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.

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.

 

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.