Class action settlements face growing scrutiny by objectors, courts

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By Sylvia Hsieh
Dolan Media Newswires

Facing new objectors, class action settlements are attracting greater scrutiny from appellate courts, which are gutting those settlements and sending them back to be renegotiated.

In particular, the amount and proportion of attorney fees and the payment of money into cy pres funds, in which a defendant donates to a non-profit organization instead of directly to class members, have come under fire.

Last month, the 3rd U.S. Circuit Court of Appeals ruled that a $35.5 million settlement that allocated $3 million to class members and $18.5 million to charitable purposes, and included $14 million in attorney fees, should not have been approved, and remanded the case for the lower court to reconsider whether class members could have gotten a greater direct benefit.

In another case, the 9th Circuit overturned a deal in which breakfast cereal maker Kellogg Co. agreed to donate $5.5 million to anti-hunger organizations and pay class members $15 each plus $2 million in attorney fees to settle class claims that it falsely advertised that Frosted Mini-Wheats improved children’s brain function. (Dennis v. Kellogg, 687 F.3d 1149 (2012).

But in a contrary ruling, the 9th Circuit recently approved Facebook’s cy pres payout of $6.5 million to an organization where one of the company’s directors served as a board member.

The agreement settled a class action against the social media giant for disclosing users’ online purchases, including their video rental history. (Lane v. Facebook, 696 F.3d 811) The court denied rehearing en banc on Feb. 26, although six judges dissented.

Similar challenges to class action settlements are pending in the 2nd, 5th and 6th Circuits.

‘Hoops and nitpicks’

Many of the objections come from litigation groups, such as Public Citizen, and a new player on the scene, the Center for Class Action Fairness.

The “warning signs” of a settlement likely to raise objections are “when nobody in the class is getting much and there’s a cy pres award that is then the sole basis for a large fee to attorneys,” said Scott Nelson, an attorney at Public Citizen Litigation Group in Washington, D.C.

Theodore Frank, who in 2009 founded the Center for Class Action Fairness, also located in Washington, said that in some cases cy pres funds have no connection to the class members.

But class action plaintiffs’ attorney Scott Kamber said cy pres comes up in many newer digital-age class actions because they are trying to resolve harms that are less quantifiable, such as privacy violations and false advertising.

Some lawyers see a threat of objectors trying to expand the Class Action Fairness Act’s limitations on attorney fees in coupon awards into restrictions in other areas. A coupon settlement is one in which class members receive coupons instead of cash.

“A number of objectors are trying to take an activist approach to expand the Class Action Fairness Act” beyond its explicit limitations on coupon settlements, said Adam Levitt, a consumer class action plaintiffs’ attorney at Grant & Eisenhofer in Chicago.

Vanderbilt Law School professor Brian Fitzpatrick characterized objections as “nitpicking” and creating more “hoops” for litigants to jump through.

But he doesn’t see anything wrong with hoops and nitpicks.

Fitzpatrick conducted a study of every class action in federal court during 2006 and 2007 and found that class actions are “getting something of a bum rap.”

“Sure there are some outliers, but in the run-of-the-mill case, things are pretty fair and as they should be,” he said. “The settlements are pretty darn good.”

Fitzpatrick said that in his study, the amount of attorney fees awarded in a class action averaged 15 percent of the total amounts paid by defendants over the two years.

He said the objectors serve an important role, but in most cases, their arguments should be rejected.

“I think it’s good to have some push-back, but I don’t think courts should adopt some of the arguments,” he said.

What the new scrutiny means

Some predict the attacks on class action settlements will gum up the works.

“In the short term, it makes it harder to get certain settlements through the courts; in the long run, it makes settlements more expensive,” said Jay Edelson, a plaintiffs’ class action attorney at Edelson McGuire in Chicago.

Eugene Spector, a partner at Spector, Roseman, Kodroff & Willis in Philadelphia, who represented the plaintiffs in the recent 3rd Circuit case, expects settlements to be delayed by six to nine months.

Lawyers negotiating on both sides of a class action will be more careful about what they agree to.

“Lawyers should think twice about every provision,” said Jeffrey Jacobson, a class action defense attorney at Debevoise & Plimpton in New York.

For example, Jacobson advised that the claims process be easy for consumers, and if it’s a coupon settlement, the coupons be transferable and have a cash value.

Kamber, whose law firm Kamber Law is based in New York, predicts that lawyers will get “back to the basics” in fashioning class action relief.

“If lawyers get creative — whether it’s a cy pres structure or an innovative claims structure — they’re going to get in trouble,” he said, adding that, in his opinion, bad settlements result from inexperienced plaintiffs’ lawyers getting “gamed” by experienced defense counsel.

“I’m not weighing in on whether it’s right or wrong, [but] in structuring settlements cy pres should be used to tuck in the corners rather than be the primary mode of relief,” said Levitt. Attorney fees should be “proportionate” to the entire settlement, he added.

“Twenty-five percent is a pretty good guideline,” said Nelson, the Public Citizen attorney, referring to the 9th Circuit’s benchmark on class action fees. “We don’t disagree with attorneys’ fees in the abstract. Most courts say to check [class action] fees against the hourly rate.”