class actions 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A reform to the Federal Rules of Civil Procedure was meant to address this problem: an objection cannot be withdrawn in district court without court approval.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.

In April 2008, the Diet Drugs MDL district court awarded $567 million the class counsel in that case, basing the award in part on representations by class counsel about future class recovery. A year later, a plaintiff's attorney requested the court reopen the question of the fee award because the class counsel had exaggerated those estimates. The district court refused, holding that the one-year delay in bringing the Rule 60(b) motion was not a "reasonable time." There has been an appeal to the Third Circuit, and, today, the Center for Class Action Fairness filed an amicus brief in support of the appeal that itself provides a short overview of the history of the fen-phen MDL. Many thanks to Chris Arfaa for his generous help in filing the brief.

We frequently cite to Professor Lester Brickman's law review article, which is on SSRN.

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.

Excellent article in Forbes on liberal professor Martin Redish's take on class actions.

Redish sees similar constitutional difficulties with so-called cy pres (pronounced "see pray") awards, where judges accept the fact that nobody is going to spend 20 minutes filling out a form to receive a $2 settlement check and award the money to a charity instead. Some argue this doctrine has a noble lineage going back to Norman times (the term is Old French for "as near as possible"). But Redish traces its use in class actions to a student article in the University of Chicago Law Review in 1972, which gave lawyers and judges the idea for how to dispose of money nobody would claim.

Cy pres awards are troubling because they raise the specter of favoritism. Is the judge approving payment to the Red Cross because it's the right thing to do, or because it's the pet charity of the admissions director at a school he wants his kids to attend? They also bring a party into the litigation that doesn't belong there. "The law doesn't say anything about the charity," Redish says. "The charity hasn't been injured."