First Class Defense

More on Class Mediation

For the ABA's 18th Annual National Institute on Class Actions held last month in Chicago, I published a paper on class mediation that expands on a blog post I published earlier this year.  If you'd like to read more practice tips on mediating class actions, you can find the paper here. 

To Settle or Not to Settle: Eight Questions Corporate Counsel Should Ask in Evaluating Class Action Settlements

To settle or not to settle; that is the question, right?  It is asked when you receive the demand letter threatening a class action, when the complaint is filed and served, at the initial scheduling conference, before the class certification hearing and after the class certification decision.  There is no single, right-or-wrong answer.  Your response will depend on many factors that only you, as in-house counsel, your management and, in some cases, your board of directors can answer.  But there are questions within the question that can point you to the path that may be most appropriate for your organization.  Here is a checklist of eight such questions (with additional sub-questions), some more obvious than others.

1.  What is your litigation risk?  As some courts have recognized, class actions often place undue pressure on defendants to settle unmeritorious cases because they magnify the company's exposure in the event the plaintiff wins.  As disturbing as that reality is, it places a premium on analyzing the litigation risks at key junctures in the case.  Whether you choose to perform a formal litigation risk analysis or something more informal, you should consider your likelihood of success on dispostive motions, at class certification and at trial, and the likely financial outcome if you lose.  A thoughtful litigation risk analysis will help you place a settlement value on the case that can then be used to assess the benefits of any settlement that may be offered.  The accuracy of the analysis will depend on how much information you have.  It therefore will become more accurate as you gather more facts through your own internal investigation and discovery, and as you become more familiar with your judge and opposing counsel.

2.  What is your likely litigation expense?  This is another obvious question, although it also can be difficult to answer early in the case.  A companion question that is easy to overlook is:  what will be the legal expense of settlement?  The class action settlement process itself takes time and costs money, and some settlements can require years of additional work that should be taken into account.

3.  Will the settlement attract copy-cat lawsuits?  Sometimes settlement of a statewide class action invites additional filings in other states, greatly multiplying the company's exposure.  If your company engaged in the same business practices in other states that are the focus of the statewide claims you are now facing, then you should consider settling on a nationwide basis, or at least make sure the attorneys' fees award in the statewide settlement is not so rich that it will attract lawyers waiting in the wings or more filings by your current adversaries.  

4.  Will the settlement buy you peace?  The answer will depend largely on how you draft the class definition and the scope of the release.  In drafting the class definition, you should ask whether it is expansive enough in time (its temporal scope) and space (its geographic scope) to include all persons who might become class members in a lawsuit involving the same or related subject matter.  In drafting the release, you should ask whether it will encompass all of the types of claims from which you reasonably may seek protection.  You also should consider including in the settlement agreement a provision that allows your company to withdraw from the settlement if a threshold percentage of class members opt out.

5.  Are you prepared to pay the price of fairness?  A class action settlement is valuable only if it is approved.  At the final fairness hearing, the trial court will have to decide whether the terms of the settlement are fair and reasonable to the class, and its determination could be overturned on appeal.  For cases in which there are no objectors, judges will make the fairness determination based only on the presentation of counsel for the settling parties.  In other cases, objectors may oppose the settlement, either because they truly believe it is unfair to class members or, all too often, because they want to hold the settlement hostage until they are paid a ransom to go away.  Even where there are no objectors, courts increasingly are taking closer looks at settlements to assess whether they treat potential class members fairly.  You and your outside counsel will want to make sure that the terms you are agreeing to will offer benefits to class members that can be defended as a fair and reasonable exchange for the rights they will be giving up by virtue of the release, viewed in light of the risks they bear of an unfavorable result if the litigation goes forward.  Happily, this is one area in which you and counsel for the settling plaintiffs have common interests, permitting what could be a helpful collaboration to craft a settlement that passes the fairness test.

6.  Can you live with the attention the settlement will receive?  There is no such thing as a private class action settlement.  The settlement agreement will be filed on the court's docket and its fairness will be adjudicated in a public hearing.  What's more, there will be a class notice, which may include publication in newspapers or on the Internet, and there likely will be a website describing the settlement.  If your company has public relations professionals, you may want to include them in reviewing the class notice and the notice plan, and your management and board will need to understand that the settlement could well attract attention not only from potential class members and lawyers, but also from your customers and competitors.  

7.  How will the settlement affect your company's reputation?  Will it signal to plaintiffs' lawyers that you are an easy target, causing them to line up to bring the next lawsuit?  Or will it signal to the marketplace that yours is a responsible company that cares about its customers and is prepared to take care of them when they are harmed?  The answers to these questions will turn not only on the terms of the settlement, but also on the merits and seriousness of the claims in the underlying lawsuit.  

8.  How important is it to the company to put the litigation behind it and return to business as usual?  Class litigation, like any significant litigation, can be an unwelcome distraction from the daily needs of running a business.  Some companies take a principled approach, choosing to fight rather than settle the unmeritorious case regardless of the resources and attention that defending the case may demand.  Other companies may decide that they would rather settle the matter and get on with their corporate lives, even though the case has no basis.  Each company, and each case, is different, but it is always worth considering the effects that ongoing litigation will have on the company's operations.  

 

You Can't Always Get What You Want: D. Mass. Awards Small Fraction of Requested Attorneys' Fees in ZIP Code Class Settlement

In an opinion reminiscent of the famous Rolling Stones song, Judge Richard Stearns on December 26th awarded plaintiffs' class counsel fees of $75,959.00 of a requested amount of $450,000 for work performed in connection with a settled Massachusetts consumer class action.  Brenner v. J.C. Penny Co., C.A. No. 13-11212-RGS (D. Mass.).  For defendants, the case demonstrates the value of pursuing objections to fee awards in class settlements where the parties are unable to agree on a reasonable fee.

The lawsuit alleged that the defendant's retail stores had unlawfully gathered customer ZIP codes in connection with credit card purchases, and had used them for "intrusive marketing purposes" in violation of a Massachusetts privacy statute.  As Judge Stearns pointed out, the case was "one of a number of ZIP code class actions filed in this district by [Meiselman, Packman, Nealon, Scialabba & Baker P.C.], and it is the third in which Brenner appears as the named plaintiff."  The other cases were brought against other retailers, and in one of the cases, about which we have previously written, the Massachusetts Supreme Judicial Court had upheld the viability of the claims under the Massachusetts Consumer Protect Act.   Meiselman Packman filed the case against J.C. Penney, as well as cases against two other retailers, shortly after the SJC's ruling.

The parties in the case before Judge Stearns had mediated their dispute and arrived at a settlement before the lawsuit was filed, and filed a notice of settlement on the same day that plaintiffs filed the complaint.  The settlement provided, inter alia, 1) that gift certificates would be issued to class members, 2) that J.C. Penney expressly denied liability, 3) that Massachusetts law governed the settlement agreement, and 4) that the parties could not reach agreement on attorneys' fees, and that J.C. Penney reserved the right to object to class counsel's fee petition.

Finding that there was no common fund, Judge Stearns applied a lodestar analysis to the fee award.  Meiselman Packman submitted billing records reporting a total of 337 billable hours epended on the case, most of which were billed at a rate of $600 an hour.  

The court held that Massachusetts law applied and adopted the lodestar method, which it described as "multiplying the number of hours reasonably spent on a case times a reasonable hourly rate."  Determining the number of hours "reasonably spent" meant "determining the number of hours actually spent" and "subtracting those hours that are 'duplicative, unproductive, excessive, or otherwise unnecessary.'"  

Meiselman Packman billed over 100 hours on tasks described as legal research and motion drafting, which the court reduced.  Judge Stearns based the reduction for time spent on research in part on the fact that more than one partner researched the same issues.  Citing First Circuit case law, he acknowledged that "[t]ime spent by two attorneys on the same general task is not . . . per se duplicative," but said that "it must be justified by the circumstances of the litigation, such as the 'ferocity' of an adversary's defense."  Because "J.C. Penney signaled its capitulation within a month of the demand letter being received," the court found that the duplication of effort was not justified.  He also applied the associate hourly rate of $275 to research rather than the partner hourly rate of $600.  

The court followed a similar approach in reducing the time spent drafting legal documents, such as the motion for preliminary approval of the settlement and the brief in support of the fee application.  "The court recognizes that the drafting of legal documents is not a task to be lightly undertaken, but it does not require that multiple partners work on the same drafting task at the same time."  The court also awarded only one hour, at the associate rate, for the drafting of the complaint because the complaint was nearly identical to a complaint against another retailer that had previously been filed, rejected time entered by a third partner (finding that there was "no justification for adding a third partner to this case,") and cut travel time by half.  Finally, in a concession to class counsel, "[t]he court has not reduced time documented as involving communications with defense counsel, letter writing, attendance of mediations, court appearances, or conferences, even if attended by more than one partner."  The court then applied the relevant rates for partner, associate and paralegal work, and arrived at a lodestar fee award of $75,959.00.  

Finally, Judge Stearns rejected class counsel's argument that they should receive a mulitplier of the lodestar because of the "extraordinary," "exceptional," and "unparalleled" result they secured for the class.  Not only had J.C. Penney agreed to settle almost at the case's inception, but the SJC decision in the earlier filed case greatly simplified counsel's task.  As the court observed:  "[T]his is not a case where the firm chose to take on what might have appeared a quixotic quest on behalf of a plaintiff unable to afford counsel.  To the contrary, it was Meiselman Packman that sought out Ms. Brenner as a plaintiff in this and severl other nearly idencial cases in which the result, given the decision of the SJC in Tyler v. Michael Stores, was virtually preordained."

Six Tips for Mediating Class Actions

There comes a time in many class actions when the parties agree to mediate.  Like class litigation, the mediation of class actions, whether pre-certification or post-certification, is more complicated than the mediation of individual cases.  Here are a few tips for making the most of the experience.

1. Choose the right mediator.  Not all mediators have class action experience.  While the lack of such experience should not be a disqualifier, the procedural peculiarities of class settlements make it a significant factor to consider in selecting a mediator.  Other important characteristics for class action mediators are experience resolving or adjudicating complex business disputes, a general understanding of the business implications of substantial settlements and of corporate decision-making processes, the ability to stay organized with respect to complicated settlement proposals, and the absence of any perceived biases or predilections.
2. Don't waste time arguing the case.  This is not to say that discussions about the merits or about the likelihood of class certification have no role in class mediations; they do.  But oral presentations should not occupy the same amount of time as they do in individual mediations.  Lawyer arguments are generally presented in two ways at mediation:  in the written submissions the parties exchange and provide to the mediator, and in an oral presentation during a joint session at the outset of the mediation.  There are three audiences each party wants to reach in the joint session:  the mediator, opposing counsel, and the opposing counsel's client, who ordinarily is the ultimate decision-maker.  What sets class mediations apart is that, while named plaintiffs ultimately need to understand and make decisions with respect to any settlement reached, they will rely heavily on class counsel to negotiate the settlement and protect absent class members.  For this reason, they often don't attend the mediation sessions.  That leaves only the mediator and opposing counsel as the target audiences for formal presentations, but they will already know your arguments before the mediation begins.  It likely will be necessary to remind them of your arguments as negotiations progress, but time spent needlessly arguing your case at a joint session is time taken away from more pressing matters.
3. Anticipate objections.   If you are able to arrive at a class settlement, you will need to have it approved by the trial court, and if there are objectors, possibly by an appellate court.  It takes a lot of time and money to get from the mediation to final approval of the settlement, and the last thing you want is to have the settlement rejected after all those resources have been spent.  It is therefore important to enter the mediation with a good understanding, both from experience and from familiarity with precedent, about what objections the settlement might invite so that you can structure the settlement to avoid them.  Careful attention to such issues as the value provided to absent class members, the reasonableness of named plaintiffs' service fees and class counsel's attorneys' fees, the appropriateness of any cy pres relief, and the quality and manner of notice and procedural rights afforded absent class members can help you craft a settlement that will survive objectors' challenges.
4. Be patient.  Class settlements are complicated.  To achieve fairness, some settlements may involve various levels of relief to take into account differences among categories of class members.  It can take many hours to come to agreement on class relief, even before wading into the treacherous waters of attorneys' fees.  Although settling the case on the first day of mediation may be the goal, it is seldom achieved.  It is best to enter the mediation expecting to make substantial progress on the first day, with the understanding that additional formal sessions or informal communications will be necessary to reach a deal.
5. Be prepared to end the mediation.  As with any case, the ability to settle will depend on the reasonabless and flexibility of all parties.  If your opponent is unreasonable, be prepared to walk out.  I don't say that lightly.  If you have committed to mediate, you have committed to negotiate in good faith.  You owe it to your client and to all concerned to work long and hard to bridge the gap that separates the parties.  But you also owe it to your client not to let it be held hostage to unreasonable demands.  If the goal is to achieve a fair settlement, it should be fair not only to the plaintiffs and to absent class members, but also to your client and its shareholders.
6. Write it down.  If the mediation produces a settlement, ask the mediator to help you prepare a term sheet outlining its key provisions.  A term sheet can prevent disputes as the parties prepare the formal settlement agreement, and keeping the mediator involved can help resolve any disputes that threaten to derail the settlement. 

Closer Scrutiny for Cy Pres Distributions?

The Third Circuit’s recent opinion in In re Baby Products Antitrust Litig. is noteworthy for its approach to cy pres distributions in class settlements, a topic that has also garnered recent attention in the First Circuit.  In that case, the Third Circuit held that a district court must determine whether a class settlement incorporating a cy pres fund provides sufficient direct compensation to class members.  The Third Circuit’s opinion suggests the possibility of even closer scrutiny for cy pres distributions and additional challenges for class settlements.

In re Baby Products involved a claim that certain companies involved in the sale of baby products had conspired to set a price floor.  After class certification was granted, the parties entered into a settlement agreement that was approved by the district court.  Under the settlement agreement, the defendants paid over $35.5 million into a common fund.  From that fund, roughly $14 million was allocated to attorneys' fees and expenses.  The remainder was to be distributed via a claims process that would allow claimants who provided proof of purchase to receive higher levels of reimbursement than those who provided no proof of purchase.  A class member who submitted proof of purchase would receive a percentage of the purchase price, while a class member with no proof of purchase would receive a payment of $5.  Any residual funds were first to be redistributed to claimants until their claims had been paid in full, and any funds remaining after redistribution were to go to cy pres recipients to be selected by the district court.  Because many claimants did not have a proof of purchase, the claims process revealed that only about $3 million would be distributed to class members, while approximately $18.5 million would be distributed to cy pres recipients.

On appeal, the Third Circuit held that class settlements may include a cy pres component.  As noted by the Third Circuit, and as previously addressed on this blog, the First Circuit has also approved the use of cy pres distributions in settlement agreements.  However, the Third Circuit vacated the baby products settlement because of what it characterized as the “troubling” and “surprising” allocation of the settlement fund. 

Observing that the district court had been unaware of the amount of the fund that would be distributed to cy pres recipients at the time it approved the settlement, the Third Circuit remanded for the lower court to find whether the settlement provided “sufficient direct benefit” to the class.  According to the Third Circuit, the primary purpose of a settlement is to “compensate the class members,” and, therefore, “direct distributions to the class are preferred over cy pres distributions.”  As such, the Third Circuit observed, “cy pres awards should generally represent a small percentage of total settlement funds.”

In consequence, the Third Circuit held that a district court should consider “the degree of direct benefit provided to the class” in approving a settlement – an analysis that might require a district court “to withhold final approval of a settlement until the actual distribution of funds can be  estimated with reasonable accuracy.”  As an alternative, the Third Circuit observed that a district court “may urge the parties to implement a settlement structure that attempts to maintain an appropriate balance between payments to the class and cy pres awards.” 

The Third Circuit then went on to vacate the attorneys’ fees award because the settlement was no longer in effect.  In so doing, the court declined to impose a rule requiring district courts to discount attorneys’ fees when a portion of an award will be distributed through cy pres, but did state that, “[w]here a district court has reason to believe that counsel has not met its responsibility to seek an award that adequately prioritizes direct benefit to the class, we . . . think it appropriate for the court to decrease the fee award.”

The Third Circuit’s opinion is notable for at least three reasons.  First, the opinion adds the voice of the Third Circuit to that of other courts that have expressed concern about the use of cy pres in class settlements.  Similar criticism has also been heard within the First Circuit.  For instance, in the  Download In re Compact Disc Minimum Advertised Price Litigationin the District of Maine, Judge Hornby took the step of “substantially reduc[ing] the request for attorney fees” because of “the modest benefit” to recipients of the cy pres award.  Second, and perhaps more importantly, the Third Circuit’s reasoning could introduce increased uncertainty into settlement negotiations.  Under the Third Circuit’s approach, final approval of a settlement could be contingent on the results of the claims process – which is not known (and may not reasonably be knowable) at the time of negotiation.  Parties therefore may be left to negotiate a settlement in a vacuum, and could have their settlement agreements rejected despite their efforts to reasonably compensate class members.  Finally, and relatedly, the Third Circuit’s approach also highlights the First Circuit’s admonishment in In re Lupron Marketing & Sales Practices Litigation that, when class members will receive less than 100% compensation under the terms of the settlement, unclaimed funds should be used to augment the class members’ recovery before they are allocated to cy pres distributions.  In re Baby Products is another signal that cy pres distributions will be closely scrutinized.

High Court Strikes a Blow to Securities-Fraud Defendants Opposing Class Certification

In a watershed moment for class action securities litigation, last Wednesday the Supreme Court issued its opinion in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, making it easier for plaintiffs to obtain class certification and, in turn, pressure defendants into exorbitant settlements to avoid the costs of class action—and, in many cases, bet-the-company—litigation.  The high court ruled that securities-fraud plaintiffs need not prove the materiality of alleged misstatements or omissions at the class-certification stage in order to satisfy Rule 23(b)(3)’s requirement that common questions of law or fact predominate over individual ones.

Reliance by investors on the alleged misrepresentation is an essential element of a securities fraud claim under §10(b) of the Exchange Act and SEC Rule 10b-5.  In an earlier landmark case, Basic, Inc. v. Levinson, the Supreme Court recognized the unrealistic burden of proving direct reliance when plaintiff-investors trade on impersonal capital markets.  Accordingly, the Supreme Court endorsed the fraud-on-the-market theory of indirect reliance on the integrity of the market, which embraces the notion that our capital markets efficiently digest and incorporate all public information into a stock’s market price.  The fraud-on-the-market theory enables plaintiffs to invoke a presumption of reliance on material misrepresentations aired to the public.  (Immaterial information, by definition, does not affect market price and thus cannot be relied upon by investors who rely on the market price’s integrity.)  Armed with this presumption of reliance, potential class action plaintiffs are able show that common questions of reliance predominate for purposes of Rule 23(b)(3) certification.

In Basic, the Supreme Court also established certain predicates to a plaintiff’s invocation of the presumption of reliance—including materiality.  Under Basic, defendants may rebut the presumption of reliance by disproving any of the presumption’s predicate elements (materiality and publicity of the alleged misrepresentation, and efficiency of the market on which the subject security is traded).  The Amgen case arrived at the Supreme Court by way of a circuit split over when plaintiffs are required to prove, and when defendants are permitted to rebut, the presumption of reliance.

In Amgen, the plaintiff alleged that Amgen violated §10(b) and Rule 10b-5 through material misrepresentations and omissions regarding the safety, efficacy, and marketing of two of its flagship drugs.  The trial court granted plaintiff’s motion to certify a class under Rule 23(b)(3), and, on interlocutory appeal, the Ninth Circuit affirmed, rejecting Amgen’s arguments that the trial court erred by not requiring proof of materiality and by not considering Amgen’s evidence that the alleged misrepresentations were immaterial.

In a divisive 6-3 opinion authored by Justice Ginsburg, the Supreme Court held that because materiality is also an element of a §10(b) and Rule 10b-5 claim on the merits, proof of materiality is not a prerequisite to class certification.  The court reasoned that “the plaintiff’s inability to prove materiality would not result in individual questions predominating.  Instead, a failure of proof on the issue of materiality would end the case, given that materiality is an essential element of the class members’ securities-fraud claims.”  According to the majority, requiring such proof would have courts “put the cart before the horse” and “necessitate a mini-trial on the issue of materiality at the class-certification stage.”  For the same reasons, the court held that the defendants were not entitled to submit evidence rebutting the presumption of reliance at the class-certification stage.

Courts (and Congress) have long recognized the “in terrorem” effect of class certification, as it often pressures defendants into what some view as extortionate settlements of frivolous claims.  The Supreme Court overcame Amgen’s policy arguments in this regard by noting that Congress chose not to do away with Basic’s presumption of reliance when it enacted the Private Securities Litigation Reform Act of 1995, which simply created heightened pleading standards for securities-fraud claims, a mandatory stay of discovery pending motions to dismiss, and more exacting lead plaintiff requirements.

From the defense perspective, the court’s decision misses the mark, for several reasons.  First, as the Supreme Court had recently confirmed in Wal-Mart Stores, Inc. v. Dukes, the class-certification analysis is “rigorous” and “entail[s] some overlap with the merits of the plaintiff’s underlying claim.”  Thus, the fact that materiality is not only a predicate to the presumption of reliance that is necessary for Rule 23(b)(3) certification, but also an element of a securities-fraud claim, should not bar an inquiry into proof of materiality (or immateriality) at class certification.  Moreover, the Basic court established the rebuttable presumption of reliance—including the predicates to invoking that presumption—in connection with a class-certification ruling.  The Amgen opinion is, therefore, arguably a departure from Basic that limits defendants’ ability to dispose of meritless securities-fraud claims in the early stages of litigation.

Diversity, Choice-of-Law and Fee Awards in Class Action Settlements

In an opinion authored by Chief Justice Sandra Lynch that could, and should, find its way into civil procedure casebooks, the First Circuit charted a course through the complexities of the Erie doctrine and state choice-of-law principles in determining which law governed the award of attorneys' fees to be paid under a class action settlement agreement, reached in a federal MDL proceeding, where subject matter jurisdiction was based on diversity of citizenship.  The decision brings remarkable clarity to an often murky area of law.

In re:  Volkswagen and Audi Warranty Extension Litigation was an MDL proceeding pending in the District of Massachusetts.  Plaintiffs alleged that engine defects in certain vechicles caused the build up of damaging sludge unless certain types of motor oil were used.  They asserted claims of consumer fraud and unfair and deceptive trade practices under various state laws.  Putative class actions were filed in five district courts, and the Judicial Panel on Multidistrict Litigation ordered them transferred to the District of Massachusetts and consolidated for pretrial proceedings.  Subject matter jurisdiction was based on diversity under the Class Action Fairness Act.

The parties arrived at a proposed settlement agreement in September 2010.  They agreed to a claims-made settlement that included both monetary and non-monetary components (including payment for repair and replacement costs, warranty extensions for certain vehicles, one-time oil change discounts, and an education and information program.)  Although defendants agreed to pay attorneys' fees, the settlement agreement expressly separated the benefits to be awarded class members from the anticipated application for attorneys' fees and costs.  It contained no agreement concerning the amount of the fees or how they would be determined, and specified that any attorneys' fee award would be over and above the benefits to be paid to the class.  Another section of the agreement provided that the parties had not agreed to any choice of state or federal law with respect to the construction of the agreement, "including but not limited to attorney fees and costs."

Class counsel asked the court to award $37.5 million in attorneys' fees, and argued that the fee award was governed by federal law.  They contended that the percentage-of-the-fund methodology should apply, and that the settlement value was at least $414 million.  They also argued that an award of $37.5 million was reasonable under the lodestar method.  Defendants argued that state, not federal, law should apply, that their expert valued the settlement at $50 million, and that the requested fees were excessive.

The district court awarded $30 million in fees.  The court held that, where the fee award is the result of a private agreement, federal law governs, and that application of state fee-shifting statutes would not be appropriate because plaintiffs were not prevailing parties.  The court opined that, in the settlement context, fees may be awarded as part of the court's equitable powers over the fund created to benefit the class.  The court further determined that $30 million was reasonable under both the percentage-of-the-fund method and the lodestar approach.

Defendants appealed from the fee award.  The First Circuit vacated the award and remanded for re-determination of the fees.  

First, the court of appeals determined that state law governed the attorneys' fee award.  It noted that, in general, state contract law governs the interpretation of agreements, and that the issue of attorneys' fees "has long been considered for Erie purposes to be substantive and not procedural."  Class counsel argued that the determination of fee awards is procedural because Rule 23(h) of the Federal Rules of Civil Procedure expressly provides for them.  The court rejected this argument, relying on the language of the rule (permitting courts to award attorneys' fees and costs "that are authorized by law or by the parties' agreement"), and the Advisory Committee's notes (stating that Rule 23(h) "does not undertake to create new grounds for an award of attorney fees or nontaxable costs.")  The court also rejected class counsel's Shady Grove argument because there was no conflict between Rule 23(h) and the application of state-law principles.    

Next, the court held that "the district court erred in finding that it had inherent federal equitable powers to fashion an attorneys' fee award."  The cases used to support that argument, the court noted, were based on federal question jurisdiction, not diversity.  Because the basis for the fee award in the MDL proceeding was the agreement itself, it was based on state contract law principles, not federal law.  Additionally, the settlement did not create a common fund from which the fees would be paid, and the common benefit method did not apply "because this is not a case in which the cost of the fees is being 'spread around' among the parties benefitted; the fees are on top of the class-wide benefits."

Having established that state law governed the determination of the fee award, the court then turned to the question of which state's law applied.  The court first determined that, in an MDL proceeding where jurisdiction is based on diversity, the relevant choice-of-law rules are those of the states where the transferor courts sit.  Next, analyzing the choice-of-law rules of each state in which the lawsuits were originally filed, the court concluded that Massachusetts law applied.  The court then determined that Massachusetts follows two approaches to determining attorneys' fees under a contractual agreement (the lodestar method and a multi-factor approach), and remanded the case to the district court to select one of these two methods and award an appropriate fee.

 

Another Circuit Weighs in on Cy Pres Awards in Class Settlements

In an April 30th post, we described the First Circuit's recent decision in In re: Lupron Marketing and Sales Practices Litigation, in which the court for the first time articulated the standards district courts are to apply when reviewing cy pres awards in class action settlements.  As we explained then, the court adopted the "reasonable approximation" test of the American Law Institute's Principles of Aggregate Litigation, and warned that failure to meet the test could result in the reversal of district court orders approving class action settlements that include cy pres components.  Nevertheless, although the court expressed discomfort with a settlement agreement that did not identify the recipients of the cy pres benefits, it upheld the approval of a class action settlement where the district judge exercised his discretion to apply the cy pres payments to charities whose goals were found to be sufficiently aligned with the interests of the class.

On July 13th, the Ninth Circuit, applying a similar analysis, arrived at a different result, striking down a settlement in significant part because it disapproved of the settlement's cy pres provisions.  The Ninth Circuit's analysis is instructive for parties and their counsel in either circuit who hope to gain approval of class action settlements calling for cy pres distributions.  

In Dennis v. Kellogg Company, plaintiffs alleged that the defendant's advertising concerning the nutritional value of one of it's breakfast cereals was false and misleading.  They commenced a class action on behalf of a putative nationwide class of consumers.  The parties agreed to participate in mediation, and the mediation produced a settlement agreement.  The agreed-upon terms of settlement included a $2.75 million fund to be distributed to class members on a claims-made basis, with any unclaimed funds being donated to "charities chosen by the parties and approved by the Court pursuant to the cy pres doctrine."  The defendant also agreed to distribute $5.5 million worth of specific food items to charities that feed the indigent, without specifying how the food would be valued.  

Two class members objected to the settlement.  They argued that the cy pres relief was improper because "the only relationship between [the] lawsuit and feeding the indigent is that they both involve food in some way."  They also argued that the cy pres distributions would benefit class counsel and the defendant, but not the class members.  

The district court approved the settlement and the Ninth Circuit reversed.  The principles articulated by the Ninth Circuit, drawn from some of its prior decisions, closely resemble the ALI principles that the First Circuit adopted earlier this year in Lupron.

The driving principle behind the Ninth Circuit's decision is that the settlement retain an appropriate connection to the class members' claims and represent "'the next best distribution' to giving the funds directly to class members."  The breakfast cereal settlement did not satisfy the first of these criteria, the court held, because feeding the indigent, however noble, has little or nothing to do with the lawsuit's claims of false advertising.  "Thus, appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising."  The court also rejected the argument that its concerns would be placated by the settlement provisions that the charities would be identified at a later date and approved by the court.  As the court held, once the cy pres recipients were selected, the objectors might again object, leading to another appeal, and on the record then before it, it was entirely possible "that the asserted $5.5 million value of the cy pres award will only be of serendipitous value to the class purportedly protected by the settlement."  As the court explained:

The difficulty here is that, by failing to identify the cy pres recipients, the parties have restricted our ability to undertake the searching inquiry that our precedent requires.  The cy pres problem presented in this case is of the parties' own making, and encouraging multiple costly appeals by punting down the line our review of the settlement agreement is no solution.

Finally, the court held that, because it did "not have the authority to strike down only the cy pres portions of the settlement," the entire settlement must fall.  Anticipating that the parties on remand might negotiate a new settlement, the court identified two additional concerns with the agreement's vagueness.  First, the settlement did not explain how the $5.5 million worth of food to be distributed would be valued, and second, the settlement did not explain how the defendant would account for the cy pres distribution, or whether the distribution would be in addition to the company's already planned giving.

Although the First and Ninth Circuits arrived at different outcomes, one affirming the approval of a settlement and the other reversing, the principles they applied were essentially the same.  The take-aways for parties entering into class action settlements in either circuit are straightforward.  First, settling parties should strive to ensure that any cy pres component of a class action settlement is reasonably connected to the purpose of the lawsuit and that the interests of the cy pres recipients reasonably approximate the interests being pursued on behalf of the class.  Second, the settling parties should identify the cy pres recipients in the settlement agreement, and not leave their selection to future determination.

The First Circuit and Cy Pres

In 2009, the First Circuit held, as a matter of first impression, that class action settlement agreements may, in appropriate circumstances, include provisions for cy pres distributions.  In re Pharmaceutical Industry Average Wholesale Price Litigation, 588 F.3d 24 (2009).  On April 24, 2012, the court "address[ed] for the first time the procedural and substantive standards for distribution of cy pres funds" and, "in doing so, . . . express[ed its] unease with federal judges being put in the role of distributing cy pres funds at their discretion."  In re:  Lupron Marketing and Sales Practices Litigation ("Lupron"), Nos. 10-2494 and 11-1329 (1st Cir., April 24, 2012).

Plaintiffs in Lupron included patients who alleged fraud in being overcharged for Lupron, a medication often prescribed by physicians for the treatment of certain forms of cancer.  The parties agreed to a settlement in the amount of $150 million, of which $40 million was allocated to the consumer class.  The agreement further provided that all unclaimed funds from the consumers' allocation would go into a cy pres fund to be distributed at the discretion of the trial judge.  At the conclusion of the claims process, approximately $11.4 million remained unclaimed.

Plaintiffs then requested that the district court determine a plan for the distribution of the unclaimed funds.  After hearing, the court declared its intention to make a cy pres award and distribute the residual funds for the purpose of funding research into the causes and treatments of Lupron-related conditions.  Certain objectors appealed, arguing that the entire amount should be distributed to members of the plaintiff class through a supplemental claims process.  The First Circuit rejected the objectors' arguments, and affirmed the district court's distribution plan.  Its decision marks the first time the court has addressed questions about the distributions of cy pres funds.

The court first ruled that the district court did not abuse its discretion in rejecting a supplemental claims process that would distribute the remaining funds to class members, because the "process would be prohibitively expensive, time-consuming, and, given the high mortality rate among members of the class, would likely recruit few new claimants." 

Next, the court began its review of the substance of the distribution order by turning for guidance to the American Law Institute's Principles of the Law of Aggregate Litigation ("ALI Principles").  The ALI Principles, the court explained, express a policy preference for redistributing unclaimed funds to class members, but because that preference was motivated by a concern that few settlements award 100 percent of a class member's losses, the court held it did not apply to the Lupron settlement, in which all claimants would be fully compensated.  The court noted that the ALI Principles also reject any presumption that residual funds be returned to the defendant. 

The court then referred to ALI Principles Section 3.07(c), which "sets up an order of preference:  when feasible, the recipients should be those 'whose interests reasonably approximate those being pursued by the class.'"  "If no recipients 'whose interests reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve a recipient that does not reasonably approximate the interests being pursued by the class.'"

The First Circuit adopted the "reasonable approximation" test, and set forth the following non-exclusive factors to guide its application:

• The purposes of the underlying statutes claimed to have been violated;
• The nature of the injury to the class members;
• The characteristics and interests of the class members;
• The geographical scope of the class;
• The reasons why the settlement funds have gone unclaimed; and
• The closeness of the fit between the class and the cy pres recipient.

The court also made it clear that "[f]ailure to meet the reasonable approximation test can lead to reversal," and that "the mere fact that a recipient is a charitable or public interest organization does not itself justify its receipt of a cy pres award."

Applying these principles to the Lupron settlement, the court upheld the district court's cy pres award.  The court rejected the objectors' argument that claimants should receive an award of treble damages from the residual funds, noting that the claimants received more than their actual losses and that the research funded by the cy pres award could benefit absent class members who did not submit claims. The court also reasoned that allowing residual funds to be distributed to claimants who have already recovered their losses would result in a windfall to the claimants that could create improper incentives for plaintiffs to file suits in which they expect large numbers of absent class members not to file claims, and to keep information from absent class members.

Finally, the court expressed the view that district court judges should not be given discretion by the settling parties to decide how cy pres funds should be distributed.  Rather, the parties should choose the cy pres recipients as part of their settlement agreement, which the district courts can then test against the principles identified in the First Circuit's decision.