Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 1 of 11 Page ID #:1959 Present: The Honorable GARY ALLEN FEESS Renee Fisher None N/A Deputy Clerk Court Reporter / Recorder Tape No. Attorneys Present for Plaintiffs: Attorneys Present for Defendants: None None Proceedings: (In Chambers) ORDER RE: PRELIMINARY APPROVAL OF CLASS ACTION SETTLEMENT I. INTRODUCTION This securities class action is brought on behalf of all persons who purchased or otherwise acquired the common stock of MannKind Corporation ( MannKind ) between May 4, 2010 and February 11, 2011 (the Class Period ), against MannKind and certain of its officers and/or directors (collectively, Defendants ). (Docket No. 56, Corrected Consolidated Class Action Compl. ( CC ) 1.) The complaint alleges that Defendants violated 10(b) and 20(a) of the Securities Exchange Act of 1934 by making various untrue statements of material facts and [by] omitt[ing] to state material facts necessary in order to make the statements made, with the intent to deceive the investing public, artificially inflate and maintain the market price of MannKind securities, and cause Plaintiffs to purchase MannKind common stock and options at artificially inflated prices. (Id. 121) After extended motion practice and several days of mediation before a retired district judge, the parties reached agreement on the terms of a settlement of the class claims. The settlement has now been reduced to writing, and Plaintiff seeks the following: (1) preliminary approval of the terms of the settlement; (2) provisional certification of the class for settlement purposes; (3) approval of the class notice and related settlement administrative documents; and (4) the scheduling of hearings for final approval of the settlement and entry of judgment. (Mem. at 1-2.) Defendants do not oppose Plaintiff s motion. (Mem. at 1.) CV-90 (06/04) Page 1 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 2 of 11 Page ID #:1960 II. PROPOSED SETTLEMENT The Settlement Agreement contemplates that, in exchange for the payment described below, members of the Settlement Class will dismiss the pending lawsuit and release all claims asserted by the Settlement Class, defined as all persons or entities who purchased publicly traded shares of MannKind common stock from May 4, 2010 through February 11, 2011. (Docket No. 99, Declaration of Coby M. Turner ( Turner Decl. ), Ex. 1 [Settlement Agreement] at 9.) The proposed settlement class consists of potentially thousands of members, with over 130 million shares of outstanding common stock as of February 18, 2011. (Mem. at 19.) Under the terms of the Proposed Settlement, Defendants have agreed to pay $16 million (plus interest which will accrue once the settlement fund is put into escrow) and no less than 2,777,778 1 shares of MannKind common stock into a Gross Settlement Fund ( GSF ) to be allocated to members of the Settlement Class. 2 (Mem. at 1; Settlement Agreement at 11-12.) If the closing price for MannKind common stock is below $1.00 per share on the final judgment date, the settlement fund will include an additional 1 million shares of MannKind common stock. (Settlement Agreement at 11.) The amount of the award of attorney s fees and reimbursement of actual costs and expenses remain subject to approval by the Court. (Mem. at 2.) Each Participating Class Member is eligible to receive a proportional share of the Net Settlement Fund ( NSF ), 3 based on the number of valid claim forms that settlement class members send in, the number of shares of MannKind common stock purchased during the settlement class period, and the timing of purchases and sales. (Docket No. 99, Turner Decl., Ex. 1.B. [Class Notice] at 5.) The estimated average recovery will have an economic value of approximately $0.665 per share, before deduction of Court approved fees and expenses and costs 1 Plaintiffs Mem. at 1 states 2,777,779 shares, but as the stipulation of settlement is the underlying document, it will control. 2 The agreement does not clearly specify whether this is reversionary or not, but the Settlement Agreement at 26, E seems to indicate that the sum is non-reversionary. 3 The NSF is the balance of the GSF after: (1) attorneys fees and expenses, (2) taxes and tax expenses, (3) notice and administration expenses, and (4) reimbursement awards to the lead plaintiff. (Settlement Agreement at 10.) CV-90 (06/04) Page 2 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 3 of 11 Page ID #:1961 of notice and claims administration, based on a valuation of the stock component of the settlement at $2.58 per share, the closing price of MannKind common stock on July 23, 2012, and assuming a 50% claims rate. (Mem. at 21.) Members of the Settlement Class may opt out of the settlement by submitting a letter asking for exclusion from the class. Likewise, a notified party may seek to object to the proposed settlement; he or she may write a letter to the Court objecting to any part of the settlement, including the plan of allocation and/or request for attorney s fees. (Id. at 5-6.) The notice proposed by the Parties will provide Class Members with appropriate information about the nature of the action, the class definition, a description of the claims at issue and the defenses to those claims, the ability of the settlement class members to enter an appearance through counsel, and the class member s ability to be excluded and the process for exclusion from the class. (Mem at 14-16; Class Notice.) The mailed notice will also include a statement of plaintiff s recovery, a statement of the potential outcome of the case including issues on which the parties disagree, a statement of attorneys fees or costs sought, including a summary of this information on the cover page, information on how to contact the claims administrator and/or class counsel, and a discussion of the reasons for the proposed settlement. (Mem. at 15-16.) The Parties propose that the Proposed Class Notice and Proof of Claim ( Notice Packet ) be sent by first class mail to all Class Members who can be identified with reasonable effort (Mem. at 13.) In addition, a summary notice ( Summary Notice ) will be published in Investor s Business Daily, and on a different day, the Summary Notice will be published on PR Newswire. (Id.) III. DISCUSSION A. CLASS CERTIFICATION Where, like here, the proposed settlement involves a proposed class that has not yet been certified, a court must preliminarily certify the proposed settlement class before it can preliminarily approve the class settlement. See Amchem Products, Inc. v. Windsor, 521 U.S. 591, 619 (1997); Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 23 (9th Cir. 1999). A class may be certified only if a plaintiff has met all four requirements of Federal Rule of Civil CV-90 (06/04) Page 3 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 4 of 11 Page ID #:1962 Procedure 23(a), as well as at least one of the three requirements of Rule 23(b). See Fed. R. Civ. P. 23(a) (b); Hanlon, 150 F.3d at 1019 22. Ninth Circuit precedent makes clear that the requirements of Rule 23 should be liberally construed in favor of class action cases brought under the federal securities laws. Schneider v. Traweek, 1990 U.S. Dist. LEXIS 15596 at 16 (C.D. Cal. July 31, 1990) (citing Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir. 1975)). Rule 23(a) requires: (1) that the proposed class be so numerous that joinder of all members is impracticable ; (2) that there be questions of law or fact common to the class ; (3) that the representative plaintiff s claims be typical of the class s claims; and (4) that the representative plaintiff will fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a). These four elements are mandatory prerequisites to a class being certified. Id. In addition to meeting the conditions imposed by Rule 23(a), the parties seeking class certification must also show that the action is maintainable under Fed. R. Civ. P. 23(b)(1), (2) or (3). Hanlon, 150 F.3d at 1022. Plaintiff seeks certification under Rule 23(b)(3), and in order to qualify under that subsection, a class must satisfy two conditions in addition to the Rule 23(a) prerequisites: common questions must predominate over any questions affecting only individual members, and class resolution must be superior to other available methods for the fair and efficient adjudication of the controversy. Id.; Fed. R. Civ. P. 23(b)(3). In making this determination, the courts are advised to consider: (1) the class members interests, if any, in individually controlling the prosecution of separate actions; (2) the extent and nature of any lawsuits concerning the controversy already begun by members of the proposed class; (3) the desirability of concentrating the litigation in the particular judicial forum; and (4) the likely difficulties in managing a class action. Fed. R. Civ. P. 23(b)(3). As discussed further below, after considering Plaintiff s arguments, the Court concludes that Plaintiff has met the requirements of Rules 23(a) and 23(b)(3). The Court will therefore preliminarily certify the proposed settlement class. 1. RULE 23(A) First, Rule 23(a)(1) requires that the class be so numerous that joinder of all members would be infeasible. As Plaintiff indicates, the proposed class here will likely number in the thousands owing to the fact that there were over 130 million shares of outstanding common stock as of February 18, 2011. (Mem. at 19.) As defined, the class would include anyone who purchased publicly traded shares of MannKind common stock between May 4, 2010 and CV-90 (06/04) Page 4 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 5 of 11 Page ID #:1963 February 11, 2011, inclusive. (Id. at 4.) Moreover, joinder of all members would be exceedingly difficult considering the large number of shareholders and their geographical distribution across numerous jurisdictions throughout the United States. (Id. at 19.) In light of the evidence set forth, Plaintiff has satisfied the numerosity requirement. Second, Rule 23(a)(2) mandates that there be commonality of questions of law or fact between the class members. The rule s disjunctive language means that either shared legal issues with divergent facts or common facts with disparate legal remedies within the class will satisfy the requirement. See Hanlon, 170 F.3d at 1019. In Wal-Mart Stores v. Dukes, 131 S.Ct. 2541 (2011), the Supreme Court expanded on the notion of commonality, stating the claims must depend upon a common contention.... That common contention, moreover, must be of such a nature that it is capable of classwide resolution which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke. Id. at 2551. As Plaintiffs have demonstrated, there are many factual overlaps revolving around Defendants alleged misrepresentations and a common contention that Defendants violated federal securities laws causing Plaintiffs stock to artificially inflate. (Mem. at 19-20.) Third, Rule 23(a)(3) requires that the representative plaintiff s claims be typical of the claims or defenses of the class. Hanlon, 170 F.3d at 1019 (quoting Fed. R. Civ. P. 23(a)(3)). The purpose of the typicality requirement is to assure that the interest of the named representative aligns with the interests of the class. Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). A court must ensure that the named plaintiff will not have to address defenses unique to itself such that absent class members suffer. Id. Here, Plaintiff is seeking relief based on his purchase of MannKind common stock shares in reliance on Defendants representations of the value of MannKind stock and pending FDA approval on its product Afrezza, causing the stock to artificially inflate until declining after the public disclosure of the FDA s deferral of Afrezza. (CC 12, 17-20.) Given that the Class is composed of members who purchased MannKind common stock during the period of Defendants public statements, Plaintiff s claims are likely to be typical of the class of investors who also purchased MannKind common stock during the relevant time period. (Mem. at 20.) Finally, Rule 23(a)(4) requires a court to ask whether the representative plaintiff will adequately protect the class interests. In the Ninth Circuit, courts look for any conflicts of interest that the representative plaintiff and his or her counsel might have with the other class members, as well as ask if the representative plaintiff and his or her counsel will prosecute the action vigorously on behalf of the class. Staton, 327 F.3d at 957; Hanlon, 150 F.3d at 1020. CV-90 (06/04) Page 5 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 6 of 11 Page ID #:1964 There is no standard to assess vigor, but considerations include competency of counsel and, in the context of a settlement-only class, an assessment of the rationale for not pursuing further litigation. Hanlon, 150 F.3d at 1021. Here, Lead Plaintiff will receive the same pro rata share of the Settlement Fund as the rest of the Settlement Class. (Mem. at 20.) The parties have agreed to the allocation of $16 million plus 2,777,778 shares of common MannKind stock, amounting to fourteen percent of the $157.8 million maximum settlement amount. (Mem. at 8.) Plaintiff has also provided sufficient reason for the decision to settle, namely the cost of litigation balanced against the risks their claims might not ultimately survive Defendants opposition to class certification or summary judgment attacks regarding, inter alia, loss causation, scienter, liability, or damages. (Mem. at 9, 20.) As for Plaintiff s counsel, they have provided voluminous declarations of their skill and qualifications in handling securities and class action litigation. (Docket No. 99, Turner Decl., Exs. 2, 3) In sum, Plaintiff has satisfied the requirements of Rule 23(a). 2. RULE 23(B) As discussed above, under Rule 23(b)(3) a court must first look to whether common questions predominate over any questions affecting only individual members. Fed. R. Civ. P. 23(b)(3). The predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation. Amchem, 521 U.S. at 623. However, this test is readily met in certain cases alleging consumer... fraud. Id. at 625. Plaintiff has made such a fraud claim. (CC 21.) Further, Plaintiff s claims are all based on the alleged misrepresentations surrounding Defendant s product, Afrezza. (Id. at 20.) It is unlikely that any other legal and factual issues will arise, as the class itself is based entirely on the purchase of Defendant s common stock during the time period of the alleged misrepresentations. (Mem. at 21.) If the predominance test is met, the Court then must ask if a class action lawsuit would be a superior method of adjudicating the various claims. In determining the answer to this question, courts are instructed to look at four factors, namely (1) the class members interests, if any, in individually controlling the prosecution of separate actions; (2) the extent and nature of any lawsuits concerning the controversy already begun by members of the proposed class; (3) the desirability of concentrating the litigation in the particular judicial forum; and (4) the likely difficulties in managing a class action. Fed. R. Civ. P. 23(b)(3); Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1190 (9th Cir. 2001). CV-90 (06/04) Page 6 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 7 of 11 Page ID #:1965 Overall, the factors favor certifying the class. Damages for the overwhelming majority of each class member would be too low to pursue individually. Consolidation of actions in this forum indicates that the second factor favors certification. (Docket No. 7, 03/01/11 Order.) The concentration of litigation in this forum is desirable because of the weak remedies available to most individuals, and because actions have already been consolidated in this forum. Finally, because this case is in a settlement posture, the fourth factor does not apply because the case will not be going to trial. Amchem, 521 U.S. at 620. 3. CONCLUSION RE: CLASS CERTIFICATION The proposed class complies with the requirements of Rules 23(a) and 23(b)(3). The class is therefore provisionally certified for settlement purposes. B. NOTICE Rule 23(c)(2)(B) requires a court to ensure that the proposed notice to the potential class be the best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. Fed. R. Civ. P. 23(c)(2)(B)). The notice must state the following in plain, easily understood language : (1) the nature of the class action, (2) the definition of the certified class, (3) the class s claims, (4) that a class member may appear through an attorney, (5) that this Court will exclude from the class any member so requesting, (6) the time and manner for requesting exclusion, and (7) the binding effect on class members of a final judgment. Id. Plaintiff s proposed notice meets the requirements of Rule 23. The Class Notice sets forth, in plain, easily-understood language, (1) what the lawsuit is about (violations of federal securities laws relating to a series of misleading statements about communications with the FDA regarding approval of the product Afrezza), and why it is a class action (Class Notice at 3-4); (2) who is included in the settlement (anyone who purchased publicly traded shares of MannKind common stock between May 4, 2010 and February 11, 2011, inclusive) (id.); (3) the claims asserted by the class (that Defendants intentionally made misleading statements about the FDA approval status of their product to inflate MannKind s stock price) (id. at 1); (4) that a Class Member may appear through an attorney (id. at 6); (5) that a Class Member may request to be excluded from the settlement, and will be excluded (id. at 5); (6) how and when to request exclusion (by mailing a request for exclusion, following the model provided, to the Claims Administrator by the date listed) (id.); and (7) the binding effect on Class Members of a final CV-90 (06/04) Page 7 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 8 of 11 Page ID #:1966 judgment. (Id. at 6 8.) The Class Notice also provides information regarding the settlement terms and the method to be employed for calculating settlement payments. (Id. at 3 5.) 23. In conclusion, Plaintiff s proposed notice is sufficient to meet the requirements of Rule C. PRELIMINARY APPROVAL OF SETTLEMENT 1. THE LEGAL STANDARD Finally, Rule 23(e) provides that the claims of a certified class shall be settled or compromised only with the court s approval. Fed. R. Civ. P. 23(e). This approval is a two-step process in which the Court first determines whether a proposed class action settlement deserves preliminary approval and then, after notice is given to class members, whether final approval is warranted. Nat l Rural Telecomms. Coop. v. DirecTV, Inc., 221 F.R.D. 523, 525 (C.D. Cal. 2004). This Order pertains to a preliminary approval; [c]loser scrutiny is reserved for the final approval hearing. Harris v. Vector Marketing Corp., No. C-08-5198 EMC, 2011 WL 1627973 (N.D. Cal. April 29, 2011). The central concern of judicial supervision at this stage of the settlement process is to ensure that [1] the proposed settlement appears to be the product of serious, informed, noncollusive negotiations, [2] has no obvious deficiencies, [3] does not improperly grant preferential treatment to class representatives or segments of the class, and [4] falls with the range of possible approval. In re Tableware Antitrust Litig., 484 F. Supp. 2d 1078, 1079 (N.D. Cal. 2007). Although Rule 23(e) is silent respecting the standard by which a proposed settlement is to be evaluated, the universally applied standard is whether the settlement is fundamentally fair, adequate and reasonable. Officers for Justice v. Civil Svc. Comm n, 688 F.2d 615, 625 (9th Cir. 1982). In the Ninth Circuit, district courts consider at least eight factors in determining whether a proposed class-action settlement is fair, reasonable, and adequate. Fed. R. Civ. P. 23(e)(2); Staton v. Boeing Co., 327 F.3d 938, 959 (9th Cir. 2003); Officers for Justice, 688 F.2d at 615. These factors include: (1) the strength of Plaintiff s case; (2) the risk, expense, complexity, and likely duration of further litigation ; (3) the risk of maintaining class action status throughout the trial ; (4) the amount offered in settlement ; (5) the extent of discovery completed and the stage of the legal proceedings; (6) the experience and opinions of counsel; (7) CV-90 (06/04) Page 8 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 9 of 11 Page ID #:1967 whether a governmental entity is a participant in the proceedings; and (8) the reaction of the class to the proposed settlement. Staton, 327 F.3d at 959. However, these factors are not exhaustive, and courts have not identified which factors are more salient to the analysis; rather, the relative weight to give each factor varies on a case-by-case basis. Officers for Justice, 688 F.2d at 625. The proposed settlement must also fall within the range of possible approval. Tableware, 484 F. Supp. 2d at 1079. As case law has defined it, the range of possible approval is typically a balancing of the plaintiff s expected recovery... against the value of the settlement offer. See Tableware, 484 F. Supp. 2d at 1079; Vasquez, 670 F. Supp. 2d at 1125. In short, the fundamental inquiry is substantive fairness and accuracy. Vasquez, 670 F. Supp. 2d at 1125 (quoting Tableware, 484 F. Supp. 2d at 1079). This determination entails a weighing of many of the eight factors listed above. See Tableware, 484 F. Supp. 2d at 1080 (noting that the expected recovery would be lowered by the anticipated expense and complexity of litigation); 6A Fed. Proc., L. Ed. 12:378 (2011). Having considered the Settlement Agreement, the Court concludes that it should be preliminarily approved. It is not the product of fraud or overreaching; it lacks any obvious deficiencies; it does not give any improperly preferential treatment to Plaintiff; and it falls within the range of possible approval. The factors and considerations that support this conclusion are discussed in turn. 2. THE PROPOSED SETTLEMENT IS FAIR, REASONABLE, AND ADEQUATE There can be little doubt that the negotiations in this case, which were conducted under the auspices of a retired district court judge and which required many days to conclude, were serious, informed and noncollusive. The parties were represented by experienced counsel who bargained hard, each with a comprehensive understanding of the strengths and weaknesses of each party s respective claims, Tableware, 484 F. Supp. 2d at 1080, under the watchful eye of an experienced mediator. The settlement in this case was plainly the result of good faith negotiations. Furthermore, the Court finds that the settlement of the claim for penalties is reasonable. The parties have agreed to the allocation of $16 million plus 2,777,778 shares of common MannKind stock. (Mem. at 1; Settlement Agreement at 11.) This allocation represents 14 percent of the $157.8 million maximum settlement amount. (Mem. at 8.) Given the general risk, CV-90 (06/04) Page 9 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 10 of 11 Page ID #:1968 delay, and costs of litigating further combined with the possibility Plaintiff s claims might not survive Defendants opposition to class certification or summary judgment attacks (Id. at 9), the settlement amount represents a fair and reasonable resolution and gives certain and immediate recovery to the Class. Plaintiff s attorneys have asked for reasonable fees to be paid out from the common fund. The Settlement Agreement caps the recoverable fees at a maximum of 25 percent of the common fund. (Class Notice at 2.) As Plaintiff properly notes, 25 percent is the benchmark award in the Ninth Circuit. Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370, 1376 (9th Cir. 1993). Counsel has presented evidence that much time was expended on this case. (Mem at 9.) The final award for attorneys fees and reimbursements has yet to be approved, but at this preliminary stage, the Court does not see any special circumstances that would warrant an adjustment of the benchmark percentage. 3. THE SETTLEMENT FALLS WITHIN THE RANGE OF POSSIBLE APPROVAL As a preliminary matter, the Court notes that the seventh factor, whether a governmental entity is part of the proceedings, is not at issue in this case. The eighth factor is also not at issue in this case because the class has not yet received notice of the proposed settlement. First, Plaintiff has stated that the class s case faced not only the general risks of any litigation, but also the risks that... [the] claims might not ultimately survive Defendants opposition to class certification or summary judgment attacks regarding, inter alia, loss causation, scienter, liability, or damages. (Mem. at 9.) Having presided over the complex, hard fought motions filed earlier in this case, the Court is well aware that any claims pursued by Plaintiffs face substantial obstacles at trial. Moreover, experienced counsel are in a position to assess those risks and weigh them along with the financial and psychological costs of litigation and the delays associated with proceeding to trial (and possibly appeal) against the likelihood of success and the possible recovery in the event liability is established. Because this lawsuit could hardly be described as risk free, the first three factors all tip in favor of approving the settlement. Moreover, the fourth through sixth factors also favor approval of the settlement. The settlement provides for a GSF of $16 million plus 2,777,778 shares of common MannKind stock. (Mem. at 1; Settlement Agreement at 11.) The parties estimate that before deduction of courtapproved fees, expenses, and costs of notice, the price per share awarded to each Class Member CV-90 (06/04) Page 10 of 11
Case 2:11-cv-00929-GAF -SS Document 105 Filed 09/12/12 Page 11 of 11 Page ID #:1969 will be $0.665. (Id. at 21.) Additionally, while Plaintiff engaged in extensive research and review during the discovery process, the proceedings never moved beyond the pre-trial stage. (Id. at 8-9) Plaintiff s counsel have provided a declaration attesting to their skill and qualifications in handling class action litigation. (Declaration of Coby M. Turner (Turner Decl. Exs. 2 3.) Plaintiff s counsel are experienced and wish to settle the case; the opinions of counsel who are most closely acquainted with the facts of the underlying litigation are entitled to great weight. DirecTV, 221 F.R.D. at 528. In conclusion, the Ninth Circuit s factors support the preliminary approval of the settlement. IV. CONCLUSION In light of the foregoing, Plaintiff s motion is GRANTED subject to the Court s comments regarding the attorney fee award. The proposed notice and class action settlement are preliminarily APPROVED. In accordance with the proposed schedule of events provided by Plaintiffs, the Court hereby establishes the following SCHEDULE: Mailing of Notice Packet to Class Members by Claims Administrator on or before: September 17, 2012 with a hearing on final approval to be held on December 17, 2012. Plaintiff s are to provide the Court with a proposed order setting forth a complete schedule for all other dates including dates for publication, deadlines for objections to the settlement, deadlines for filing a motion for final approval, etc. The proposed order should be lodged with the Court no later than the close of business on September 17, 2012. IT IS SO ORDERED. CV-90 (06/04) Page 11 of 11