Settling Weak Claims Can Sometimes Make Bad Precedent
We've all been there. Your client is sued on a weak or silly claim. But you can't seem to get the court to dismiss the darn thing on the pleadings, as it should. And so, you consider settling. Discovery, after all, is expensive, as are class certification briefing, experts, and hearing. Because the claim is bullfeathers, there can't be that many class members who will actually bother to collect under a settlement, so it should be relatively cheap.
But although Plaintiffs' counsel know the claim is weak, they insist on their payday. And so the challenge becomes constructing a settlement that can somehow justify the sack of money that plaintiffs' counsel demand to drop this stinker of a claim.
Exhibit # 1: Wrigley's Eclipse settlement, which was preliminarily approved on June 15, 2010. Wrigley was sued by a putative nationwide class of consumers for alleged violation of the Florida Unfair and Deceptive Trade Practices Act and breach of express warranty. Why? Because it advertised that its Eclipse gum was the first to include Magnolia Bark extract, which is "scientifically proven to help kill the germs that cause bad breath." These statements, plaintiffs alleged, were false and deceptive and allowed Wrigley to sell the gum at a premium price.
One key problem with plaintiffs' claim, however, is that credible scientific literature actually exists to support the claim that Magnolia Bark extract kills the type of germs that cause oral malodor. See, e.g., Michael Greenberg, Philip Urnezis, & Minmin Tian, Compressed Mints and Chewing Gum Containing Magnolia Bark Extract Are Effective against Bacteria Responsible for Oral Malodor, J. Agric. Food Chem 2007, 55, 9456-9469; Michael Greenberg, Michael Dodds & Minmin Tian, Naturally Occurring Phenolic Antibacterial Compounds Show Effectiveness against Oral Bacteria by a Quantitative Structure--Activity Relationship Study, J. Agric. Food Chem. 2008, 56 (23) 11151-11156.
The defendant moved on various grounds to dismiss the case on the pleadings, but the motion was denied by the Southern District of Florida. See Smith v. Wm. Wrigley Jr. Co., Case No. 09-60646-CIV-COHN/SELTZER, slip op. (S.D. Fla. June 15, 2010) (preliminarily approving settlement and recounting case history).
In June, the parties announced a settlement. See www.eclipsesettlement.com. Individual claimants can get up to $5 just for submitting a claim form, and up to $10 if they submit a claim form with an affirmation under penalty of perjury that they bought the packs, listed by approximate dates, places, and amounts of purchase.
The class counsel, however, secured for themselves the right to file an unopposed fee application for $2 million, plus "actual out-of-pocket expenses not to exceed $75,000."
One might think that the class counsel fee should be based, at least in part, on the total amount of claims ultimately made by class members. Indeed, if this were a coupon settlement under CAFA, it would be. But under this cash-in-the-pocket settlement, the $2+ million fee award seems a foregone conclusion. So how is it justified?
The settlement obligates the defendant to establish a settlement fund of $6 million that will pay for the attorneys' fees, expenses, and class members' claims. Any remainder -- and you can bet there will be a substantial one -- will be paid to a charity to be named later, invoking the "cy pres doctrine." (In the extraordinarily unlikely event that there are more claims than the fund can pay, the defendant has obligated itself to pay up to an additional $1 million.) Thus, class counsel's fee superficially appears to be roughly one third of the settlement, if not the class members' actual recovery.
Eclipse is a tasty gum with exceptionally long-lasting flavor. But its settlement provisions on class counsel fees have a certain halitosis about them. Let's hope the court takes a closer look at them at the fairness hearing.
Russell,
This is my first time on your interesting blog. I will confess now that I am with the other camp.
First, I am a plaintiff's lawyer. Second, I extensively handle class actions and make wrongdoing companies repay large amounts of money they did not have a right to collect in the first place. Finally, I widely use cy pres, finding it to be a very effective doctrine to accomplish justice, and not large fees with no corresponding disgorgement of ill gotten gains.
Ok. Strike three, I guess I'm out? I hope not.
You write this article about the misconduct of using a class action to generate fees with no corresponding benefit to the class or society. I agree on that wholeheartedly.
But then you apply that criticism to the Wrigley suit. There, you lost my support.
The practice of using false advertising to scam consumers into buying products which dont and cant do what they are boasted to accomplish is nothing new.
What is new, is that the courts and the public are at the end of their rope with it, and wont put up with it anymore.
I dont know whether the claim of Wrigley was false or true. I do know that federal judges of the District Courts in Florida are hardly the bastion of liberalism which you find on the left coast.
Such a judge refused to dismiss the Wrigley lawsuit and its assertion that the public was being scammed by a false statement.
That leads me to believe that 'de'er jus mite be sumptin der, bawwss.'
Anyways, I also know from litigating consumer cases now for over 25 years, Skadden like firms and Wrigley like companies dont throw $6 million on the table, with a guarantee to pay another million if the claims rate warrants it, just for nuisance.
Something which you, and I, and the lamp post dont know, was rolling around in the wings in that matter, resulting in Wrigley paying a healthy sum of money.
So now, how do we divide that pie?
Maybe first we should ask, what is the pie for?
Like any class action, the resolution of the suit by payment of money is intended by Rule 23 to serve TWO equally important purposes. First, it is intended to compensate class members.
Second---and this is the one everyone forgets---it is intended to disgorge some or all of the money which the corporation obtained by alleged improper conduct.
That wrongdoing might be telling a customer they must pay a fee on a bill, when the fee is a lie. A charge for something never done. It also might be charging the customer for something which the law does not allow to be charges. Or, it might be telling a customer the product will do something it cant, or that it has some quality which it doesnt.
Now at this point, there will be a hue and cry by defenders of corporate America (which, we know, would NEVER cheat anyone or do anything improper---cf. the TARP scandal, but who's counting). They will state that a settlement is no admission of liability, and so I should not be talking about disgorgement. After all, how could I mention giving back "ill gotten gains", when no liability finding was ever made.
I can only tell them, that is the way it works, folks. And thank goodness it does, for all of our sakes.
BP has not been adjudged liable for anything......so does that mean we should pretend the money being paid out is just out of the goodness of their hearts?
Dozens of drug makers did not go to trial for any adjudication of liability for their products.....yet payments are being made for the countelss people who have died or been maimed by the medicines. Are those just lagniappe?
Certain banks were not held liable for telling customers that they would save money if they bought overdraft protection insurance---when actually it cost them their bank accounts and their credit rating. Yet those venerable old institutions are ponying up millions to pay back the families they ruined with this practice. Guess that is just coincidence?
Bottom line. Payments are made for many reasons even without a finding of liability. And if the defendant agrees to pay a certain amount, that should be paid. Not kept. Not rolled back into the company coffers. And certainly not pocketed by plaintiff's lawyers.
Enter cy pres.
Rather than being questionable, the Wrigley settlement is the best of all worlds.
First, it comes to a conclusion for an amount which the defendant agreed it should pay out, in full. The deal does not revert any money back to the company. Wrigley did that for a reason, and it certainly wasnt to help plaintiff's counsel make their desired fee----unless that additive to Wrigley's gum also produces delium.
Second, the settlement makes provision to pay, in full, all claims made, including an agreement to pay MORE than the fund, if claims rates warrant it. Again, that is not something a defendant just sticks into a deal to be a nice guy.
Finally, the settlement makes sure that all the money which Wrigley agreed to pay, will be paid. A cy pres provision was used to accomplish the distribution of whatever amounts were left over.
So where is the criticism?
Of course, many readers might want Wrigleys to get back the unclaimed funds. But it did not make that deal, even though it could have done so....if it was reasonable confident on liability. Hmmmmm, guess it wasnt.
It made a deal to pay out an amount. And wrote the deal to do just that.
Now lets suppose for a minute that the plaintiff lawyers in this case were honorable folks, and that they came to this outcome with the agreement of Wrigley based on discovery, documents, class size, etc, which they and Wrigleys know, and we dont.
Lets even suppose they didnt pull the numbers out of thin air, but they are based on amount which, based on the facts, would be proper for Wrigley to release and not keep. (You know, that old concept of not keeping something which you didnt get honestly.)
So why would those attorneys who crafted and accomplished this outcome, be excluded from their fee on the whole fund they won by their efforts. Cut out some, half, or most because the class members dont send their coupons in for their pittance.
And that brings us back to the beginning. Apparently, class actions which yield a large fund but only chump change to the class ($5 or $10) should never be allowed at all.
For those who agree, you forgot a main reason for the suits in the first place----not to pay the class, but to disgorge the company from money which it never had a right to in the first place.
It is not up to us to decide what Wrigley should pay in this suit. That was up to Wrigely.
But is it up to us, as a society, to make sure that when someone says they agree to pay a certain amount, that the amount gets paid and they keep their word.
I am glad this settlement does just that.
Rather than being a bad precedent, it was a great one.
Thank you.