Class Action Settlements

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.

Continue Reading Sixth Circuit Rejects Class Settlement Over Excessive Payments to Class Counsel and Named Plaintiffs

Social media can be a game-changer for class actions.

I was recently reminded of this when reading news coverage of a proposed class settlement of claims involving chicken that a fast food restaurant allegedly had improperly described as halal. A Michigan lawyer, who wasn’t involved in the case, had taken to Facebook to complain that the settlement would distribute the $700,000 class fund to plaintiff’s counsel and two charities rather than to class members. (We’ve previously blogged about the emerging backlash against settlements with large cy pres components.)

Plaintiff’s counsel, apparently fearing that the Facebook posting would stir up objectors, persuaded the judge to require the Michigan lawyer to remove his post, replace it with the official class notice, and refrain from commenting further on the settlement. I wonder if that plaintiff’s counsel now appreciates the irony of suing over a web posting; the court filings and media coverage have drawn way more attention to the issue than the original Facebook posting ever would have. In any event, Public Citizen intervened and persuaded the judge to lift the gag order as a violation of the First Amendment.

I can understand the plaintiff’s counsel’s motive for seeking a gag order. A random stranger’s venting on Facebook, Twitter, or Youtube can go viral, multiplying the number of objections to a proposed class settlement. Such a development can be disappointing to both plaintiffs’ lawyers and defendants: Plaintiffs’ counsel don’t get paid for their work on a class action until a settlement is approved, and defendants are denied (at least for the time being) the peace and finality they sought when they agreed to settle rather than litigate.

Businesses should be monitoring social media for other class-action threats. Plaintiffs’ counsel are using social media to recruit potential named plaintiffs or class members. Moreover, the business’s own use of social media can be a source of liability risk. Privacy, employment discrimination, and false-advertising class actions with a social-media component abound. In-house counsel also should familiarize themselves with the FTC’s guidance concerning social media advertising. See Guides Concerning the Use of Endorsements and Testimonials in Advertising (pdf), 74 Fed. Reg. 198 (Oct. 15, 2009). And industries subject to special advertising regulations, such as pharmaceuticals, financial firms, and insurance companies, face additional oversight by the FDA and FINRA. A failure to comply with these regulations may trigger not only agency attention but also private class actions.

In sum, marketing departments are not the only ones that should have a social media strategy. So should legal departments. The modern Perry Mason is fluent in Facebook.

A new paper by Fordham law professor Howard Erichson, entitled “The Problem with Settlement Class Actions”—and a blog post about it by Andrew Trask—caught my eye.

The paper uses two recent class settlements, In re AIG and Sullivan v. DB Investments, Inc., as the springboard to discuss settlement class actions. Erichson argues that the problem with class settlements isn’t that the would-be class counsel will collude with defendants to reach a deal that sells out the rights of absent class members. Instead, he says that plaintiffs’ lawyers simply lack sufficient leverage to negotiate a fair deal because (1) the practice of certifying settlement classes that aren’t manageable for trial means that they can’t realistically threaten to take the case to trial; and (2) the defendant has monopsony power and so can “purchase” a class-wide release from any class-action plaintiff’s lawyer. To ameliorate these problems, Erichson proposes to ban settlement classes and permit courts to certify classes only if they could be tried.

Trask contends that Erichson has misdiagnosed the problem, noting that if the plaintiffs had lacked leverage the defendants in AIG and Sullivan wouldn’t have paid so much to settle class actions that likely couldn’t have been certified over the defendants’ opposition.

I think Trask is right, and that Erichson’s attempt to re-frame the problem with settlement class actions is mistaken. To begin with, settlement negotiations take place before the settlement class is certified, when the plaintiff still can threaten to obtain class certification over the defendant’s objections (or at the least, to inflict millions of dollars of asymmetric class discovery costs on the defendant). With these weapons in hand, plaintiffs often have lots of leverage over defendants—which is precisely why many defendants are forced to settle claims of even dubious merit.

Moreover, Erichson’s worry about a class-action defendant’s monopsony power ignores the fact that in most class actions, there is only a single class counsel on the other side of the table. In the cases in which multiple plaintiffs have filed class actions, transfers and the MDL process usually lead to coordination and the appointment of a single interim lead class counsel. And even when there are still multiple plaintiff’s firms at the table, the one that can obtain the highest settlement price from the defendant in theory could use the surplus to pay the other plaintiff’s firms to cooperate.

Of course, it’s not always a good thing when this happens. As many observers have suggested, class counsel are often focused on maximizing attorneys’ fees rather than the class recovery—a problem that may be exacerbated when there are many mouths to feed. In other words, the real problem is that courts do not always try to align the incentives of class counsel and the class by tying fee awards to amounts actually recovered by class members.

At bottom, Erichson seems suspicious of settlement class actions because he thinks that cases as a rule are settling for too little. But when a class action lacks merit—and studies suggest that a high percentage of class actions do—a reduction in the price of class settlements is a cause for celebration, not concern.

It’s rare for a court to appoint its own expert in a class action. But Judge Gleeson of the Eastern District of New York is poised to do precisely that in order to help him decide whether to grant final approval to the $7.25 billion proposed class settlement of antitrust claims by retailers challenging Visa’s and MasterCard’s interchange fees. Some observers say that the proposed class settlement in the case—In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 1:05-md-01720—would be the largest class settlement of private antitrust claims in U.S. history.

In November, Judge Gleeson granted preliminary approval to the proposed settlement, which reportedly calls for $6.05 billion to be distributed to class members and for a $1.2 billion reduction in future interchange fees. Several major retailers and trade associations are expected to object to final approval of the settlement, after having objected to preliminary approval.

Judge Gleeson recently asked the parties if they had any objection to having law professor Alan Sykes—a leading law-and-econ scholar—advise the court “with respect to any economic issues that may arise in connection with the forthcoming motion for final approval of the proposed settlement.”

The complexity and multi-billion-dollar stakes of this case may have motivated Judge Gleeson to seek guidance from an independent expert regarding whether the proposed class settlement should be approved under Federal Rule of Civil Procedure 23(e). We haven’t seen judges evaluating other class action settlements—which generally present less complicated issues than this settlement appears to raise—consider appointing their own experts to assess the settlement’s fairness.

We’ve blogged before about federal courts’ increasing reluctance to approve class settlements that involve a significant cy pres component. The Third Circuit’s recent decision in In re Baby Products Litigation (pdf) is the latest example of this trend.

Class counsel often use the distribution of funds to handpicked charities in order to disguise the percentage of the class recovery that’s actually going right into class counsel’s pocket. That may have been what was going on in In re Baby Products Litigation. In that case, class counsel got almost five times as much money ($14 million in fees and expenses) as the members of the class ($3 million). But because $18.5 million (minus administrative costs of settlement) was to be distributed in cy pres, creating a total “class fund” of $35.5 million, class counsel appeared to be getting only one-third of the settlement in fees. Put another way, the use of cy pres made the benefits of the settlement to class members (as compared to their attorneys) to appear to be over seven times what it actually was. 

The Third Circuit decision represents a victory for Ted Frank of the Center for Class Action Fairness, who argued the appeal on behalf of an objector. His summary of the decision on Point of Law is worth a read.

A recent decision from the Delaware Supreme Court is a reminder that the members of a mandatory class—one in which the class isn’t guaranteed opt-out rights—sometimes may be given the right to opt out in order to pursue their own individual actions.

The decision, In re Celera Corp. Shareholder Litigation (pdf), addressed a class settlement of claims that the directors of Celera Corp. had breached their fiduciary duties in agreeing to a merger with Quest Diagnostics. The settlement promised “therapeutic benefits” to the class of Celera shareholders, such as additional disclosures and changes to the merger agreement that made it easier for Celera to entertain other offers. But the settlement gave class members no damages, it released all shareholder claims related to the merger, and it barred class members from opting out to pursue individual actions. The chancery court certified the class under its Rule 23(b)(1) (because of the potential for inconsistent adjudications) and Rule 23(b)(2) (because the class sought injunctive relief). The chancery court also overruled the objection to the settlement lodged by Celera’s largest shareholder, BVF Partners, which believed that the transaction undervalued Celera and wanted to pursue an individual claim for damages.

On appeal, the Delaware Supreme Court rejected BVF’s challenge to the standing of the named plaintiff. The court ruled that even though the named plaintiff sold its shares before the consummation of the merger, the plaintiff still was an adequate class representative, albeit “barely,” because it owned the shares when the merger was announced and did not “acquiesce” to the merger. The Delaware Supreme Court also saw no merit in BVF’s argument that the class’s potential damages claims should have precluded any class certification except under Delaware’s Rule 23(b)(3), which guarantees opt-out rights to class members. The court explained that Delaware precedent allows shareholders to bring mandatory class actions under Rules 23(b)(1) and (b)(2) in order to challenge director conduct in carrying out corporate transactions.

BVF had better success with its request to opt out of the certified class. The Delaware Supreme Court concluded that the chancery court should have allowed BVF to opt out. Worried that absent class members “could have their claims released without an opportunity to be heard,” the court explained that the chancery court has discretion to permit class members to opt out of (b)(2) classes. The court noted that such discretionary opt-out rights have been allowed when an objector has a distinct claim or when allowing opt outs would facilitate fair and efficient litigation. The court then explained that the “objective of global peace” shared by the parties to the settlement was “outweighed by due process concerns” arising from BVF’s circumstances. In particular, the named plaintiff was “barely” adequate, the “therapeutic relief” afforded by the class settlement was quickly mooted by consummation of the merger, and BVF was a substantial shareholder with a supportable damages claim. The court therefore concluded that barring BVF from opting out was an abuse of discretion.

The Celera decision promises to become an important consideration in negotiating class settlements of challenges to corporate transactions in Delaware and elsewhere. Defendants can no longer count on obtaining global peace from a non-monetary class settlement. And both sides must now be ready to account for the possibility that objecting shareholders may try to obtain opt-out rights.

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.

 

Antitrust class actions differ in a number of respects from the ordinary run of consumer class actions. Perhaps most notably, they frequently involve classes made up, not of individual consumers, but of highly sophisticated businesses with potentially enormous sums of money on the line. These class members sometimes take an active role in the litigation, using innovative tactics to advance their individual interests within the broader context of the class action.

It doesn’t always work. In Precision Associates, Inc. v. Panalpina World Transport (pdf), a class action under Section 1 of the Sherman Act, several large class members intervened and filed an objection to an early proposed settlement agreement with one of the many defendants named in the action. These objectors didn’t challenge the substance of the agreement—under which the defendant’s relatively modest payment to the class was offset by its agreement to cooperate with class counsel in pursuing claims against the other defendants —but instead to the opt-out provision of the agreement. That provision required class members to opt out not only from the settlement but also from the action as a whole “for all purposes,” including any further settlements with or judgments against any of the other defendants. Several class members argued the all-or-nothing opt-out provision was unfair, and they should not be forced to opt out of the entire litigation just because they wish to opt out of an early settlement with a single defendant, at least not without first knowing what benefits future settlements may hold.

Judge Gleeson of the Eastern District of New York rejected that argument, holding that class members “do not have an independent right to pick-and-choose” which elements of a class action to join and which to exclude themselves from. He noted that the intervenors can challenge the one-off settlement on fairness grounds if they think the settlement sum insufficient, but he would not “second-guess” the litigation strategy of class counsel, who are “charged with a fiduciary duty to litigate the action in the best interests of the class.”

Practical considerations cut both ways. One the one hand, a rule contrary to the one adopted by Judge Gleeson both risks complications for district courts charged with managing complex class actions and creates a serious challenge for defendants, who would face uncertainty concerning the categorical finality ordinarily provided by final judgments and settlements class actions. On the other hand, sophisticated corporate class members may have legitimate reasons to opt-out on a defendant-by-defendant basis from overly-expansive class actions involving numerous defendants. Allowing them to do so would promote judicial efficiency by permitting them to pursue individual actions to vindicate their potentially unique interests vis-à-vis particular defendants, while at the same time permitting them to take advantage of the class device with respect to the remaining defendants.