When class money doesn’t go to class members: new calls for SCOTUS review

December 14, 2015

(Reuters) – A couple of years ago, Chief Justice John Roberts appended an unusual statement to the U.S. Supreme Court’s decision not to review a privacy class action settlement in which all of the class recovery (except for legal fees) was delivered to a new online privacy education group Facebook was to help oversee. The chief justice said the Facebook settlement challenge was too tightly focused on the particulars of the case to warrant Supreme Court review but he basically invited future cert petitions raising the issue of when, if ever, class action settlements can deliver money to charities under the doctrine of cy pres, or “as near as possible.”

Last year, an objector to a class action settlement with Volkswagen over leaky sunroofs asked the Supreme Court “to establish a nationwide standard for determining counsel fees in class actions containing cy pres provisions,” citing conflicts in how federal circuits weigh the value to class members of these charitable contributions. The court denied the petition.

But now the Supreme Court has two additional chances to consider challenges to class action settlements in which the vast majority of settlement funds went to nonprofits, not class members. The cases are different in their particulars, of course, but if three other justices share their chief’s concern about cy pres awards, either or both could pique the court’s interest.

The petitions raise fundamental questions about the purpose of class actions. Are they intended to provide direct recompense to injured class members or to police defendants’ conduct and deter future violations? How should lower courts weigh those sometimes competing goals? Should plaintiffs’ lawyers be awarded lower fees in cy pres settlements? And if their fees are based only on cash payouts to class members, will we lose the deterrent value of class actions?

In November, a group of former professional football players asked the justices to review the 8th U.S. Circuit Court of Appeals’ approval of a settlement that resolved claims the league didn’t fairly compensate ex-players for the use of their names and images in promotional films. The settlement, which the trial court called “unique,” granted no money directly to class members. Instead, it earmarked $50 million to set up a nonprofit to distribute funds to other charities that may, in turn, indirectly aid ex-players. It also established a licensing agency to help current and former players license their likenesses to entities other than the NFL. In exchange, the NFL received a unrestricted license to use players’ images.

The former players who object to the settlement, represented at the Supreme Court by Robins Kaplan and Ciresi Conlin, said the settlement runs contrary to the principle that class actions are intended to compensate class members. In this case, class members were “readily identifiable,” according to the cert petition, yet the settlement guarantees them no benefit. “No appellate court has approved a class-action settlement in which the settling parties agreed to distribute all funds to third parties without first seeking to compensate class members directly or demonstrating that such distribution would be impossible or infeasible,” the petition said. “The 8th Circuit’s decision squarely presents the type of issues raised by Chief Justice Roberts in Marek and warrants this court’s review.”

On Friday, meanwhile, the Competitive Enterprise Institute – which recently merged with Ted Frank’s Center for Class Action Fairness – filed a petition for certiorari in a class action against Gillette, the maker of Duracell batteries. As I’ve reported, Frank was an objector to the Duracell settlement, which purported to deliver $50 million to consumers who bought batteries described as extra-long lasting. In fact, class members ended up claiming only about $350,000. Duracell agreed as part of the original settlement to contribute $6 million in batteries to charities of its choice, including Toys for Tots. Plaintiffs’ lawyers were awarded about $5.7 million.

CEI’s Supreme Court counsel, Thomas Goldstein of Goldstein & Russell, argues in Friday’s cert petition that the 11th Circuit, which approved the Duracell settlement, is at odds with the 6th and 7th Circuits in evaluating class actions that grant such paltry compensation to class members. That split “also extends to the proper evaluation of cy pres awards,” the petition said. “The 11th Circuit here held that such an award should be included when evaluating the attorney share; the 7th Circuit excludes such awards entirely because they ‘do not benefit the class.’  And while other courts sometimes permit including cy pres awards in the assessment of a fee request, they frequently discount them or scrutinize their value far more rigorously than the 11th Circuit permitted here.”

Both the NFL and Duracell cert petitions stand for the proposition that the highest priority of class actions is to compensate class members. Of course, that’s a more complicated proposition when it’s hard to identify who is in the class. In the Duracell case, for instance, Duracell does not sell directly to consumers so it didn’t have records of who purchased the allegedly mislabeled batteries. Potential class members were notified by notices in a variety of widely circulated print and online publications. Of a class said to include more than 7 million consumers, only about 55,300 made claims.

The CEI cert petition says that both Duracell and plaintiffs’ lawyers knew relatively few battery purchasers would make claims, yet based class counsel based their fee request on the amount the class would recover if every consumer demanded a partial refund. (And Duracell agreed not to oppose the fee request.) The 11th Circuit also factored in the settlement’s $6 million cy pres component, even though Duracell gets to pick the charities and at least some of those mentioned in the settlement already receive contributions from Duracell.

Would plaintiffs’ lawyers bring consumer class actions if they couldn’t win million-dollar fee awards? The CEI cert petition acknowledges the policy argument that some recovery is better than nothing at all. Over at the Litigation Daily, columnist Jenna Greene defended the “fat fees” awarded to class counsel in the Duracell case because if it weren’t for that incentive, plaintiffs’ lawyers wouldn’t bring class actions holding businesses responsible for misleading consumers. Greene, who was actually a member of the Duracell class, didn’t make a claim but doesn’t have a problem with the settlement. “As a class member, I care far less about collecting my $6 than sending a message to companies that they can’t just make stuff up and put it on their packaging,” she wrote. “If I paid more than I should have for batteries based on a lie, that makes me mad. That’s what I want to stop.”

Greene believes the deterrent value of the class action mechanism is more important than any particular class member’s recovery. I have mixed feelings about that theory. I agree with Greene (and Judge Richard Posner) that scaring corporations straight is a societal rationale for class actions. I’ve also said, however, that market competitors, under recent Supreme Court precedent, are better positioned than consumers to keep their industry rivals from making false advertising claims.

It seems to me that, at the very least, courts ought to reward plaintiffs’ lawyers who deliver money to the people actually harmed by the defendant, not to class counsel who make deals to give money to charities already favored by defendants. What kind of deterrence is that? The CEI cert petition points out that when courts have rejected settlements and forced class counsel to come up with better notice and claims processes – by using, for instance, purchasing records from stores’ loyalty card programs – more class members bring claims. Cy pres contributions to nonprofits should be a last resort.

“Settlement proponents frequently say  cy pres is the only way to do some good while punishing wrongdoers,” the CEI petition said. “This is just not true: The point of objecting (to cy pres deals) is not to punish lawyers, but to endeavor to actually improve the outcomes of these settlements for the real parties in interest – the absent class members whose claims are being settled away.”

In both the NFL and Duracell cases, nonprofits took home vastly more money than class members. If the Supreme Court is serious about cy pres, the justices ought to take a hard look at objectors’ cert petitions.

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