different
terms for different class members”). ...

As in Acosta [v. Trans Union, LLC, 243 F.R.D. 377 (C.D.
Cal. 2007)], the settlement here draws an arbitrary
distinction among class members with identical legal
claims and injuries, and allows some to receive a cash
award, and others only a DVD and limited rebate. This is
patently unfair, and counsels against approval of the
proposed settlement.

On coupons (pp. 30-32):

The primary relief offered by this settlement is the
$500 or $1000 rebate given to class members who purchase
another Honda or Acura over the next nineteen months.
Thus, the settlement is largely a “coupon settlement.”
See Fleury v. Richemont North America, Inc., No.
C-05-4525 EMC, 2008 WL 3287154, at *2 (N.D. Cal. Aug. 6,
2008) (a coupon settlement is one where the relief
constitutes “a discount on another product or service
offered by the defendant in the lawsuit”). ...

The Court acknowledges the wide range of judicial and
scholarly criticism of coupon settlements cited by the
Objectors and amici, and concurs that such settlements
are generally disfavored. This is due to three common
problems with coupon settlements: “they often do not
provide meaningful compensation to class members; they
often fail to disgorge ill-gotten gains from the
defendant; and they often require class members to do
future business with the defendant in order to receive
compensation.” Figueroa v. Sharper Image Corp., 517 F.
Supp. 2d 1292, 1302 (S.D. Fla. 2007), citing Christopher
R. Leslie, “The Need to Study Coupon Settlements in Class
Action Litigation,” 18 Geo. J. Legal Ethics 1395, 1396-
97. See also Synfuel Techs., 463 F.3d at 654; In re
Mexico Money Transfer Litig., 267 F.3d 743, 748 (7th Cir.
2001); In re GMC Pick-Up Litig., 55 F.3d at 807-10 (3d
Cir. 1995); Kearns v. Ford Motor Co., No. CV 05-5644 GAF,
2005 WL 3967998, at *1 n. 1. ...

On valuation of coupon settlements:

Courts have generally rejected the idea
that the face value of coupons or rebates should be used
for settlement valuation purposes; “[c]ompensation in
kind is worth less than cash of the same nominal value.”
Acosta, 243 F.R.D. at 390, quoting In re Mexico Money
Transfer Litig., 267 F.3d at 748. See also In re GMC
Pick-Up Litig., 55 F.3d at 807. Where a coupon or rebate
is not freely transferable on the open market, as is the
case here, it has even less value. See In re Compact
Disc Minimum Advertised Price Antitrust Litig., 216
F.R.D. 197, 221 n. 58 (D. Me. 2003); In re Lloyd’s Am.
Trust Fund Litig., No. 96 Civ. 1262 RWS, 2002 WL
31663577, at *16 (S.D.N.Y. Nov. 26, 2002); Clement v. Am.
Honda Finance Corp., 176 F.R.D. 15, 27 (D. Conn. 1997).
Compare In re Mexico Money Transfer Litig., 267 F.3d at
748 (analyzing value of transferable coupons).

Plaintiffs’ argument that face value is the proper
measure ignores the basic economics of coupons and
rebates. “Coupons promote sales without lowering the
price to everyone (that is, holding a ‘sale’).” Menasha
Corp. v. News America Marketing In-Store, Inc., 354 F.3d
661, 662 (7th Cir. 2004). In the automobile context,
“[r]ebates are given to encourage purchases by reducing
the total amount of money the buyer needs to acquire the
new car or by providing the debtor a premium that can be
used for some purpose other than acquiring the new car.”
In re Gray, 382 B.R. 438, 442 (Bankr. E.D. Tenn. 2008).
Since rebates and coupons aim to facilitate a sale to a
purchaser who would not otherwise purchase a product at a
higher price, the Court cannot, as Plaintiffs do, assume
that every sale to a class members “would have happened
anyway.” (Pls.’ Resp. to Objs. at 15.) Class members
may purchase new Honda or Acura vehicles only “because
they fe[el] beholden to use the certificates,” not
because they would have otherwise. In re GMC Pick-Up
Litig., 55 F.3d at 808.

The Court also notes that the coupons are not only
worth less than face value to class members, but they
cost AHM less as well. If many class members do in fact
take advantage of the rebates offered by Options A and B,
the Settlement can result in a “tremendous sales bonanza”
for AHM. In re GMC Pick-Up Litig., 55 F.3d at 808,
quoting Bloyed v. General Motors Corp., 881 S.W.2d 422,
431 (Tex. Ct. App. 1994). For each class member who
purchases another Honda or Acura who would not have done
so without the settlement rebate, AHM will experience a
net benefit.

On the use of lodestar to calculate fees:

While the lodestar method of awarding fees is permissible under
CAFA, the Court has the discretion to use either a
percentage or lodestar method in awarding fees, and is
particularly wary of using the lodestar method here. See
Hanlon, 150 F.3d at 1029; Fleury, 2008 WL 3287154, at *2-
*3. The lodestar amount is particularly inappropriate
where, as here, the benefit achieved for the class is
small and the lodestar award large. See, e.g., Create-ACard,
Inc. v. Intuit, Inc., No. C 07-06452 WHA, 2009 WL
3073920 (N.D. Cal. Sept. 22, 2009). ...

Under the terms
of the settlement, there is no certainty that class
members will receive any cash payments or rebates at all,
but class counsel will receive a three million dollar
payment regardless of whether one or 10,000
class members file valid claims. Since there is no guarantee that AHMwill pay any money out of the settlement to either class
members or a cy pres beneficiary, to award three million
dollars to class counsel who may have achieved no
financial recovery for the class would be unconscionable.

Does a small number of objectors demonstrate approval?

“However, a combination
of observations about the practical realities of class
actions has led a number of courts to be considerably
more cautious about inferring support from a small number
of objectors to a sophisticated settlement.” In re GMC
Pick-Up Litig., 55 F.3d at 812, citing In re Corrugated
Container Antitrust Litig., 643 F.2d 195, 217-18 (5th
Cir. 1981); In re General Motors Corp. Engine Interchange
Litig., 594 F.2d 1106, 1137 (7th Cir. 1979). “[A] low
number of objectors is almost guaranteed by an opt-out
regime, especially one in which the putative class
members receive notice of the action and notice of the
settlement offer simultaneously.” Ellis v. Edward D.
Jones & Co., L.P., 527 F. Supp. 2d 439, 446 (W.D. Pa.
2007). ...

Plaintiffs attack many of the Objectors’
counsel because they have represented objectors in other
actions in the past. (Id. at 17.) This has no greater
bearing on the merits of the objections raised than a
plaintiff’s counsel’s experience in filing class action
suits speaks to the merits of claims he brings.