Attorney Fees

No Pay, No Play

** District Court Rejects Settlement Deal That Extracts a Broad Release of Claims But Provides No Money to Class Members **

Pay writing on Keyboard

It is not common for judges to reject class settlements, usually because lawyers for the opposing sides — putting aside their adversary roles — are savvy enough not to give the judge cause.  That was not the case recently, however, in a long running homeopathic product false advertising case in the Southern District of California.  Allen v. Similasan Corp., No. 12-CV-376-BAS-JLB, 2016 WL 4249914, at *1 (S.D. Cal. Aug. 9, 2016).

The allegations in this case, which are similar to those of other recent homeopathy cases (see e.g., Nat’l Council Against Health Fraud v. King Bio Pharms., 107 Cal. App. 4th 1336, 1348 (2003); Herazo v. Whole Foods Mkt., Inc., No. 14-61909-CIV, 2015 WL 4514510, at *1 (S.D. Fla. July 24, 2015); Conrad v. Boiron, Inc., No. 13 C 7903, 2015 WL 7008136, at *1 (N.D. Ill. Nov. 12, 2015)) complain that Similasan engaged in false advertising by omission by not including on its products’ labels statements to the effect that (i) the product was not FDA approved as medically effective and (ii) the active ingredients were diluted.  Notably, neither of those disclaimers is required on homeopathic products – but even so, many companies voluntarily include them.

In Similasan, after four years of hard fought litigation  the Defendant had successfully narrowed the claims by summary judgment [Dkt. No. 142] and Plaintiffs had certified  a class [Dkt. No. 143].  Similasan, however, filed a motion to decertify, arguing that Plaintiffs would not be able to prove materiality or falsity with their expert witnesses’ survey evidence [Dkt. No. 164].  With the motion to decertify pending, the parties settled and sought judicial approval of their agreement [Dkt. No. 196].  But the settlement was not a cure the district court could swallow.  Judge Bashant noted her role in the fairness hearing was to look for “subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations.” (2016 WL 4249914, at *3 citing In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 947 (9th Cir.2011)).  In this case, the signs were not subtle, and it was not a close call for the Court to deny approval.

In particular, Judge Bashant took exception to the following features of the proposed agreement:

  • The remedy for the unnamed class was injunctive relief only. While the company agreed to add the disclaimers that Plaintiffs’ counsel had complained were omitted, Similasan was not required to compensate class members;
  • The only money went to the class representatives who would pocket $2,500.00 each and Plaintiff’s counsel who secured a clear-sailing agreement which would permit an award of fees in excess of $550,000.00;
  • In exchange for injunctive relief, class members released Similasan from all claims identified in the complaint;
  • The release covered a nationwide class even though the Court had certified a California class only.

These settlement terms were not good enough for the Court.  The class was being asked to give up the right to sue but receiving nothing in return.  Indeed, to the extent the remedy was an injunction, a class member who opted out would receive the same benefit without forfeiting any rights.  Tellingly, eight State Attorneys General (Arizona, Arkansas, Louisiana, Michigan, Nebraska, Nevada, Texas and Wyoming) filed an amicus curiae brief urging the Court to reject the proposed settlement. [Dkt. No. 219].

The Court also discussed the role that notice (or lack thereof) played in its decision making.  The Court observed that the proposed class would have been in the tens of thousands [Dkt. No. 216], but the settlement notice prompted only 136 views of the settlement information website and 21 phone calls to the settlement hotline.  The Court attributed this lackluster response to the weakness of the notice, which consisted of a single ad in USA Today and some incidental online placements.  But the reality is the paucity of the economic return (i.e. zero) likely resulted in mass indifference.

 

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A Lodestar Off Our Mind!

** The California Supreme Court endorses the Percentage of Common Fund Approach for Class Action Settlements **                                                                                                                                                                                        

4427950_HiResIn a decision that consumer class action lawyers have been on pins and needles awaiting, the California Supreme Court just issued its opinion in Lafitte v. Robert Half Int’l Inc, Cal., No. S222996 (Aug. 11, 2016) regarding the proper way to determine attorney fee awards in common fund cases.  The Court concluded that the percentage of the fund method favored by plaintiffs’ class action lawyers (and, frankly, defense attorneys who settle consumer class actions by agreeing to a common fund) is alive and well.

For the past several years, objectors to class action settlements in California have become increasingly vocal with their criticism of this prevalent class action settlement device that creates a fund to compensate class members and pay class counsel (and sometimes claims administration costs as well).  In consumer fraud actions, after compensation to the class has been negotiated, additional money is placed in the common fund to compensate class counsel for their work on the case – typically 25% of the entire fund amount. Critics of the percentage of the common fund approach argue that it incentivizes plaintiffs’ counsel to put their interests ahead of class members (see e.g., Smith, Adam, The Wealth of Nations (1776)) and settle cases quickly in an amount that may not fully compensate class members in order to avoid otherwise needless effort in obtaining their fee.

Lafitte was a wage and hour case against Robert Half, the well-known staffing company.  The parties preliminarily settled the lawsuit by establishing a $19 million settlement fund that included a “clear sailing” provision for attorney fees of $6,333,333 – 33% of the common fund.  (Because courts must rule on the reasonableness of fees, a plaintiff and defendant settling a class action cannot agree on the plaintiff’s attorney’s fee award.  Instead, the defendant will sometimes agree that it will not oppose a specific fee award – giving plaintiff’s counsel “clear sailing” toward their requested fee.)

One of the class members in Lafitte thought the $6+ million award was a bit rich and believed it was not sufficiently justified or substantiated by class counsel, who relied primarily on the fact that 33% was within the range of typical class action settlement awards (20%-50%).  The class member filed an objection to that effect citing Serrano v. Priest (1977) 20 Cal.3d 25 (“Serrano III”) for the proposition that fee awards must be calculated on the basis of time spent by the attorneys on the case plus a multiplier.  The Los Angeles Superior Court denied the class member’s objection determining that a percentage of the common fund was the correct approach but double-checking it against the reasonable fee class counsel would have charged if it was a billable hour case – the “lodestar.”  The court analyzed plaintiff’s counsel’s billing records and concluded that the lodestar was between $2,968,620 and $3,118,620.  The gap between the lodestar amount and the $6,333,333 percentage fee was closed by applying a multiplier of between 2.03 and 2.13.  Why apply a multiplier?   To compensate class counsel “for the novelty and difficulty of the questions involved, (2) the skill displayed in presenting them, (3) the extent to which the nature of the litigation precluded other employment by the attorneys, (4) the contingent nature of the fee award.”  Ketchum v. Moses, 24 Cal.4th 1122, 1132 (2001) (citing Serrano III).

Viewing the “double check” methodology with Pope’s “jaundiced eye,” one might conclude that – because the multiplier is completely subjective – a court can always engineer a proposed percentage fee award in a class action settlement with the lodestar analysis.  This is precisely what the objector argued.  Any student of algebra can solve this simple equation where the contingent fee award and lodestar fee are known:

contingent fee award = lodestar fee x multiplier

In Lafitte, the California Supreme Court charted the birth, death and resurrection of the common fund percentage approach for attorney fee awards throughout legal history — at least from 1966 when Federal Rule of Civil Procedure 23 was amended so as to usher in the modern class action.  The Court also carefully analyzed the pros and cons of each approach.  For those keeping score:  Lodestar MethodPros:  (1) better accountability from class counsel for case handling, (2) encourages class counsel to pursue marginal increases in class recovery; Cons:  (1)  discourages early settlement, (2) consumes judicial resources in reviewing class counsel’s timesheets; Percentage MethodPros:  (1) easy to calculate, (2) creates reasonable expectations for class counsel in terms of recovery, (3) encourages early settlement; Cons:  (1) encourages class counsel to settle too early for a reduced amount, (2) may create a windfall when the common fund is very large.  After this detailed analysis, the Court concluded, “[W]e clarify today that use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion.”  Moreover, “[T]rial courts have discretion to conduct a lodestar cross-check on a percentage fee . . . [but]; they also retain the discretion to forgo a lodestar cross-check and use other means to evaluate the reasonableness of a requested percentage fee.”  The Lafitte Court acknowledged that Serrano III may have caused confusion on the issue, but limited Serrano III’s lodestar requirement to cases involving enforcement of statutes with fee-shifting provisions – for example, where prosecution of the case “has resulted in the enforcement of an important right affecting the public interest.”  Cal. Code Civ. Proc. §1021.5.

Before California consumer class action lawyers fire up their calculators, however, a few words of warning are in order.  First and foremost, the Lafitte Court did not dispense with the fundamental requirement that the fee award be reasonable.  While the Court’s opinion does not require a lodestar double check, it does mandate that the trial court use some means to evaluate the reasonableness of the fee.  Interestingly, the Court shied away from endorsing the “sliding scale” approach sometimes employed in class action settlements to promote reasonableness where the fee percentage decreases as the settlement increases in amount:  “[W]e do not mean to endorse the use of a sliding percentage scale. That issue is not before us and is not without controversy.” In addition, the California Supreme Court made clear that its ruling does not inform whether and how a contingent fee can be applied where there is no common fund – i.e., where class counsel argues for a “’constructive common fund’ created by the defendant‘s agreement to pay claims made by class members and, separately, to  pay class counsel a reasonable fee as determined by the court.”

Most importantly for counsel who settle consumer class actions, the Court stated that its decision does not apply to a case where “a settlement agreement establishes a fund but provides that portions not distributed in claims revert to the defendant or be distributed to a third party or the state, making the fund‘s value to the class depend on how many claims are made and allowed.”   Because it is often the case that the common fund settlement amount in a consumer class action includes more money (even minus class counsel fees and administration costs) than is needed to compensate class members’ claims, such settlements often include cy pres provisions requiring that left-over money not claimed by class members (or eaten up by fees and costs) be donated to a specific charity.  Cy pres provisions are employed to:  (1) convince the court deciding whether to approve the settlement that the amount is “real” in that the defendant isn’t getting any of it back; and (2) establish a concrete settlement number on which to apply the attorney fee percentage.  The Lafitte Court grounded its decision to approve the percentage of fund method on the basis that “the percentage of the fund method more accurately reflects the results achieved.”  But if cash in the settlement fund ends up going to a charity – no matter how worthy the cause – does this amount “reflect the results achieved” for the class?  No doubt, given the ever-increasing use of cy pres provisions in consumer class actions, we will almost certainly learn the answer to this question in the very near future.

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A Poker Lesson From The Pom Wonderful v. Coca-Cola Co. Cases

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** Coca Cola Prevails in false Advertising Case Bought By Pom Wonderful – Trying to Protect its Pomegranate Juice Market – While at the Same Time Settling Class Actions **                                                                                                                                                                                                                                                            

Pom Wonderful lost its 7 1/2 year battle against Coca-Cola this week after a nine person jury in California found that Coke was not misleading consumers with its Minute Maid division’s “Pomegranate Blueberry Flavored Blend of 5 Juices” which contained only a half-percent of pomegranate and blueberry juice.  Pom Wonderful LLC v. The Coco-Cola Co., No. cv-08-06239-SJO (MJWX) (C.D. Cal. March 21, 2016) (Dkt. 732). Pom had argued that the product’s labeling, which included pictures of all five fruits with the pomegranate dominating (although the apple was pretty darn big too) and the fact that “Flavored Blend of 5 Juices” was in smaller print below “Pomegranate Blueberry” was intended to “hoodwink” consumers into believe that pomegranate and blueberry juices were significant components of the product.  In addition, Pom pointed to the color of Minute Maid’s juice in its clear plastic bottles, which resembled pomegranate juice (i.e., red).  Pom’s attorneys told the jury that Coke leached off of the hard work and money that Pom had invested in growing the pomegranate juice market by creating a cheap juice that Pom’s customers would be tricked into buying due to the cost differential and the belief that they were getting the healthy benefits of pomegranate juice.  Pom sought $77.6 million in lost profits.

Coke’s principal defense was simple — it’s label was accurate and complied with FDA guidelines.  However, it is worth noting that Coke recently settled – subject to preliminary and final court approval — a putative consumer class action, Niloofar Saeidian v. The Coca Cola Company, Case No. 09-cv-06309, which was filed in the Central District of California approximately one year after Pom filed its lawsuit and which made the same deceptive labeling allegations on behalf of a nation-wide class of consumers who purchased the juice.  Interestingly, both the Pom and Saeidian cases are before Judge S. James Otero.  The proposed class action settlement provides for full refunds to class members with proof of purchase (uncapped) and up to two vouchers for replacement products in Coke’s Minute Maid, Simply, Smartwater, Vitaminwater, Vitaminwater Zero, and Honest Tea brands (capped at 200,000 on a “first come, first served” basis).  Coke also agreed to pay the administrative costs of the settlement (est. $400,000), attorney fees and costs not to exceed $700,000, a $5,000 incentive payment to Mr. Saeidian, and to donate $300,000 in product to Feeding America.  Finally, during the pendency of the class action (and the Pom case for that matter), Coke discontinued Minute Maid’s Enhanced Pomegranate Blueberry Flavored Blend of 5 Juices and represented in the settlement that it has no plans to reintroduce it.  Niloofar Saeidian v. The Coca Cola Company, No. 09-cv-06309, (C.D. Cal. Feb. 26, 2016) (Dkt. 192).

Does Coke regret settling the class action lawsuit less than a month before its triumph in Pom?  The difference between the results highlights the stark differences between consumer class actions and Lanham Act false advertising cases.  The latter, especially those not involving negative advertising – are notoriously hard on plaintiffs.  First, surveys show that juries say they read labels – word for word – (see Persuasion Strategies National Jury Survey, 2015).  It thus an uphill battle to convince them they have been misled by a label.  Second, if a company dishes it out, it will almost surely have to take it (nobody’s ads are perfect after-all). In Pom, Pom Wonderful’s claim of misleading labeling was met by Coke asserting “unclean hands” — pointing the jury to an 2012 administrative law judge’s decision in a case brought by the FTC against Pom that Pom made unsubstantiated claims that its juice treated, prevented or reduced the risk of heart disease, prostate cancer, and erectile dysfunction (upheld by POM Wonderful, LLC v. F.T.C., 777 F.3d 478 (D.C. Cir. 2015)).  This is likely a second critical underestimate of jurors’ typical behavior that worked against Pom. Most jurors react predictably to a party’s perceived hypocrisy. Third, most advertisements aren’t blatantly (legal term: “ literally”)  false so the question of whether an ad or label is materially deceptive comes into play.  Experts are hired to present bone dry surveys of consumer behavior, markets and perceptions of the offending ad that are subject to methodology challenges and sometimes clash with jurors’ own perceptions:  “Why do we need an expert? Everybody knows what that means?”  These experts’ opinions even conflict with the company’s own beliefs from time to time.  Indeed, Coke’s counsel’s closing argument mocked Pom’s assertion that Minute Maid’s juice stole customers from Pom by quoting from some early “creative briefs” prepared by Pom’s marketing department that Pom’s target audience for certain ads was “health-conscious hypochondriacs,” juxtaposing that audience with Minute Maid’s target market — regular old families.  And fourth, even if a corporate plaintiff successfully navigates these tough proof issues, it is left with the daunting task of proving that it suffered actual injury from its competitor’s ad and the amount of that injury in dollars – no easy task in multi-competitor markets that suffer the slings and arrows of shifting consumer tastes, new market entrants, the next “new thing,” and the fluctuation of the economy as a whole.  Frequently, defense counsel in Lanham Act cases are willing to just poke holes in plaintiffs’ experts’ damage analyses through cross-examination and possibly their own experts’ critiques without proffering alternative damage calculations on the theory that offering alternative numbers is a tacit admission of liability and creates a floor.  Coke eschewed this approach and called an expert who testified that, even accepting some of Pom’s forensic accountant’s premises, Pom’s damages would only be between $886,000 and $9.8 million – not $77.6 million (see also this post on the strategy for damages anchors).  In the end, that tactical decision didn’t matter.  In less than a day of deliberations, the jury determined that Coke’s blended juice did not mislead consumers about the amount of pomegranate juice in the bottle.  Pom Wonderful LLC v. The Coco-Cola Co., No. cv-08-06239-SJO (MJWX) (C.D. Cal. March 21, 2016) (Dkt. 732).

One can assume that Pom went into this Lanham Act lawsuit against Coke with eyes wide open.  Clearly Pom is sincere in its view that its hard work and research funding created the explosive growth in consumer demand for pomegranate juice and its market should not be hijacked by impostors.  Pom had previously been to trial against Ocean Spray and Welch’s making similar Lanham Act claims to the ones asserted against Coke.  In the Ocean Spray case, a two-week trial in the Central District of California at the end of 2011 resulted in a jury verdict that Ocean Spray did not deceptively advertise its “100% Juice Cranberry and Pomegranate” juice after two hours of deliberation.   Pom Wonderful LLC v. Ocean’s Spray Inc., No. 2:09-cv-00565-DDP-R2 (C.D. Cal. Dec. 2, 2011) (Dkt. 552). The Welch’s case proved a pyrrhic victory for Pom – the Central District of California jury found in 2010 that Welch’s labeling of its juice as “100% Juice White Grape Pomegranate” was literally true but nevertheless deceptive yet concluded that Pom was unable to prove any injury.  Interestingly, Welch’s – like Coke – settled two consolidated consumer class action lawsuits making the same claims as Pom five months after its victory over Pom. Pom Wonderful LLC v. Welch Foods Inc., No. 2:09-cv-00567-AHM-AGR (C.D. Cal. Sept. 13, 2010) (Dkt. 374).

In the end, the problem with Pom’s Lanham Act lawsuits – like many such cases – may be the plaintiff.  Jurors are asked to find that the defendant deceived consumers, but then give the money to a competitor – not a particularly satisfying result.  This is obviously not a problem in consumer class actions.  In a Lanham Act case, if the advertising is negative and directly pointed at the competitor or if the advertisement is particularly naughty – for example, Blue Buffalo’s trumpeting that its premium priced dog food contained no byproducts when the company knew that it did (lesson: don’t mess with man’s best friend) – a jury will likely find liability and damages.  But in the more common “literally true but deceptive” case, Lanham claims are a hard sell.  In the triad of Pom cases, the only one in which actual consumers testified as to deception was Welch’s, which might have had something to do with the jury’s finding of deception.                                                                                                                                                                                                             

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No New Year Cheer For “Meaningless” Class Settlements

** Second Circuit Affirms Denial of Class Certification in Low Ball Settlement of New York Fair Debt Collection Suit **                                                                                                                                                                                                                                                                                                                                                                                                                          

A recent Second Circuit decision highlights the thorny issues involved in a “low dollar” class settlement.  In Gallego v. Northland Group Inc. No. 15-1666-CV (2d Cir. Feb. 22, 2016), Gallego, along with about 100,000 New York residents, received a rather perky dunning letter from defendant collection agency Northland in January 2014 declaring, “IT’S A NEW YEAR WITH NEW OPPORTUNITIES!” and inviting Gallego to settle his debt with a department store credit card company.  Rather than heralding the new year by settling the claim, Gallego rang it in by bringing a putative class action lawsuit against Northland under the Fair Debt Collection Practices Act (“FDCPA”).  The substance of the claim was dubious – attempting to bootstrap a technical violation of the New York City Administrative Code (not providing the name of an individual to contact) into a false representation or unfair or unconscionable means under the FDCPA.

Northland, apparently calculating that it was cheaper to settle than fight, entered into a proposed settlement with Gallego.  In addition to an attorneys’ fee cap of $35,000, Northland agreed to establish a settlement fund of $17,500 – approximately 1% of the net worth liability limit under the FDCPA.  Gallego would receive a $1,000 incentive fee and the remaining $16,500 would be distributed pro rata to class members who made a claim.  The proposed settlement dissolved if there were 50 opt outs – who could then bring individual actions under the FDCPA with statutory damages of $1,000 each plus attorney fees.

The district court denied class certification under Rule 23(b)(3) superiority observing that class members would receive 16.5 cents each while, if they brought individual actions, they might each recover $1,000 statutory damages and attorney fees. Gallego v. Northland Group Inc. 102 F.Supp.3d 506 (S.D.N.Y 2015).  The court opined that the prospects of a recovery measured in pennies would likely result in “mass indifference” among most class members who would be deterred from filing individual lawsuits or joining the class.  This could result in a few class members reaping a windfall from the settlement.  “The prospects of mass indifference, a few profiteers, and a quick fee to clever lawyers is hardly the intended outcome for Rule 23 class actions.”

On appeal, the Second Circuit agreed that the district court did not abuse its discretion by denying certification.  Gallego argued that it was unlikely that all 100,000 class members would make claims so the individual class member recovery would be higher (a particularly noteworthy admission given that because Northland sent the offending letters in the first place – individual notice was practical and would likely be effective in this case) – basically agreeing with the district court that there would be “mass indifference” to the settlement.  The Court of Appeals retorted, “An expected low participation rate is hardly a selling point for a proposed classwide settlement.”  The Second Circuit went even further, determining that the district court would have been right in doubting that Gallego would “fairly and adequately protect the interests of the class,” as required by Rule 23(a)(4) pointing out that the proposed settlement included a release – not only of class members’ FDCPA claims – but all “claims arising out of any of the facts, events, occurrences, acts or omissions complained of in the Lawsuit, or other related matters . . . relating to letters sent to them that are substantially similar to the letter” received by Gallego.

It is important to reiterate that the FDCPA provides for an individual right of action with statutory damages as well as attorney fees, which are often absent from general consumer protection statutes.  This made it easy for the district court to find that the class action lawsuit was not a superior method for resolving the dispute given the proposed settlement value.  Nevertheless, the district court’s “a plague on both your houses” conclusion on class certification serves up a cautionary note:  “Because I find that certifying a class would do little more than turn [Nortland’s] settlement with Mr. Gallego into a general release of liability from all similarly situated plaintiffs at minimal extra cost while furthering a cottage industry among enterprising lawyers, class certification is denied.”

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