Seventh Circuit Rejects Another Class Settlement

The Seventh Circuit is one of the appeals courts that tends to examine very closely proposed class action settlements.  In a recent case, the court rejected a proposed settlement, finding the distribution to members of a class challenging dietary supplement labeling didn't justify the attorneys' fee award. See Pearson v. NBTY Inc., No. 14-1198 (7th Cir. 11/19/14).

Judge Posner opined for the panel about several class action settlement issues.  Defendants manufactured vitamins and nutritional supplements, including glucosamine pills, which are dietary supplements designed to help people with joint disorders, such as osteoarthritis. Several class action suits were filed in federal district courts across the country alleging violation of several states’ consumer protection laws by making allegedly false claims for glucosamine’s efficacy.  The district court had jurisdiction of this case under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2).

About eight months after the plaintiffs filed this suit in federal district court in Illinois, class counsel in all the cases negotiated a nationwide settlement and submitted it to that court for approval. Judge Posner noted it is typical in class action cases of this sort—cases in which class counsel want to maximize the settlement and the defendants don’t want to settle except for “global” peace—for the class counsel to negotiate a single nationwide settlement and agree to submit it for approval to just one of the district courts in which the multiple actions had been filed.

Here, the district judge approved the settlement, though with significant modifications. As approved, the settlement required payment of $1.93 million in fees to class counsel, plus an additional $179,676 in attorney expenses (attorneys' fees cover billable time and overhead expenses such as office space); $1.5 million in class notice and administration costs, $1.13 million to the Orthopedic Research and Education Foundation, $865,284 to the 30,245 class members who submitted claims, and $30,000 to the six named plaintiffs ($5,000 apiece) as compensation for their role as the class representatives. There had been a stipulation that defendants wouldn’t challenge any attorney fee requests by class counsel up to the agreed amount. Such a stipulation is sometimes called a “clear-sailing” agreement.

Approval of the proposed settlement involved an assessment of the value of the settlement to the class. The district judge valued the settlement at the maximum potential payment that class members could receive, which came to $20.2 million. That valuation, which played a critical role in the judge’s decision as to how much to award class counsel in attorneys’ fees, comprised $14.2 million for class members (based on the contrary-to-fact assumption that every one of the 4.7 million class members who had received postcard rather than publication notice of the class action would file a $3 claim), $1.5 million for the cost of notice to the class, and the fees to class counsel.  The $20.2 million figure had "barely any connection to the settlement’s value to the class," said Judge Posner.  Notice and fees, which together account for $6 million of the $20.2 million, are costs, not benefits. The attorneys’ fees are of course not paid to the class members; and as stated in Redman v. RadioShack Corp., 768 F.3d 622, 630 (7th Cir. 2014), “administrative costs should not have been included in calculating the division of the spoils between class counsel and class members. Those costs are part of the settlement but not part of the value received from the settlement by the members of the class. The costs therefore shed no light on the fairness of the division of the settlement pie between class counsel and class members.”

The $14.2 million “benefit” to the class members was a fiction too, said the panel, since only 30,245 claims were filed, yielding total compensation for the class members of less than $1 million.  Because the amount of the attorneys’ fees that the judge wanted to award class counsel—$1.93 million—was only 9.6 percent of $20.2 million, he thought the amount reasonable. But Judge Posner explained that was not relevant;  the ratio that is relevant is the ratio of the fee to the fee plus what the class members received. Basing the award of attorneys’ fees on this ratio, which shows how the aggregate value of the settlement is being split between class counsel and the class, gives class counsel an incentive to design the claims process in such a way as will maximize the settlement benefits actually received by the class. Here, said the court, the class received a "meager" $865,284. This means the attorneys’ fees represented not 9.6 percent of the aggregate value but an "outlandish" 69 percent.

Although appellate review of approval of class action settlements is limited, Williams v. Rohm & Haas Pension Plan, 658 F.3d 629, 634 (7th Cir. 2011), it is far from pro forma, because the district judge as “a fiduciary of the class, who is subject therefore to the high duty of care that the law requires of fiduciaries.” Reynolds v. Beneficial National Bank, 288 F.3d 277, 280 (7th Cir. 2002).

Judge Posner also took issue with the claim forms.  As experienced class action lawyers, class counsel in the present case must have known, said the panel, that the notice and claim forms, and the very modest monetary award that the average claimant would receive, were bound to discourage filings. The postcard sent to each of 4.7 million class members informed the recipient that to file a claim he must click on a website or call a toll-free phone number. A long and detailed process was not enticing for a $3 reward.

The panel also rejected the $1.13 million cy pres award in this case. A cy pres award is supposed to be limited to money that can’t feasibly be awarded to the intended beneficiaries, here consisting of the class members. Notice costing $1.5 million reached 4.7 million class members. Granted, doubling the expenditure would not have doubled the number of class members notified. But there could have been more notice, or the claims process could have been simplified to generate more returns.  The Orthopedic Research and Education Foundation was entitled to receive money intended to compensate victims of consumer fraud only if it was infeasible to provide that compensation to the class—which had not been demonstrated.

An economically rational defendant will be indifferent to the allocation of dollars between class members and class counsel. Caring only about his total liability, the defendant will not agree to class benefits so generous that when added to a reasonable attorneys’ fee award for class counsel they will render the total cost of settlement unacceptable to the defendant.  Judges have learned that class action settlements are often quite different from settlements of other types of cases, which indeed are bargained exchanges between the opposing litigants. Class counsel rarely have clients to whom they are responsive. The named plaintiffs in a class action, though supposed to be the representatives of the class, are typically chosen by class counsel; the other class members are not parties and have no control over class counsel. The result is an acute conflict of interest between class counsel, whose pecuniary interest is in their fees, and class members, whose pecuniary interest is in the award to the class. Defendants, said Judge Posner, are interested only in the total costs of the settlement to them, and not in the division of the costs between attorneys’ fees and payment to class members.   See Eubank v. Pella Corp., 753 F.3d 718, 720 (7th Cir. 2014).

The panel concluded that the district judge made significant modifications in the settlement, but not enough. The settlement, a "selfish deal" between class counsel and the defendant, dis-served the class. Only one-fourth of one percent of the class members would receive even modest compensation, and for these "meager benefits," the court said, class counsel should not receive almost $2 million.  

 

 

Seventh Circuit Rejects Coupon Settlement Terms

The Seventh Circuit has rejected the award of attorneys' fees award for a settlement that would provide the class coupons as a remedy for allegedly printing credit card expiration dates on sales receipts. See Redman v. Radioshack Corp., No. 14-1470 (7th Cir., 9/19/14).

Judge Posner wrote for the panel.  The court had consolidated appeals in two class actions brought under the Fair and Accurate Credit Transactions Act (“FACTA”), 15 U.S.C. § 1681c(g). The Act prohibits putting "the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.”  The goal is security: a thief can of course guess at the expiration date—the date is unlikely to be more than a few years in the future and there are only 12 months in a year; so if he guesses 60 times he’s very likely to hit the jackpot. But if he guesses wrong the first few times that he places a bogus order, the card issuer typically will get suspicious and refuse to authorize his next order.  Additional reasons for requiring deletion of the expiration date include that expiration dates combined with the last four or five digits of an account number can be used to bolster the credibility of a criminal who is making pretext calls to a card holder in order to learn other personal confidential financial information.

If a violation of the statute is willful, a consumer whose receipt contains as a result of the violation data that should have been deleted, but who sustains no harm because no one stole his identity as a result of the violation, is nevertheless entitled to “statutory damages,” as distinct from compensatory or punitive damages, of between $100 and $1000. 15 U.S.C. § 1681n(a)(1)(A). (Statutory damages are in effect bounties—means of inducing private persons to enforce a
regulatory law.)  Let's put aside the court's discussion of willfulness, and focus on the class issues.

The named plaintiffs (realistically, class counsel) agreed with RadioShack on terms of settlement. The essential term was that each class member who responded positively to the notice of the proposed settlement would receive a $10 coupon that it could use at any RadioShack store. The class member could use it to buy an item costing $10 or less (but he would receive no change if the item cost less than $10), or as part payment for an item costing more. He could stack up to three coupons (if he had them) and thus obtain a $30 item, or a $30 credit against a more expensive item. He could also sell his coupon or coupons, but the coupons had to be used within six months of receipt because they would expire at the end of that period. With regard to three‐coupon stacking, the only way a member of the class could obtain more than a single coupon would be to buy one or more coupons from another class member, because the settlement allows only one coupon per
customer no matter how many of his or her RadioShack purchases involved the alleged erroneous receipts. Although the class was assumed to contain 16 million members, notice of the proposed settlement was sent to fewer than 5 million. Of those potential class members who received notice of the proposed settlement, some 83,000 —a little more than one half of one percent of the entire class, assuming the entire class really did consist of 16 million different consumers— submitted claims for the coupon in response.

The court of appeals had lots of problems with the trial court's handling of the proposed settlement, and offered a number of important observations on coupon settlements in particular.

The magistrate judge’s statement that “the fact that the vast majority of class members—over 99.99%—have not objected to the proposed settlement or opted out suggests that the class generally approves of its terms and structure” was "naive, as was her basing confidence in the fairness of the settlement on its having been based on “arms‐length negotiations by experienced counsel.” The fact that the vast majority of the recipients of notice did not submit claims hardly shows “acceptance” of the proposed settlement: rather, said Judge Posner,  it may show oversight, indifference, rejection, or transaction costs. The bother of submitting a claim, receiving and safeguarding the coupon, and remembering to have it with you when shopping may exceed the value of a $10 coupon to many class members. And “arm’s‐length negotiations” are inconsistent with the existence of a conflict of interest on the part of one of the negotiators— class counsel—that may warp the outcome of the negotiations. The magistrate judge’s further reference to “the considerable portion of class members who have filed claims” questionably treated one‐half of one percent as being a “considerable portion.”

Another controversial term of the proposed settlement was that RadioShack would pay class counsel $1 million  in attorneys’ fees, plus pay various administrative costs including the cost of notice. The agreed upon attorneys’ fees, plus the $830,000 worth of coupons at face value, plus the administrative costs, added up to about $4.1 million. Class counsel argued that since the attorneys’
fees were only about 25 percent of the total amount of the settlement, they were reasonable. The district court, agreeing, approved the settlement, precipitating this appeal by two groups of class members who objected to the settlement in the district court.

On appeal, the 7th Circuit noted that he law quite rightly requires more than a judicial rubber stamp when the lawsuit that the parties have agreed to settle is a class action. The reason is the "built‐in conflict of interest" in class action suits. The defendant typically is interested only in the bottom line: how much the settlement will cost it. And class counsel, as rational “economic man,” presumably is interested primarily in the size of the attorneys’ fees provided for in the settlement, for those are the only money that class counsel, as distinct from the members of the class, get to keep. The optimal settlement from the joint standpoint of class counsel and defendant, assuming they are self‐interested, is therefore a sum of money moderate in amount but weighted in favor of attorneys’ fees
for class counsel. The named plaintiff often is the nominee of class counsel, and in any event he is dependent on class counsel’s good will to receive the modest extra compensation ($5,000 in this case) that named plaintiffs typically receive. 

Critically the judge must assess the value of the settlement to the class and the reasonableness of the agreed‐upon attorneys’ fees for class counsel, bearing in mind that the higher the fees the less compensation will be received by the class members. When there are objecting class members, the judge’s task is eased because he or she has the benefit of an adversary process: objectors versus settlors (that is, versus class counsel and the defendant).

Here, the trial judge accepted the settlors’ contention that the defendant’s entire expenditures should be aggregated in determining the size of the settlement; it was this aggregation that reduced the award of attorneys’ fees to class counsel to a "respectable‐seeming" 25 percent. But the roughly $2.2 million in administrative costs should not have been included in calculating the division of the spoils between class counsel and class members. Those costs, said the panel, are part of the settlement but not part of the value received from the settlement by the members of the class. The costs therefore shed no light on the fairness of the division of the settlement pie between class counsel and class members. Of course, without administration and therefore administrative costs, notably the costs of notice to the class, the class would get nothing. But also without those costs class counsel would get nothing, because the class, not having learned of the proposed settlement (or in all likelihood of the existence of a class action), would have derived no benefit from class counsel’s activity.

Therefore, said the court, the ratio that is relevant to assessing the reasonableness of the attorneys’ fee that the parties agreed to is the ratio of (1) the fee to (2) the fee plus what the class members received. At most they received $830,000. That translates into a ratio of attorneys’ fees to the sum of those fees plus the face value of the coupons of 1 to 1.83, which equates to a contingent fee of 55% ($1,000,000 ÷ ($1,000,000 + $830,000)). Computed in "a responsible fashion by substituting actual for face value," the ratio would have been even higher because 83,000 $10 coupons are not worth $830,000 to the recipients. Anyone who buys an item at RadioShack that costs less than $10 will lose part of the value of the coupon because he won’t be entitled to change. Anyone who stacks three coupons to buy an item that costs $25 will lose $5. Anyone who fails to use the coupon within six months of receiving it will lose its entire value. (Six‐month coupons are not unusual, but redemption periods usually are longer. See, e.g., In re Mexico Money Transfer Litigation (Western Union & Valuta), 164 F. Supp. 2d 1002, 1010–11 (N.D. Ill. 2000) (35 months); Henry v. Sears Roebuck & Co., 1999 WL 33496080, at *10 (N.D. Ill. 1999) (nearly three years).) 

The court found it significant that no attempt was made by the magistrate judge or the parties to the proposed settlement to estimate the actual value of the nominal $830,000 worth of coupons. Couponing is an important retail marketing method, and Judge Posner postulated that it would have been possible to obtain expert testimony (including neutral expert testimony by the court’s appointing an expert, as authorized by Fed. R. Evid. 706), or responsible published materials, on consumer response to coupons. And likewise it should have been possible to estimate the value of
couponing to sellers—a marketing device that in some circumstances must be more valuable than cutting price, as otherwise no retailer would go to the expense of buying and distributing coupons.

The court re-emphasized that in determining the reasonableness of the attorneys’ fee agreed to in a proposed settlement, the central consideration is what class counsel achieved for the members of the class rather than how much effort class counsel invested in the litigation. The court noted that in so doing it was not  taking sides in a controversy over the interpretation of the coupon provisions
of the Class Action Fairness Act, which states in part that If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value
to class members of the coupons that are redeemed. Judge Posner thinks "this is a badly drafted statute." To begin with, read literally, the statutory phrase “value to class members of the coupons
that are redeemed” would prevent class counsel from being paid in full until the settlement had been fully implemented. For until then one wouldn’t know how many coupons had been redeemed. An alternative interpretation of “value … of the coupons that are redeemed” would be the face value of the coupons received by class members who responded positively to notice of the class action. In this case that would be 83,000 of the millions of class members who received notice, though not all 83,000 will actually use the coupon.

Perhaps there is no need for a rigid rule—a final choice, for all cases, among the possibilities suggested. In some cases the optimal solution may be part payment to class members and
class counsel up front with final payment when the settlement is wound up. That might be appropriate in a case such as this, said the court. What was inappropriate, however, was an attempt to determine the ultimate value of the settlement before the redemption period ended without even an estimate by a qualified expert of what that ultimate value was likely to prove to be.

Some had called this  an “all‐coupon” case (only benefit was a coupon), but class counsel call it a “zero‐coupon” case. They argued that a coupon that can be used to buy an entire product, and not just to provide a discount, is a voucher, not a coupon. “Voucher” was indeed the term used in the settlement agreement, because the parties didn’t want to subject themselves to the coupon  provisions of the Class Action Fairness Act. But the idea that a coupon is not a coupon if it can ever be used to buy an entire product didn't make any sense to Judge Posner, certainly in terms of the
Act. Why would it make a difference, so far as the suspicion of coupon settlements that animates the Act’s coupon provisions is concerned, that the proposed $10 coupon could be used either to reduce by $10 the cash price of an item priced at more than $10, or to buy the entire item if its price were
$10 or less? Coupons usually are discounts, but if the face value of a coupon exceeds the price of an item sold by the issuer of the coupon, the customer often is permitted to use the coupon to buy the item—and sometimes he’ll be refunded the difference between that face value and the price of the item.

This case illustrated, said the panel, why Congress was concerned that class members can be shortchanged in coupon settlements whether a coupon is used to obtain a discount off the full
price of an item or to obtain the entire item; class counsel’s proposed distinction between discount coupons and vouchers also would impose a heavy administrative burden in distinguishing
coupons used for discounts on more expensive items (“coupons” in class counsel’s narrow sense of coupon) and the identical coupons used to pay the full prices of cheaper items (“vouchers” in class counsel’s lexicon and not “coupons” at all).  Assessing the reasonableness of attorneys’ fees based on a coupon’s nominal face value instead of its true economic value was no less troublesome when the coupon may be exchanged for a full product.

The difficulty of valuing a coupon settlement exposed for the court another defect in the proposed settlement: placing the fee award to class counsel and the compensation to the class members in separate compartments. The $1 million attorneys’ fee is guaranteed, while the benefit of the settlement to the members of the class depends on the value of the coupons, which may well turn out to be much less than $830,000. This guaranty is the equivalent of a contingent‐fee contract that entitles the plaintiff’s lawyer to the first $50,000 of the judgment or settlement plus one‐third of any amount above $50,000—so if the judgment or settlement were for $100,000 the attorneys’ fee would be $66,667, leaving only a third of the combined value (to plaintiff and lawyer) of the
settlement to the plaintiff. Another questionable feature of the settlement for the appeals court was the inclusion of a “clear‐sailing clause”—a clause in which the defendant agreed not to contest class counsel’s request for attorneys’ fees. Because it’s in the defendant’s interest to contest that request in order to reduce the overall cost of the settlement, the defendant won’t agree to a clear‐sailing clause without compensation—namely a reduction in the part of the settlement that goes to the class members, as that is the only reduction class counsel are likely to consider. The existence
of such clauses thus illustrates the danger, said the court, of collusion in class actions between class counsel and the defendant, to the detriment of the class members.

The panel was also bothered by the fact that class counsel did not file the attorneys’ fee motion until after the deadline set by the court for objections to the settlement had expired. That violated Rule 23(h). See In re Mercury Interactive Corp. Securities Litigation, 618 F.3d 988, 993–95 (9th Cir. 2010); see also Committee Notes on the 2003 Amendments to Rule 23. From reading the proposed settlement the objectors knew that class counsel were likely to ask for $1 million in attorneys’ fees, but they were handicapped in objecting because the details of class counsel’s hours and expenses were submitted later, with the fee motion, and so they did not have all the information they needed to justify their objections. 

So, coupon settlement and fee rejected.

Class Member Lacks Standing to Appeal Fees to Class Counsel

Last week, the First Circuit dismissed for lack of standing a class member's challenge to the significant fee award to class counsel in the Volkswagen AG/Audi AG MDL. In re Volkswagen and Audi Warranty Extension Litigation, MDL No. 1790.
 

The MDL included litigation over alleged oil sludge buildup in engines in the vehicles, and involved about 480,000 cars. The parties reached a settlement under which the automakers had agreed to cover the sludge-related maintenance costs for owners or lessees of Audi A4s from certain model years and Volkswagen Passats from specific model years, if the owners could document required oil changes.

The court also approved an award of $30 million in fees to the firms representing the plaintiffs, which drew the fire of class member Ashley Birkeland.  Her appeal of this issue was rejected last week, however, by the 1st Circuit, which dismissed for lack of standing. The court concluded that appellant suffered no redressable injury from the fee award. She did not allege, for example, that class counsel sold the class short as part of a collusive fee agreement. See Glasser v.  Volkswagen of America, Inc., 645 F.3d 1084, 1088-89 (9th Cir. 2011). Nor did she allege any improper supplemental agreement between plaintiffs counsel and defendant. Cf. In re Cendant Corp. PRIDES Litig., 243 F.3d 722, 726 & n.4 (3d Cir. 2001).

The court held that Fed. R. Civ. P. 23(h)(2) does not effectively confer standing to appeal on such appellants. "The district court's jurisdiction to review fee applications with the input of objectors is one thing; our appellate jurisdiction is another."

The court's reasoning seemed to reflect the view that the defendants, Volkswagen and Audi, and not class members, would be paying class counsel's fees -- implicitly rejecting the notion that such settlements are a zero-sum game based on a total that a defendant is willing to pay (and calculates it will have to pay in total), so every dollar in fees is a dollar less to the class members. 

 

Supreme Court Passes on Case Involving State Retention of Private Counsel

The U.S. Supreme Court declined last week to review a California Supreme Court ruling that permitted cities and counties to engage private attorneys for public nuisance litigation against lead paint defendants on a contingency fee basis.  See Atlantic Richfield Co. v. Santa Clara County, Calif., No. 10-546 (U.S. cert. denied 1/10/11).

Readers may recall our previous posts on the important issue of  the power of government agencies to retain private plaintiffs attorneys on a contingency fee basis to prosecute nuisance litigation.  One case we posted on was County of Santa Clara v. The Superior Court of Santa Clara County, Cal., No. S163681 (7/26/10), in which a group of public entities composed of various California counties and cities were prosecuting a public-nuisance action against numerous businesses that manufactured lead paint.

The state supreme court permitted the use of contingency fee counsel with restrictions. To pass muster, neutral government attorneys must retain and exercise the requisite control and supervision over both the conduct of private attorneys and the overall prosecution of the case. Such control of the litigation by neutral attorneys supposedly will provide a safeguard against the possibility that private attorneys unilaterally will engage in inappropriate prosecutorial strategy and tactics geared to maximize their monetary reward. Accordingly, when public entities have retained the requisite authority in appropriate civil actions to control the litigation and to make all critical discretionary decisions, the impartiality required of government attorneys prosecuting the case on behalf of the public has been maintained, said the court. 

We noted that the list of specific indicia of control identified by the court seem quite strained, and to elevate form over substance, written agreements over human nature. Defendants sought cert review. In amicus filings, various trade organizations including the American Chemistry Council, the American Coatings Association, and the National Association of Manufacturers, argued that the financial incentives inherent in contingency-fee agreements simply distort the decision-making of both the government lawyers and the private attorneys they retain. Inadequately grounded contingency fee arrangements distort the state's duty of even-handedness not only to defendants, but also to the public. The amici argued that public nuisance cases are not typical tort lawsuits because they claim to be pursued in the public interest. It violates due process for the type of personal financial assessment made by contingency fee private lawyers to impact the decisions in a public nuisance action brought in the government's sovereign capacity. The briefing also raised another important practical issue: the attorney-client privilege and work-product doctrines will block any meaningful inquiry into whether the government is actually exercising the appropriate control that he state court said would solve these issues.

These kinds of contingency fee prosecutors threaten to diminish the public's faith in the fairness of civil government prosecutions. These arrangements frequently result in allegations that government officials are doling out contingency fee agreements to lawyers who make substantial campaign contributions.


 

California Supreme Court Amends Rules for Government Retention of Private Contingent Fee Counsel

The California supreme court has taken a major step backward by modifying a 1985 decision that had properly limited the power of government agencies to retain private plaintiffs attorneys on a contingency fee basis to prosecute nuisance litigation. County of Santa Clara v. The Superior Court of Santa Clara County, Cal., No. S163681 (7/26/10). 

A group of public entities composed of various California counties and cities were prosecuting a public-nuisance action against numerous businesses that manufactured lead paint. Defendants moved to bar the public entities from compensating their privately retained counsel by means of contingent fees. The lower court, relying upon People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985), ordered that the public entities were barred from compensating their private counsel by means of any contingent-fee agreement, reasoning that under Clancy, all attorneys prosecuting public-nuisance actions must be “absolutely neutral.”

The supreme court acknowledged that Clancy arguably supported defendants' position favoring a bright-line rule barring any attorney with a financial interest in the outcome of a case from representing the interests of the public in a public-nuisance abatement action. The court proceeded to engage in a reexamination of the rule in Clancy, however, finding it should be "narrowed," in recognition of both (1) the wide array of public-nuisance actions (and the corresponding diversity in the types of interests implicated by various prosecutions), and (2) the different means by which prosecutorial duties may be delegated to private attorneys supposedly without compromising either the integrity of the prosecution or the public's faith in the judicial process.

The court had previously concluded that for purposes of evaluating the propriety of a contingent-fee agreement between a public entity and a private attorney, the neutrality rules applicable to criminal prosecutors were equally applicable to government attorneys prosecuting certain civil cases. The court had noted that a prosecutor's duty of neutrality stems from two fundamental aspects of his or her employment. As a representative of the government, a prosecutor must act with the impartiality required of those who govern. Second, because a prosecutor has as a resource the vast power of the government, he or she must refrain from abusing that power by failing to act evenhandedly.

But now, the court concluded that to the extent Clancy suggested that public-nuisance prosecutions always invoke the same constitutional and institutional interests present in a criminal case, that analysis was "unnecessarily broad" and failed to take into account the wide spectrum of cases that fall within the public-nuisance rubric. In the present case, found the court, both the types of remedies sought and the types of interests implicated differed significantly from those involved in Clancy and, accordingly, invocation of the strict rules requiring the automatic disqualification of criminal prosecutors was unwarranted.

The court described a range of cases; criminal cases require complete neutrality. In some ordinary civil cases, neutrality is not a concern when the government acts as an ordinary party to a controversy, simply enforcing its own contract and property rights against individuals and entities that allegedly have infringed upon those interests. The present case fell between these two extremes on the spectrum of neutrality required of a government attorney. The case was not an “ordinary” civil case in that the public entities' attorneys were appearing as representatives of the public and not as counsel for the government acting as an ordinary party in a civil controversy. A public-nuisance abatement action must be prosecuted by a governmental entity and may not be initiated by a private party unless the nuisance is personally injurious to that private party. The case was being prosecuted on behalf of the public, and, accordingly, the concerns identified in Clancy as being inherent in a public prosecution were, indeed, implicated.

But, the court found that the interests affected in this case were not similar in character to those invoked by a criminal prosecution or the nuisance action in Clancy.  This case would not result in an injunction that prevents the defendants from continuing their current business operations. The challenged conduct (the production and distribution of lead paint) has been illegal in the state since 1978. Accordingly, whatever the outcome of the litigation, no ongoing business activity would be enjoined. Nor would the case prevent defendants from exercising any First Amendment right. Although liability may be based in part on prior commercial speech, the remedy would not involve enjoining current or future speech, said the court.

With the public-nuisance abatement action being prosecuted on behalf of the public, the attorneys prosecuting this action, although not subject to the same stringent conflict-of-interest rules governing the conduct of criminal prosecutors or adjudicators, were held to be subject to a heightened standard of ethical conduct applicable to public officials acting in the name of the public — standards that would not be invoked in an ordinary civil case.  That is,  to ensure that an attorney representing the government acts evenhandedly and does not abuse the unique power entrusted in him or her in that capacity — and that public confidence in the integrity of the judicial system is not thereby undermined — a heightened standard of neutrality is required for attorneys prosecuting public-nuisance cases on behalf of the government.

The court then determined that this heightened standard of neutrality is not always compromised by the hiring of contingent-fee counsel to assist government attorneys in the prosecution of a public-nuisance abatement action.  Use of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation.  In so finding, the court downplayed the reality that the public attorneys'  decision-making conceivably could be influenced by their professional reliance upon the private attorneys' expertise and a concomitant sense of obligation to those attorneys to ensure that they receive payment for their many hours of work on the case.

To pass muster, neutral government attorneys must retain and exercise the requisite control and supervision over both the conduct of private attorneys and the overall prosecution of the case. Such control of the litigation by neutral attorneys supposedly will provide a safeguard against the possibility that private attorneys unilaterally will engage in inappropriate prosecutorial strategy and tactics geared to maximize their monetary reward. Accordingly, when public entities have retained the requisite authority in appropriate civil actions to control the litigation and to make all critical discretionary decisions, the impartiality required of government attorneys prosecuting the case on behalf of the public has been maintained, said  the court.

The list of specific indicia of control identified by the court seem quite strained, and to elevate form over substance, written agreements over human nature. The authority to settle the case involves a paramount discretionary decision and is an important factor in ensuring that defendants' constitutional right to a fair trial is not compromised by overzealous actions of an attorney with a pecuniary stake in the outcome. The court found that retention agreements between public entities and private counsel must specifically provide that decisions regarding settlement of the case are reserved exclusively to the discretion of the public entity's own attorneys. Similarly, such agreements must specify that any defendant that is the subject of such litigation may contact the lead government attorneys directly, without having to confer with contingent-fee counsel.

But in reality, even if the control of private counsel by government attorneys is viable in theory, it fails in application because private counsel in such cases are hired based upon their expertise and experience, and therefore always will assume a primary and controlling role in guiding the course of the litigation, rendering illusory the notion of government “control”.  The concurring opinion questioned whether public attorneys under all foreseeable circumstances will be able to exercise the independent supervisory judgment the majority concludes is essential if private counsel are to be retained under contingent fee agreements. 

The court noted that the issues all arose under its authority to regulated the practice of law, and no statutes or state constitutional provisions were at issue, which may distinguish the case from the issue in other states.

Class Counsel Fees Approved, But Reluctantly

At MassTortDefense, we typically focus on product liability, toxic tort, and consumer fraud litigation. But a recent decision arising from the largest retail security breach in history, where, the intruders made off with data relating to over 45,000,000 credit and debit cards, raises important class action issues for our readers. In re TJX Companies Retail Security Breach Litigation, 2008 WL 4786658 (D.Mass. November 03, 2008).

Consumers made several complaints, many of them putative class actions. The federal court consolidated these cases, and later received additional cases by order of the Judicial Panel on Multidistrict Litigation, see In re TJX Cos. Customer Data Security Breach Litig., 493 F.Supp.2d 1382, 1383 (J.P.M.L.2007). By September, 2007, TJX and counsel for the consolidated putative class action reached an agreement on settlement. After reviewing objections to the Agreement and holding a fairness hearing, the court gave final approval to the agreement on July 15, 2008. The court then considered class counsel's petition for attorneys' fees.

Determining whether a requested fee is reasonable requires consideration of a variety of factors. Some of the most typical include (1) the reaction of the class members to the settlement and proposed attorneys' fees; (2) the skill and efficiency of the attorneys involved; (3) the complexity and duration of the litigation; (4) the risk that the litigation will be unsuccessful; (5) the amount of time devoted to the case by counsel, and (6) the extent of the benefit obtained. The potential problem here was with the last item. Plaintiffs’ counsel asked for $6.5 million in fees, but as of October 30, 2008, class members had claimed just over $6,100,000 in benefits, a figure unlikely significantly to increase. To grant the petition would thus put more money in the pockets of the attorneys than in those of the wronged clients in whose name the suit was brought. When viewed through this prism, the benefits obtained for the class seem “virtual rather than real,” said the court. At bottom, said the court, class action litigation should benefit the individuals who have been harmed.

Simply awarding fees by reference to the valuation of the settlement presented by counsel requires a court to ignore two interrelated realities about class action litigation. First, only a fraction of any given class is likely to claim the benefits provided for in a settlement. Indeed, it is not unusual for only 10-15% of the class members to bother filing claims, and when settlements require class members to file statements or proofs of claim in order to receive their share response rates rarely exceed 50%. See Leslie, The Significance of Silence: Collective Action Problems and Class Action Settlements, 59 Fla. L. Rev. 71, 119-20 (2007)

The weakness in the approach of awarding fees based on benefits made available rather than actually utilized is that it arguably sets up a conflict between counsel and the class by creating an incentive for counsel to accept a settlement unlikely to yield a high claiming rate, for example, a coupon-in exchange for being guaranteed a percentage of the fund made available, not claimed. Similarly, some class counsel may agree to conditions on a settlement -- such as a short time frame in which to make claims or a burdensome claims procedure --in order to obtain additional concessions from the defendant that purportedly increase the value created by the litigation and that support an enhanced fee award.

“Simply put, the class action vehicle is broken,” opined the court.  And tying the award of attorneys' fees to claims actually made by class members is one step that judges can take toward repair. This approach will not only encourage more realistic settlement negotiations and agreements, but also will drive class counsel to devise ways to improve how class action suits and settlements operate. Class counsel would have an incentive to pay attention to the needs and desires of the class and to “think outside the box” to devise better notice programs, settlement terms, and claim procedures, all to the benefit of the consumers.

Linking attorneys' fees to claims would serve two additional objectives, thought the court. First, it might prevent “windfalls” for attorneys created by “class apathy.” Second, the court noted that there are surely plaintiffs' lawyers who bring putative class action lawsuits without merit, assuming, correctly, that in many cases the defendant will bw forced to settle the case to avoid a small probability of a substantial judgment. The failure to link fees to benefits claimed thus could encourage the filing of needless lawsuits.

Class counsel may argue that “You can lead a horse to water, but you can't make him drink.”   But the court responded that while this may be true, it stands to reason that one can maximize the chances that a horse will drink by, for example, verifying the horse can see the water; choosing clear, fresh, and cold water so that the horse is given the utmost incentive to drink; and making sure there are no obstacles in the horse's path.  (Gotta love it when a court takes a lawyer's analogy and runs with it!)