On Circ. Courts' Radar: Class Settlement Requirements

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: On Circ. Courts' Radar: Class Settlement Requirements Law360, New York (September 04, 2013, 1:45 PM ET) -- The U.S. Supreme Court s October 2012 term included several noteworthy class action decisions that received much-deserved attention as the court continues to reorder class action law, e.g., Comcast Corp. v. Behrend,[1] Genesis HealthCare Corp. v. Symczyk[2] and American Express Co. v. Italian Colors Restaurant.[3] But the federal circuit courts of appeals over the same period have been busy as well, issuing opinions that signal some new directions in class actions, particularly regarding the permissible content of class settlements. What follows is a synopsis of some of the more noteworthy cases. Attorneys Fees in Coupon Settlements Although the jurisdictional and removal provisions of the Class Action Fairness Act have been extensively litigated since CAFA s enactment in 2005, its important settlement provisions have received far less attention. In In re HP Inkjet Printer Litigation, 716 F.3d 1173 (9th Cir. 2013), a divided panel of the Ninth Circuit became the first circuit court to construe this part of the act in a published opinion. The court vacated a district court s approval of a class action settlement because the settlement failed to comply with CAFA s coupon settlement provisions regulating attorneys fees, codified at 28 U.S.C. 1712(a)-(c). The term coupon is undefined in CAFA, and its meaning was not at issue in HP. In coupon settlements, CAFA addresses three attorneys' fee scenarios. In Section 1712(a), entitled Contingent fees in coupon settlements, the portion of any attorneys' fee award to class counsel that is attributable to the award of the coupons must be based on the actual redemption value of the coupons. Second, if a portion of the recovery of coupons is not used to determine the attorneys' fee paid to class counsel, then any attorneys' fee award must be based on the amount of time spent by class counsel working on the action, i.e., the lodestar approach, not a contingent fee approach. The statute provides, however, that the lodestar may include a multiplier. 28 U.S.C. 1712(b). Third, for attorneys' fee awards calculated on a mixed basis in coupon settlements, Section 1712(c) provides that the portion of the attorneys' fee that is not based upon a portion of the recovery of coupons shall be calculated in accordance with subsection (b), apparently meaning by using the lodestar method. The Ninth Circuit panel grappled with the meaning of these provisions in HP. The settlement before the court featured a nationwide class of consumers who purchased certain inkjet printers between 2001 and 2010.

2 The settlement featured up to $5 million in e-credits, which the court termed a euphemism for coupons. Objecting class members contended that the settlement was an unfair product of collusion between class counsel and HP and included a fee award that violated CAFA. Class counsel had submitted bills totaling more than $7 million in fees and expenses, but requested only the portion of the lodestar that HP agreed to pay, $2.3 million in fees and roughly $600,000 in costs. The district court determined that the additional injunctive relief provided for in the settlement would confer some benefit on class members but nothing close to the $16 million to $41 million estimated by the plaintiffs. The district court estimated the ultimate value of the overall settlement to be roughly $1.5 million and ordered HP to pay a reduced lodestar amount of $1.5 million, plus costs. On appeal, the Ninth Circuit, in the majority opinion by Judge Milan D. Smith Jr., explained that the purpose of CAFA s coupon settlement provisions is to target settlements in which the class receives nothing but essentially valueless coupons while class counsel receives substantial attorneys' fees in cash. Section 1712 thus provides for increased judicial scrutiny of coupon class settlements generally and establishes specific rules that govern the award of attorneys' fees in coupon class settlements. The court deemed the crucial question to be what it means for an attorneys' fee award to be attributable to the award of coupons. The court looked to dictionary definitions of attributable to and concluded that in the statutory context, it means that the award of coupons is a condition precedent to the award of attorneys' fees. The majority held that under CAFA, when a settlement provides for coupon relief, either in whole or in part, any attorneys' fee that is attributable to the award of coupons must be separately calculated using the redemption value of the coupons. The court vacated the order approving the settlement on the grounds that the district court failed to calculate that redemption value. This calculation was, in fact, impossible according to the court because the settlement provided that no coupons would be issued until after entry of a final judgment (a common provision in such settlements). In dissent, Judge Marsha S. Berzon argued that the lodestar approach should be available to compensate class counsel for time spent on the case as a whole, even if the settlement includes coupons. A consequence of HP s separate valuation requirement will likely be that fee applications will be deferred until coupons are redeemed. But this places the risk of a low redemption rate on class counsel. This may align class counsel s interests more closely with the class but is likely in practice to be a deterrent to class settlements featuring coupons. Another consequence is likely to be further attention paid to the meaning of coupon. For example, a recent proposed class settlement in Dardarian v. OfficeMax North America Inc., No. 4:11-cv YGR (N.D. Cal. July 12, 2013), was denied preliminary approval because the merchandise vouchers to be awarded under the settlement could not be valued as required by HP. The court rejected the proponents argument that the vouchers were not coupons because they could be redeemed without spending additional money. "Incentive awards" under Scrutiny Incentive awards, as settlement payments to class representatives are known, have been steadily escalating in recent years. As originally conceived, the payments corresponded at least in some rough way to the additional time spent by the class representatives in prosecuting claims on behalf of the class.

3 But the increasing amounts have gradually eroded that rationale. Incentive payments in excess of $10,000 are now relatively commonplace as class representatives have often eyed the hefty fee awards to class counsel and have become more demanding, sometimes influenced by personal legal advisers. The Sixth Circuit, however, may have called a halt to this trend in Vassalle v. Midland Funding LLC, 708 F.3d 747 (6th Cir. 2013). Vassalle was a putative class action brought as a counterclaim under the Fair Debt Collection Practices Act. The counterclaim alleged specifically that the defendant s employees routinely signed form affidavits in loan collection actions without personal knowledge of the facts asserted, a practice referred to as robo-signing. The class settlement provided for the four named class representatives to receive not only the relatively modest aggregate sum of $8,000 but also a release from their indebtedness that the class itself did not receive. The class members, in contrast, were required to file claims and ended up receiving roughly $17.38 a piece. While observing that the district court, in approving the settlement, had properly weighed the familiar seven factors that are to be primarily considered in assessing the fairness of a class settlement, the court held that the disparity in the relief afforded under the settlement to the named plaintiffs, on the one hand and the unnamed class members, on the other hand, made the settlement unfair. Id. at 755. The court ultimately reserved the question of whether incentive awards were appropriate in any case but found this particular settlement to be unfair to the unnamed class members. The court deemed that the relief the unnamed class members received was perfunctory at best. The court found the one-year injunction imposed by the settlement to be of little value, noting that it did not even explicitly prohibit the defendant from continuing the practice at issue. The court concluded that the class should not have been certified because the class representatives were inadequate since their debts were forgiven in the proposed settlement, which put them in conflict with unnamed class members. The court also held, for two reasons, that the certification of the class was not superior under Rule 23(b)(3), even though the amount of each potential claim was small. First, the unnamed class members had an interest in individually controlling the defense of the state court judgments that the defendant had obtained against them. Second, the class members could collect damages under state law claims that would exceed the value of the monetary relief provided by the settlement. Finally, the court concluded that the notice to the class did not satisfy the requirements of due process because the notice did not inform class members that by not objecting to the settlement they would lose their rights to use the defendant s false affidavits as a defense in their debt collection actions. Incentive award problems torpedoed another settlement in the Ninth Circuit s recent decision in Radcliffe v. Experian Information Solutions Inc., 715 F.3d 1157 (9th Cir. 2013), a Fair Credit Reporting Act case. Here, the concern was not primarily the disproportionate amount, though that was a factor, but rather a provision that made any award contingent on supporting the settlement. A $45 million settlement was reached that provided for payment of damages in varying amounts not exceeding $750. Incentive awards to class representatives of $5,000 were payable but only if they supported the proposed settlement. Some of them did not.

4 The Ninth Circuit concluded that this provision created an impermissible conflict of interest that was exacerbated by the smaller settlement amount available to unnamed class members. The court concluded that both the class representatives and class counsel were no longer adequate to represent the class. Vassalle and Radcliffe are significant decisions that will probably reset the range of negotiations over incentive awards in class settlements. The cases are a reminder to class counsel of the importance of controlling client expectations throughout the process so that a class representative s outsized personal aspirations do not become an impediment to resolution of the case. Cy Pres Wars The Ninth Circuit also has been struggling with setting the boundaries for permissible use of the cy pres doctrine in class settlements. In Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012), the Ninth Circuit vacated a district court s approval of a class settlement on the ground that its cy pres provisions were flawed. The plaintiffs asserted that Kellogg s marketing claims for one of its cereals were false and based on a scientifically invalid study. The nationwide settlement established a $2.75 million fund for distribution to class members on a claims-made basis. The maximum claim was $15. The remainder of the settlement fund was to be donated to unidentified charities chosen by the parties and approved by the court under the cy pres doctrine. Kellogg also agreed to distribute $5.5 million worth of food items to charities that feed the indigent, but the settlement did not indicate how the $5.5 million value was determined. The class counsel fees were $2 million. Two class members objected to the settlement, arguing that cy pres relief was improper because of the tenuous relationship between the subject of the lawsuit and feeding the indigent. The objectors also argued that the attorneys' fees were excessive. The Ninth Circuit noted that its precedents required a driving nexus between the plaintiff class and the cy pres beneficiaries. [4] The court deemed the cy pres awards in the proposed settlement to be divorced from the concerns embodied in consumer protection laws. Id. at 866. Feeding the indigent is a noble goal but has little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs, the court observed. The court noted that the parties on remand were free to negotiate a new settlement, though it pointedly questioned the value of Kellogg s food donation and urged the district court to examine the valuation of any reworked settlement with great care.[5] Dennis stands in contrast to another recent Ninth Circuit case in which the court rejected a challenge to a cy pres remedy in a class action settlement, Lane v. Facebook Inc., 696 F.3d 811 (9th Cir. 2012). The plaintiffs in Lane challenged a Facebook program that they contended violated their privacy rights by disseminating information about their online activities without their permission. A class settlement was reached, which provided that Facebook would terminate the program and pay $3 million toward settlement administration, attorneys fees and incentive awards. Another $6.5 million was to be paid to create a new organization, the Digital Trust Foundation (DTF), which would sponsor and fund educational programs concerning online privacy. The agreement provided that DTF would have a three-member board of directors that would include Facebook s director of public policy. After a hearing, the district court approved the settlement and awarded attorneys' fees to class counsel exceeding $2.3 million.

5 On appeal, objectors to the settlement pointed to the distribution of cy pres funds to DTF, which included Facebook s representative on its board. The court found that DTF s distribution of settlement funds to entities that promote causes of online privacy and security benefited absent class members sufficiently and furthered the purposes of the privacy statutes forming the basis for the lawsuit. The court rejected the argument that the Facebook employee s board membership categorically precluded the organization from receiving cy pres funds. The court also rebuffed the objectors settlement valuation challenges. In dissent, however, Judge Andrew J. Kleinfeld wrote that the settlement perverts the class action into a device for depriving victims of remedies for wrongs, while enriching both the wrongdoers and the lawyers purporting to represent the class. A petition for certiorari is pending in Lane,[6] and the U.S. Supreme Court s recent interest in class action law may again be piqued. --By Thomas Byrne, Sutherland Asbill & Brennan LLP Thomas Byrne is a partner in the firm's Atlanta office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] 133 S. Ct (2013). [2] 133 S. Ct (2013). [3] 133 S. Ct (2013). [4] Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011). The court also cited its decision in Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9th Cir. 1990). [5] The Third Circuit recently cited Dennis in an opinion vacating an order approving a class settlement that it determined lacked a factual basis for a finding of fairness to the class. The settlement included a large cy pres component of uncertain value. In re Baby Prods. Antitrust Litig., 708 F.3d 163, (3d Cir. 2013). [6] No (July 26, 2013). All Content , Portfolio Media, Inc.