Concept-Changes_Hughway_Sign_44809020Rule 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.

Continue Reading Ten Things Class Action Practitioners Need To Know About Potential Amendments To Federal Rule Of Civil Procedure 23

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.

We previously wrote about the Third Circuit’s decision in Carrera v. Bayer Corp., which reversed a district court’s class-certification order because there was no reliable way to ascertain class membership—indeed, no way to identify who was a member of the class aside from a class member’s own say-so. Last week, the full Third Circuit denied (pdf) the plaintiff’s request to rehear the case en banc over the dissent of four judges. The clear message of Carrera is that when plaintiffs file class actions that have no hope of compensating class members for alleged wrongs because the class members can’t be found, courts should refuse to let these actions proceed.

As we discuss below, the denial of rehearing is significant in itself, given the concerted efforts by Carrera and his amici to draw attention to the case. But what might be most significant about this latest set of opinions is what even the dissenting judges did not say.

Continue Reading Third Circuit Rejects Effort At End Run Around The Ascertainability Requirement

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.

A copy of the study is available here. It has already received press coverage in Forbes and Reuters’ On the Case blog.

Continue Reading New Study Finds That Class Members Rarely Benefit From Class Actions

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.

 

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.

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.

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.

The Second Circuit’s recent decision in Hecht v. United Collection Bureau, Inc., No. 11-1327 (2d Cir. Aug. 17, 2012), should sound alarm bells for any business that attempts to settle a class action.  The takeaway from the decision is to make sure that  notice of the settlement to absent class members is adequate. Under some circumstances, a single notice in the USA Today won’t cut it. And if it doesn’t, the release in the settlement won’t be worth the paper it’s printed on, and other plaintiffs will be free to bring the exact same class action against you.

Continue Reading Second Circuit: Insufficient Notice of Class Action Settlement Means That Class Members Can Bring Copycat Class Actions