Federal Court Finds CAFA Doesn't Preclude Settling Bull$h#& Cases for Nuisance Value, But It Should Limit Class Counsel's Fee Award
Last week District Judge Jeremy Fogel approved the combined settlement of three class actions involving Hewlett Packard printers. See In re HP Inkjet Printer Litigation, 2011 WL 1158635 (N.D. Cal. Mar. 29, 2011). All three of them were bull$h#& cases. The first challenged HP's practice of having "low on ink" warnings and graphics appear on the printer's screen before the ink cartridge had completely run dry. The second challenged the printers' use of "more expensive" color ink under black ink to improve the print quality of black type and images. And the third challenged HP's use of an expiration date on certain printer cartridges.
The court consistently referred to the cases as "weak" throughout its settlement opinion. See, e.g., id. at *1 (the court had denied summary judgment, describing the evidence of injury as "weak," and had denied certification of a litigation class), *1 (it had granted a motion to dismiss most claims in the second action), *2 (it had granted a motion to dismiss a number of claims in the third action).
The cases also had dragged on for years. Indeed, class counsel claimed to have incurred more than $7 million in fees for some 17,000 hours' work on the cases, including 12 depositions, review of hundreds of thousands of pages of documents, more than 100 written discovery requests, and extensive expert work, inter alia. Id. at *9.
Despite what class counsel had sunk into the case, they proposed a settlement in which the defendant agreed not to challenge a fee award of only $2.9 million, which included some $600,000 in costs. This is perhaps the best evidence that even class counsel believed these cases were crap.
The problem facing the district court was that the settlement itself did not provide much value to the class, which was estimated to have more than 13 million members. The settlement set up a mechanism for class members to register online for e-credits at HP's website of up to $2, $5, or $6, depending on which class they belonged to. These credits would be capped at $5 million if there were too many claimants. (There weren't.)
The settlement also provided certain "injunctive" relief. HP would stop using pop-up images to remind people cartridges are low on ink, and would put disclosures on its website. The company also would include on its website disclosures about "underprinting" with color ink and have instructions for how to turn that feature off. And it would explain on its website the intricacies of ink cartridge expiration.
The court had preliminarily approved the settlement, and the notice and opt out period ran prior to the fairness hearing. Roughly 122,000 of the 13 million class members registered for e-credits by the deadline. Their e-credits totalled almost $1.5 million -- substantially less than the $5 million cap. Eight hundred opted out. And five filed formal objections, including Ted Frank at the Center for Class Action Fairness.
The court acknowledged that most of the criticisms of the e-credits were legitimate. They were non-transferrable, couldn't be combined with other discounts, and were redeemable only at HP.com. These facts made the e-credits of less value than cash of the same face amount. Id. at *6. The court also was dubious of the claim that the value of the injunctive relief was anywhere near the range of $16 million to $41 million posited by class counsel. Id. at *6-*7.
Nevertheless, the court approved the settlement because the value of the underlying class claims was so very low. In citing the standards by which the settlement should be evaluated, the district court cited the Seventh Circuit's opinion in In re Mexico Money Transfer Litig., 267 F.3d 743 (7th Cir. 2001) with the following description: "approving a coupon settlement, even though it found the relief offered was 'more in the nature of a PR gesture . . . than an exchange of money (or coupons) for the release of valuable legal rights,' because the underlying 'claims had only nuisance value.'" Id. at *6.
The district court had harsh words for the underlying claims in the cases before it:
Despite these evident problems with the proposed settlement, the limited value of the relief obtained must be considered in relation to the strength of Plaintiffs' claims in the first instance. . . . As the Court has observed repeatedly over the course of the litigation, even assuming Plaintiffs could prove that HP's "low on ink" warnings were inaccurate or misleading, the task of determining whether the warnings actually confused consumers or resulted in the unwarranted disposal of a significant amount of ink necessarily involves a great deal of speculation. The underprinting at issue in Rich and the expiration date at issue in Blennis involve similar challenges with respect to proof. . . . [T]here is no reason to believe that the posture of any of the cases would improve through further litigation.
Moreover, even if the Plaintiffs could prove their claims at trial, the damages recoverable by each class member still would be very modest. According to Plaintiffs' own analysis, only about two percent of HP inkjet printer owners replace their ink cartridges prematurely due to low on ink warnings. Among those consumers, the amount of ink that otherwise would be used before print quality was affected appears virtually impossible to determine.
Id. at *7-*8.
The district court ultimately approved the settlement because it was negotiated at arm's length and "the value of the settlement is reasonable in light of the evident weakness of the case and the modest value of Plaintiff's claims." Id. at *8.
But the court could not grant class counsel's unopposed fee petition. The court estimated the total value of the injunctive relief and e-credits to the class as $1.5 million. Thus, it reduced class counsel's fee award to $1.5 million in fees and roughly $600,000 in costs, reasoning:
[W]hile this case was extensively litigated over several years, the Court still has serious questions as to whether consumers actually incurred significant injury from HP's actions. To allow an award of attorneys' fees to outstrip the benefit to consumers in such cases would undermine the importance of focusing the efforts of class action counsel on issues that most affect consumers.
Id. at *10.
Judge Fogel's opinion is a clear reminder that sometimes even the worst class actions should settle, but when they do, class counsel should not be rewarded with fees out of proportion to what the class receives, regardless of what they may have expended on the case.
Expect an appeal.