Court Rejects Settlement Because of Cy Pres Issues

A federal court recently rejected a proposed settlement of an economic loss class action because of the details of its cy pres component.  See In re Hydroxycut Mktg & Sales Practices Litig. (Dremak v. Iovate Health Scis. Grp.),  No. 09-cv-1088 (S.D. Cal. 11/19/13).

The “Settlement Class” was defined as including those persons who purchased various Hydroxycut  Products between May 9, 2006 and May 1, 2009, inclusive.The settlement relief consists of a $10 million Cash Component and a $10 million Product Component. Settlement Class Members who opted to receive cash were to receive $25 for each Hydroxycut Product they purchased.  In lieu of cash, Settlement Class Members could elect to receive a Product Bundle for
each purchase of a Hydroxycut Product. Any amount remaining in the Cash Component after payment of Notice and Claim Administration Expenses, and Eligible Cash Claims would constitute the “Residual Settlement Amount.”  If any funds remained after six years from the Effective Date of the deal, the remainder was to be paid out pursuant to the cy pres doctrine to certain types of organizations (such as ones promoting community-based solutions for common and preventable diseases like cancer, heart disease, diabetes, obesity, and asthma).

The cy pres doctrine allows a court to distribute unclaimed or non-distributable portions of a class action settlement fund to indirectly benefit the entire class. See Six Mexican Workers v. Ariz.Citrus Growers, 904 F.2d 1301, 1305 (9th Cir. 1990). When employing the cy pres doctrine, unclaimed funds should be put to their next best use, e.g., for “the aggregate, indirect, prospective benefit of
the class.” Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011). The Ninth Circuit has held that cy pres distribution must be “guided by (1) the objectives of the underlying statute(s); and (2) the interests of the silent class members.” Six Mexican Workers, 904 F.2d at 1307. A cy pres distribution is an abuse of discretion if there is “no reasonable certainty” that any class member
would benefit from it. Dennis v. Kellogg Co., 697 F.3d 858, 865 (9th Cir. 2012).  A court should not find that a settlement is fair, adequate, and reasonable unless the cy pres remedy accounts for the nature of the plaintiffs’ lawsuit, the objectives of the underlying statutes, and the interests of the absent class members.

Generally, a district court can approve a class action settlement if the court finds that the settlement is “fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e). When the settlement is reached before formal class certification, settlement requires a higher standard of fairness and a more probing inquiry than may normally be required under Rule 23(e).

Here, the court concluded that the cy pres remedy did not satisfy the standards for cy pres relief set forth by the Ninth Circuit. and denied the motion for final approval of the settlement.  The court found that the proposed cy pres distribution in this proposed settlement did not benefit the class. At the hearing, defendant's counsel explained that under a separate master settlement agreement governing the personal injury cases in the multi-district litigation, personal injury claimants are to be paid out of a $14 million settlement fund. And cy pres distributions for personal injury claimants in this action reduce the amount that Iovate must pay into the personal injury fund, yet, said the court, providing no additional benefit to the personal injury claimants and no benefit at all to the class members who suffered no personal injury.

The court rejected the argument that causing a benefit in the form of "facilitating settlement" in this action or the separate personal injury actions is the type of “indirect benefit” that cy pres remedies are meant to provide. The focus, said the court, should be on whether the funds themselves are being used for the benefit of the class.

The cy pres remedy was also problematic, said the court, because it allowed for a disproportionate distribution of settlement funds to personal injury claimants. In doing so, the cy pres remedy fails to take into account the interests of the majority of absent class members who did not suffer any personal injury, and the nature of this action, which mostly concerned alleged unfair competition, consumer protection, and product warranty claims, not personal injury liability.

Because of the expenses and claims, it appeared that more than half the settlement might be used for cy pres distribution to the personal injury claimants. The court expressed concern that so little of the sizeable settlement fund directly benefitted the class. Under the terms of the settlement, most of the fund could be channeled into cy pres distribution.  The American Law Institute’s Principles of the Law of Aggregate Litigation provide that where a settlement involves individual distributions to class members and there are funds remaining after the distributions, the settlement should
presumptively provide first for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair. See ALI Principles § 3.07(b) (2010).

Thus, the court found that the cy pres distribution was not guided by the interests of the class
members.  It appeared to the court that the cy pres relief was being used as a vehicle to help settle the personal injury cases, not to provide an indirect prospective benefit to the entire class.  The court also contrasted that class counsel was seeking $5 million in fees based in part on a percentage of the total fund.


 

Energy Drink Case Subject to Primary Jurisdiction

We have posted before about the important doctrine of primary jurisdiction.  Last week, a defendant obtained dismissal of a proposed class action over its energy drinks under this theory. See Fisher v. Monster Beverage Corp., No. 12-2188 (C.D. Cal. 11/12/13).

Plaintiffs sued individually and as putative class representatives for  allegedly "unfair and deceptive business and trade practices on behalf of anyone who purchased for personal consumption any of the Monster-branded energy drinks sold under the Monster Rehab® brand name and the original Monster Energy®."  Plaintiffs alleged various misrepresentations on the labels of the Original Monster and Rehab Varieties cans, including language that the drink "quenches thirst, hydrates like a sports drink, and brings you back after a hard day's night", that it would "RE-FRESH, RE-HYDRATE, REVIVE," and is "the ideal combo of the right ingredients in the right proportion to deliver the big bad buzz that only Monster can."  Plaintiffs alleged these statements were  misrepresentations because the cans do not hydrate like a sports drink, and allegedly cause dehydration; because "it is not the ideal combo of the right ingredients in the right proportion" and because the statement omits the potential health risks associated with such drinks.  Plaintiffs also alleged claims related to Monster's advertising "strategy."  Plaintiffs alleged that Monster specifically "targets" youth despite the caffeine levels in Monster Drinks.

The court tackled a number of challenges, including standing, preemption (some claims were preempted by the Nutrition Labeling and Education Act), and the absence of particularity in many of the fraud allegations.  But our focus here is on primary jurisdiction.  The primary jurisdiction doctrine allows courts to stay proceedings or to dismiss a complaint without prejudice pending the resolution of an issue within the special competence of an administrative agency; it is most often invoked if a claim involves an issue of first impression or a particularly complicated issue Congress has committed to a regulatory agency.  The courts traditionally weigh four factors in deciding whether to apply the primary jurisdiction doctrine: (1) the need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration.  The court determines that an otherwise cognizable claim implicates technical and policy questions that should be addressed in the first instance by the agency with regulatory authority over the relevant industry rather than by the judicial branch.

Defendants argued that the FDA has jurisdiction over issues involving food safety and labeling, and the FDA has specialized expertise in the "technical and policy" questions involved here; the FDA has commenced a science-based evaluation of the safety of caffeine-containing food products, including energy drinks. They also argued that the FDA has primary jurisdiction because the agency has special competence over the matters involving the alleged inadequate warnings and failure to warn issues in this case.  The court agreed that the matters at issue here have been placed by Congress within the jurisdiction of the FDA pursuant to statute and regulations that require the FDA's expertise. The FDA has regulatory authority over food labeling. The FDCA establishes a uniform federal scheme of food regulation to ensure that food is labeled in a manner that does not mislead consumers. Second, plaintiffs' claims ultimately involve "technical and policy claims" about the effects of caffeine and whether Monster should be allowed to advertise and label their products in a way that appeals to a younger demographic. Plaintiffs cited to studies examining the effects of "energy drinks" in general, demonstrating that issues raised in the complaint may affect an entire industry. 

Third, the FDA has taken an interest in investigating and resolving whether energy drinks, including Monster, contain proper levels of caffeine. The FDA's interest in regulating the safety of caffeine weighed in favor of exercising the primary jurisdiction doctrine.  Thus, the Court found that plaintiffs' claims were covered under the Primary  Jurisdiction Doctrine.  

 

 

Class Action Rejected Per Primary Jurisdiction Defense

A California federal court recently rejected a putative class action alleging meal replacement bars sold in General Nutrition Centers Inc. stores somehow defrauded customers into thinking they were healthy because they were labeled with the term “zero impact.”  See Gabe Watkins v. Vital Pharmaceuticals, et al., No. 2:12-cv-09374 (C.D. Cal. 2013).  Readers may be interested in the discussion of primary jurisdiction.

On September 25, 2012, Plaintiff filed a Class Action Complaint in the Superior Court of California
for Los Angeles County. Plaintiff alleged that Defendants falsely labeled the Bars in violation of the Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, et seq., and the Consumers Legal Remedies Act ("CLRA"), Cal. Civ. Code § 1750, et seq.  Defendants removed the action to federal court, asserting federal subject matter jurisdiction in reliance on the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2).

Plaintiff asserted that while Vital and GNC marketed and advertised the Bars as 'ZERO IMPACT,' the Bars have an impact on consumers' carbohydrate, sugar and overall caloric intake, and to claim otherwise was "false and misleading."  However, the back of the wrapper features nutritional facts, an ingredient list, and a marketing statement, which notes that the low Dextrose Equivalent sugars contained in the Bars have less impact on blood sugar and glycemic index than most whole grain carbohydrates.  Plaintiff responded that the location and type size of the nutritional information and marketing statement allegedly made it too difficult to see and read.

Defendant moved to dismiss, arguing that the court should defer the question of whether the "ZERO IMPACT" label is misleading, to the Food and Drug Administration under the doctrine of primary jurisdiction.  Primary jurisdiction is a doctrine specifically applicable to claims properly cognizable in court that contain some issue within the special competence of an administrative agency.  Reiter v. Cooper, 507 U.S. 258, 268 (1993). While it is not to intended to secure expert advice for the courts from regulatory agencies every time a court is presented with an issue conceivably within the agency's ambit, it is a doctrine used by the courts to allocate initial decision-making responsibility between agencies and courts where such jurisdictional overlaps and potential for conflicts exist.  Syntek Semiconductor Co., Ltd. v. Microchip Tech. Inc., 307 F.3d 775, 780 (9th Cir. 2002). Typically, there are four factors present in cases where the doctrine properly is invoked: (1) the need to resolve an issue that (2) has been placed within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory scheme that (4) requires expertise or uniformity in administration. See United States v. Gen. Dynamics Corp., 828 F.2d 1356, 1362 (9th Cir. 1987). The doctrine is often most applicable where a claim requires resolution of an issue of first impression or of a particularly complicated issue that Congress has committed to a regulatory agency.

Here, the court concluded that the relevant factors weighed in favor of dismissing plaintiff's claims in deference to the FDA's primary jurisdiction.

Defendants contended that the FDA has primary jurisdiction over how a manufacturer may name
and label its food products and that the resolution of plaintiff's UCL and CLRA claims would clearly invade the FDA's primary jurisdiction. Indeed, Congress has granted the FDA regulatory authority over false and misleading food labeling as part of the Food, Drug, and Cosmetic Act. The primary jurisdiction doctrine was applicable in this case because the FDA has yet to consider the nutritional import of the claim "ZERO IMPACT" or in what context the claim might possibly mislead consumers about a product's nutritional content.

Plaintiff's claims centered on the argument that the nature of the marketing claim "ZERO IMPACT," combined with its location on the wrapper and larger type size, somehow created the impression that the Bars have no dietary impact at all.  But could not direct the court to any FDA rule, regulation, or guidance document discussing how the claim "ZERO IMPACT" or even the word "impact" can or should be used to describe a food product's nutritional content. Nor is there any evidence of the FDA bringing an enforcement action against anyone regarding the "ZERO IMPACT" claim or the nutrient content on its label.  Without any guidance about the context in which the FDA would find the claim "ZERO IMPACT" to be permissible, any determination on whether the term is misleading risked undermining, through private litigation, the FDA's considered judgments.

The FDA has issued some regulations with regard to the word "zero," but these are designed to
make sure that foods with claims like "zero calorie," "zero sodium," and "zero fat" contain the type
and amount of nutrients that a reasonable consumer would expect. See 21 C.F.R. §§ 101.60-101.62. Without more, however, there is no reasoned way for a court to determine whether the FDA regulations associated with labeling items as "zero calorie" and "zero fat" could encompass a claim like "ZERO IMPACT."   Calories, sugar, and fat are specific nutritional elements, but "impact" may refer to the effect those elements have on the human body.

In the absence of any FDA rules or regulations (or even informal policy statements) regarding the
use of the word 'impact' on food labels, the court declined to make any independent determination on whether defendant's use was false or misleading.  The court  concluded it lacked the FDA's expertise in guarding against deception in the context of food labeling.  See Pom Wonderful, 679 F.3d at 1178, and so it deferred this issue to the FDA to consider administrative action regarding the use of the "ZERO IMPACT" claim.

 

Supreme Court Hears Argument in CAFA Case

The U.S. Supreme Court heard argument in a case raising the issue whether a parens patriae group action by a state attorney general -- a class-like litigation without the procedural protections of a class action -- is removable as a mass action under CAFA.  See Mississippi ex rel. Hood v. AU Optronics Corp.,  No. 12-1036 (U.S., oral argument 11/6/13).

The Fifth Circuit, 701 F.3d 796 (5th Cir. 2012), had announced a claim-by-claim analysis to determine the real party in interest for purposes of CAFA jurisdiction in such parens patriae actions; the Fourth, Seventh and Ninth Circuits have taken a different, more “whole case” approach, considering the entire complaint to determine the real party in interest.  See AU Optronics Corp. v. South Carolina, 699 F.3d 385 (4th Cir. 2012); LG Display Co. v. Madigan, 665 F.3d 768 (7th Cir. 2011); Nevada v. Bank of America Corp., 672 F.3d 661 (9th Cir. 2012).

CAFA allows removal of certain mass actions, even if not styled as class actions, but contains an exception that a suit is not a mass action if all of the claims in the action are asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class) pursuant to a state statute specifically authorizing such action; but when specific individual consumers, in addition to the state, are the real parties in interest, there is no way that all of the claims are asserted on behalf of the general public.

Mississippi, of course, argued for "state sovereign prerogatives.”  And Mississippi focused on the statutory language about a mass action seeking a joint trial, and contended that the parens patriae action did not propose a joint trial for 100 or more plaintiffs' claims. On the other hand, defendants noted that the use of the word “persons” in CAFA's mass action provision clearly required the court to engage in a fact specific claim-by-claim analysis, rather than take a whole-claim approach. CAFA could have, but did not focus on “named plaintiffs.”  It was clear that the Mississippi consumers allegedly harmed by defendants' prices were the real parties in interest.  Regarding the federalism concerns, defendants noted that this was only a question of forum, and federal courts can faithfully enforce state law.

The Washington Legal Foundation, in one of multiple amicus filings, argued that CAFA was enacted to enhance the ability of defendants to remove interstate mass actions to federal court.  The Chief Justice raised the most compelling issue, asking “So the answer is, that there is nothing to prevent 50 attorneys general, from saying, every time there is a successful class action as to which somebody in my State purchased one of the items, we are going to file a parens patriae action, the complaint is going to look an awful lot like the class action complaint, and we want our money” -- in state court, out of the reach of CAFA?

 

Report Issued on "New Lawsuit Ecosystem"

The U.S. Chamber of Commerce Institute for Legal Reform has released a report examining the developing lawsuit “ecosystem” and areas of litigation of most concern to the business community. The report examines the trends and players in six key litigation areas, offers insights into new emerging liability threats, and explores the growing alliance between state attorneys general and the plaintiffs’ bar.  One key feature notes how alleged deceptive marketing claims against food and beverage makers are on the rise.  Readers will recall our many posts about the trend for plaintiffs to parse labels and bring putative class actions even when they were not injured by the product. The report is entitled "The New Lawsuit Ecosystem.”

The report delves into the areas of law where entrepreneurial plaintiffs’ lawyers have been prospecting for new liability: Class actions against food makers alleging misleading advertising;
Data privacy suits against businesses over allegations that they inadvertently violated released or misused customer information; Claims against brand-name drug manufacturers for injuries allegedly stemming solely from generic products they did not make or sell; Speculative theories of liability seeking to recover for risks of harm or “economic loss,” not actual injuries.

The report also looks at the increasingly troubling trend of state attorneys general turning over the keys to their offices and litigation powers to private plaintiffs’ lawyers. Plaintiffs’ lawyers often develop the legal theories, decide whom to target, and then “recruit” state attorneys general
to retain them on a contingency fee basis to bring the lawsuits. This process provides significant advantages to plaintiffs’ lawyers: it eliminates the need to represent individuals who were actually injured by a defendants’ product or conduct; avoids any contribution those individuals may have
made to their own injuries; reduces traditional defenses; heightens the plaintiffs’ lawyers’ subpoena power; and gives them the ability to seek fines, not just damages. State attorneys general have these powers because they are to be used sparingly, and only to advance appropriate public policies. They are not to be used to maximize personal profit, which is the goal
of private contingency fee lawyers who are often personal or political allies of the state attorneys general.

Very interesting read.


Among those contributing to the report were my colleagues Mark Behrens, Phil Goldberg, Victor E. Schwartz and Cary Silverman.