Seventh Circuit Continues Scrutiny of Class Action Settlements and Cy Pres

US-CourtOfAppeals-7thCircuit-SealThe U.S. Court of Appeals for the Seventh Circuit has, for better and worse, been at the forefront of federal class action jurisprudence recently. On the “better” side of the ledger, the appeals court has closely scrutinized and rejected a number of class action settlements in 2014. Its most recent rejection, Pearson v. NBTY, also dealt a serious blow to the  use of the controversial cy pres device in such settlements.

Judge Richard Posner regularly lands on Seventh Circuit panels involving class actions, where has been highly skeptical of class action settlements. In a June 2 opinion, Eubank v. Pella, he labeled the class action settlement “inequitable” and “even scandalous.” In another Posner-authored opinion, Redmand v. RadioShack, the Seventh Circuit on September 19 reversed a lower court’s approval of a coupon settlement. The court was especially troubled that the settling parties attempted to consider sums not available to the class members, such as “administrative costs,” when calculating the attorneys’ fees. As Reed Smith Counsel James Back and Rebecca Weil argued last month in a WLF Working Paper, such reasoning could be applied similarly to cy pres awards, the value of which settling parties seek to include when calculating fees.

The settling parties in Pearson v. NBTY, a consumer class action involving marketing claims for glucosamine pills, attempted to include a $1.13 million cy pres donation to the Orthopedic Research and Education Foundation when calculating attorneys’ fees. The trial judge refused to consider that amount as a “benefit” to the class when totaling the value of the settlement to be $20.2 million. The judge awarded the plaintiffs’ lawyers $1.93 million in fees.

The Center for Class Action Fairness objected to the settlement and on November 19, the Seventh Circuit, led by none other than Judge Posner, reversed the lower court. Judge Posner agreed with little of what the lower court determined, but he found the trial judge’s refusal to consider the cy pres amount in calculating the class benefit correct “for the obvious reason that the recipient of that award was not a member of the class.”

Separately, the court found that the cy pres award was itself improper. Judge Posner stated that while the recipient “seems perfectly reputable,” beneficiaries of cy pres are “entitled to receive money intended to compensate victims of consumer fraud only if it’s infeasible to provide that compensation to the victims—which has not been demonstrated” (our emphasis). Prior to reaching that conclusion, the opinion criticized the parties for seemingly “structur[ing] the claims process with an eye towards discouraging the filings of claims.” Less than one-quarter of one percent of the 4.72 million consumers notified sought the menial refund offered in NBTY. Judge Posner remarked that the claims process could have been simplified or “Rexall could have mailed $3 checks to all 4.72 million postcard recipients.”

The opinion contains several other positive statements and conclusions that district court judges and other circuit courts should find compelling, such as Judge Posner’s suggestion that “It might make sense for the district judge in a large class action suit like this to appoint an independent auditor, on the authority of Fed. R. Evid. 706, to estimate the reasonableness of class counsel’s billing rate.” But the double-blow to the cy pres device—that courts cannot consider it when calculating the settlement’s class benefit, and that the parties must prove that it is infeasible to provide the funds earmarked for the charity to the class members themselves—will likely be ruling’s most lasting achievement.

In the aforementioned WLF Working Paper, the authors asked, “Is the end near for a legal remedy with no basis in law?” With Judge Posner’s NBTY opinion exposing several more chinks in the doctrine’s already weakened armor, perhaps it is.

But we think it’s also important to take Judge Posner’s reasoning that cy pres is inappropriate in cases where money can’t feasibly be rewarded to plaintiffs to its logical endpoint: If plaintiffs cannot feasibly be located, why should a case be certified as a class action in the first place?

Also published by Forbes.com at WLF’s contributor page

Update: Senate Judiciary Committee Chairman Urges Payment Processors to Deter Online Copyright Piracy

copyrightwarningIn our October 2, 2014 post, Profit, Not Ideology, Motivates Cyberlockers that Facilitate Copyright Infringement, we noted that a Digital Citizens Alliance study found that 29 out of the 30 cyberlockers it reviewed accepted payment using a MasterCard or Visa credit card. We urged those payment processors to follow the example of PayPal, which has worked aggressively to deny such piracy-facilitating sites the use of its service.

Today, the current Chairman of the Senate Judiciary Committee, Senator Patrick Leahy, added his influential voice to those pressing for further MasterCard and Visa action. He sent letters to the CEOs of those businesses asking them to swiftly review the complaints against those cyberlockers and to ensure that payment processing services offered to those sites, or any others dedicated to infringing activity, cease.”

Senator Leahy also made the important point that not only do the payment processors “unwittingly contribute” to cyberlockers’ profitability, they also “lend[ ] the sites a harmful imprimatur of legitimacy” by allowing their logos to appear on the sites. He continued, “A consumer wondering whether a site is offering lawful access to copyrighted content may easily trust the cyberlocker’s legitimacy if world-respected payment processors service the site.”

Local “Fracking” Bans Face Constitutional Takings Challenges

sboxermanFeatured Expert Column – Environmental Law and Policy

by Samuel B. Boxerman, Sidley Austin LLP with Ben Tannen, Sidley Austin LLP

Recently, the citizens of Denton, Texas voted to ban hydraulic fracturing within the city limits, becoming the first municipality in the state to do so. One day later, the Texas Oil and Gas Association filed suit, arguing the ordinance was unconstitutional and preempted by state law. N1 In enacting a ban, Denton joined the list of municipalities that have adopted limits on hydraulic fracturing, N2 including a number of outright bans. N3 The bans reflect the ongoing battle between state and local interests over the value and risks of oil and gas development. The legality of local bans is being hotly disputed in the courts, with two common challenges being that the bans are preempted by state law or constitute an unconstitutional taking.

Preemption

Plaintiffs have challenged local bans as expressly preempted by or in direct conflict with a comprehensive state oil and gas statute—quite simply, the argument goes, municipalities and other local governments cannot prohibit what has already been expressly authorized by the state. Moreover, as a policy matter, allowing local governments to restrict or otherwise regulate oil and gas development would create a patchwork of regulation within a state—or even within a single county. To date, several courts have found preemption, but others have deferred to local land use authority. N4

Takings

Plaintiffs have also challenged local bans on constitutional grounds, N5 asserting a range of claims, including a Takings claim under the Fifth Amendment (and state analogs). N6 Although as of yet no courts have ruled on the issue, here are a few of the basics:

Of course a traditional “taking” occurs when the government actually causes a “permanent physical occupation” of an individual’s property. N7 A regulation, however, can be a taking when it affects or limits the use of private property to a sufficient degree. N8 According to the Supreme Court, a “regulatory” taking occurs if the regulation deprives the property holder of all economically beneficial use of their property, Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), or satisfies a three-part balancing test set out by the Court in Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978). Continue reading

Concurrence in Federal Circuit’s “Ultramercial” Ruling Sends Pointed Message to Patent Litigants

Kaminski_Jeffri_LRFeatured Expert Contributor – Intellectual Property (Patents)

Jeffri A. Kaminski, Venable LLP

The recent Federal Circuit decision in Ultramercial v. Wild Tangent continues the trend of courts invalidating software and business method patents made vulnerable by the Supreme Court’s decision in Alice Corp. v. CLS Bank International. The Ultramercial decision also continues the wave of “patent reform” in the courts, at the Patent Office, and in Congress. Software and business method patent owners and applicants should be concerned by these recent developments, and alleged infringers should be encouraged. The concurring opinion by Judge Mayer describes how an early determination of patent eligibility during litigation may help stem “[t]he scourge of meritless infringement claims [that] has continued unabated for decades.”

The Federal Circuit invalidated Ultramercial’s patent as being directed to an abstract idea, which is not patentable subject matter under 35 U.S.C. § 101. The asserted patent, U.S. Patent No. 7,346,545 (“the ’545 Patent”), is optimistically titled, “Method and system for payment of intellectual property royalties by interposed sponsor on behalf of consumer over a telecommunications network.” The main patent claim includes eleven specific steps for displaying an advertisement in exchange for access to copyrighted media. However, the appellate court determined that the patent “describes only the abstract idea of showing an advertisement before delivering free content” and is therefore invalid.

In spite of the eleven steps enumerated in the method claim, the court held that merely adding additional routine steps to an abstract idea “does not transform an otherwise abstract idea into patent-eligible subject matter.” Furthermore, although the claims of the ’545 Patent were tied to a general purpose computer, “adding a computer to otherwise conventional steps does not make an invention patent-eligible” either. Continue reading

Copyright and Patent Holders Advance Separate Market-Based, Self-Help Initiatives

copyrightIntellectual property (IP) rights and innovation are inextricably intertwined. It’s not surprising, then, that in the spirit of innovation, some IP owners have taken proactive steps to advance and defend their own property rights. They understand that reliance on current or future government action is no panacea. In separate developments this past week, some of the world’s most successful copyright holders adopted a creative approach to bolster those rights, while leaders of three different patent “self-help” entities explained their unique strategies at a Washington Legal Foundation (WLF) briefing.

Copyrights and WhereToWatch. Pirated online file peddlers and their apologists routinely argue that they are meeting consumers’ unfulfilled demand for affordable access to digital music, movies, and TV shows. As we noted in a WLF Legal Pulse post last month, however, “Huge music libraries can be accessed for free or low cost at outlets such as Spotify, Pandora, Amazon Music, and iTunes. Online options for TV and movie content continue to multiply. Copyright-infringing consumers can no longer claim that they seek pirated content because it isn’t digitally available for a reasonable price.” A September 23, 2014 report by KPMG provides empirical supports that argument. It found, for instance, that 96% of the top 20 movies for the years 2000 to 2010 were available through legal online distributors. Also, 96% of television’s top 100 shows in 2012 were available. Continue reading

Why “King v. Burwell” Obamacare Case Is Not “NFIB v. Sebelius” Redux

supreme courtThe Supreme Court’s decision to hear King v. Burwell means that the Court, for the second time in three years, will be deciding an issue that will have a major impact on the Obama Administration’s ability to implement the Affordable Care Act. The ACA’s requirement that individuals purchase health insurance or else pay a penalty barely survived a constitutional challenge in June 2012 when the Court voted 5-4 in NFIB v. Sebelius to uphold the mandate as a proper exercise of Congress’s power under the Taxing Clause. The claim raised in King—that individuals who purchase insurance on the federal government’s healthcare exchange are not entitled to the tax subsidies available to those purchasing on state exchanges—would, if accepted by the Court, have an impact on the ACA every bit as great as a decision striking down the individual mandate. That fact has caused some commentators to draw spurious parallels between the two cases. Many Obamacare partisans who dismissed the NFIB constitutional challenge as a “shameful” and hypocritical “solicitation of right-wing judicial activism,” are making the same accusation against the King challenge.

The accusations were inaccurate in NFIB; they are hopelessly wrong when applied to King. Before such unfounded criticism of King takes hold, it is important to emphasize major distinctions between the two cases. The petitioners in NFIB were asking the Court to take a decisive step: to strike down legislation adopted by Congress and signed by the President. Those petitioners, in my opinion, raised highly plausible (and indeed, partially successful) arguments in support of their constitutional claims. However, a majority of the justices—mindful of separation-of-powers concerns that arise whenever they are asked to override the will of Congress and the President—followed the Court’s long-held preference that, in the words of Chief Justice Roberts, “every reasonable construction must be resorted to, in order to save a statute from unconstitutionality.” Continue reading

WLF Briefing: Private Ordering Solutions Advance Patent Non-Aggression

This November 10, 2014 WLF Media Briefing, Toward Patent Non-Aggression: Market-Based Approaches to Deterring Legal Risks and Neutralizing Litigation, featured presentations by three innovators whose ideas are minimizing operating companies’ exposure to abusive patent lawsuits:

  • Keith Bergelt, CEO of the Open Invention Network;
  • Kevin Jakel, CEO of Unified Patents, Inc.; and
  • Tim Kowalski, Senior Patent Counsel to Google Inc. and Director, License on Transfer Network

Our speakers make reference to PowerPoint slides, which can be downloaded here.

If you would prefer to watch the presentation in higher resolution video where you can view the slides synched with the presentations, WLF has posted it in its online archive of on-demand videos here.