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Posts Tagged ‘coupon settlement’

United States District Court Judge Janet C. Hall issued an order today rejecting the proposed settlement in Wilson v. DirectBuy, Inc., No. 3:09-CV-590 (JCH) (D. Conn. May 16, 2011) (Here is a link to the slip opinion).  The controversial settlement had been opposed by 39 attorneys general, a nonprofit consumer rights organization, and had been singled out by commentators for criticism as a model for class action abuse. 

Judge Hall’s order found fault with many aspects of the settlement, including both the proposed settlement’s procedural and substantive fairness.  Procedurally, Judge Hall was concerned with the nascent stage of the record at the time of the settlement and the lack of discovery performed before the settlement.  Among the court’s substantive concerns were that the in-kind benefits provided under the agreement were similar to a coupon settlement, that the parties had overstated the risks to class members of litigating the case to trial, and that the maximum value of the settlement was too low in comparison to the best possible recovery in order for the settlement to be within the range of reasonableness. 

The court’s opinion expressly does not rule on, although it does discuss, several of the other issues raised by objectors, including the sufficiency of the email notice given to class members and an order by the magistrate judge enjoining a similar lawsuit filed by the State of West Virginia.

It is important to note that the court’s opinion does not at all portend a win for the class at trial.  In fact, pointing to the potential for statewide class actions under individual state consumer protection laws and enforcement actions by individual state attorneys’ general:

[t]he court notes that these state consumer protection statutes may not be suitable for litigation on a nationwide class action basis. . . . However, it appears to the court that they may be well suited for statewide class actions, especially within the states with broadly written consumer protection statutes.  This attempt is already being made in California and Missouri. . . . Further, investigations by state attorneys general are under way in at least a couple states, and, in some states, consumer protection actions can be brought on behalf of consumers. . . .

Therefore, in light of these statutes and the evidence that public and private attorneys are prepared to enforce them, class members appear to have substantially stronger claims than the RICO claims alleged in this case. Because the parties seek to release these state claims via the Settlement Agreement, the strength of these claims must be accounted for in this court’s analysis of the fairness, adequacy, and reasonableness of the Agreement. . . .

Slip op. at 26 (internal citations omitted).

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Recently, I have commented on two types of objectors in class action settlements.  This March 31 entry discusses the problem of so-called “professional” objectors.  And this April 12 entry addresses objections raised by government officials.  There is at least one other type of organized objectors to class action settlements: public interest organizations.  (I use the term “organized objectors” to distinguish these types of objections from objections that may be sent in by individual class members who are not represented by separate counsel).  Mechanically, objections by public interest organizations may be accomplished in a manner similar to that used by professional objectors: through the representation of one or more settlement class members by lawyers employed by or cooperating with the organization.  However, unlike with professional objectors lawyers, the representation is usually pro bono.  Alternatively. as with objections by government officials, public interest objections to a settlement may be accomplished through amicus briefs to the court.

There are a variety of public interest organizations that file objections to proposed class action settlements.  These organizations have widely differing purposes and political agendas.  For example, the Center for Class Action Fairness (CCAF) was founded by attorney and leading tort and class action reform advocate (and contributor to the popular law blog, Overlawyered), Ted Frank.  CCAF is a nonprofit organization formed for the stated purpose of providing “pro bono representation to consumers and shareholders aggrieved by class action attorneys who negotiate settlements that benefit themselves at the expense of their putative clients.”  In this April 18, 2011 press release, Frank summarizes various cases in which his organization successfully objected to class action settlements that “will result in class members receiving over $5 million more than what their class attorneys were willing to negotiate.” 

At the other end of the political spectrum (at least from the perspective of tort reform) from CCAF, is Public Justice, an organization founded by leading trial lawyers that describes itself as “America’s public interest law firm.”  A stated objective of Public Justice is to fight interests aimed at “closing the courthouse doors so victims can’t hold the powerful accountable,” including fighting “class action bans and abuses.”  Like CCAF, Public Justice has successfully objected to or intervened in a variety of class action settlements.  Some of its work in this area is summarized in the article “Fighting Class Action Abuse,” which is available on its website.

A third organization, Public Citizen, is a consumer advocacy group that has the stated goal of preserving the right of consumers to seek relief through class actions.  However, according to its website, “[a]t the same time, we recognize that on occasion class action settlements may not be in the interest of all class members, and in such cases we have often represented class members in objecting to and seeking to improve the terms of such settlements.”

Although the political motivations of these organizations might be different, there are several key similarities between these groups.  First, their interest in objecting to a settlement is based on a sincerely held belief that their involvement is necessary to protect the public interest.  This means that they are not motivated by profit, but rather by a conviction that the settlement (or the system itself) is unfair.  Like government objectors, their goal is to gain disapproval of or modification to the settlement, not to extort a portion of the fee.

Second, regardless of the ultimate motivating philosophy, even public interest groups with drastically different political agendas can find the same kinds of settlements or settlement terms objectionable.  Not surprisingly, many of their objections are the same as those that a government official might make.  Coupon settlements are a natural target.  A conservative group formed to combat class action abuse might object to a coupon settlement because the fact that a coupon settlement was the best the plaintiffs’ could do for the putative class reflects that he case was a frivolous, lawyer-driven case that had no societal value in the first place.  A consumer advocacy group might object to the same settlement because of a perception that it is unfair for a defendant to profit from its own wrongdoing.  Where both groups might agree is that the court should not approve a settlement that includes little or no benefit to class members and a large payout to the plaintiffs’ lawyers.

One area in which right-leaning and left-leaning public interest groups may diverge is in their view of cy pres provisions in class action settlements, that is, distribution of any unclaimed funds to a charity.  Class action reform advocates object to cy pres distributions because they don’t benefit the members of the class, and are sometimes simply a tool used by trial lawyers to raise funds for their own pet causes.  Trial lawyers in turn, argue that cy pres is the best way to deal with unclaimed funds, because the alternative would be to let the money revert back to the defendant, which would allow the defendant to profit from its wrongdoing.  (Although I want to stay neutral, as a defense lawyer, I am compelled to point out that the fallacy in this reasoning is the class action settlement context, the defendant hasn’t been found to have done anything wrong.  Rather it has voluntarily agreed to provide some compensation in exchange for peace from further litigation).

As with objections by government actors, objections to class action settlements by public interest groups are rare, but they present a significant risk to approval of a settlement if they do occur.   There are a variety of steps that counsel can make to avoid these types of objections, including:

  • Ensure that the settlement notice is in plain English, understandable, and contains all information required by Rule 23(c)(2)(B).  The Federal Judicial Center guidelines for plain English notice provide an excellent template, but the template obviously must be tailored to each case in order to provide effective notice.  Hiring a qualified notice expert (not simply a settlement administrator) to help draft the notice and testify about the fairness of the notice plan can protect against possible objections to the fairness of the notice.
  • Make sure that the notice is delivered in a way that makes it truly the best notice practicable.  Intentionally using a method of notice that is unlikely to be read and appreciated by class members, in the hopes of reducing the response rate, is folly.  If you don’t do everything reasonable possible to give class members adequate notice of a settlement, you risk having the entire settlement disapproved after you have incurred the significant notice costs. In many cases, direct mail is still considered the best way of distributing notice.  Technology has made direct mail possible even in cases where the last known addresses of class members are a few years old.  Old addresses can be updated through the post office change of address system, as well as through various private databases.  Again, having a qualified notice expert can help.  If it is truly impossible to reach a sufficient number of class members through direct mail, then a published notice can be used as a supplement, but it is better to think of published notice as a last resort. 
  • Avoid settlement terms or arguments that exaggerate the true value of a benefit to be given to the class.  A settlement does not have to give class members 100% of the claimed damages in order to be fair.  It is, after all, the result of a compromise.  However, exaggerating the value of benefits, especially non-monetary benefits, is one of the surest ways to draw objections and skepticism from the Court.
  • Avoid unnecessary publicity.  Unnecessary publicity (by either the plaintiffs or the defendant) raises the risk that public interest groups will scrutinize it.  This is another reason to use direct mail when possible. 
  • If the settlement does include a cy pres component, try to find an organization that is likely to benefit some or all of the class members directly.  Distribution to any organization in which one of the lawyers has a personal affiliation or stake will raise a red flag.  Donations to a victim’s assistance fund, for example, are less likely to receive scrutiny than a donation to a lawyer’s law school.
  • In any settlement that may include unclaimed funds (whether those funds revert to the defendant, are distributed pro rata to other class members, or are distributed to a charity),  above all else, do whatever you can to ensure that class members have a fair opportunity to participate in the settlement.  You often can’t force class members to claim benefits, but you do have the power to make sure that there are no artificial barriers to participation.

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Rita Robinson, who writes the Boomer Consumer blog for the Seattle Post-Intelligencer, posted an entry titled Attorneys general oppose DirectBuy’s class-action lawsuit settlement discussing an amicus brief filed by Attorneys General from 34 states, Puerto Rico, and the District of Columbia objecting to a proposed settlement in a consumer fraud class action brought against online wholesale club DirectBuy, Inc. in the U.S. District Court for the District of Connecticut.

A copy of the brief is available for download here courtesy of the Washington Attorney General’s website.   The essential theory of the case was that the defendant “represented that paid DirectBuy memberships entitle customers to purchase goods from manufacturers and suppliers at actual cost when, in fact, Defendants receive kick-backs from the suppliers and manufacturers out of the purchase price paid by DirectBuy members — resulting in members paying more than the actual cost for such goods.”  Amicus Brief at 4.   The 34-page brief raises a variety of objections to the settlement, but the primary beef is that only benefit to claimants was membership extensions or discounts on future memberships, which they argue amounts to a “coupon” settlement.

The case illustrates the practical impact of a key but often overlooked component of the Class Action Fairness Act of 2005, the requirement that “appropriate” government officials be given notice of a proposed class action settlement in federal court.   This is a topic that was the subject of a series of CAB posts in 2008, which you can access at the links below:

As noted in June 25, 2008 entry, although CAFA requires that notice be given to state and federal officials, it is rare for those officials to take any action to object to the settlement after they receive it.  One exception, as exemplified by the DirectBuy case, is a coupon settlement.  (The other thing that can get officials’ attention is where the release in a proposed settlement purports to bind state officials, such as a clause that purports to release parens patriae claims by the state.)

Although CAFA requires notice to state officials, it does not give them any power to prevent the settlement.  In fact, state officials do not even have the express power to formally object to a settlement, which is why when they do act, it is usually in the form of an amicus (friend of the court) brief.  Ultimately, approval or disapproval of the settlement is still up to the trial court.  However, it should go without saying that if you’re a party or attorney seeking approval of a class action settlement, it’s much better not to have government officials filing an amicus brief critical of your settlement.

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A Los Angeles County Superior Court judge’s attempt to exact poetic justice out of a proposed gift card settlement has resulted in a censure by the California Commission on Judicial Performance, according to this article from the legal humor blog, Lowering the Bar.  The censure stems from a ruling on a motion for final approval of a settlement that reportedly called for a $125,000 fee for the plaintiffs’ lawyer and $10 gift card for settlement class members.  Judge Brett Klein, filling in for an ill colleague in presiding over the final fairness hearing, had initially approved the settlement only on the condition that the fee also be paid in gift cards (although he apparently later granted reconsideration of that order and the settlement was ultimately approved as originally proposed). 

It sounds like the cult hero status that Judge Klein will have attained among some factions of society as a result of the ruling may have more than compensated for the shame of the public censure, especially since he has since retired from the bench.  But whether or not you think the lawyer got what he deserved, other aspects of the conduct that reportedly led to the censure have to be troubling, such as sarcastic comments to the attorneys during the fairness hearing and “grandstanding” to the press about the order.  It is one thing to believe that “coupon” settlements are unfair and should not be allowed, it is quite another for a judge to publicly mock lawyers and litigants for seeking relief that is within his power to simply deny with dignity and decorum.

Postscript: 2/8/10 – Following my posting of the original article above, a reader sent me the following, which may be of interest to others as well:

If you’re curious what sarcastic remarks the Court made, you can read
the ten examples quoted on pages 3-4 of the official censure order:

One would need to look at the entire 32-page reporter’s transcript to find out
what the attorneys told the Court about the details of the settlement.

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This article on claims-made settlements appeared originally in the guest column section of the March 10, 2008 issue of ProductLiabilityLaw360.  Under the submission guidelines, I retain copyrights to the article, but I was required to wait at least three months before reprinting the article elsewhere.

Claims-Made Settlements In Consumer Class Actions

Monday, Mar 10, 2008 — In recent years, commentators, consumer advocates, and courts have become increasingly critical of perceived abuses in consumer class action settlements.

Recent changes to Rule 23, Federal Rules of Civil Procedure, and provisions of the 2005 Class Action Fairness Act impose express requirements on courts for assessing the constitutionality and fairness of class action settlements before approving them.

Much of the debate has focused on so-called “coupon” settlements, in which class members are given coupons with little or no value in exchange for a release of claims by the class against the defendant and payment of substantial attorneys’ fees to class counsel.

In light of debate at the federal level, state court judges are also reviewing class action settlements with a more critical eye.

In the context of this additional scrutiny, attorneys in consumer class actions still face the challenge of trying to fashion a settlement acceptable to both sides or face the prospect of years of prolonged and expensive litigation.

One tool still available to counsel in meeting this challenge is the claims-made settlement, in which the defendant agrees to pay a monetary settlement award to qualifying class members who mail in a claim for a payment.

Claims-made settlements can be controversial because like coupon settlements, they do not ensure monetary relief to every member of the class.

However, claims-made settlements can provide a win-win solution for all of the true stakeholders in a consumer class action. They can maximize the relief available to individual class members who take the minimal steps necessary to participate, provide reasonable compensation to the attorneys and class representatives who took the time and effort necessary to pursue the class action, and still keep the cost of the settlement low for the defendant.

If they are done right, claims-made settlements remain a viable tool for resolving consumer class actions despite the atmosphere of additional scrutiny.

Each class action settlement is unique, but there are several common methods for distributing relief to the class. They include: (1) direct payment; (2) fund; (3) claims-made; (4) coupon; and (5) equitable relief.

Two or more methods may be used in combination as part of an overall settlement structure. In a direct payment settlement, class members are sent payments or have accounts credited directly without having to take any affirmative action.

In fund settlements, the defendant pays an agreed sum to a fund that may then be used to pay for settlement costs, attorneys’ fees, and cash awards to class members. Class members may or may not have to file claims for benefits as part of a fund settlement.

In coupon settlements, class members are sent coupons for free or discounted products or services from the defendant, which provide actual monetary benefits only to the extent the coupons are redeemed. Equitable relief, in which the defendant agrees to change its conduct in the future, may be provided on its own or in addition to other relief.

The basic mechanics of a claims-made settlement are typically as follows:

The defendant agrees to pay a monetary award to class members who return a timely claim form after receiving notice of the settlement.

Only qualifying class members who timely mail in claim forms are entitled to payment; no settlement fund is created.

The settlement agreement includes a release of claims by all class members, whether or not they submit a claim, unless they exclude themselves pursuant to Rule 23.

Administrative costs and attorneys fees are paid separately from the amounts to be paid to claimants.

Within this basic structure, there can be many variables.  For example, the award amount can be calculated in numerous ways. It can be a set dollar amount, a percentage of an agreed calculation of the plaintiffs’ alleged damages for each class member, a formula that reasonably approximates the harm to each individual, etc.

The notice plan may also differ from case to case. Common means of providing notice include direct mailings to class members, publication in newspapers or other media, or a combination of mailing and publication.

Claim form requirements also can vary. In some cases, each claimant may simply be asked to correct any address information and sign a claim form. In other cases, additional information may be requested to assist in the calculation of award amounts. The amount of verification needed for claims will also vary.

The response rate to a claims-made settlement can vary depending on the makeup of the class, the amount of individual awards, the geographic scope of the settlement, and numerous other factors. Predicting response rates is an art, not a science.

Although it is impossible for a defendant to predict the response rate with certainty, consulting with attorneys and class action administrators with experience in claims-made settlements can help to at least provide a ballpark estimate of what the settlement will ultimately cost.

The claims-made approach differs from other common methods for distributing class relief in several key ways. Unlike direct payment settlements, no payments are made without class members taking the affirmative step of returning a claim form.

Unlike fund settlements, the amount the defendant must pay is not predetermined.  Instead, the defendant only pays to the extent claims are made.

This also means that the defendant’s risk is not capped. Also, in a fund settlement, attorneys’ fees and administrative costs are often paid out of the fund, which reduces the amount of money available to class members. These amounts are usually paid separately in a claims-made settlement.

Finally, despite sharing with coupon settlements the characteristic that class members must do something affirmative to enjoy benefits of the settlement, claims-made settlements are not coupon settlements. Real money is paid.

The unique characteristics of claims-made settlements provide advantages over other possible methods of distributing relief. They can allow the parties to maximize the amount of individual awards available to those class members who take the time and effort to make a claim, while minimizing the overall cost to the defendant of funding the settlement.

This makes it much easier to reach an agreement. Certain administrative costs are avoided because there is no fund. There is no need to set up a structure to deal with unclaimed funds because only those award amounts that are claimed are to be paid.

This eliminates the need for settlement provisions for distributing unclaimed funds, which commonly require that unclaimed funds be paid to a charity or to the state or revert back to the defendant.

Finally, the amount of money available to a class member is not reduced by administrative costs and attorneys’ fees because those amounts do not come out of a common fund.

Despite these advantages, the claims-made settlement is not without criticisms. The criticisms can be grouped into two categories.

The first relates to traits inherent to the claims-made settlement structure that cannot be changed but may be explained and justified. The main criticism in this category is that not all class members are guaranteed relief. This is true, and, in fact, in many cases the number of class members who actually make a claim may be quite low, especially in cases where individual award amounts are low.

As a philosophical matter, a response to perceived unfairness in not guaranteeing relief to the entire class is that the structure maximizes the potential relief afforded to any given individual class member who is interested enough in obtaining relief to participate.

A defendant is much more likely to agree to a higher individual settlement award when faced with the prospect that it will not have to pay 100% of the claims of all class members.

Therefore, while the settlement structure does not guarantee an award to all class members, it does maximize the opportunity available to each class member.

Moreover, oftentimes there is no way to guarantee monetary relief to each class member regardless of the settlement structure, especially in those cases where the defendant lacks contact information for all or part of the settlement class. So, forcing the defendant to pay 100% of all possible claims often does not guarantee that class members will receive those benefits.

Whatever the justification for not guaranteeing relief to all class members in a particular case, courts generally have not rejected claims-made settlements for this reason alone.

Courts typically look to the reach and adequacy of the notice given to class members, not whether all class members ultimately receive monetary relief.

As long as there have not been unreasonable restrictions on access to notice and the opportunity to participate, claims-made settlements are commonly approved.

The second category of criticisms has to do with potential problems that can be avoided in any given settlement. For example, some critics argue that claims-made settlements create an incentive for the defendant to keep the claims rate low.

While this might be a legitimate objection in a settlement where unreasonable hurdles to receiving notice of the settlement and participating in its benefits have been erected, it can be overcome if the parties agree to a notice plan that is reasonably calculated to reach and provide simple, understandable notice and an opportunity to participate to the maximum possible number of class members.

A reputable notice expert will be able to assist in creating a notice plan that meets these objectives. Another common objection is that the attorneys’ fees award may be disproportionate to the payout to class members. This criticism can be tempered if fees are paid separately from the money being made available to class members and if the parties wait to negotiate fees until after reaching agreement on relief to be made available to the class. Including equitable relief can also help to justify a fee award.

A final criticism is that notices tend to be in legalese, causing class members to ignore them or throw them away. This criticism can be avoided in any given case by hiring a qualified notice administrator and by following notice guidelines adopted by the Federal Judicial Center.

Counsel can also maximize the likelihood of court approval, both at the preliminary approval stage and at the final approval stage, by giving full disclosure to the court. Counsel should be up front with the court at or before preliminary approval by explaining all of the material elements of the settlement, including the pivotal factor that only class members who submit claims will be paid.

If the judge is unfamiliar with claims-made settlements, it is a good idea to have at least one hearing in open court where the settlement structure can be explained by the attorneys for both sides, and the judge can ask why the parties agreed to this particular settlement structure.

At the time of preliminary approval, it may even be a good idea to point out some of the criticisms that have been made against claims-made settlements and explain why the settlement before the court is fair. The parties should attempt to quantify the relief available to each individual class member and its relation to the award amounts available to claimants under the settlement plan.

It is a good idea to explain these facts in a memorandum accompanying the preliminary approval motion, along with a discussion of why the litigation risks to plaintiffs and the class justify any discounts used in determining the settlement award.

If it is done right, the claims-made settlement can be a very effective way to resolve consumer class action lawsuits. This settlement structure facilitates the maximum possible benefit to the class representatives, those class members who make the effort to participate, and class counsel.

In addition, it can make the settlement less expensive for the defendant. This makes settlement more likely under terms that are favorable to those class members who care to participate. The parties should be able to adequately respond to any criticisms by providing full disclosure to the court from the beginning and by utilizing a fair and adequate notice plan.

–By Paul G. Karlsgodt, Baker & Hostetler LLP

 

Paul Karlsgodt is a partner with Baker & Hostetler in the Denver office.

 

 

 

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