Another Ninth Circuit panel has roiled the class certification waters, this time rejecting a class action settlement because the district court did not conduct a meaningful analysis of predominance.
We’ve often argued that when the principal rationale for approving a low-value class settlement is that the claims are weak, that is a signal that the case should not have been filed as a class action in the first place. The Second Circuit recently reached that exact conclusion when considering a proposed class settlement in a Fair Debt Collection Practices Act (FDCPA) case, holding that the putative class couldn’t be certified and that the FDCPA claims should be dismissed.
Rule 23 may be in for some major changes. The Advisory Committee has commissioned a Rule 23 subcommittee to investigate possible revisions to the class action rules. That subcommittee issued a report (pdf) discussing its progress, and recently has been conducting a “listening tour” of sorts regarding potential rule changes.
Our initial view is that the business community should have serious concerns about the approach that at least some members of the subcommittee appear to be taking, as several proposals are aimed at rolling back judicial decisions—including Supreme Court decisions—that are critical to ensuring that class actions satisfy the requirements of due process.
Here are ten things you need to know from the subcommittee’s report.
The first bill signed by Oregon Governor Kate Brown—H.B. 2700 (pdf)—changes the rules for handling payment of damages awards in class actions in Oregon state courts. Effective immediately, including for pending actions, the new law attempts to redirect unclaimed damages under class-action settlements or judgments to the state bar’s legal aid program and to charities picked by the judge presiding over each case. In other words, Oregon has effectively mandated cy pres in every class action. (We’ve repeatedly covered—and criticized—the use of cy pres awards in class actions.)
Among other things, the new law amends Oregon Rule of Civil Procedure 32, which governs class actions in state court, to add a new subsection addressing the payment of damages in accordance with “the settlement or judgment in a class action.” The court is authorized to approve a “process” for making payments that “may include the use of claim forms.” But “any amount awarded as damages” that the court finds either hasn’t been timely claimed by class members or simply “is not practicable” to pay to class members must be distributed in the following fashion:
- “At least 50 percent of the amount not paid to class members” must be given “to the Oregon State Bar for the funding of legal services provided through the Legal Services Program.”
- “The remainder of the amount not paid to class members” must be given to “any entity” chosen by the court “for purposes” that are “directly related to the class action or directly beneficial to the interests of class members.”
Before enactment of this law, damages in class actions that could not be paid to class members either reverted to the defendant or—in the context of some class-action settlements—were given to a charity picked by the parties and approved by the court.
Proponents of cy pres awards often contend that class members who can’t be paid their damages are better served by a donation to a charity whose mission is related in some fashion to the goals of the class-action lawsuit. Proponents also contend that forcing defendants to pay the full amount of damages they theoretically would owe if liability were established as to all class members—and then all class members actually claimed payments—would better deter future wrongdoing.
More cynical observers of class actions note that cy pres awards are often used by class counsel to puff up the amount of money purportedly recovered in the case in order to justify a higher fee award. Sometimes the recipient of cy pres largesse is picked simply to curry favor with a judge being asked to approve the settlement—for example, a donation to the law school clinic at the judge’s alma mater. And in every case, the use of cy pres eliminates the incentive for class counsel to ensure that class members—the ostensibly injured parties—get the individualized compensation they have been awarded. And while some federal courts have begun to pay closer attention to whether class members actually recover under class settlements, this law encourages Oregon state court judges to ignore that question.
Even worse, the potential of a cy pres award sometimes is used to justify the certification of particularly dubious class actions. For example, take a putative class whose members can’t be identified. Class certification should be denied because the class isn’t ascertainable. But if cy pres were mandatory, the would-be class counsel can always say “so what—let’s just figure out the defendant’s aggregate liability, pay the handful of class members we can identify, and then give the rest away in cy pres in order to punish the defendant.” And never mind, of course, that this procedure would deprive the defendant of the right to cross-examine absent class members or assert individualized defenses. Indeed, there are strong arguments that the use of cy pres—particularly in a litigated case where the defendant has not agreed to it—is unconstitutional (pdf).
Chief Justice Roberts has said that the U.S. Supreme Court might be interested in hearing a case that presents appropriate questions about the use of cy pres awards in class-action settlements in federal court. Of course, if the case arises in federal court, those questions might be framed in terms of Federal Rule of Civil Procedure 23(e), which tasks federal judges with assessing the fairness of class settlements. If the case arises from the Oregon courts—which may be a possibility thanks to H.B. 2700—more fundamental questions of due process would be raised, with potentially much larger ramifications for class-action litigation.
Here’s a great formula for becoming a rich plaintiffs’-side class-action lawyer:
- Copy-and-paste some cookie-cutter complaints alleging technical statutory violations.
- Send demand letters to a group of deep-pocketed targets and negotiate coupon settlements with them before even filing the complaints.
- 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.
Proponents of class actions often contend that these lawsuits deliver substantial benefits to class members. But while media coverage of class actions often suggests that class members are receiving millions of dollars in relief, most practitioners in the class action arena know that the reality is quite different. That said, to date there has been little empirical information on the practical results of class actions.
My colleagues and I have sought to change that. At the request of the U.S. Chamber’s Institute for Legal Reform, a team of Mayer Brown lawyers (including Andy Pincus and me) have produced a study detailing how consumer and employee class actions filed in 2009 actually fared in practice. The bottom line: of the class actions we studied, only a few cases delivered tangible benefits to more than a small fraction of class members.
For the second time in two weeks, the Supreme Court’s denial of certiorari in a class action case—this time, Martin v. Blessing—has garnered significant attention because of a separate statement by a Justice concerning the denial of review.
In Martin, the petitioner challenged the policy of one federal judge in the Southern District of New York to condition appointment of class counsel on the agreement by that counsel to “make every effort to assign * * * this matter [to] at least one minority lawyer and one woman lawyer with requisite experience.” Specifically, in Martin—an antitrust class action against Sirius XM Radio—Judge Baer specified that class counsel “should ensure that the lawyers staffed on the case fairly reflect the class composition in terms of relevant race and gender metrics.”
After the class action against Sirius settled, some objectors appealed Judge Baer’s approval of the settlement—and specifically, his order regarding the diversity of class counsel. The Second Circuit held that the objectors lacked standing because “they never contend that class counsel’s representation was actually inferior” to the representation that would have been provided absent a diversity mandate.
One of those objectors—represented by Ted Frank of the Center for Class Action Fairness—filed a petition for certiorari seeking review of the Second Circuit’s holding that he lacked standing to challenge Judge Baer’s order regarding class counsel’s staffing of the case.
The Supreme Court denied review. But Justice Alito took the unusual step of issuing a separate statement respecting the denial of certiorari (pdf) in an effort to dissuade Judge Baer (and other judges) from imposing a diversity requirement for appointed class counsel.)
Justice Alito explained that the “uniqueness of” Judge Baer’s “practice weighs against review by this Court, but the meaning of the Court’s denial of the petition should not be misunderstood.” That is because, in Justice Alito’s view, it is not only “doubtful that the practice in question could survive a constitutional challenge,” but also likely that the practice runs afoul of Federal Rule of Civil Procedure 23(g), which regulates the appointment of class counsel.
According to Justice Alito, because “any deviation from the criteria” in Rule 23(g) for selection of class counsel “may give rise to suspicions of favoritism,” it “would be intolerable if each judge adopted a personalized version of the criteria set out” in the rule. Justice Alito acknowledged that Rule 23(g) has a catch-all allowing the district court to consider “any . . . matter pertinent to counsel’s ability to fairly and adequately represent the interests of the class.” But from his perspective, it “seems quite farfetched to argue that class counsel” could not do so “unless the race and gender of counsel mirror the demographics of the class.” And he opined that Judge Baer’s rule would be impossible—or at least very expensive—to administer in cases in which the demographics of the class were unknown.
Finally, Justice Alito closed by warning that, although “we are not a court of error correction,” if “the challenged appointment practice continues and is not addressed by the [Second Circuit], future review may be warranted.” That’s about as clear a shot across the bow as you can get from a single Justice.
Incidentally, the denial of review in Martin v. Blessing brings the objector’s lawyer, Ted Frank of the Center for Class Action Fairness, to 0-2 in seeking Supreme Court review this term. (We’ve discussed the Court’s earlier denial of Ted Frank’s cert. petition seeking review of the cy pres component of the Facebook class action.) But in each loss, a Justice has issued a separate statement intimating that the lower court had erred. That’s pretty remarkable.
It’s always worth a look when a federal judge steps down from
Olympus the bench to act as an ordinary mortal litigant. Class action aficionados in particular should not miss Alison Frankel’s report for Reuters, discussing a remarkable objection by Chief Judge Kozinksi and his wife to approval of a class settlement in a case in which he happens to be a class member.
For weeks, class-action practitioners have been waiting to see whether the Supreme Court would grant review in Marek v. Lane, a case involving a challenge to the cy pres component of the class settlement of the Facebook “Beacon” litigation. The Court did not, but Chief Justice Roberts issued a rare statement respecting the denial that sounded a warning to everyone involved in class-action settlements: At least some Justices are on the lookout for a case in which to address the propriety of cy pres settlements.
Here’s the background. The plaintiffs alleged that Facebook’s Beacon program violated a host of federal and state privacy laws. The parties reached a settlement requiring Facebook to pay up to $9.5 million to resolve the case, with $6.5 million to be paid in the form of cy pres relief to a new charitable foundation that would be established to promote online privacy. The settlement did not provide for the distribution of funds to any of the absent class members; the parties agreed that any payments to individual class members would have been so small as not to be worth writing checks. The district court ultimately approved the settlement and awarded plaintiffs’ counsel $2.36 million in fees and expenses and granted incentive payments to the named plaintiffs. The Ninth Circuit affirmed and denied en banc review over the dissent of six judges.
An objector, Megan Marek, petitioned for a writ of certiorari, represented by (among others) Ted Frank of the Center for Class Action Fairness. Marek sought review of whether a settlement featuring “a cy pres remedy that provides no direct relief to class members” is “fair, reasonable, and adequate”—as required by Rule 23.
As noted above, the Supreme Court denied review. But the Chief Justice’s statement respecting the denial of certiorari is well worth a read; it is a warning shot that—at some point—the Court may take up the question whether (and under what circumstances) cy pres is an appropriate way to settle class actions.
Chief Justice Roberts explained that the Facebook case was not the right vehicle for addressing the issue because “Marek’s challenge is focused on the particular features of the specific cy pres settlement at issue.” Another case, the Chief Justice suggested, might “afford the Court an opportunity to address more fundamental concerns surrounding the use of [cy pres] remedies in class action litigation.” According to the Chief, this non-exclusive list of concerns includes:
- “when, if ever, such relief should be considered”;
- “how to assess its fairness as a general matter”;
- “whether new entities may be established as part of such relief,” and, “if not, how existing entities should be selected” to receive cy pres funds;
- “what the respective roles of the judge and parties are in shaping a cy pres remedy”; and
- “how closely the goals of any enlisted organization must correspond to the interests of the class.”
These questions—which the “Court has not previously addressed”—range from the operational details of how cy pres works to the fundamental question whether cy pres is permissible at all. And thus, while Ted Frank’s petition did not succeed in getting review of the Facebook settlement, there is no question that cy pres is now on the Supreme Court’s radar screen. Because “[c]y pres remedies … are a growing feature of class action settlements,” the Chief Justice opined that “[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies.”
What does this mean for companies facing class actions and the lawyers who defend them? Certainly any defendant who agrees to cy pres relief in a class settlement should be prepared for potential objections—and, if the most tenacious objectors are involved, for the possibility that those objectors will seek appellate and Supreme Court review. If defendants agree to cy pres settlements, those settlements should be negotiated and crafted with Chief Justice Roberts’ questions in mind. Within the world of cy pres settlements, there is a wide spectrum of possibilities, and the less troubling the features of such a settlement might appear to courts, the less likely it is that the Supreme Court will view the case as an appropriate vehicle for review.
There is a second issue lurking in the background of the Chief Justice’s opinion. In response to defendants’ arguments that class certification is improper because a class is unascertainable or a trial would be unmanageable, plaintiffs often argue that it doesn’t matter whether class members can be identified or cross-examined at trial, because so long as aggregate liability can be determined, any funds that can’t be distributed to individual class members can be paid out through a cy pres remedy. Yet that premise is open to debate: Cy pres payments in litigated class actions are exceptionally rare—in part because class actions that go to trial are so infrequent—and a number of courts have either concluded or suggested that defendants cannot be forced to make cy pres payments in the context of a litigated class action. Some of the questions in Chief Justice Roberts’ opinion indicate that he may be receptive to such arguments in an appropriate case.
The federal courts of appeals continue to scrutinize class-action settlements closely when the direct benefits to class members are overshadowed by the attorneys’ fees that flow to plaintiffs’ counsel. The most recent example is Greenberg v. Procter & Gamble Co. (pdf), No. 11-4156 (6th Cir. Aug. 2, 2013). In its decision, the Sixth Circuit provided guidance to practitioners regarding the fee awards and incentive payments to named plaintiffs.