The Seventh Circuit Court of Appeals recently invalidated a nationwide settlement agreement covering six consumer fraud class actions (“Settlement Agreement”) brought against NBTY, Inc., Rexall Sundown, Inc., and Target Corporation (“Defendants”). See Pearson v. NBTY, Inc., No. 14-1198 (decided Nov. 19, 2014). Each case involved allegations that the Defendants’ deceptively marketed and sold glucosamine supplements, which are marketed as promoting joint health. The Defendants market, manufacture, and/or sell joint-health dietary supplements, including glucosamine. The Plaintiffs sued after they purchased the dietary supplements but did not experience any of the promised health benefits as represented on the packaging, seeking damages in the amount of the purchase price of the products.
On April 15, 2013, the parties executed the Settlement Agreement, which covered approximately 12 million class members and provided for a total fund of $20.2 million, only $2 million of which was guaranteed to be paid to class members; $4.5 million was guaranteed to class counsel for their fees. Theoretically, each class member could receive $3 for an undocumented purchase and $50 for a documented purchase. As is common in consumer class actions with individual relief of small value, however, the settlement resulted in a very low claim rate. As of the claims deadline, only 0.25 percent of the proposed settlement class returned claims, totaling $865,284.
When Plaintiffs’ moved for Final Approval, certain class members objected, arguing that the settlement agreement was not “fair, adequate and reasonable” within the meaning of Federal Rule of Civil Procedure 23(h) given that class members were receiving less than $1 million dollars, approximately 4 percent of the settlement fund, while class counsel was receiving $4.5 million. On Jan. 3, 2014, the District Court for the Northern District of Illinois approved the final settlement but reduced the attorneys’ fees to $1.9 million. The objectors then appealed to the Seventh Circuit.
During oral argument, the Panel made clear that they had grave concerns about the $4.5 million in fees requested by Plaintiffs’ attorneys and whether there was collusion. Judge Posner commented that the settlement claim form and informational website were “extremely confusing” for a $3 refund on a product that averaged around $20 per bottle and suggested that the forms were clearly designed “to discourage people from applying.” Similarly, Judge Rovner questioned the propriety of making class members attest, under penalty of perjury, as to what month they bought a bottle of pills years after their purchase of the product.
As expected, on Nov. 19, 2014, the Seventh Circuit reversed the district court’s confirmation of the settlement, which it described as a “selfish deal between class counsel and the Defendants.” (Slip Op. at 18). Taking a brutal view of class settlement negotiations, the court explained how counsel for both sides often has an incentive to make the claim forms as burdensome as possible to minimize the claims rate. Like all Defendants, Rexall had “no reason to care about the allocation of its cost of settlement between class counsel and class members; all it cares about as a rational maximizer of its net worth is the bottom line – how much the settlement is likely to cost.” (Id. at 10). The problem in this case was that class counsel too had an incentive to minimize class claims and therefore were agreeable to a more burdensome claims process, “because the fewer the claims, the more money Rexall would be willing to give class counsel to induce settlement.” (Id.).
The Seventh Circuit was unequivocal in its opinion that the settlement in this case did not come close to comporting with the fairness requirements of Fed. R. Civ. P. 23(h) due to the disparity between the Plaintiffs’ attorneys’ fees award and the actual benefit to the class. In order to mitigate the effect of such dynamics in the future, the Court ruled that the reasonableness of the attorneys’ fees allowed to class counsel should be judged against the “actual or at least reasonably foreseeable benefits to the class,” not the mere potential benefit. (Id.). In the future, both sides should be aware of this ruling when negotiating class settlements. While the ruling is limited to the Seventh Circuit, for now, objections to attorney fees in class settlements are not uncommon and the issue is likely to come up again.
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