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Evan Tager is a member of the Supreme Court & Appellate practice in Mayer Brown's Washington, DC office. Identified by Chambers USA as one of America's leading appellate lawyers for the past eight years, and profiled by Legal Times as a leading appellate lawyer, Evan has been integrally involved in a range of issues of paramount importance to the business community, including punitive damages, class certification standards, admissibility of expert testimony, and enforceability of arbitration agreements.
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As we’ve noted in this space before, one of the most persistent efforts to undermine the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion—which held that the Federal Arbitration Act (FAA) generally requires enforcing arbitration agreements that waive class or collective proceedings—has been spearheaded by the National Labor Relations Board. In 2012, the Board concluded in the D.R. Horton case (pdf) that Section 7 of the National Labor Relations Act (NLRA), which protects the ability of employees to engage in “concerted activities” (for example, union organizing), supersedes the Supreme Court’s interpretation of the FAA in Concepcion and its progeny and requires that employees be allowed to bring class actions (either in court or in arbitration).

Until recently, the D.R. Horton rule had been rejected by every appellate court to consider it—the Second Circuit, Fifth Circuit, and Eighth Circuit as well as the California and Nevada Supreme Courts—not to mention numerous federal district courts. But last year, the Seventh Circuit and Ninth Circuit parted ways with this consensus, agreeing with the Board and concluding that (at least in some circumstances) agreements between employers and employees to arbitrate their disputes on an individual basis are unenforceable.

This circuit split all but guaranteed that the Supreme Court would need to step in, and sure enough, last Friday, the Court granted certiorari in three cases involving the validity of the D.R. Horton rule. (We drafted amicus briefs for the U.S. Chamber of Commerce in each case). One case, NLRB v. Murphy Oil USA, Inc., arises out of a Board decision finding that an employer had engaged in an unfair labor practice by entering into arbitration agreements with its employees, and the other two, Epic Systems Corp. v. Lewis and Ernst & Young LLP v. Morris, are private-party disputes in which employees invoked D.R. Horton to challenge their arbitration agreements.

Continue Reading Supreme Court Will Review NLRB’s Anti-Arbitration D.R. Horton Rule

Here’s a great formula for becoming a rich plaintiffs’-side class-action lawyer:

  1. Copy-and-paste some cookie-cutter complaints alleging technical statutory violations. 
  2. Send demand letters to a group of deep-pocketed targets and negotiate coupon settlements with them before even filing the complaints.
  3. Then seek a six- or seven-figure award of attorneys’ fees for doing no heavy lifting, bearing no risk of non-payment, and providing no meaningful social benefit. 

But a district judge in Massachusetts recently changed the equation by cutting a class counsel’s fee request by more than eighty percent in Brenner v. J.C. Penney Co. (pdf).

Brenner was one of a series of class actions filed in the wake of the Massachusetts Supreme Judicial Court’s ruling in Tyler v. Michaels Stores that it violates Massachusetts’ privacy statute for a vendor to request a customer’s zip code and that the customer can seek redress in court without proving monetary loss. The plaintiff in Brenner was one of a stable of clients of the law firm that secured the decision in Tyler. On Brenner’s behalf, the law firm sent demand letters to Penney’s and other stores within days of the issuance of the decision in Tyler. The firm then proceeded to negotiate a settlement with Penney’s under which one subclass would receive a $25 gift certificate—better known as a coupon in class-action parlance—and a second subclass would receive a $10 gift certificate. The firm filed the complaint and the notice of settlement at the same time and then immediately filed a motion for class certification. The only disputed issue was the amount of attorneys’ fees.

The law firm requested a fee award of $450,000 without any supporting documentation. Clearly skeptical, the district court (Stearns, J.) required the firm to submit its fee records. The court then reviewed the records and concluded that the amount of hours purportedly expended, the deployment of partners on “grunt work” that should have been done by associates, and the duplication of effort by multiple partners were unjustified. The court accordingly reduced the lodestar to just under $80,000. It then proceeded to reject the law firm’s argument for a risk multiplier. The court appeared bemused by the law firm’s rather cheeky contention that the results it obtained were “extraordinary,” “exceptional,” and “unparalleled,” observing that “the case required no extensive litigation effort, given J.C. Penney’s willingness to settle the case almost at its inception” and that, given the decision in Tyler, the result “was virtually preordained.” The court also pointed out that “this is not a case where the firm chose to take on what might have appeared a quixotic quest on behalf of a plaintiff unable to afford counsel. To the contrary, it was [the law firm] that sought out Ms. Brenner as a plaintiff in this and several other nearly identical cases.”

In prior posts, we have identified a number of arguments that defendants can raise in seeking dismissal of lawyer-driven, no-injury class actions like Brenner—including Article III standing if the case is in federal court. Brenner suggests that defendants beleaguered by no-injury class actions may have another option—reduce the incentive for bringing these suits by agreeing to an early settlement and then resisting any fee award that is disproportionate to the negligible benefits obtained in the settlement.

As readers of the blog by now know, I’m always on the lookout for examples of class-action settlements that pay off the lawyers while providing little or no benefit to the members of the putative class. The most recent example is Galloway v. Kansas City Landsmen, LLC (pdf), in which Judge Greg Kays of the U.S. District Court for the Western District of Missouri rejected a coupon-only settlement.

The claim in the case is that the defendants, a number of Budget rental car outlets, violated the Fair and Accurate Credit Transactions Act (FACTA) by failing to truncate credit card numbers and expiration dates on electronically printed receipts. The parties entered into a “claims made” settlement under which class members who submitted claims would receive coupons for use in future car rentals. The coupons would have a 120-day expiration date, be subject to blackout periods, and could not be combined with other coupons, discounts, or promotions. Meanwhile, the defendant agreed to pay $175,000 in attorneys’ fees to class counsel.

Judge Kays concluded that “few class members will likely file claims because the benefit of doing so is not worth the effort.” That was so for two reasons.

Continue Reading Galloway v. Kansas City Landsmen, LLC: Court Rejects Coupon Settlement After Finding That Few Class Members Would Be Likely To File A Claim

Past posts have noted that federal courts have become increasingly skeptical of class-action settlements that contain a cy pres component.  Another recent example is In re Groupon, Inc., Marketing & Sales Practices Litigation (S.D. Cal.).  The plaintiffs in this case alleged that Groupon violated various federal and state consumer-protection statutes by marketing vouchers with allegedly improper restrictions on usage.  In settling the case, Groupon agreed to create a settlement fund of $8.5 million, of which $2.125 million would be paid to class counsel as attorneys’ fees.  The remaining funds would be used to provide settlement vouchers (good for 130 days) to class members who bought a Groupon voucher before December 1, 2011, but never used it.  The settlement provides that if more than $75,000 is left after the settlement vouchers are cashed in, a similar process would take place for customers who purchased Groupon vouchers after December 1, 2011.  Once the settlement fund diminishes to $75,000, the remainder would be divided between two designated advocacy groups for internet consumers.

U.S. District Court Judge Dana Sabraw had no problem with the amount of the settlement fund, the distribution of the fund to class members in the form of vouchers (rather than outright cash refunds), and the $2.125 million fee request.  But he bridled at the cy pres award to the advocacy groups, pointing out that neither group was expressly dedicated to addressing the specific wrongs alleged in the complaint.  As Judge Sabraw read Ninth Circuit precedent, there must be “a ‘driving nexus’ between the claims alleged in the case and the cy pres beneficiary.”  Judge Sabraw also questioned why the $75,000 “should be reserved for the cy pres recipients when there may be class members who could make a claim to those funds.”  Noting that he lacks authority to strike down only the cy pres component of the settlement, Judge Sabraw felt compelled to reject the entire settlement.

The obvious lesson to be learned here is that cy pres should be a tool of last resort, not a standard component of every settlement.  This settlement almost surely would have been upheld if the fund were $8.425 million, instead of $8.5 million.  And for that reason, I don’t think that there could be any logically valid objection if the settlement instead provided that if $75,000 or less is left over after all class members submit their claims, that amount would revert to Groupon.  But in hindsight, it’s hard to understand why the parties felt the need to include a cy pres award for such a modest amount when that feature would subject the entire settlement—which could result in millions of dollars of value to the class—to far more searching scrutiny.

 

On September 26, California Superior Court Judge Kenneth Freeman rejected a proposed class settlement of allegations that Ticketmaster had misled ticket buyers by implying that fully disclosed charges for an Order Processing Fee and delivery by U.P.S. represented its actual costs.

Before commenting on the grounds for rejecting the settlement, though, I can’t resist observing that this is still another illustration of a lawyer-driven class action that attacks a practice that causes no actual harm to consumers. While at first blush it might appear unseemly to charge delivery fees that exceed the amount actually charged by UPS, it is a matter of straightforward economics that consumers care only about the total cost of obtaining the desired tickets. If I value the opportunity to attend a Springsteen concert at $150, it doesn’t matter one whit to me whether Ticketmaster charges me $140 for the ticket and $10 for UPS, or instead charges me $130 for the ticket and $20 for UPS. How Ticketmaster takes its profit does not affect whether I will be willing to pay $150 to see the Boss.

So what we start with here is a shakedown class action that serves no valid public purpose but carries with it enough risk (because of the size of the class) to leave the defendant with little choice other than to settle. It should come as no surprise then that the settlement itself reflects the economic realities of the case. To buy peace, the defendant entered into a so-called “clear sailing” agreement under which it would pay class counsel $15 million. And having accomplished what they set out to do, class counsel turned around and agreed to a “pure” coupon settlement, under which class members would, for a limited time, receive discounts on future purchases from Ticketmaster. Judge Freeman offered a host of reasons for finding the coupon settlement in this case to be objectionable, including that many members of the class were one-time purchasers and hence will get no benefit from the settlement; the discount is time limited; it is non-transferrable; and class members may forget to redeem it. (For such reasons, the Class Action Fairness Act places significant restrictions on coupon settlements, but this case pre-dated CAFA and proceeded in state court.)

Judge Freeman also denounced the cy pres component of the settlement, under which Ticketmaster would provide charitable organizations with free tickets to certain events, because Ticketmaster had sole authority to choose the charities and had discretion as to the quality of seats and the timing of making them available. In other words, class counsel had agreed to give Ticketmaster “credit” for giving away tickets it can’t sell.

Unsurprisingly, given the bad taste in his mouth created by the coupon and cy pres components of the settlement, Judge Freeman rejected the attorneys’ fee component—even though the fees would come directly from Ticketmaster, not the class. Although Judge Freeman didn’t question either the rates requested or the hours class counsel represented that they had expended, the lodestar came to only approximately $6.5 million. Given the inadequacy of the settlement, Judge Freeman pointedly held that “the results in this litigation do not warrant a fee award of twice the lodestar (and certainly not 2.312 times the lodestar).”

As a result of this ruling, some of the $8.5 million in excess of the lodestar that Ticketmaster was willing to pay for peace will become available for cash payments to class members and possibly cy pres beneficiaries. Though that would be an unwarranted windfall to the class members, it certainly is preferable to letting the lawyers make out like bandits.

There should be little wonder why many plaintiffs’ lawyers hate CAFA: By and large, federal district courts take their obligation under Federal Rule of Civil Procedure 23(e) to police class settlements seriously, which generally means lower fee awards for plaintiffs’ lawyers. The most recent example is Ko v. Natura Pet Products, Inc. (N.D. Cal. Sept. 10, 2012).

Ko is a putative nationwide class action alleging that a pet-food maker misrepresented that the ingredients it uses are fit for human consumption. The parties eventually reached a settlement under which the defendant would alter its advertising and pay the class $2,150,000—from which $400,000 would be deducted for the cost of notice, $20,000 would go to the plaintiff as an incentive payment, and 35% of the remainder would be awarded as attorneys’ fees.

The district court (Saundra Armstrong, J.) upheld the settlement, but slashed the award of attorneys’ fees and the incentive payment. The court reasoned that, although class counsel had achieved “acceptable” results—a payment of roughly $35 per class member, which is equivalent to the value of one bag of pet food—the outcome was not “superior.” The court also refused to take at face value class counsel’s assertion that settlement of the case “required the work of highly skilled and specialized attorneys,” that their “work on the case was exemplary,” and that they “litigated this action with great efficiency.” Instead, it rejoined: “The quality of work with respect to the motion for final approval of class action settlement and the motion for attorneys’ fees, costs and an incentive award to Plaintiff is not consistent with Class Counsel’s claim that highly skilled attorneys efficiently litigated this case in an exemplary manner.” Ouch.

Judge Armstrong also rejected class counsel’s exhortation to calculate their lodestar using billing rates of large law firms, expressing the view that “[l]arge law firms, such as the ones identified by Class Counsel in support of the hourly rates charged, typically hire individuals that graduate at the top of their class from top law schools. They also generally have Fortune 500 companies as their clients and provide defense-side litigation services. There is no showing that the work performed by the large law firms identified by Class Counsel or the credentials and reputation of their attorneys are in any way comparable to Class Counsel and the attorneys that worked on this case or to small plaintiff-side law firms located in this district and their attorneys.” Ouch again.

The district court accordingly cut the fee request from 35% to 25%, which it indicated is consistent with the benchmark typically used in cases within the Ninth Circuit. The court likewise rejected class counsel’s request to award the named plaintiff an incentive payment of $20,000, deeming that figure to be unjustifiable when compared to the roughly $35 per-class-member recovery. The court instead allowed an award of $5,000, which is consistent with other incentive awards in the Ninth Circuit.

Although most of the court’s opinion was devoted to the fee award, there is one other interesting tidbit. Two class members objected to the settlement on the ground that the lawsuit itself was “frivolous,” “unbelievably nitpicking,” and “severe[ly] unfair” to the defendant. The court disregarded these objections, explaining: “[A]n objection based on a concern for the Defendants and an apparent non-substantive assessment of the frivolity of the action are not germane to the issue of whether the settlement is fair. [The objectors’] apparent concern for the Defendants is inapposite, since the purpose of Rule 23(e)’s final approval process is the protection of absent class members, and not the Defendants.” Nevertheless, I can’t help but suspect that the aspersions cast on the merits of the case by these objectors reinforced the court’s determination not to reward class counsel with an atypically large fee award.

Since the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, the Eleventh Circuit has consistently enforced agreements to arbitrate with class waivers. Earlier this week, it did so again in a case involving Sprint’s arbitration agreement in its service contracts. See Pendergast v. Sprint Nextel Corp. (pdf), No. 09-10612 (11th Cir. Aug. 20, 2012).

Businesses should pay close attention to Pendergast for two reasons. First, the decision closes a door that—at least according to some plaintiffs—had been left wide open in the Eleventh Circuit. Specifically, the Eleventh Circuit issued the first post-Concepcion federal appellate decision in Cruz v. Cingular Wireless LLC (pdf), 648 F.3d 1205 (11th Cir. 2011) (pdf), which involved the same AT&T Mobility provision upheld in Concepcion. Plaintiffs thus argued that Cruz did not apply to arbitration clauses that lacked the pro-consumer incentives of AT&T’s arbitration provision. See Concepcion, 131 S. Ct. at 1753 & n.3. Because the Sprint provision at issue in Pendergast does not contain similar features, Pendergast makes clear that Concepcion and Cruz extend to a broad array of arbitration agreements with class waivers.

Second, Pendergast rejects the attack on arbitration agreements that is currently in vogue among the plaintiffs’ bar: that without the class action device, a plaintiff will not be able to “effectively vindicate” his or her statutory rights. At the eleventh hour—or, to be more precise, just a few weeks before the Eleventh Circuit issued its opinion— the plaintiff filed a motion (pdf) attempting to invoke In re American Express Merchants Litigation (pdf), 667 F.3d 204 (2d Cir. 2012) (“Amex III”). In Amex III, the Second Circuit refused to enforce the arbitration provision in the agreements between the plaintiff and American Express after concluding that the plaintiffs could not vindicate their federal antitrust claims on an individual basis in arbitration. (Please see our more detailed reports on the Amex III decision (pdf) and the Second Circuit’s denial of rehearing en banc (pdf).) By enforcing Sprint’s arbitration clause, the Eleventh Circuit’s decision tacitly rejects the plaintiff’s attempt to invoke this “vindication of statutory rights theory” in the context of Florida’s consumer-protection statute.

Continue Reading Pendergast v. Sprint: Eleventh Circuit Holds That Federal Arbitration Act Preempts State-Law Attacks On Class-Action Waiver In Sprint’s Arbitration Agreement

Lest there was any uncertainty on the topic, in Gelder v. Coxcom Inc. (pdf), the Tenth Circuit has now made clear that when a party moves for reconsideration of an order granting or denying class certification, the time for filing a petition for permission to appeal under Rule 23(f) runs from the date of the order resolving the motion for reconsideration.  The court rejected the contention that the motion for reconsideration merely tolls the time for filing the petition for review such that the time it takes to file the motion for reconsideration is deducted from the 14 days that Rule 23 (f) affords the losing party to file the petition for review.  It instead held, consistent with the rule in appeals from final judgments, that the losing party has the full amount of time to petition from the date of action on the motion for reconsideration.

Federal Rule of Civil Procedure 23(f) gives federal courts of appeals authority to permit interlocutory appeals from orders granting or denying motions to certify a class. The rule leaves it murky, however, whether an order partially decertifying a class is appealable under Rule 23(f). In a brief opinion by Judge Posner, the Seventh Circuit has now held that it is.

In Matz v. Household International Tax Reduction Investment Plan (pdf), the court ruled that “an order materially altering a previous order granting or denying class certification is within the scope of Rule 23(f) even if it doesn’t alter the previous order to the extent of changing a grant into a denial or a denial into a grant.” The court reasoned that “[t]his is best seen by imagining that rather than altering a class that the court had already certified the district judge had at the outset certified a narrower class than proposed by the plaintiff. That order would have been appealable by either party . . . . We don’t see why it should make a difference that the order modifying the class requested by the plaintiff came later. The difference is between one order and two orders that accomplish the same thing.”

We recently reported on a class settlement in which no members of the class submitted claims.  The plaintiffs in that case contended that the defendant violated the Electronic Funds Transfer Act (EFTA) by failing to post a notice on its ATMs that consumers would be charged a fee for using the machines.

More recently, in another case involving the same kind of alleged violation, Ballard v. Branch Banking & Trust Co. (pdf), Judge Ellen Huvelle of the U.S. District Court for the District of Columbia refused to certify a class, concluding that, under the circumstances, a class action failed Rule 23(b)(3)’s superiority requirement.

It’s pretty clear that Judge Huvelle saw Ballard as a lawyer-driven class action.  She pointed out in the statement of facts that the named plaintiff was not a true victim.  Instead, he was sent to the ATM in question by his lawyer, who had informed him that the ATM lacked the requisite notice on the face of the machine, and he made a withdrawal after receiving actual notice of the fee on the display screen, in order to “collect evidence.”  Perhaps influenced by the fact that the plaintiff suffered no true injury, Judge Huvelle held that a class action is not a superior means of resolving the dispute, explaining: “[I]t is undisputed that each of the prospective class members proceeded with the transaction despite having received the required notice on the screen and that the potential class recovery will be de minimis, especially in comparison to the petition for fees and costs that will ultimately be filed after lengthy and costly litigation.”  Indeed, she reasoned, “the likelihood of de minimis damages [if the case is pursued as a class action] may make it preferable for consumers to litigate their claims as individual actions, for which the minimum recovery is $100.”

Congress has taken note of the growing cottage industry of EFTA lawsuits against banks challenging the lack of a physical notice of fees on ATMs when the ATMs provide on-screen notices.   On July 9, 2012, the House passed H.R. 4367 (pdf), which would require banks to make fee disclosures required by EFTA on the ATM screen alone.  The bill is now pending in the Senate, where it has attracted a growing number of co-sponsors.  The House committee report (pdf) provides useful background about the abuses of EFTA–some truly egregious–that are motivating the legislation.