class actions settlements

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."

A stipulation of settlement has been filed in the Dannon Activia yogurt consumer-fraud case. A $35 million fund will be established to pay claim forms with cash, and plaintiffs' lawyers (including Coughlin Stoia, the lead firm) have "clear sailing" to request $10 million plus expenses from that fund—that's over 28.5% for those of you keeping track at home. A typical contingent fee of 25% would mean a fee of $8.75 million.

Any unclaimed funds will go to charity—which means that, as the settlement is structured, the plaintiffs' firms have no incentive to ensure that the allegedly injured class members will collect the money: their fee is tied to the common fund, rather than to what consumers receive.

That's before we get to the injunctive relief. For that, I'll defer to Russell Jackson, who reports on his blog:

It's understandable that it could make economic sense for a defendant to settle a series of class actions after years of litigation. But this settlement's so-called "equitable" relief involving the defendant's advertising and labeling makes it crystal clear that these lawsuits were not based on any real fraud at all. The settlement allows Dannon to say practically the same thing it always has said. The lawsuits obviously were lawyer-invented, and although they may have survived some motions to dismiss, the settlement's equitable relief demonstrates that the defendant's statements were backed up by real science.

The court has yet to provide preliminary approval to the settlement. If you are a member of the class of Activia purchasers, and you wish to object to the settlement, please let me know.

Monday, I attended the fairness hearing for the Bluetooth MDL settlement. UCLA math professor and client Henry Towsner was in the audience.

Dozens of people filed objections with the court, but, aside from the CCAF objection, only 12 of those successfully navigated the procedural maze to file a "valid" objection. Out of those, we were the only ones to cite precedent in favor of our objection. And we were the only ones to make an appearance in court, which suggests that this would've been a quiet rubber-stamp without our appearance and filing.

After hearing from all sides, Judge Fischer took the position that settlements are favored outcomes in a world of crowded dockets, and, even if the case is meritless and unlikely to succeed, it is preferable to allow defendants to get out of the case by paying a small cy pres sum, since the plaintiffs would get nothing if the case was thrown out. The judge ruled that the settlement was fair and adequate, and approved the settlement. She postponed a ruling on the attorneys' fees (despite my argument that the fairness of the settlement was inextricably tied to the fee award). The plaintiffs have until August 5 to submit additional material in support of their fee request; the defendants will file a proposed order by July 20.

This is a settlement that is arguably fair if the fees are knocked down sufficiently so that the attorneys are not receiving more than their putative clients; though the plaintiffs negotiated a "clear sailing" clause where the defendants will not object to fees, the fee request was severable from the rest of the settlement. We will know more in August or September.