Supreme Court Rules on Effect of Offers to Named Class Plaintiffs

The U.S. Supreme Court issued a decision earlier this week in a case raising the issue whether a defendant can cut off a Telephone Consumer Protection Act class action by making an offer of full relief to individual named plaintiffs. See Campbell-Ewald Co. v. Gomez, No. 14-857 (U.S. 1/20/16).

Here is the background: the Navy contracted with petitioner Campbell to develop a multimedia recruiting campaign that included the sending of text messages to young adults, but only if those individuals had “opted in” to receipt of marketing solicitations on topics that included Navy service. Respondent Gomez alleged that he did not consent to receive text messages and, at age 40, was not in the Navy’s targeted age group anyway. Gomez filed a nationwide class action, alleging that Campbell violated the Telephone Consumer Protection Act (TCPA), 47 U. S. C. §227(b)(1)(A)(iii), which prohibits “using any automatic dialing system” to send a text message to a cellular telephone, absent the recipient’s prior express consent. He sought treble statutory damages for a willful and knowing TCPA violation and an injunction against Campbell’s involvement in unsolicited messaging.

Before the deadline for Gomez to file a motion for class certification, Campbell proposed to settle Gomez’s individual claim and filed an offer of judgment pursuant to Federal Rule of Civil Procedure 68. Gomez did not accept the offer and allowed the Rule 68 submission to lapse on expiration of the time (14 days) specified in the Rule. Campbell then moved to dismiss the case pursuant to Rule 12(b)(1) for lack of subject-matter jurisdiction. Campbell argued first that its offer mooted Gomez’s individual claim by providing him with complete relief. Next, Campbell urged that Gomez’s failure to move for class certification before his individual claim became moot caused the putative class claims to become moot as well.

The District Court denied the motion. After limited discovery, the District Court then granted
Campbell’s motion for summary judgment on the merits, relying on the Navy’s sovereign
immunity from suit under the TCPA. The Ninth Circuit reversed. It agreed that Gomez’s case remained live but concluded that Campbell was not entitled to “derivative sovereign immunity.” 

The Supreme Court took the case and ruled that a mere unaccepted settlement offer or offer of judgment does not automatically moot a plaintiff’s case, so the District Court retained jurisdiction to adjudicate Gomez’s complaint.  While Article III’s “cases” and “controversies” limitation requires that “an actual controversy . . . be extant at all stages of review, not merely at the time the complaint is filed,” Arizonans for Official English v. Arizona, 520 U. S. 43, 67, a case does not become moot as “long as the parties have a concrete interest, however small,” in the litigation’s outcome. Here Gomez’s complaint was not effaced by Campbell’s unaccepted offer to satisfy his individual claim. Under principles of contract law, Campbell’s settlement bid and Rule 68 offer of judgment, once rejected, had no continuing efficacy. With no settlement offer operative, the parties remained adverse; both retained the same stake in the litigation they had at the outset. (Of course, our readers may well recognize that laying a legal controversy to rest may not be quite the same thing as making a contract.) 

On the merits, less interesting to our readers, Campbell’s status as a federal contractor did not entitle it to immunity from suit for its violation of the TCPA. Unlike the United States and its agencies, federal contractors do not enjoy absolute immunity. A federal contractor who simply performs as directed by the Government may be shielded from liability for injuries caused by its conduct. But no “derivative immunity” exists when the contractor has exceeded its authority or its authority was not validly conferred.

The decision resolved a circuit split on the settlement offer issue, and closed the loop on an issue left open by the Court in its 2013 decision in Genesis Healthcare Corp. v. Symczyk.

Interestingly, the majority declined to address the related issue whether the result would have been different if Campbell had actually paid up rather than merely offered to pay. “That question is appropriately reserved for a case in which it is not hypothetical. "

The Chief Justice dissented, arguing that “The problem for Gomez is that the federal courts exist to solve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking.”  It seemed beyond dispute that the offer made would have fully satisfied Gomez’s claims. "That makes the case moot, and Gomez is not entitled to a ruling on the merits of a moot case.”  

The ruling may impact other consumer type claims under statutes, such as the TCPA, under which damages can be easily calculated.  But one has to wonder about a rule in which  federal courts are forced to preside over cases where plaintiffs insist on litigating, with all of the burden and expenses, even when they have been offered 100% of what they could possibly recover. 

 

State Passes Mandatory Cy Pres Law

Oregon has enacted controversial legislation affecting damages in class actions in the state.  House Bill 2700 was recently signed into law by Gov. Brown, following passage on largely party lines.

The law addresses the not uncommon situation of leftover class action funds.  Sometimes unclaimed funds will revert to the defendant, which makes sense given the purpose of compensatory damages is to compensate persons injured by wrongful conduct. Sometimes the unclaimed funds are allocated in a form of "cy pres," which we have posted about before.

Oregon's new plan is for half of unclaimed or unpaid damages in Oregon class actions to be paid to the state bar's Legal Services Program and the other half to a court-determined entity that benefits the "interests" of class members -- so partly a tax, and partly a cy pres distribution.

The law says it is effective immediately, including for pending actions.  Any amount awarded as damages or to be paid in settlement that the court finds either hasn’t been timely claimed by class members, or when it is simply “not practicable” to pay the full amount to class members, must be distributed in the following fashion:  “At least 50 percent of the amount not paid to class members" must be paid “to the Oregon State Bar for the funding of legal services provided through the Legal Services Program.”  The "remainder of the amount not paid to class members” must be handed over to an entity chosen by the court for purposes that are “directly related to the class action or directly beneficial to the interests of class members.”

Class action observers have noted that cy pres awards are often used by class counsel to enhance the appearance of benefit recovered in the case in order to justify a higher fee award. Another huge problem is that use of cy pres can eliminate the incentive for class counsel to ensure that all absent class members, the allegedly injured parties,  get the compensation they have been awarded or earned in settlement.  Trying to enhance funding for Legal Services programs seems like a great goal, but this does not seem like a wise way to do it. 

Eighth Circuit Clarifies Cy Pres Rules for Settlements

The  Eighth Circuit last week issued an opinion with a set of new guidelines regarding "cy pres' disbursements in settlements. See In re BankAmerica Corp. Sec. Litig. (Oetting v. Green Jacobsen P.C.),  No. 13-2620 (8th Cir., 1/8/15).

Following the 1998 merger of NationsBank and BankAmerica to form Bank of America Corporation, shareholders filed multiple class actions around the country alleging violations of federal and state securities laws. The cases were transferred by the Judicial Panel on Multidistrict Litigation to the Eastern District of Missouri.  The transferred cases were resolved when the court approved a $490 million global settlement.  See In re BankAmerica Corp. Sec. Litig., 210 F.R.D. 694, 704-05, 714 (E.D. Mo. 2002), and 227 F. Supp. 2d 1103 (E.D. Mo. 2002). After an initial and then a second distribution, motion was made to distribute cy pres the remainder of the “surplus settlement funds” to three St. Louis area charities suggested by class counsel. The district court granted the motion over various objections. Objectors appealed the cy pres distribution, and the court of appeals reversed in the opinion for today's post.

In recent years, some federal district courts have approved disposed of unclaimed class action settlement funds after distributions to the class by making “cy pres distributions.” The term cy  pres is derived from the Norman French expression "cy pres comme possible," which means "as near as possible." The cy pres doctrine originated as a rule of construction to save a testamentary charitable gift that would otherwise fail, allowing ‘the next best use of the funds to satisfy the testator’s intent as near as possible.’” In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 625 (8th Cir.2001).

Such distributions “have been controversial in the courts of appeals.” Powell v. Ga. Pac. Corp., 119 F.3d 703, 706 (8th Cir. 1997). Indeed, some courts have criticized or restricted the practice. See, e.g., Ira Holtzman, C.P.A. v. Turza, 728 F.3d 682, 689-90 (7th Cir. 2013); In re Baby Prods. Antitrust Litig., 708 F.3d 163, 172-73 (3d Cir. 2013); In re Lupron, 677 F.3d at 29-33; Nachshin, 663 F.3d at 1038-40; Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 473-82 (5th Cir. 2011); In re Katrina Canal Breaches Litig., 628 F.3d 185, 196 (5th Cir. 2010); Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 434-36 (2d Cir. 2007); Wilson v. Sw.Airlines, Inc., 880 F.2d 807, 816 (5th Cir. 1989).  Recently, echoing these views, Chief Justice Roberts noted “fundamental concerns surrounding the use of such remedies in class action litigation” while nonetheless agreeing with the denial of certiorari in Marek v. Lane, 134 S. Ct. 8, 9 (2013).

The American Law Institute addressed the issue of Cy Pres Settlements in § 3.07 of its published Principles of the Law of Aggregate Litigation (2010). The ALI has recommended:

A court may approve a settlement that proposes a cy pres remedy . . . .The court must apply the following criteria in determining whether a cy pres award is appropriate:

(a) If individual class members can be identified through reasonable effort, and the distributions are sufficiently large to make individual distributions economically viable, settlement proceeds should be
distributed directly to individual class members.
(b) If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide 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.
(c) If the court finds that individual distributions are not viable based upon the criteria set forth in subsections (a) and (b), the settlement may utilize a cy pres approach. The court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class. If, and only if, no recipient whose interest 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.

Given what it saw as a substantial history of district courts ignoring and resisting circuit court cy pres concerns and rulings in class action cases, the 8th Circuit then concluded it was time to clarify the legal principles for the doctrine, relying in great measure on the ALI principles.

First, said the court, because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible only when it is not feasible to make further distributions to class members, except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution. Here, said the court, from the perspective of administrative cost, a further distribution to the class was in fact feasible. The district court thus erred in finding that further distributions would be so “costly and difficult” as to preclude a further distribution; that type of inquiry must be based primarily on whether “the amounts involved are too small to make individual distributions economically viable.” ALI § 3.07(a).

Second, a cy pres distribution is not authorized by declaring, as class counsel did in this case, that all class members submitting claims have been satisfied in full. It is not true that class members with unliquidated damage claims in the underlying litigation are “fully compensated” by payment of the amounts allocated to their claims in the settlement. In this case, the district court approved (not atypically) a global settlement in which plaintiffs would recover only a percentage of the damages that they sought.  The settlement notice to the class stated: “the settling parties disagree as to both liability and damages, and do not agree on the average amount of damages per share that would be recoverable by any of the Classes.” Thus, the notion that class members were fully compensated by the settlement  was speculative, at best, said the court of appeals.

Third, the court rejected any contention that the cy pres distribution must be affirmed because the district court is bound by language in the settlement agreement, such as a clause stating that the balance in the settlement fund “shall be contributed” to non-profit organizations “determined by the court in its sole discretion.” Distribution of funds at the discretion of the court is not a traditional Article III function. More importantly, a proposed cy pres distribution must meet the standards governing cy pres awards regardless of whether the award was fashioned by the settling parties or the trial court.

Fourth, the court held that, unless the amount of funds to be distributed cy pres is de minimis, a district court should make a cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient. This gives class members a voice in choosing a “next best” third party and minimizes any appearance of judicial overreaching. See In re Baby Prods., 708 F.3d at 180; ALI § 3.07(c), cmt b (encouraging courts to “solicit input from the parties” regarding cy pres recipients).

Fifth, when a district court concludes that a cy pres distribution is appropriate after applying the foregoing rigorous standards, such a distribution must be for the next best use, for indirect class benefit, and for uses consistent with the nature of the underlying action and with the judicial function. Any unclaimed funds should be distributed for a purpose as near as possible to the legitimate objectives underlying the lawsuit, the interests of class members, and the interests of those similarly situated. Applying this standard here, the court of appeals concluded that while the recipient here was unquestionably a worthy charity, it was not necessarily the “next best” recipient of unclaimed settlement funds in this nationwide class action. A district court must carefully weigh all considerations, including the geographic scope of the underlying litigation, and make a thorough investigation to determine whether a recipient can be found that most closely approximates the interests of the class.

The order was thus vacated. On remand, if any settlement funds remain after an additional distribution to the class, and if the district court concludes after proper inquiry that a cy pres award is still appropriate, the district court was directed to select next best cy pres recipient(s) more closely tailored to the interests of the class and the purposes of the underlying litigation.

 

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.

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.


 

Court of Appeals Considering Significant Mass Tort Settlement Issue

When a defendant settles a mass tort, it wants to achieve peace; one of the worst things that can happen is for plaintiffs to attempt to pursue claims that were and ought to have been extinguished in the settlement.  An important version of this issue arises in the Vioxx mass tort. See In re: Vioxx Products Liability Litigation, No. 12-30560 (5th Cir. 2012).

Amicus, the Product Liability Advisory Council, weighed in on the issue, emphasizing the policy implications.  Merck entered into a class action settlement in the Vioxx MDL. Afterwards, plaintiffs in Missouri sought to pursue claims that had already been resolved in the settlement. Specifically, the state court plaintiffs sought recovery of alleged economic damages for the price of Vioxx prescriptions that were owned, not by the Missouri plaintiffs, but by the MDL plaintiffs who settled their claims and were paid already.  The MDL court stepped in, issuing an injunction under the All Writs Act, to protect and effectuate its orders regarding the settlement.  The district court concluded that the injunction was necessary to prevent interference with years of effort, at great expense, to reach the massive settlement. Plaintiffs appealed.

PLAC noted that an MDL court has authority and flexibility to decide a case and to manage it, including to effectuate binding settlements that state courts may not frustrate or imperil. Injunctions in aid of the settlement are valid exercises of a federal court's authority under the All Writs Act.

The policy underlying this view is that, otherwise, the finality of virtually any class action involving pendent state claims could be defeated by subsequent suits brought in those states, asserting rights derivative of those already released by class members.  As a practical matter, no defendant in consolidated federal court actions could reasonably be expected to consummate a settlement of the claims if those claims could later be reasserted under state law by different plaintiffs seeking recovery of the money already paid to the federal court plaintiffs.

The "clear and present risk" to the finality of the settlements reached, argued PLAC, was the duplication of effort, the re-litigation of claims that were settled, and a possible double recovery of the damages. The success of any federal court settlement is dependent on the parties' ability to agree to a release of all claims in exchange for fair consideration; if any of those claims can be re-litigated, there could be no certainty about the finality of the federal settlement, nor the amount a defendant will pay.  This would threaten settlement efforts by the district courts, and hamper the utility of the MDL forum.  Indeed, MDL litigation presents a unique opportunity to resolve large numbers of claims in an efficient manner. Parallel state court actions that functionally would require defendants to pay twice on the same claims would severely curtail the incentive to settle.

PLAC argued that the had been careful not to over-reach; the injunction forbids recovery only of the claims that have already been settled.

Senate Judiciary Committee Approves "Sunshine" Bill That Clouds Up Settlements

Here at MassTortDefense we know that while not the "sexy" part of litigation, the nuts and bolts of settlement agreements are crucial to clients.  That is why it caught our eye that the U.S. Senate Judiciary Committee last week approved a bill that would require courts to consider so-called public health and safety concerns before approving the sealing of certain legal agreements and settlements in product liability suits.

The committee voted 12-6 to pass S. 623, the so-called Sunshine in Litigation Act. The bill would  prohibit a federal court, in any civil action in which the pleadings state facts relevant to the "protection of public health or safety," from entering an order restricting the disclosure of information obtained through discovery, or from approving a settlement agreement that would restrict such disclosure, or restricting access to court records, unless in connection with that order the court has first made certain findings of fact.  Specifically, the bill requires the court to find that: (1) the order would not restrict the disclosure of information relevant to the protection of public health or safety; or (2) the public interest in the disclosure of past, present, or potential health or safety hazards is outweighed by a specific and substantial interest in maintaining the confidentiality of the information, and the requested protective order is no broader than necessary to protect the confidentiality interest asserted.

The bill similarly would prohibit the court from enforcing any provision of a settlement agreement that prohibits a party from disclosing that a settlement was reached or the terms of the settlement, other than the amount paid, or from discussing the civil action, or evidence produced in it, that involves matters relevant to the protection of public health or safety -- unless, again, the court finds that the public interest in the disclosure of past, present, or potential health or safety hazards is outweighed by a specific and substantial interest in maintaining the confidentiality of the information or records in question, and the requested order is no broader than necessary to protect the confidentiality interest asserted.

Surprisingly Republican Senators. Orrin Hatch, R-Utah, and Chuck Grassley, R.-Iowa, joined all 10 Democrat committee members in support. But the bill seems ill-conceived and even unnecessary. As pointed out by the American College of Trial Lawyers' Federal Rules of Civil Procedure Committee, the bill would establish an undesirable precedent by circumventing the procedure set out in the Rules Enabling Act that Congress established for amending the Federal Rules of Civil Procedure. These kind of ad hoc legislative initiatives that address specific parts of the Federal Rules contradict the careful, open, deliberative, rigorous ways that the rules have been amended from time to time.

Moreover, the bill would would unduly restrict the discretion of trial judges to regulate civil litigation and would impose substantial new fact-finding burdens on the courts, without a demonstrated need for those changes.  There is no compelling evidence that protective orders governing discovery or confidentiality provisions in settlement agreements are frequently abused. Nor is there evidence that federal courts do not currently have the power to regulate those agreements. 

Moreover, as written, the bill would lead to more confusion, not less, regarding what information has to be released, and when.  As pointed out by Steve Zack, President of the ABA, the language is is vague and indefinite, threatening to sweep up many cases having little to do with true public health or safety.  And it certainly would  require the parties and courts to spend extensive time and resources litigating whether and how the statute applies.  The politicians seem to forget  that protective orders are critical to both plaintiffs and defendants, including by helping to safeguard against dissemination of highly personal sensitive information or trade secrets.  

Perhaps Congress should spend less time on restricting judicial discretion and more on seeing that federal judges are paid a market-competitive wage.  A district court judge on the bench since 1993 failed to receive a total of $283,100 in statutorily authorized but then-denied pay. Appellate court judges have lost even more.
 

Partial Settlement Proposed in FEMA Trailer Litigation

Defendants and certain plaintiffs in the FEMA TRAILER FORMALDEHYDE PRODUCTS
LIABILITY LITIGATION, MDL NO. 07-1873(E.D. La.) have filed a joint motion seeking approval of a partial settlement of the litigation.

Readers may recall from our previous posts that plaintiffs had filed claims against the United States and several manufacturers alleging that they were exposed to high levels of formaldehyde contained in emergency housing provided to them by FEMA in the aftermath of Hurricane Katrina. The plaintiffs proposed litigating the claims in six subclasses, including four subclasses for residents divided by state (Louisiana, Alabama, Texas, and Mississippi), a medical monitoring (“future medical services”) subclass, and an economic loss subclass.  The court denied the personal injury class, and then the medical monitoring class.   The court then adopted a bellwether trial approach.  We posted on the federal jury in Louisiana returning a defense verdict in just such a bellwether plaintiffs' suit over alleged exposure to formaldehyde fumes while living for several months in a FEMA-provided trailer.  Indeed, all three bellwether trials have resulted in losses for plaintiffs. There are currently two appeals pending from previous bellwether trial verdicts. The MDL court also found last year that FEMA itself could not be held liable for the alleged formaldehyde in the trailers.
 

Now, several maker of the emergency mobile homes used after hurricanes Katrina and Rita have agreed to pay approximately $2.6 million to settle certain claims that plaintiffs were allegedly sickened by levels of formaldehyde in the homes.  The proposed settlement covers FEMA mobile homes issued to victims of the hurricanes, not the travel trailers, which actually formed the majority of emergency housing made available after the hurricanes. 

Under the proposed settlement, a whopping 48% of that total will be set aside for plaintiff attorneys' fees.  According to the settlement agreement, the size of the potential settlement class is more than 1,000.  In addition to the trial results, the joint motion makes reference to the MDL court ruling that precluded plaintiffs from arguing for liability under varied (and higher) state standards, rather than a uniform federal level.

Drywall Litigation Update

The Georgia Superior Court has preliminarily approved a $6.5 million settlement between the Lowe's home improvement stores and a nationwide proposed class of drywall purchasers. Vereen v. Lowe's Home Centers Inc., SU10-CV-2267B (Ga. Super. Ct., Muscogee Cty.).

The proposed resolution of this piece of the drywall litigation would provide Lowe's gift certificates ranging from $50 to $2,000 to any consumer who purchased drywall (not just from China), as well as cash awards of up to $2,500, if the claimant can provide documentation of damages and proof of purchase. That is, plaintiffs who provide proof of purchase of drywall from Lowe's but have no proof of actual damages would receive gift cards valued up to $250. Class members unable to provide a proof of purchase would receive $50 gift cards.

Under the settlement, Lowe's also agreed to pay attorneys' fees and expenses up to 30% of the class fund, as well as $1 million to the plaintiff attorneys for administration of claims. The settlement purports to release Lowe's from all drywall claims.The Georgia court conditionally certified a settlement class and set a final fairness hearing for November 19th.

But the proposed settlement has apparently drawn objections from participants in the federal Chinese drywall multidistrict litigation, who are arguing that the settlement fund is too small and that the settlement would interfere with federal jurisdiction.  The plaintiffs' steering committee for the Chinese drywall multidistrict litigation in the Eastern District of Louisiana went so far as to move to enjoin the state court from moving ahead with the settlement, arguing that the benefit to the class is too small, and the attorneys' fees too large. Ironically, these plaintiff attorneys assert that the form of the class benefit, i.e.,  a gift card, is also improper.

The MDL lawyers assert that the parties involved in the MDL have been negotiating towards a global settlement, and allowing the state court, one-defendant settlement to go forward would simply undermine those efforts.  They called on the federal court, pursuant to the Anti-Injunction Act, to enjoin state court proceedings where, as here, it is allegedly necessary in aid of its jurisdiction or to protect or effectuate its judgments.

Readers will recall that after Hurricanes Katrina and Rita in 2005, drywall was imported from China to address a shortage of drywall required for repairs and new construction. After the drywall was installed, homeowners began to complain of smells, gas emanations, corrosion of appliances and electrical fixtures, and other alleged property damage. The lawsuits typically allege that sulfur compound levels in the drywall are too high, causing issues with air conditioning systems, electrical appliances, internal wiring, and other electrical systems in homes. Plaintiffs also allege the drywall produces a rotten egg-like stench and causes a variety of respiratory and other health problems for those who live in the affected homes.

So far, a few bench or jury bellwether trials have been completed, with mixed results.
 
 

Lone Pine Ruling Affirmed in Vioxx

The Sergeant Joe Friday character on Dragnet was created and played by actor Jack Webb.  Like so many famous lines, the immortal words, "Just the facts, ma'am," were apparently never uttered by the character.  What Friday actually said in early episodes is "All we want are the facts, ma'am."  

Either way, that's our motto when we post about litigation the firm has been involved in.  But with that limitation, a noteworthy decision is In re Vioxx Products Liab. Litig., 2010 WL 2802352 (5th Cir. July 16, 2010).

After a tentative settlement was reached in the Vioxx litigation, the MDL court entered several pre-trial orders with respect to the claims of those plaintiffs who could not or chose not to participate in the Master Settlement Agreement (MSA).  PTO 28 required non-settling plaintiffs to notify their healthcare providers that they must preserve evidence pertaining to the plaintiffs' use of Vioxx. Plaintiffs were also required to produce pharmacy records and medical authorizations, answers to interrogatories, and a Rule 26(a)(2) report from a medical expert attesting that the plaintiff sustained an injury caused by Vioxx and that the injury occurred within a specified time period. Failure to comply could result in dismissal of the plaintiffs' claims with prejudice.

PTO 28 is characterized as a Lone Pine order, named for Lore v. Lone Pine Corp., No. L-33606-85, 1986 WL 637507 (N.J.Super. Ct. Law Div. Nov. 18, 1986). Lone Pine orders are designed to handle the complex issues and potential burdens on the aprties and the court in mass tort litigation. Acuna v. Brown & Root Inc., 200 F.3d 335, 340 (5th Cir.2000).

The trial court extended deadlines, but eventually defendant Merck moved for an Order to Show Cause as to sixty-one plaintiffs for alleged failure to provide a case-specific expert report as required by PTO 28. The plaintiffs filed responses, arguing that they were in substantial compliance with PTO 28 and that state substantive law only required general forms of causation proof. In April 2009, the district court dismissed these plaintiffs' complaints with prejudice for failure to comply with PTO 28.

A district court's adoption of a Lone Pine order and decision to dismiss a case for failing to comply with a Lone Pine order are reviewed for abuse of discretion. Acuna, 200 F.3d at 340-41. The district court stated that “it is not too much to ask a plaintiff to provide some kind of evidence to support their claim that Vioxx caused them personal injury.”

The court of appeals had previously held that such orders are issued under the wide discretion afforded district judges over the management of discovery under Federal Rule 16. The court had held that the Lone Pine orders essentially required information which plaintiffs should have had before filing their claims pursuant to Rule 11.  Each plaintiff should have at least some information regarding the nature of his injuries, the circumstances under which he could have been exposed to harmful substances, and the basis for believing that the named defendants were responsible for his injuries.

The Fifth Circuit reaffirmed its view that it is within a trial court's discretion to take steps to manage the complex and potentially very burdensome discovery that these mass tort cases would require. The court of appeals thus affirmed the judgment of the district court.
 

Duke Hosts Conference on Civil Rules

At the request of the Standing Committee on Rules of Practice and Procedure, the Advisory Committee on Civil Rules sponsored a conference last week at Duke University School of Law. The purpose of the conference was to explore the current costs and burdens of civil litigation, particularly discovery, and to discuss possible solutions. The Conference was designed in part to highlight some new empirical research done by the Federal Judicial Center, and others, to assess the degree of satisfaction with the performance of the present system and the suggestions of lawyers as to how the system might be improved.  The Conference included insights and perspectives from lawyers, judges and academics, on the discovery process (particularly e-discovery), pleadings, and dispositive motions. Other topics considered included judicial management and the tools available to judges to expedite the litigation process, the process of settlement, and the experience of the state courts on these issues.

Specifically, the empirical data from the FJC was discussed by Judge Rothstein, and Emery Lee and Tom Willging of the FJC; the ABA Litigation Section research data was to be reported by Lorna Schofield; the NELA Data was next.  Prof. Marc Galanter commented on vanishing jury trial data. Litigation cost data from the Searle Institute, and RAND data were circulated. The next section of the agenda focused on pleadings and dispositive motions, fact based pleading, Twombly, Iqbal. Participants included several judges and academics. The following panel asked about excessive discovery, and included practitioners, judges, and academics. The judicial management issue, and the level of early judicial involvement, was next.

Day Two focused on e-discovery and the degree to which the new rules are working or not.  The U.S. Chamber Institute for Legal Reform weighed in with a white paper.  The conference turned next to whether the process was structured sufficiently for trial and settlements as they really occur, i.e., should the endgame be viewed as settlement rather than trial. Corporate counsel, outside lawyers, public and governmental lawyers weighed in next. The following panel offered perspectives from the state courts. Finally, the Bar Association and lawyer group proposals were on the table. The Lawyers for Civil Justice, DRI, Federation of Defense & Corporate Counsel, and International Association of Defense Counsel submitted a white paper.

One speaker summed up the two-day discussion, suggesting that consensus had formed around the proposition that federal judges should provide strong, early, consistent case management, although plaintiff lawyers felt there was no need to give the judges any more formal authority.  But there was great disagreement on critical questions of the scope of discovery, the breadth of possible voluntary disclosures, and pleading requirements. Readers have read my posts about  Twombly and Iqbal, which clarified the requirements of what must be included in a complaint.

A survey of the Oregon system, a fact-based pleading approach, was presented by the Institute for the Advancement of the American Legal System. It has not led to more dismissals, and most observers agreed that fact-based pleading was revealing the key issues and narrowing the contentions earlier. 

The notion that the cost of the process is so large that it may be making litigation beyond the reach of many potential litigants is something a number of participant expressed concern about. One judge noted that he now requires lawyers to estimate the costs of discovery, and report that to their client. One participant raised the issue of cutting off discovery for defendants who move to
dismiss, although it is unclear how that would be an effective remedy for any current unsatisfactory case management methods.

 

How Much Did They Pay? I Need to Know

Many mass torts involve multiple defendants, and many of our readers have been in the position of hearing that co-defendants had settled out of the case.  It is natural to wonder, and could be quite useful to know, what co-defendants paid to settle their part of the case.  Typically, the agreements are subject to confidentiality agreements, and the protections of Fed. R. Evid. 408, which recognizes the strong public policy promoting settlement. See Block Drug Co. v. Sedona Labs., Inc., 2007 WL 1183828, at *1 (D.Del. Apr.19, 2007); Fidelity Fed. Sav. & Loan Assn. v. Felicetti, 148 F.R.D. 532, 534 (E.D.Pa.1993).

A recent federal case tested these boundaries.  Dent v. Westinghouse, et al., 2010 WL 56054 (E.D.Pa. Jan. 4, 2010).  Warren Pumps, a defendant in multi-party asbestos litigation, filed a motion to compel the plaintiff to respond to certain interrogatories and requests for production of documents regarding the settlement of any claim asserted in the complaint. Plaintiff objected.  The thrust of Warren Pumps' argument was that the discovery about each additional asbestos-containing product which plaintiff claims caused his mesothelioma made it that much less likely that his mesothelioma was caused by exposure to any Warren Pump product.  And it allegedly made plaintiff's assertions to the contrary less and less credible.

Warren Pumps pointed out that on its face Rule 408 pertains to the admissibility of evidence, and argued it was inapplicable to a discovery dispute. (citing DirecTV, Inc. v. Puccinelli, 224 F.R.D. 677, 685 (D.Kan.2004)).  Although Rule 408 speaks in terms of admissibility, several courts have concluded that a heightened showing is required for even the discovery of settlement information. That is, they have required a more particularized showing that the evidence of settlement sought is relevant and calculated to lead to the discovery of admissible evidence. Block Drug, 2007 WL 1183828, at *1; Lesal Interiors, Inc. v. Resolution Trust Corp., 153 F.R.D. 561, 562 (D.N.J.1994)). 

Warren Pumps also argued that it was not seeking the information for any purpose prohibited by the rule.  Rule 408 bars the use of settlement information “to prove liability for, invalidity of, or amount of a claim....” F.R.E. 408(a). Among other purposes, Rule 408 specifically permits settlement evidence to show a witness's bias or prejudice. F.R.E. 408(b).  The defendant contended that it was merely seeking the settlement information to test the credibility of plaintiff's claims.

The court found this was merely "repackaging" the motives forbidden by Rule 408 by placing them under the guise of credibility.  To the extent the defendant was seeking the information to determine whether the dismissed co-defendants were dismissed for lack of evidence, Warren Pumps wanted to impugn the credibility of plaintiff's claims against Warren Pumps by virtue of his apparently merit-less claims against the dismissed co-defendants. Thus, Warren Pumps sought the information to prove the invalidity of the claims against it, a use which Rule 408 prohibits, said the court.  To the extent defendant sought the settlement information, and the amounts of those settlements, it was trying to show that if plaintiff had settled with a co-defendant more or less equivalent in culpability to Warren for a certain sum of money, and thus established the value of his damages with regard to that co-defendant, it would not be credible for plaintiff to seek a higher sum from Warren.   But, said the court, this would be using the settlement information to establish the amount of plaintiff's claim against Warren Pumps. Again, this is forbidden by Rule 408.

Bottom line, the discovery was denied because while disclosure of the settlement agreements would reveal the amount of money plaintiff received from other asbestos manufacturers, the settlement amounts could not then be used to prove the extent of plaintiff's exposure to, or damages from, asbestos from another manufacturer's product.

Federal Court Approves Class Action Settlement in Toxic Tort Case

The Sixth Circuit has approved a class action settlement in an interesting toxic tort case. Moulton v. U.S. Steel Corp., 2009 WL 2997921 (6th Cir., 9/22/09).

This class action was filed in 2004 by neighbors of a steel mill operated by defendant U.S. Steel, and alleged various claims arising from “metal-like dust and flakes” allegedly falling on plaintiffs' property. The district court in Michigan certified the class in 2006, and the parties eventually agreed on a settlement for $4.45 million in 2008.

As is not unheard of, some class members and at least one plaintiffs' lawyer objected to the settlement. They argued that the settlement agreement was not “fair, reasonable, and adequate” under Fed.R.Civ.P. 23(e)(2).  Specifically, they argued (1) that the agreement dis-serves the “public interest” due to the broad scope of the release, (2) that alleged “collusion” between Class Counsel and U.S. Steel tarnished the agreement and (3) that the agreement improperly prioritizes the distribution of the settlement proceeds. The district court rejected all such objections, and the court of appeals reviewed the district court's conclusions for abuse of discretion.

To determine whether a settlement agreement satisfies Rule 23's fairness standard,  courts consider:  (1) the risk of fraud or collusion;  (2) the complexity, expense and likely duration of the litigation;  (3) the amount of discovery engaged in by the parties;  (4) the likelihood of success on the merits;  (5) the opinions of class counsel and class representatives;  (6) the reaction of absent class members; and (7) the public interest. UAW v. Gen. Motors Corp., 497 F.3d 615, 631 (6th Cir.2007). 

On the issue of the scope of the release, the release of the continuing nuisance claims was held not unfair, because, contrary to the objections, it did not go“well beyond the claims plead in the complaint."  Since 2005, every version of the plaintiffs' complaint included a claim for “continuing private nuisance.”  As class members, the objectors are the last individuals in a position to claim lack of notice that this claim was on the table at the settlement talks. And the bar on future continuing nuisance claims applies only to claims arising out of conditions that existed prior to the settlement. It does not preclude future continuing nuisance claims based on emissions from new equipment installed after the date of settlement. Nor does it bar future claims based on old equipment, so long as the continuing nuisance is a “new” one.

Neither did the objectors make the case that the agreement was a product of collusion. See Williams v. Vukovich, 720 F.2d 909, 921 (6th Cir.1983). The duration and complexity of the litigation undermined the objectors' suspicions. The parties litigated for almost four years before reaching a settlement agreement. The court fielded numerous contested pretrial motions. Class Counsel pursued multiple avenues to gather evidence; and the agreement itself was a product of months of supervised negotiations, two facilitated mediations and a settlement conference with the court.

Third, there was the challenge to the $4.45 million settlement, which the agreement distributed as follows: $300 to each covered member of the class, limited to one award per household; $10,000 to the seven class representatives; and $1.335 million in attorney's fees (30%) and $622,279.86 in costs to class counsel. Any residual goes to local public schools. Because class counsel received 4,026 class-member claims, roughly $1.21 million will go to the claimants and roughly $1.28 million will go to the schools. The appeals court noted that the district court should have been more expansive in its explanation of the approval of the award as reasonable.  However, that claimants will in the aggregate receive less than Class Counsel does not automatically invalidate the agreement. That the public schools will receive $1.28 million in unclaimed funds does not reflect on the settlement's fairness.

Finally, a plaintiffs' lawyer purporting to represent multiple class members insisted that the court improperly shut him out of the case. In what the appeals court called a “sideshow” to the main case, the attorney reportedly contacted an unknown number of class members after the class certification advising them to opt out because those who opt out “always get a much higher settlement than … the general population.”  The 6th Circuit found that the district court also did not err by corralling the extent of this counsel's involvement in the case. Rule 23 gives the district court broad discretion in handling class actions, authorizing orders that impose conditions on the representative parties or on intervenors. Fed.R.Civ.P. 23(d)(1)(C).  In view of the questionable communications with litigants, unannounced solicitation of opt outs, and apparent guarantee to individuals who opted out, the district court appropriately exercised its discretion, said the Circuit.

Supreme Court Denies Cert In Nationwide Class Despite Absence of Choice Of Law Analysis

The U.S. Supreme Court has denied General Motor's cert petition seeking review of the Arkansas Supreme Court's affirmation of a nationwide class of owners of pickup trucks and sports utility vehicles with allegedly defectively designed parking brakes. General. Motors Corp. v. Bryant, U.S., No. 08-349, certiorari denied 1/12/09.


GM filed the petition after the Arkansas Supreme Court ruled, in June, 2008, that an Arkansas circuit court was not required to conduct a choice-of-law analysis before certifying a multi-state class action.


Last June, we called this a “disturbing” opinion. General Motors had noted that the significant variations among the fifty-one pertinent product defect laws should defeat predominance. [Most courts have accepted this notion.] But the trial court provided four reasons for its finding that the potential application of multiple states’ law did not create predominance concerns. First, the court noted that, unlike the federal rule which requires a rigorous analysis of class certification factors including the impact state law variations may have on predominance, no such rigorous analysis is required in Arkansas. Second, the potential application of many states’ laws was not germane to class certification, but was instead a task for the trial court to undertake later in the course of exercising its autonomy and substantial powers to manage the class action. Third, the trial court found that assessing choice of law was a merits-intensive determination and thus inappropriate at the certification stage. “It would be premature for the Court, at this stage in the case, to make the call on choice of law.” Fourth, if application of multiple states’ laws was eventually required, and it proved too cumbersome or problematic, the circuit court could always consider decertifying the class. The state supreme court agreed.

MassTortDefense would suggest that most courts and commentators do not equate a choice of law analysis with an impermissible examination of the merits of the plaintiffs’ claims. Choice of law is a threshold question that ultimately permits a court to reach the merits of the dispute by establishing the governing legal rules. The selection of the proper law cannot fairly be termed a “merits-intensive determination.”  Moreover, the trial court need not make any determination about the merits of the causes of actions alleged in order to assess, based on relevant contacts, which state’s law ought to apply to those claims. Nor does the trial court even have to “make the final call” on what law will apply to each and every claim by every class member. It is sufficient for class certification for the trial court to discover that the law of many other states will likely have to be applied to many class members’ claims, and factor that into superiority and manageability of the proposed class.

The repeated references to the trial court’s ability to later decertify the class smacks of the improper, rejected, concept of conditional certification – a practice that has been soundly rejected in recent years by state and federal courts and is now prohibited under both the Arkansas Rules of Civil Procedure and the federal rules on which they are modeled. After considerable time and effort is expended, courts are reluctant to decertify. Here, for example, GM presented the court with a thorough analysis of conflicts of laws regarding the state-law fraud claims, breach of warranty, applicable statutes of limitations, and unjust enrichment. It seems unlikely that the trial court (after its certification was affirmed) will ever seriously revisit this issue in the context of a new predominance determination. If the Arkansas court’s approach were correct, class certification would be a meaningless exercise since courts would not address the most difficult and important class certification-related questions – i.e., whether a class trial is fair or feasible – until long after certification. 

Perhaps it is not surprising that the Supreme Court would decline to weigh in on a state procedural law issue, particularly one billed by respondents as a preliminary determination, but a shame that resources will be wasted on a clearly inappropriate class action.  And let's not forget the "blackmail settlement" pressure that these types of cases create.  Castano v. American Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996); In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1298-99 (7th Cir.1995); Bruce L. Hay & David Rosenberg, “ ‘Sweetheart’ and ‘Blackmail’ Settlements in Class Actions,” 75 Notre Dame L.Rev. 1377, 1389-92 (2000).
 

China Melamine Update

China's Dairy Industry Association announced last week that the Chinese dairy companies accused of producing contaminated milk-containing products have agreed to pay compensation.  Reports are that nearly 300,000 people (mostly kids) were sickened, and six reportedly died.  Baby formula was contaminated with melamine, apparently an intentional act to deceive protein quality control testing.  Melamine artificially increases the protein profile of the milk, but can cause kidney damage at higher doses.

MassTortDefense has posted on the issues before.

The settlement includes an immediate payment of $130 million, and $30 million to cover future medical bills for related health problems.  Wrongful death cases will receive a reported $30,000, and seriously sick kids' families will get $4000.  Some 28,000 product users were hospitalized.

Many officials responsible for quality control and inspection of the dairy industry have been fired or indicted.  Trials are ongoing for 17 such defendants, and the former head of the largest dairy outfit was to be charged last week with manufacturing and selling counterfeit goods. That company, the Sanlu Group, ceased operations and filed for the equivalent of bankruptcy in the Fall.

China is also reportedly revising its regulatory approach to the dairy industry, with new safety and quality standards, new testing approaches, and more tools to enable local governments to catch issues.

 

Supreme Court Agrees To Hear Manville-Related Asbestos Insurance Issues

The U.S. Supreme Court has agreed to review a federal appeals court decision rejecting the resolution of asbestos claims against an insurer, and to decide whether thousands of personal injury plaintiffs may directly sue the insurer. Travelers Indem. Co. v. Bailey, 2008 WL 4106796 (U.S., December 12, 2008).

The case arises from the now-decades old Manville bankruptcy. From the 1920s until the 1970s, Johns-Manville was the largest manufacturer of asbestos-containing products and the largest supplier of raw asbestos in the United States. As a result, in the 1960s and 1970s, Johns-Manville became the target of product liability suits. Johns-Manville filed for Chapter 11 protection under the federal bankruptcy law on Aug. 26, 1982. On that date, Johns-Manville was a defendant in more than 12,500 asbestos-related suits. To fund its reorganization plan, the bankruptcy court allowed Johns-Manville to settle its insurance claims for about $850 million.

Travelers, Johns-Manville's primary insurer from 1947 to 1976, paid about $100 million into the bankruptcy estate in exchange for a full and final release of Manville-related claims. In 1986, Bankruptcy Judge Lifland entered a confirmation order, inter alia barring any person from commencing any actions based upon, arising out of or related to insurance policies that Travelers issued to Manville. In 2004, Judge Lifland found that his injunction was being violated by a new species of asbestos-related lawsuits (referred to by some as “direct action” claims) against insurers. These new asbestos claims were part of a global strategy developed by the plaintiffs' bar to put insurers in Manville's shoes and thereby hold them liable on account of their insurance relationship with Manville.

The Second Circuit, rather than enforce the confirmation order as it was originally written, entered and affirmed on a prior appeal, ruled that Judge Lifland had exceeded the “subject matter jurisdiction” granted by the Judicial Code. In re: Johns-Manville Corp., 517 F.3d 52 (2d Cir. 2008). The Second Circuit concluded that the bankruptcy court in 1986 was without power to enjoin all claims that literally arise out of the insurance policies that Manville purchased from Travelers. Thus, the bankruptcy court had exceeded its authority in approving a multi–million dollar settlement of asbestos–related claims filed against Travelers. The court said the bedrock issue in this case requires a determination as to whether the bankruptcy court had jurisdiction over the disputed statutory and common law claims. While the bankruptcy court repeatedly used the terms “arising out of” and “related to,” global finality for Travelers is only as global as the bankruptcy court's jurisdiction.

Travelers filed a petition for writ of certiorari, as did a group of plaintiff attorneys. Travelers argued that “decades of bankruptcy practice in the lower federal courts” are at risk, and that the Second Circuit opinion is inconsistent with “the carefully crafted legislative scheme Congress constructed.” The plaintiffs petitioner group asserted that the Second Circuit obscured the distinction between jurisdiction and statutory authority and that as a result of the Second Circuit decision, the finality of certain Chapter 11 reorganization plans in federal bankruptcy would be rendered uncertain.

One may wonder whether mass tort reorganization plans might be in jeopardy, under the Second Circuit opinion. Some tens of billions of dollars have been committed to asbestos trusts in cases that relied at least in part on the finality of the Johns-Manville bankruptcy. And the Second Circuit noted that Travelers had alleged that all underlying asbestos settlements were dependent upon the continued validity of the settlement scheme utilized over the past 20 years.

 

Modified Rice MDL Court Proposes Settlement Master

The federal judge overseeing the MDL involving claims over allegedly mishandled genetically modified rice has appointed a special master to assist with settlement talks. In re Genetically Modified Rice Litigation, MDL No.1811.
 

The order comes as the parties prepare for the process of selecting the bellwether trials currently slated to begin in November, 2009. The parties are to select plaintiff claims from each of 5 affected states for the initial trial pool. The bellwether trial plan approach follows the court's denial of class certification.

The bulk of plaintiffs are long grain rice producers who allege that defendants developed and tested a genetically modified strain of rice that contaminated the U.S. commercial rice supply. When rice importers banned the importation of U.S. rice, prices dropped and plaintiffs sued. Defendants have argued that such damages are too legally remote and speculative to be recovered.

The court noted that it “is important that the parties continue to explore settlement while preparing the cases for trial or remand to the transferor districts.” Because the MDL court did not have time to address settlement in as an effective and timely manner as is needed, the court proposed appointment of Hon. Steven N. Limbaugh, Sr., who has recently retired from the bench, and is available and willing to serve as a settlement special master for this case.

The court is giving the parties notice and an opportunity to be heard, and the opportunity to suggest alternative candidates for appointment. If no party files objections by Nov. 20, any objections will be waived, and the court will enter an order appointing him as Special Master.
 

 

Secrecy in Mass Tort Settlement Agreements

Settlement agreements that require a plaintiff not to disclose or publicize any information about her claim are common in mass tort and product liability cases, and sometimes controversial. See generally Bechamps, Sealed Out-of-Court Settlements: When Does the Public Have a Right to Know, 66 Notre Dame L. Rev. 117 (1990); Dore,  Settlement, Secrecy, and Judicial Discretion: South Carolina’s New Rules Governing the Sealing of Settlements, 55 S.C. L. Rev. 791 (2004); Drahozal & Hines, Secret Settlement Restrictions and Unintended Consequences, 54 Kan. L. Rev. 1457 (2006); Moss, Illuminating Secrecy: A New Economic Analysis of Confidential Settlements, 105 Mich. L. Rev. 867 (2007).


The conventional wisdom is that confidential settlement agreements aid defendants. Confidentiality minimizes bad publicity for the corporate defendant which is important to the defendant both for its own sake and to minimize additional claims. But both the defendant and an early claimant - a claimant who discovers that he or she has a claim before other claimants do - may have a strong incentive to maintain confidentiality. And they have a variety of means by which they might do so.  

Nevertheless, several commentators and academics have called for restrictions on secret settlements. Such attempted restrictions on secret settlements may be ineffective: a claimant may circumvent restrictions adopted by a single state or federal court by filing suit in a state or court without such restrictions. Second, parties might circumvent secret settlement restrictions adopted by a single state by choosing another state's law to govern the settlement. Third, parties could avoid restrictions on secret settlements in court by settling before the claimant files suit. Finally, many parties could try to accomplish much the same result as a secret settlement by use of pre-dispute or post-dispute arbitration agreements, taking advantage of the privacy of the arbitration process. See generally, Drahozal and Hines, Secret Settlement Restrictions and Unintended Consequences, 54 Kansas Law Rev. 1457 (2006).

An interesting recent paper by James Anderson observes that under some conditions, however, a mass tort defendant will rationally choose to discourage such secrecy. A defendant can use publicity to act as a commitment device akin to a most-favored-nation agreement to increase its bargaining power with plaintiffs. The paper uses the real world example of a drug (statin) litigation as a case study to illustrate this theory in practice and to explore the public policy implications of this finding. The paper is Understanding Mass Tort Defendant Incentives for Confidential Settlements, published by the RAND Institute for Civil Justice.  An interesting read, worth a look.