Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

Yes, I admit that I took a far-too-extended break from this blog without getting your permission.  I've missed you.  In some other posts, I will report on what I did on my summer vacation.

But I'm back, baby!

I look forward to posting some more fulsome materials later.  But today I'm in lovely New Orleans at the Annual Meeting of the Defense Research Institute.  There have been some fantastic presentations here at this conference.  I am getting ready to experience my 15 minutes (literally) of fame delivering a short speech on class action settlements at 4:30 p.m.  You can view my PowerPoint -- because really, who could possibly consider giving a speech without having a bunch of slides to preoccupy one's bored listeners? -- by clicking here.

I had written an article on the same subject just a few weeks ago in the National Law Journal.

More later.

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Last Thursday I had a post about the Nutella settlement in New Jersey.  In the post, I explained that there had been competing class actions, that the California action had been certified as a statewide (California) class, and that the New Jersey plaintiffs and the defendant had jointly moved for a settlement of the New Jersey putative nationwide class action.

Apparently as I was drafting that post, a second settlement was being announced.  Who knew?  Last Thursday the parties in the California statewide class action filed a joint motion for preliminary approval of a settlement of that action:  In re Ferrero Litig., Case No. 11-cv-00205 H CAB (S.D. Cal.).  The California settlement looks a lot like the New Jersey settlement, except the numbers are smaller.

In addition to the monetary relief described below, there is the so-called injunctive "relief."  First, the front panel of the Nutella label will have "nutrition keys" indicating the calories, saturated fat, sodium and sugar in a single serving of the product.  (Sounds an awful lot like the Nutrition Facts on the back of the label, to me.)

Second, the following phrase will be removed from the back label:  "An example of a tasty yet balanced breakfast."  It may be replaced with "Turn a balanced breakfast into a tasty one."  According to class counsel's brief, this second phrase is "no longer making a direct claim that use of Nutella is consistent with a balanced and healthy breakfast."  ARE YOU KIDDING ME?!!!!!

Third, plaintiffs' counsel get to have "non-binding" input on new television advertising.

And fourth, the defendant will make modifications to its website.

For this vital "injunctive relief," class counsel claim entitlement to a fee award of $900,000.  Hey, according to class counsel, "the parties vigorously litigated the action for more than ten months."

There is a monetary relief component to the settlement as well.  Like the New Jersey settlement, it, too, allows claimants to claim $4 per jar of Nutella up to 5 jars (or $20) total.  The entire settlement fund in the California settlement is to be $550,000.  Once again, claims administration and notice expenses are to be drawn from the fund.  And once again, the class counsel retain the right to make an application to be paid from the fund as well.  If not enough money is in the fund to pay all claims, the claimants' claims will be reduced pro rata.

So as I had said before, the fund is the best evidence of the fact that no one was really deceived by the conduct alleged here.  Out of the entire state of California, class counsel clearly expect that there will be less than $550,000 in claims.  Indeed, they've even made a provision for possible cy pres distribution if, after dipping into the fund for attorneys' fees, claims administration, and what claims actually roll in, there still is a positive balance in the fund.

I'll keep you posted on this bi-coastal breakfast bonanza.

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I'll admit to being a bit of an idealist.  (You're shocked, SHOCKED, at that admission, no doubt.) 

I understand that one often may not be able to win in a particular trial court, regardless of how right one is on the law or the facts.  But I generally believe in the power of a well-written appeal to right such wrongs.  And personally, I'd rather spend my money establishing that I am right on the law than spend the same amount settling and sweeping a bad decision under the rug.  In my experience, hard-fought appellate victories pay future dividends as opponents (and potential opponents) understand your values and level of commitment.

And yet, when confronted with a completely BS case that no real human being cares about, and a bad decision that -- while clearly contrary to governing law -- could be effectively erased for not a lot of money, it's understandable that many corporate defendants would elect to quickly end the litigation and return to the business of selling their product.

Except that that rewards those who file BS cases, which really sticks in my craw. 

Like I said, I'm an idealist.

Regular readers of my blog know that I think the Nutella litigation is just that:  nuts.  The ingredients for the delicious product are disclosed right on the label.  The stuff even tastes cloyingly sweet, for Pete's sake!  The idea that a parent could say with a straight face -- let alone under oath -- that she did not know the product contained lots of sugar and oils and Nutella's manufacturer somehow hid that fact from her is patently ridiculous.  Read the Nutrition Facts on the label!  And frankly, anything that a parent can use to get a kid to sit down and actually have breakfast in the morning is a good thing.

Different law firms had filed competing Nutella class actions in New Jersey and California.  The Judicial Panel on Multidistrict Litigation refused to consolidate them into an MDL, which I posted about.  I even noted that the California federal court refused to dismiss the complaint.  The legal competition in the competing cases was fierce; the plaintiffs from California unsuccessfully sought to intervene in the New Jersey action -- twice -- for the sole purpose of moving to dismiss it.  I was especially unhappy to report that the California court had seen fit to certify a class around Thanksgiving, as I knew that the handwriting probably was on the wall.  The defendant subsequently agreed to a nationwide settlement of the New Jersey actions.

On January 10, class counsel in the New Jersey action moved for preliminary approval of a nationwide class action settlement that would enjoin the defendant from describing Nutella as part of a nutritious breakfast, require the defendant to make certain "disclosures" on its label and website, and establish a settlement fund of $2.5 million that would not revert to the defendant.

This is how you know that no one really believes there was mass deception involving Nutella:  claimants can submit claims for cash reimbursements for up to 5 jars of Nutella at $4 per jar (or a total of $20), and yet they clearly don't expect even $2.5 million in claims.  Indeed, the settlement fund is supposed to pay for claim administration and part of the attorneys' fees!  And if the claims exceed the fund, they will be reduced on a pro rata basis.

And let's look at the attorneys' fees, shall we?  According to class counsel's brief, while the class gets only part of the $2.5 million settlement fund and some meaningless injunctive relief ("meaningless" because no one was ever really deceived in the first place), the attorneys get two things:  (1) up to $3,000,000 from the defendant and its insurers, and (2) up to 30% of the settlement fund (or $750,000) as attorneys' fees plus reimbursement of expenses from the settlement fund.  That's not bad compensation for the attorneys, when you consider that the "case has been pending for approximately one year" and "is in an early stage of the litigation," according to class counsel's brief.  Apparently class counsel has reviewed 53,000 pages of documents produced by the defendant and taken 2 depositions.  At nearly $4 million, that's nice work, if you can get it -- particularly where the class itself actually stands to gain less than $2 million.

As I said before, I fully understand why one might agree to settle a truly BS claim like the ones in Nutella with just such a settlement.  In many respects, it makes a whole lot of sense.

But it still sticks in my craw.

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When settling a class action, the defendant wants to make sure that it has bought complete peace with everyone except the opt-outs.  Recently the Eleventh Circuit had the opportunity to instruct on how that can be done in the context of settling one of two competing class actions.  See Faught v. American Home Shield Corp., 2011 WL 5008531 (11th Cir. Oct. 21, 2011).

The defendant, American Home, had been defending against two putative nationwide class actions.  It had reached a settlement in one being prosecuted in California by Chip and Karen Edelson, but the California court had rejected the settlement agreement.

American Home then settled with the Stephen and Laura Fraught, who had a nationwide class action pending in the Northern District of Alabama.  The district court preliminarily approved the settlement and, to preserve the status quo, temporarily enjoined class members -- including the Edelsons -- from prosecuting any claim addressed in the settlement agreement.

The Edelsons ignored the injunction and the district court issued a temporary injunction naming them expressly.  Although the Edelsons appealed, the appeal was later dismissed as moot.

The Edelsons opted out of the settlement.  In the final judgment, the district court enjoined "the Named Plaintiffs, all Class Members, their counsel and anyone claiming through or for the benefit of any of them" from pursuing a suit for the released claims.  It allowed for opt-outs to pursue their individual claims.  Although the defendant asked the district court to continue the temporary injunction expressly mentioning the Edelsons, the court did not, relying on the Edelsons' representation that they would pursue only their individual claims.

Well, as you can guess, the Edelsons proceeded to pursue their class action in California.  The defendant again asked the district court for injunctive relief expressly mentioning the Edelsons.  This time, the court gave the defendant what it wanted:  a permanent injunction against the Edelsons prohibiting them from prosecuting any and all "representative" aspects of their California action.  The Edelsons appealed.

The Eleventh Circuit reversed, holding that the "district court abused its discretion by entering an injunction to enforce a judgment that already included an injunction under the All Writs Act."  The defendant, it instructed, should have moved to hold the Edelsons in contempt of court for violating the injunction contained in the final judgment.  Another request for yet another injunction was duplicative and improper.  A court's power under the All Writs Act to issue an injunction protecting its judgment is "broader than the authority conferred in a 'traditional' injunction issued under Federal Rule of Civil Procedure 65, which allows a district court to enjoin the actions of parties and their 'officers, agents, servants, employees, and attorneys[,] and other persons who are in active concert or participation with them.'"

Faught is a useful reminder to those who draft class action settlements to include a provision in the final judgment prohibiting others from asserting the rights of class members in parallel or subsequent proceedings.  It also reminds us to actually use that injunction in seeking relief when opt-outs act in violation of that injunction to assert claims on behalf of class members.

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Sometimes it makes financial sense to settle meritless class actions, even when you know you could win if you pressed on through discovery, trial and appeal.  But how you do so -- and precisely what peace you are buying -- often can be tricky subjects.  Procter & Gamble recently proposed an interesting settlement of a BS class action in In re Dry Max Pampers Litig., Case No. 1:10-cv-00301 TSB (S.D. Ohio).

In the Spring of 2010, a number of class actions and individual actions were filed by parents who used Pampers' "Dry Max" diapers on their infants.  These diapers had a super-absorbent gel core.  The parents claimed that the gel caused severe diaper rash and burns on their infants.  Bloggers, Facebook pages, and other social media whipped parents into a frenzy.  The CPSC and Health Canada started an investigation.  A multi-district litigation was formed in the Southern District of Ohio before Judge Timothy Black, a recent Obama appointee.  A public relations storm ensued.

But in September, both the CPSC and Health Canada announced that they could find no connection between Dry Max diapers and infants' development of diaper rash, giving Pampers a clean bill of health.

But what to do with the lawsuits?  P&G moved to dismiss and, at the same time, moved to strike the class allegations.  Diaper rash, of course, is a common malady with many known causes, and the facts surrounding individual infants' diaper rash will differ substantially.

Plaintiffs' counsel waived the white flag.  They clearly had no case -- and no class action -- but presumably wanted to preserve their ability to obtain some sort of fee.  The court stayed the calendar so the parties could mediate with former federal judge Layn Phillips.  And a unique settlement was born.

To begin with, the proposed settlement is a 23(b)(2) settlement with no opt out rights.  All people who used Dry Max diapers on their children will be bound by the settlement.

What would they get?

1.  For 2 years, P&G will put on its Pampers labels a sentence referring customers to its website or an 800 number for information on "choosing the right Pampers product for your baby, preventing diaper leaks, diaper rash, and potty training."  Settlement Agreement at 18.

2.  For 2 years, P&G will include on its website two paragraphs of instructions to see a doctor if diaper rash persists or is accompanied by fever, pus, or boils, along with a link to the Mayo Clinic's website and the American Academy of Pediatrics' website.  Id. at 19.

3.  Cy pres relief -- P&G will spend a total of $300,000 over two years funding programs for medical schools related to infant skin health, and will spend a total of $100,000 over two years on an infant skin health program with the American Academy of Pediatrics.

4.  Money-back guarantee -- P&G will reinstate its money-back guarantee program for one year.  The program can have the same proof of purchase requirements that it had prior to its discontinuance.

And what would they give up?

1.  All equitable claims -- Class members release all equitable claims, known or unknown, including "all equitable claims for any damages or injuries."  They are barred from using a class action device in asserting any claim for relief that could have been brought in the lawsuits prior to settlement.  (Given that the lawsuits broadly alleged claims for personal injury, consumer fraud, violation of consumer protection statutes, etc., absent class members effectively are barred from using a class action device on any claim.)  Class members would preserve the right to file individual lawsuits for personal injury or actual damages caused by Dry Max diapers, however.

In sum, for releasing equitable claims and giving up the right to a class action, class members would receive the right to make unlimited claims against a money-back guarantee during one year and obtain information on diaper rash.

In this respect, the settlement is an ingenious post-transaction way to prevent class actions without the use of a pre-transaction arbitration agreement such as the one used in AT&T Mobility v. Concepcion.  It remains to be seen whether the Supreme Court's anticipated decision in Smith v. Bayer Corp. will impose constitutional limits on barring absent class members from filing other class actions in a way that might impact this Pampers settlement.

Interestingly, P&G's participation in the settlement appears to be based on an issue that may (or may not) be decided by the Supreme Court in Wal-Mart v. Dukes:  when damages are incidental to monetary relief in a Rule 23(b)(2) class action.  The settlement agreement states:

Procter & Gamble's agreement to seek a Settlement Class under Federal Rule of Civil Procedure 23(b)(2) is based on the belief that any monetary damages sought by Plaintiffs (other than individual claims as a result of personal injury or actual damage), which are not released claims pursuant to Section VIII(D), are properly viewed as merely incidental to the Injunctive Relief.

Settlement Agreement at 12.  It remains to be seen whether the opinion in Dukes may alter that fundamental assumption.

Four other aspects of this proposed settlement bear noting.  First, this is an all-Internet notice plan.  The parties correctly note that, because this is an injunctive relief class, individual notice is not constitutionally required.  So they have proposed a notice plan that relies on a press release, hyperlinks on the parties' websites, and a settlement website that would carry the long- and short-form notices.  See Settlement Agreement at 13-14.

Second, P&G agrees to pay up to $2.73 million in attorneys' fees, costs, and expenses, to be divvied up among the plaintiffs' firms by Lead Class Counsel.

Third, the representative plaintiffs would receive $1,000 "per affected child for each Plaintiff."  (It eludes me how this is compensation for time and effort spent as litigants, rather than a per-child compensation.)

Fourth, rather than having the court retain jurisdiction to enforce the agreement, the Settlement Agreement provides that all disputes are to be handled by mediation and, if that doesn't work, by final, binding, non-appealable arbitration.  Settlement Agreement at 28.  The parties' independent mediator, Layn Phillips, is selected as their first choice.  The backup approach is to agree on another neutral or, if the parties cannot agree, they will approach Layn Phillips or the court and ask for the appointment of one.

The proposed Dry Max Diaper Settlement is a creative approach to the age-old problem of how to settle meritless class actions.  Stay tuned for developments in the preliminary approval and fairness hearing processes regarding this settlement.

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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.

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Last night I attended an interesting lecture by Professor Lester Brickman of the Cardozo School of Law at Yeshiva University.  Professor Brickman, a legal ethicist, has written a provacative new book,"Lawyer Barons:  What Their Contingency Fees Really Cost America" (Cambridge 2011).  In "Lawyer Barons," Professor Brickman posits that there has been an exposion of litigation in America because as the filing of lawsuits gets more lucrative for plaintiffs' counsel, the number of cases filed increases. 

Professor Brickman has "calculated the inflation-adjusted effective hourly rate of the contingency fee bar to have increased by 1,000 to 1,400 percent over the last forty years. . . .  In the aggregate, tort lawyers' incomes from contingency fees have grown to Fortune 500 levels, ranging from $50 billion to $55 billion in 2006."  Id. at 37-38.  That's some serious coin.

Professor Brickman is particularly critical of the fact that the standard contingency arrangement provides a 33% to 40% fee to lawyers, regardless of the type of case that it is.  Contingency fees, he instructs, were originally conceived of to compensate lawyers who took great risk of no recovery.  But many of the suits filed today are virtually guaranteed recovery, and yet the contingency fee amount remains inelastic, and there is no real price competition among contingency fee lawyers.

The result of all of this, Professor Brickman concludes, is increased lawsuit filings, more frivolous filings, and ever-greater payouts in settlement, which get passed on by businesses to consumers as costs. 

So what is to be done?  Professor Brickman is not out to ban contingency fees; he says it would never gain any political or judicial traction.  Nor is he an advocate of adopting Britain's "loser pays" rule across the board.  One interesting proposal that he does make is called the "early offer rule," whereby tort defendants, shortly after being sued, could make an early offer of settlement.  Plaintiffs' counsel could not charge a contingency fee on amounts offered in the early offer; only hourly rates.  If the offer is rejected and the case goes to trial, the plaintiffs' counsel can charge an hourly rate on any recovery up to the early settlement offer, and a contingency fee only up on amounts recovered above the amount of the early settlement offer.  This would have the effect of limiting the contingency fee to its proper purpose, namely, compensating counsel where they have added value in the face of a significant risk of loss.

Professor Brickman's book has been well reviewed and, based on his lecture, it will make for some thought-provoking reading this Spring.  I encourage you to pick up a copy.

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When Judge Anthony Scirica writes an opinion on class action issues, it behooves class action lawyers to pay attention.  His recent opinion in In re Pet Food Prods. Liab. Litig., 2010 WL 5127661 (3d Cir. Dec. 16, 2010), is no exception.

In Pet Foods, the court reviewed the approval of a class action settlement of litigation over pet food that allegedly was contaminated with melamine and cyanuric acid, which can lead to acute renal failure in dogs and cats.  There had been over 100 putative class actions filed in the wake of the contamination and recall, alleging violations of state consumer protection statutes, breach of warranty, negligence, and products liability.

The proposed settlement created a $24 million cash fund.  The attorneys' fees and expenses accounted for 31% of the fund ($7.44 million).  Payments for claims related to veterinary screenings where the pet was deemed healthy were limited to an aggregate of $400,000.  And payments for claims regarding the return of the price of the pet food were limited to $250,000.  Undocumented claims -- which still must be verified by a sworn statement -- were limited to $900.  The remaining claims (such as for injured or deceased animals' veterinary visits) would be paid in full from the remainder of the fund.  If the fund had any excess, it would be paid to animal welfare charities.  And if it was exhausted, the claims would be reduced and paid on a pro rata basis.

Judge Scirica began his analysis by articulating the standards for appellate review of a class action settlement.  He observed that the fact of settlement is relevant to the certification question, and thus the court need not inquire whether the case could be tried as a class.  Id. at *5.  Citing Amchem, he observed that a key to the careful inquiry that is required is adequacy of representation.  

Some objectors to the class argued that the adequacy of representation requirement was not met because the "return of the purchase price" claims were severely limited and not treated the same as the veterinary costs claims for pets that were injured or killed by the contamination.  The objectors argued that there should have been subclasses with separate counsel to represent their interests.

Judge Scirica noted the propriety of subclasses to prevent conflicts of interest in representation of groups of class members whose interests diverge.  The review of a district court's decision not to certify a subclass is abuse of discretion review.

But Judge Scirica rejected the objectors' claims that they required separate treatment and representation.  All of the claims covered by the settlement were for economic damages.  (Don't tell that to the owners of deceased pets.)  And all of the damages claims were for present -- not future -- losses.  Indeed, the objectors did not identify actual adverse interests that required the establishment of subclasses,  Id. at 8.  Even those class members who had veterinary claims also had purchase price claims.  At the end of the day, the objectors' claims amounted to the fact that the purchase price claims were capped at $250,000, while other claims were not.  But mere "differences in settlement value do not, without more, demonstrate conflicting or antagonistic interests within the class."  Id. at *9.  Rather, differences in allocations reflect different values of the claims.  Id. at *10.

In fact, the court said that the "[o]bjectors have not convinced us that 'the refund claims are as strong a claim as is imaginable.' . . .  But we are skeptical of objectors' theory because defendants inititated the recall, class members are automatically legally entitled to 100% recover of the money paid for recalled pet food."  Id.

The court concluded that the arguments regarding the strength of the claims were -- just like the arguments regarding the disparity of allocation -- best addressed as a "Rule 23(e) adequacy of allocation question, rather than a Rule 23(a) adequacy of representation question."  Id. at *11.

Ultimately, however, the court listened to the objectors' complaints and, under a Rule 23(e) analysis, concluded that the case must be remanded to the district court to get more information regarding the $250,000 cap on purchase price claims.  The court reasoned that where funds for some claims are capped, while others are not, the settling parties should have provided detailed information on why they set the cap where it was set:

The settling parties also should have provided information to determine the range of reasonableness of the $250,000 allocation 'in light of the best possible recovery,' and 'in light of all the attendant risks of litigation.' . . .

Here, the settling parties failed to provide the District Court with estimations of recoverable damages for the Purchase Claims including sales information quantifying the amount of recalled pet food sold to consumers and the amount of refunds already paid to consumers.  If available, this information would have enabled the court to make the required comparisons and generate a range of reasonableness to determine the adequacy of the settlement amount.

Id. at *17 (citations omitted).  Accordingly, the court reversed and remanded the case to the trial court for further proceedings.

Judge Joseph Weis filed a separate concurrence in which he argued that the district court should have required more information to justify the 31% award for attorneys' fees and expenses.  Particularly where attorneys are riding on the coattails of a government investigation and recall, the fee should be scrutinized.  Id. at *23 ("Counsel should not charge the class for acquiring evidence of culpability by piggy-backing on the criminal and agency proceedings.  Although the liability here may well not have been foolproof, seeking recovery for loss caused by a recalled contaminated product is hardly an insurmountable task.").

Judge Weis also attacked the notion of cy pres distribution of funds in class action settlements.  Although it seems like there were plenty of claims to these funds so that a cy pres distribution would be unlikely, the court noted that unclaimed funds traditionally escheat to the state, and such a rule would be fitting where the government investigated and encouraged a product recall.  He also noted that where, as here, certain class members would not receive recovery because of a cap on certain types of claims, leftover settlement funds also could be used to compensate them, rather than pay a charity that has no connection to the litigation.

Pet Food is an important reminder to class action practitioners to properly document the record regarding the decisions to cap certain types of claims.

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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.

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Continuing with our settlement theme, this post discusses True v. American Honda Motor Co., 2010 WL 707338 (C.D. Cal. Feb. 26, 2010), in which U.S. District Judge Virginia A. Phillip ultimately rejected as unfair a class action settlement that she had preliminarily approved last August.  What changed in 6 months' time?  And can the settlement be salvaged?

Plaintiffs in True had sued Honda under California's Unfair Competition Law, the False Advertising Act, and unjust enrichment, alleging that Honda had falsely advertised the fuel economy of its Honda Civic Hybrid vehicles between 2003 and 2008 and claiming that the class had relied on these misrepresentations in paying a premium price for the vehicles.

It would appear that this is yet another one of those lawsuits that claims that the federal fuel efficiency standards that are required to be posted on new vehicles require certain kinds of driving for hybrid vehicles that some people may not understand actually promotes fuel efficiency, so that when they buy the car and drive it as they would other non-hybrid vehicles, they do not achieve the same fuel efficiency as the advertised performance using the federal standard.

After 11 months of discovery, the parties engaged in mediation and negotiated a nationwide class action settlement that the District Court preliminarily approved.  Notice went out to the class.  Ultimately, there were a number of objectors and a coalition of 25 state Attorneys General that filed oppositions to the initial proposed settlement.  The parties modified the settlement to meet many of the objections, and then moved for final approval by the District Court.

The proposed settlement did not create a settlement fund, but instead created certain categories of relief for class members.  Every class member would receive a DVD that Honda would produce that would demonstrate how to maximize the fuel efficiency of their hybrid vehicles.  Class members also could receive one of two rebates.  Option A gave a $1,000 cash rebate to those who sell their Civic Hybrid and trade it in on an eligible Honda vehicle.  Option B gave a $500 cash rebate to those who kept their Civic Hybrid and bought another eligible Honda vehicle.  In addition, a small subset of class members could receive a $100 cash payment, but only if they complained to their dealer or Honda and the dealer or Honda kept a written record of it. Finally, there was "injunctive" relief requiring Honda to change the advertising phrase "actual mileage may vary" to "actual mileage will vary."

The proposed settlement provided a full release to Honda of all claims relating to the fuel economy of the Civic Hybrid, and it allowed for incentive payments of $10,000 and $12,500 to the named plaintiffs, respectively.  Plaintiffs' counsel sought an award of $2,950,000, which Honda did not oppose.

Judge Phillip held that the class met the numerosity, commonality, and typicality requirements of Rule 23, but it failed the adequacy of representation requirement because the two named plaintiffs were part of the small subset of class members who would receive an actual $100 cash payment.  This presented an inherent conflict with the other class members, the court explained.  The court also held that the predominance and superiority requirements of Rule 23(b)(3) were met.

In assessing the fairness and adequacy of the settlement, the court challenged whether the sub-class of people who received a cash payment was fair at all.  They had no stronger or weaker legal claims than anyone else in the class.  And whether the defendants kept a record of their complaints was not in their control.  The court concluded that "the settlement here draws an arbitrary distinction among class members with identical claims and injuries, and allows some to receive a cash award, and others only a DVD and a limited rebate.  This is patently unfair, and counsels against approval of the proposed settlement."  Id. at *11.

The court also assessed the value of the rebates, noting that this is a coupon settlement that is generally disfavored.  The court analyzed whether the value of the settlement was reasonable in relation to the value of the class claims.

The court determined that the plaintiffs had reasonably strong claims.  It rejected the defendant's preemption defense, discounted the issue of whether California law could apply to a nationwide class, and then proceeded to discuss how strong the California Supreme Court's decision in In re Tobacco II, 46 Cal. 4th 298 (2009) was for the class.  The court did acknowledge, however, that a number of class members had objected to the settlement, indicating that they were pleased with their Honda Civic Hybrids and had achieved the mileage that Honda had advertised.  Id. at *15.  Indeed, the "majority of class members who opted-out . . . cited their satisfaction with the gas mileage they were receiving from their HCHs, or otherwise opposed the merits of the suit."  Id. at *23.

The court rejected the conclusions of plaintiffs' expert, which had assigned monetary values to the rebates and the DVD.

The court also expressed great concern about class counsel's requested fee, noting that a "lodestar amount is particularly inappropriate where, as here, the benefit achieved for the class is small and the lodestar award is large."  Id. at 20.  The court also expressed concern about the procedures used to negotiate the fee:

The size of the fee request also raises concerns in light of the fact that it was negotiated at the same time as the substantive relief to the class.  "Ordinarily, 'a defendant is interested only in disposing of the total claim asserted against it . . . the allocation between the class payment and the attorneys' fees is of little or no interest to the defense.'" . . .

Here, of all of the components of the settlement, the only components with any determinative value are the attorneys' fees and incentive payments.  Under the terms of the settlement, there is no certainty that class members will receive any cash payments or rebates at all, but class counsel will receive a three million dollar payment regardless of whether one or 10,000 class members file valid claims.  Since there is no guarantee that [Honda] will pay any money out of the settlement to either class members or a cy pres beneficiary, to award three million dollars to class counsel who may have achieved no financial recovery for the class would be unconscionable.

Id. at *21 (citations omitted).

As a result of its analysis, the court concluded that the value of the settlement weighed against approval.

The decision in True demonstrates the continuing difficulty of obtaining approval of coupon settlements, even for weak claims that have little, if any, merit.

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Last week the Ninth Circuit issued an opinion that highlights the fact that no matter how broadly you draft the release in a class action settlement, you can't necessarily count on a subsequent court enforcing it.

In Hesse v. Sprint Corp., No. 08-35235, Slip op. (9th Cir. Mar. 2010), plaintiffs brought a class action against Sprint, alleging that it improperly charged Washington State's business and operations tax as a line item to its customers when the law disallows such a pass-through and instead requires it to be part of the company's "operating overhead."  Plaintiffs assert causes of action under Washington's Consumer Protection Act, breach of contract, and unjust enrichment.

Sprint moved for summary judgment in the trial court, holding that the action was barred by the release and judgment in a nationwide class action settlement entered by a Kansas state court (the "Benney Settlement") in 2006.  The Benney Settlement involved a class of Sprint customers who were charged various federal regulatory fees between 2000 and 2006.  The class in the Benney Settlement released:

any and all claims  . . . that have been, could have been, or in the future might be asserted in the [Benney] Action[] or in any other court or proceeding which relate in any way to the allegations that . . . Sprint failed to properly disclose or otherwise improperly charged for surcharges, regulatory fees, or excise taxes, including but not limited to the [federal] Regulatory Fees; and all other causes of action . . . whether based on federal, state, or local statute . . . that have been, could have been, may be, or could be alleged or asserted by any Class member . . . against [Sprint] relating to . . . the subject matter of any of the claims alleged in the Benney Action.  

Slip op. at 3852.

The plaintiffs in Hesse admittedly were members of the Benney class.  The question, then, was whether the release in the Benney Settlement precluded plaintiffs' claims premised on Sprint's charging of a state-law tax (Washington's B&O tax) when the underlying claim in the Benney action had been the charging of federal regulatory taxes.

The Ninth Circuit held that "the release cannot preclude the Washington Plaintiffs' claims because the Benney Class Plaintiff did not adequately represent the Washington Plaintiffs and because the Washington Plaintiffs' claims are based on a set of facts different from those underlying the claims settled in the Benney Settlement."  Id. at 3854.

The Ninth Circuit cited Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) to conclude that although the subsequent class could not mount an all-out collateral attack on the prior state court judgment, it could seek limited review of whether the procedures in the prior litigation afforded them due process.  Slip op. at 3855.  The Ninth Circuit found that the Kansas court had not made an explicit finding that the class representative in the Benney Settlement adequately represented class members who also had claims based on state taxes.  Accordingly, the Ninth Circuit undertook its own analysis of the adequacy of representation in the Benney Settlement.

The Ninth Circuit held that because the named plaintiff in the Benney Settlement -- who, like me, hails from Missouri -- did not have claims based on Washington's B&O tax, he did not adequately represent the plaintiffs in the Hesse class.  This was not only because he did not "vigorously prosecute the claims relevant to this case," but also because he "had an insurmountable conflict of interest with those members of the class."  Id. at 3857-58.

The Ninth Circuit took care to indicate that it was not invalidating the Benney Settlement -- at least as to the release of all claims pertaining to the federal regulatory fees at issue in Benney.  Instead, it held "only that any release of the B&O Tax Surcharge claims at issue in this case by the judgment approving the Benney Settlement would violate due process."  Id. at n.5.

So are class action settlements only able to release the claims that the plaintiffs brought in the case?  The Ninth Circuit said no, a release may be broader than the claims stated, but only to a point:

A settlement agreement may preclude a party from bringing a related claim in the future "even though the claim was not presented and might not have been presentable in the class action," but only where the released claim is "based on the identical factual predicate as that underlying the claims in the settled class action."

Id. at 3860 (quoting Williams v. Boeing Co., 517 F.3d 1120 (9th Cir. 2008)).  The Ninth Circuit concluded that because "the Washington Plaintiffs' claims do not share an identical factual predicate with the claims resolved in the Benney Settlement," they were not derived from the same transaction or occurrence and thus could not be precuded by the Benney Settlement.

The Hesse opinion is an important read for all counsel who draft class action settlements.

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In February I wrote about a decision in litigation about Dannon's statements involving the health benefits of its Activia and DanActive lines of yogurt, which the defendant claimed were backed up by numerous scientific studies.  The California decision allowed plaintiffs to presume reliance upon alleged misrepresentations without actually pleading it. 

Just a little over a week ago Dannon filed in federal court in Ohio a $35 million settlement of the series of putative class actions involving its yogurt brands that it had been defending.  See Gelmas v. The Dannon Co., No. 1:08-cv-00236, Stipulation of Settlement, Docket Entry # 38 (N.D. Ohio Sept. 18, 2009).  The settlement purports to cover and release all claims -- except personal injury claims -- that were asserted or could have been asserted in the yogurt lawsuits.

The settlement structure and proof of claim process for this proposed settlement is interesting, since the settling parties are dealing with the problem of consumer product purchasers who already consumed the products and, for the most part, cannot be expected to have retained proof of purchase.  Class members may recover up to $15 merely by submitting a claim form.  To obtain between $15 and $30, they must submit a claim form "signed under penalty of perjury attesting to the amount purchased."  Claimants seeking between $30 and the maximum of $100 must not only submit the claim form with the amount sworn to under penalty of perjury, but they also must provide "a register receipt or other sufficient proof of purchase for the amount of Product for which payment is sought."  Each claimant's claim must include, "to the extent reasonable," the number and type of products purchased, the amount paid, the approximate dates of purchase, and the name of the retailer from whom purchased.  A claims administrator will be charged with whittling out the false claims.  

The settlement fund is capped at $35 million, so what individual claimants actually receive will depend on the total amount of claims and whether the fund is fully expended.  The settlement fund also covers administration fees and expenses, as well as the fees of class counsel.  Class counsel indicate in the agreement that they want "no more than" $10 million plus expenses out of the $35 million fund.  The settlement proposes that the named plaintiffs receive incentive payments of up to $5,000 if they were deposed and up to $1,000 if they were not. 

If -- as I think is highly likely -- too few claims are made to deplete the settlement fund, Dannon will distribute the value of the remainder in the form of yogurt products to charities to feed the poor, which is highly commendable.

The proposed settlement also contains "equitable relief" in the form of restrictions on advertising and labeling.  Reading these so-called restrictions, I am struck by the fact that the statements challenged in these lawsuits clearly were not false.  Indeed, if I were still teaching my Product Liability course, I would ask my students to study this settlement and tell me whom they trust the most to issue restrictions on speech based on the results of scientific research:  lawyers (as here), judges, juries, or scientists employed by regulatory bodies. 

Compare the lawsuits' allegations with the settlement. 

In the case I wrote about in January, Wiener v. The Dannon Co., 255 F.R.D. 658 (C.D. Cal. 2009), the complaint had alleged statements about Bifidus Regularis and L. casei Immunitas -- types of patented probiotic bacteria used in the Activia and DanActive products, respectively.  These were the alleged misrepresentations:

Throughout its marketing . . . Dannon advertises that Activia is "scientifically proven" to naturally regulate digestion when eaten daily for two weeks.  According to Dannon, this claim is supported by approximately twelve clinical studies . . .  

. . . In its marketing campaign . . . Dannon claims that DanActive is "clinically proven" to strengthen the immune system.  According to Dannon, this claim is supported by approximately twenty-one clinical studies.

. . . These [plaintiffs'] causes of action are based on allegations that Dannon's claims regarding the health benefits of Activia, Activia Light, and DanActive (the "Products") are unsubstantiated and deceptive.

Id. at 663 (citations omitted).

Now, here is what the settlement allows Dannon to say about its products:

First, it may say that its Activia products with Bifidus Regularis are "scientifically proven" or "clinically proven" to help regulate the digestive system, so long as it also says that it "helps with slow intestinal transit when eaten daily for two weeks, as part of a balanced and healthy lifestyle."  The settlement also provides that "[i]n existing television commercials where the qualifying language currently exists, the qualifying language shall be made materially more prominent."  (Emphasis added.)

Second, for its DanActive products with L. casei Immunitas, the defendant must remove the word "IMMUNITY" from its labeling and packaging, but it may say that the DanActive products are "'clinically proven' or 'scientifically proven' to help strengthen your body's defenses," and that they help "support the structure or function of the digestive tract's immune system."   The settlement also requires the defendant to remove the phrase "they have a positive effect on your digestive tract's immune system," which it can replace with "they interact with your digestive tract's immune system."

Third, for both product lines, the defendant is required to place on its websites' FAQs and in any product overwrap packaging the following statement:  "[This] is a food product and not a treatment or cure for any medical disorder or disease.  If you have any concerns about your digestive system, you should consult a healthcare professional."

Finally, the defendant will place the correct genus, species and strain designation of the bacteria in close proximity to the FDA-required nutritional label and ingredient list.  For Activia, that is "Bifidobacteria lactis DN 173-010," and for DanActive it is "Lactobacillus casei DN 114-001."

It's understandable that it could make economic sense for a defendant to settle a series of class actions after years of litigation.  But this settlement's so-called "equitable" relief involving the defendant's advertising and labeling makes it crystal clear that these lawsuits were not based on any real fraud at all.  The settlement allows Dannon to say practically the same thing it always has said.  The lawsuits obviously were lawyer-invented, and although they may have survived some motions to dismiss, the settlement's equitable relief demonstrates that the defendant's statements were backed up by real science.  

Is this another instance of regulation by litigation in which the only ones who really benefit are class counsel, who seek to take more than $10 million of the settlement fund in fees and expenses?  Submit a comment and let me know what you think.  

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As someone who has drafted his fair share of class action settlements, I can tell you that I always get a little nervous when I start reading a case in which a court is required to construe the language and effect of a prior class action settlement.  I had that same trepidation when I picked up Lester Building Systems v. Louisiana-Pacific Corp., 2009 WL 537501 (Minn. March 5, 2009).

The plaintiff, Lester Building Systems ("Lester"), makes hog barns, which it sells directly to farmers and indirectly through a network of independent builder-dealers.  In the early 1990s, Lester stopped using plywood in favor of an external siding product called "Inner-Seal," which was made by Louisiana-Pacific.  Around that same time, Louisiana-Pacific started receiving complaints from around the country about its Inner-Seal product swelling and deteriorating.  Eventually, Louisiana-Pacific ended up settling a nationwide class action in federal court that resolved all potential Inner-Seal claims.  The opt-out settlement did not require Louisiana-Pacific to fund the settlement all at once; rather, it was to make annual payments.  The claims ended up far out-pacing Louisiana-Pacific's contributions, and many class members were forced to either accept immediately-reduced payouts on their claims, or wait until such time as Louisiana Pacific could make a full payment.

Lester had bought around $3.4 million of Inner-Seal and used it to make some 2,600 hog barns.  Many of its customers were not happy.  Lester estimated that to repair its customers' barns would cost $13.2 million.  Many of Lester's customers, however, chose an early payout from the settlement fund of only $640,000.

In negotiating the settlement, Louisiana-Pacific -- like many product manufacturers -- had tried to protect not only itself, but also the intermediate sellers of its products by including within the settlement a complete release of liability for them:  "To the extent claims may be asserted against persons or entities in the chain of distribution, installation or finishing of the Exterior Inner-Seal siding, the Releasing Party shall be deemed to and does hereby release and forever discharge those persons or entities from claims based solely on distribution, handling, installation, specification, or use of the Exterior Inner-Seal Siding."  2009 WL 537501 at *5 (quoting the settlement).

Lester was far from grateful for such protection, however.  In fact, it sued Louisiana Pacific in Minnesota state court, asserting theories of breach of contract, breach of implied and express warranties, and fraud.  Lester won at trial handily:  the jury awarded Lester $3.4 million for Lester's purchase price for the Inner-Seal products, $10.2 million for lost profits up through 2002, $2.8 million for the cost of restoring goodwill, and $13.2 million for the estimated cost of repairing its customers' barns.

Louisiana Pacific argued that the cost of repairing Lester's customer's barns was not a proper element of damages because Lester had no legal obligation to conduct such repairs, since it had received a full and complete release from the federal settlement.  Lester countered that even if it did not have a legal obligation to make such repairs, it had a practical business obligation to do so, and Louisiana-Pacific should pay for it. 

The Minnesota Supreme Court examined the language of the federal settlement and held that it clearly and unambiguously released all entities in the chain of distribution -- including Lester -- from liability to repair the farmers' barns.  Moreover, the court held, Lester already had received from the jury awards for lost profits and loss of goodwill, and thus no "practical business obligation" could exist to support the so-called consequential repair costs.  Without Lester having a legal obligation to repair its customers' barns, Lester could not force Louisiana-Pacific to pay for it.

Lester Building Systems is another good decision for my class action settlements file that squarely considers the language of an intermediary release provision and gives it full force and effect.  The irony, of course, is that the release ultimately operated to the detriment of the intermediate seller, who instead wanted to extract money from the manufacturer to pay for repairs to its customers' barns. 

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