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

After “Smelly Washer” Trial Win, Challenges Await Whirlpool in Related Cases

WhirlpoolWhirlpool Corp. had major reason to celebrate last week; a federal jury rejected class-action claims that “Duet” front-load washing machines sold in Ohio between 2001 and 2009 were defective because of their alleged tendency to develop a moldy smell. This “smelly washer” case has drawn significant media attention in recent years after it twice reached the U.S. Supreme Court on the issue of whether the case should be certified as a class action. The High Court in 2013 vacated a U.S. Court of Appeals for the Sixth Circuit decision certifying a class of more than 100,000 Ohio consumers; but after the Sixth Circuit reaffirmed its decision on remand, the Supreme Court denied review this past February—thus setting the stage for the three-week trial that just ended last Thursday. But if history is any guide, plaintiffs’ lawyers will not willingly accept that the verdict binds all the absent class members (only two class members actually participated in the trial).

Indeed, the ongoing challenge Whirlpool faces underscores why plaintiff classes should rarely, if ever, be certified in consumer product defect cases. Federal Rule of Civil Procedure 23 states that suits seeking monetary damages are not appropriate for class action treatment unless common issues of fact and law “predominate” over individual issues of fact and law. As the Washington Legal Foundation explained in the brief it filed when this case was before the Supreme Court, individual issues (e.g., whether an individual plaintiff’s product was defective and whether that defect caused injury) will almost always overwhelm common issues of fact in the typical consumer product suit. Moreover, Rule 23 requires that the named plaintiffs demonstrate that they can adequately represent the interests of absent class members; if representation is inadequate (e.g., if their interests diverge from those of absent class members), due process case law dictates that absent class members are not bound by any judgment adverse to the class. Thus, the defendant in a certified consumer-product class action often faces a heads-you-win-tails-I lose dilemma: if a company goes to trial and loses to the class, it faces a massive liability award, but if it prevails at trial, absent class members are likely to resist any res judicata claim. Continue reading

High Court Should Not “DIG” Dart Cherokee Basin Case

supreme courtDart Cherokee Basin Operating Co. v. Owens, which raises right-of-removal issues under the Class Action Fairness Act (CAFA), is among the more important civil justice cases being heard by the Supreme Court this term. Legal commentators are virtually unanimous in concluding that the trial court adopted an overly restrictive standard governing removal of cases from state to federal court. Yet, as Columbia Law Professor Ronald Mann noted in a recent column for ScotusBlog, questioning during the October 7 oral argument revealed that the Court may be reluctant to decide the case at all. Every question posed to counsel for Petitioner focused on “vehicle” issues, not on the merits of his CAFA arguments. Several justices even suggested that the case might be dismissed as improvidently granted—which would be a terrible mistake.

On closer examination, the procedural posture issues that troubled the Court at oral argument turn out to be insubstantial; they should not dissuade the Court from addressing the Question Presented by the petition. Moreover, as explained in Washington Legal Foundation’s amicus brief, it is critical that the Court retain jurisdiction in this case to unwind the judicially created doctrine that motivated the mistake below in the first place. Dart Cherokee provides the Court an ideal opportunity to end the rule of construction whereby federal courts continue to narrowly construe federal removal statutes against the party seeking removal, contrary to Supreme Court precedent and despite the utter lack of any textual basis for doing so. Continue reading

Jurisdiction Still on Target for Supreme Court “Dart” Case

supreme courtAlthough the Supreme Court is scheduled to hear oral arguments on October 7 in a case addressing the scope of removal jurisdiction under the Class Action Fairness Act (CAFA)—Dart Cherokee Basin Operating Co. v. Owens—Public Citizen has urged the Court to dismiss the case as improvidently granted based on what it views as procedural roadblocks to reaching the merits. Last Friday, Columbia Law Professor Ronald Mann’s column for SCOTUSblog spotlighted Public Citizen’s amicus argument and stated, “[M]y sense is that the jurisdictional question [raised by Public Citizen] will seem a lot more contestable to the Justices than the issue on the merits,” adding that the Court might even consider dismissing the petition. Mann is probably correct that the Court is likely to be unimpressed by the lower courts’ merits decision—that a removal petition is deficient unless accompanied by documentary evidence supporting the petition’s allegations that the prerequisites for removal have been met. But the Court is likely to be equally unimpressed by Public Citizen’s “jurisdictional” argument, which has not been raised by the parties at any stage of these proceedings.

Public Citizen bases its argument on the fact that the Tenth Circuit did not directly address the district court’s decision to remand a case removed from state court by the Petitioners under CAFA. CAFA permits defendants in class actions to appeal remand decisions, but they first must petition the appeals court for an order accepting the appeal. In this case, the Tenth Circuit (by an equally divided 4-4 vote) denied the defendants’ petition for permission to appeal. Public Citizen contends that the only issue properly before the Supreme Court is whether the Tenth Circuit abused its discretion in denying permission for an appeal, not whether the district court erred in remanding the case.

That contention is without merit. First, the issue raised by Public Citizen cannot even remotely be deemed “jurisdictional” in nature. The Supreme Court has appellate jurisdiction over any case that has come before a federal appeals court, whether “before or after rendition of judgment or decree.” 28 U.S.C. § 1254(1). Supreme Court jurisdiction does not depend on whether the appeals court has rendered a judgment on the merits of the trial court’s determination. Because this appeal came before the Tenth Circuit, the Supreme Court has jurisdiction to review it. Continue reading

The Supreme Court’s NOT Top 10: October 2013 Term Cases the Justices Wrongly Passed Over

supreme courtThe Supreme Court press and other court observers have spilled a lot of ink this past month discussing the cases the Supreme Court took and decided during October Term 2013. Relatively little was said about the cases the court chose not to decide—and it passed over some doozies. But as Rush drummer and lyricist Neil Peart put it so eloquently, “If you choose not to decide, you still have made a choice.”

Pro-Business? Journalists like to portray the Roberts Court as particularly business friendly (see, e.g., here , here, and here; but see here), but businesses asked the Court to take plenty of cases this past term that it instead declined. When the Court denies cert in cases of such importance to business at the same time that it has a historically light docket, it can hardly be said to be pro-business. Companies crave legal certainty, so even if the Court took these cases and decided them against business interests, many times simply settling contested questions would be better than leaving them up in the air.

Wanted: More Business Cases. The Court needs to hear more business cases than it currently is, for at least two reasons. First, the unprecedented proliferation of new regulations by this administration has given rise to many more conflicts of the kind that produce Supreme Court cases. Second, to the extent the Clinton-and-Obama-appointee-dominated lower courts are predisposed against business litigants (or, more charitably, deciding close questions consistently against them), businesses will appeal more cases to the Supreme Court when they believe a lower court has denied them justice. Of course the Supreme Court justices take neither of these criteria into consideration when assessing individual cases, but surely these factors matter when assessing whether the Court leans in favor of business in forming its docket. Continue reading

In Oklahoma, Class Action Fairness Act Comes Up Short, But Daimler v. Bauman Does The Trick

OklahomaConcerns that businesses were being victimized by abusive lawsuits filed in state courts—in particular, nationwide class actions and mass actions—led Congress to adopt the Class Action Fairness Act (CAFA) in 2005. Congress intended that CAFA ease removal of class and mass actions from state to federal court. The law has had mixed results in that regard, , as plaintiffs’ lawyers have devised a variety of clever ways to evade CAFA and thereby ensure that their nationwide suits can remain in state court. If a recent Oklahoma state-court decision is any indication, however, the plaintiffs’ bar may finally have met its match: the Supreme Court’s January 2014 decision in Daimler AG v. Bauman. That decision imposed strict limitations on a court’s exercise of general jurisdiction over out-of-state defendants. The Oklahoma court invoked Daimler to dismiss hundreds of plaintiffs from a mass action that the U.S. Court of Appeals for the Tenth Circuit already had deemed not removable under CAFA.

The case involved product liability claims by 702 individuals from 26 States, each of whom alleged that she had suffered injuries from pelvic mesh surgical devices manufactured by Ethicon, Inc. (a subsidiary of Johnson & Johnson). CAFA permits removal to federal court of “mass actions” filed by 100 or more plaintiffs raising substantially similar claims. To reduce the risk of removal, the plaintiffs’ lawyers grouped the claims into 11 separate lawsuits, each containing fewer than 100 plaintiffs. Nonetheless, it was obvious that the plaintiffs wanted the cases tried together: they filed the lawsuits in a tiny Oklahoma county with only a single trial judge, thereby ensuring that all 702 claims would be heard by a single judge. They also took steps to prevent removal based on diversity of citizenship: they included at least one New Jersey resident as a plaintiff in each of the 11 lawsuits. Because the defendants have their principal places of business in New Jersey, the inclusion of one New Jersey plaintiff in each case eliminated complete diversity of citizenship and thus precluded removal based on diversity. Continue reading

Five Ways to Undo your Own Class-Action Settlement

zero dollars“This settlement is so unfair, it cannot be fixed.”

That statement marked the beginning of the end of a federal district court judge’s opinion, as well as the class-action settlement to which the opinion referred. U.S. District Court for the Northern District of California Judge William Alsup’s May 29 opinion in Daniels v. Aéropostale West, Inc. provides a tutorial on how not to win judicial approval of a class-action settlement.

Ms. Daniels alleged that she and other employees of the trendy apparel retailer Aéropostale were denied non-discretionary bonus pay (i.e., overtime) in violation of the federal Fair Labor Standards Act (FLSA). Judge Alsup conditionally certified the class in April 2013. Daniels provided notice to all employees in the class, and 594 opted into the suit. The parties filed a motion on April 24, 2014 seeking preliminary approval of a proposed settlement.

For reasons we will elaborate, Judge Alsup refused to grant approval. On June 12, the court entered an order decertifying Daniels, dismissing the claims, and extending the statute of limitations for 30 days so dismissed plaintiffs could pursue individual suits if they wish. The order noted that the parties agreed to the decertification, and that Aéropostale would make payment to any class member “who did not receive full payment for the overtime adjustment on any non-discretionary bonus earned during the collective action period.” The plaintiff’s lawyers agreed to provide notice of the action’s decertification at their own expense.

Lessons. In just 12 pages, Daniels offers litigants and their lawyers at least five lessons on how to undo your own class-action settlement.

Lesson #1: Be unresponsive to the court’s requests

In just the second paragraph of the opinion, Judge Alsup took the unusual step of noting the name and affiliation of all counsel of record in the case. This was not done to recognize their brilliant advocacy. As the rest of the opinion reveals, the lawyers, among other things, failed to provide the court with expert damage reports as required by federal procedural rules. After the parties filed their proposed settlement, the court had to ask twice for more information or corrections to the document. When pressed by Judge Alsup, Daniels’s lawyer could not state how much the plaintiff would ask the jury to reward. In addition, “Plaintiff’s counsel also failed to provide any specific information about overtime hours worked and non-discretionary bonuses paid.” Continue reading