Seyfarth Synopsis: Of the five major class action developments in 2018, the decline in class action settlement numbers may have been most the striking shift. In fact, when compared to the 2017 numbers, the value of the top class action settlements in 2018 decreased by over $1 billion. In today’s blog, our readers can see and hear Workplace Class Action Report (“WCAR”) author Jerry Maatman outline what he called “a very significant marker of class action litigation in 2018.” Click the link below to watch and hear Jerry’s presentation from Seyfarth Shaw’s “Top Trends In Workplace Class Action Litigation” book launch event!
Seyfarth Synopsis: On January 18, 2019, in Porath v. Logitech, Case No. 18-CV-3091 (N.D. Cal. Jan. 18, 2019), Judge William Alsup of the U.S. District Court for the Northern District of California rejected, for the second time, Defendant’s attempts to allow pre-certification discussions relating to a class-wide settlement. Specifically, the Court upheld its prior order, prohibiting such discussions and denying the appointment of interim counsel to represent the class. The end result for the parties is that they must spend more time and money litigating this case despite readiness to engage in settlement negotiations. The ruling is an important read for all corporate counsel involved in class action litigation.
In May 2018, Plaintiff filed a putative class action alleging that the Defendant falsely and deceptively advertised its Z200 speakers as containing four speakers when two of the speakers did not independently produce sound. On June 13, 2018, Judge Alsup issued an order entitled “Notice and Order Re Putative Class Actions and Factors To Be Evaluated For Any Proposed Class Settlement”— an order Judge Alsup typically issues at the outset of any proposed class action pending before him. That order prohibits any settlement discussions of any class claims prior to class certification. Alternatively, the order provides that if counsel believe settlement discussion should precede class certification, interim class counsel must first be appointed.
In August 2018, counsel for Plaintiff and Defendant moved to appoint interim class counsel and enumerated four reasons why they believed pre-class certification settlement discussions were appropriate, including: (i) Defendant agreed not to seek a discount based on the risk a class would not be certified, (ii) Defendant had already begun revising the advertising at issue, (iii) Defendant was prepared to make purchasers of the product whole, and (iv) the parties were prepared to engage in reasonable and appropriate discovery necessary to resolve the case.
The Court denied the motion. Judge Alsup took issue not only with the limited discovery conducted to ascertain the viability of class claims at that point, but also with what he termed “the clever wording” of the motion, which “offered little of substance” in regards to remedies that would be on the table for the absent class members in any pre-certification settlement discussions. Id. at 5.
After the Ninth Circuit denied Defendant’s request for review, Defendant moved for reconsideration of the order prohibiting discussion of class-wide settlement issues, as well as the order denying appointment of interim class counsel. Specifically, Defendant asserted that Judge Alsup’s order prohibiting pre-certification class-wide settlement violated the parties’ First Amendment rights.
Judge Alsup denied Defendant’s motion. Specifically, Judge Alsup explained that his prohibition on any class-wide settlement discussions protects absent class members because (i) it prevents the imposition of overbroad releases on claims that cannot meet Rule 23 class certification standards; and (ii) it guards against settlements inappropriately discounted based on the risk that a claim will not be certified for class treatment. Citing scholarly commentaries, Judge Alsup opined that procedural hurdles should not require absent class members to accept a “lowball offer to salvage a class recovery.” Id. at 3.
Turning to Defendant’s free speech argument, Judge Alsup noted that his order was viewpoint neutral and simply regulated the time, place and manner of class-wide settlement discussions. Judge Alsup also emphasized that his order only restrained such discussions until counsel is authorized under Rule 23 to negotiate on behalf of a class; as a result, he explained that no permanent or overly broad ban exists. Additionally, even if a limited restriction existed, Judge Alsup concluded that the interests of the parties are “overwhelmingly outweighed” by the interest of the Court in implementing orderly case management and the interests of absent class members and their rights. Id. at 5-6. As a result, Judge Alsup noted that Defendant had no First Amendment right to obtain a class-wide release from an attorney with no authority to act for the class.
While such limitations on pre-certification settlement discussions are not currently widespread, parties seeking to resolve such disputes without engaging in costly class discovery may find themselves in a difficult situation if other courts adopt Judge Alsup’s approach. Given that the recent proposed amendments to Rule 23 did not adopt proposals to provide a different standard for settlement classes, parties may see vastly different approaches to class action settlements throughout the federal system.
Seyfarth Synopsis: Yesterday’s blog posting gave our readers an in-depth look at class action settlement developments in 2018, the fourth trend of this year’s Workplace Class Action Report (“WCAR”). In terms of the top ten largest settlement among substantive areas of class action litigation, the monetary value of major case resolutions plummeted in 2018. In fact, as compared to 2017, top settlement numbers declined by more than a billion dollars. Today, author Jerry Maatman explains the factors influencing this dramatic change, as well as what employers can expect regarding class action settlements in 2019. Watch Jerry’s analysis in the video below!
Seyfarth Synopsis: Professional class settlement objectors can be a thorn-in-the-side for employers and class counsel attempting to settle class actions. Their M.O. is often the same — frivolously object, appeal its denial, settle out of court, and withdraw. It is already hard enough to obtain court approval of a class-based settlement without adding into the mix such tactics taken by objectors. But the good news for employers is that courts are closely reviewing conduct of objectors to determine if sanctions are appropriate.
That is exactly what happened in Clark v. Gannett Co., No. 1-17-2041 (Ill. App. Nov. 20, 2018). Clark is a good reminder for employers who are seeking class settlement approval to not lie down for serial objectors. Rather, employers should take the fight to objectors, who are increasingly being met with skepticism and ire from courts around the country,
In Clark v. Gannett Co., No. 1-17-2041 (Ill. App. Nov. 20, 2018), the plaintiff alleged that Gannett Co. violated the Telephone Consumer Protection Act by making unsolicited phone calls. The parties reached a $13.8 million settlement, of which $5.4 million went to class counsel. Before final approval, however, Gary Stewart (the sole objector) filed an objection to the settlement, claiming that class counsel’s fees were excessive. The trial court overruled Stewart’s objections.
A month later, class counsel moved for sanctions against Stewart’s counsel, arguing that they filed Stewart’s objection for improper reasons — namely, to elicit attorneys’ fees. The trial court declined to grant class counsel’s motion for sanctions and found that the objection was not filed for an improper purpose. In the course of that ruling, the trial court excluded evidence of counsel’s pattern of conduct in representing objectors in other class action lawsuits. Class counsel appealed the trial court’s denial of sanctions to the Illinois Appellate Court.
The Decision Of The Illinois Appellate Court
On appeal, the Illinois Appellate Court reversed the trial court’s decision to exclude the pattern of conduct of Stewart’s counsel. The Illinois Appellate Court explained, “[t]he pattern of conduct engaged in by [Stewart’s counsel] is relevant to the objection’s possible improper purpose of seeking attorneys’ fees with the bare minimum of effort, expense, and time.” Id. at 17. In reaching that decision, the Illinois Appellate Court noted that Stewart’s counsel has used this strategy in multiple cases in different states and that various courts had admonished counsel’s conduct. In fact, as the Illinois Appellate Court emphasized, one federal judge described one of Stewart’s attorneys as ‘“a known vexatious appellant.’” Id. at 18. Based on these facts, the Illinois Appellate Court vacated the order denying sanctions and directed the trial court to conduct a new hearing with evidence of similar conduct in other cases to determine whether the objection was filed for an improper purpose.
But the Illinois Appellate Court did not stop there. Because one of Stewart’s attorney’s was an out-of-state attorney who used a local attorney for filing the objection, it considered whether the duo engaged in the unauthorized practice of law. There was evidence that Stewart’s local attorney did not review any of the objection papers, all of which were prepared solely by Stewart’s out-of-state counsel. The Illinois Appellate Court explained that by “not applying and appearing pro hac vice” Stewart’s out-of-state counsel sought to “escape responsibility by appearing not to practice law in this jurisdiction.” Id. at 21. “Both attorneys,” the Illinois Appellate Court concluded, “have engaged in fraud on the court.” Id. at 25. As a result, it then directed the clerk to forward a copy of the order to the ARDC to determine whether disciplinary action should be taken.
Implication For Employers:
This ruling in Clark demonstrates that now, more than ever, courts are scrutinizing the purpose behind an objection to a class-based settlement, particularly when the objector is represented by counsel with history of hijacking class settlements. Employers confronted with a hold-up by a professional objector should work with class counsel to aggressively oppose the objector’s extortionist bid for fees. This might mean some short term pain and associated costs, but in the long run hopefully objectors will get the message that gone are the days where parties will roll over and pay their fees.
Seyfarth Synopsis: In an opinion laced with frustration over a third appeal in a class action involving attorneys’ fees, the Seventh Circuit ruled that an objector was entitled to recover attorneys’ fees from class counsel’s fee award. “Unless the parties expressly agree otherwise,” the Seventh Circuit explained, “settlement agreements should not be read to bar attorney fees for objectors who have added genuine value.” The Seventh Circuit’s recent ruling in In Re Southwest Airlines Voucher Litigation is a good reminder for companies negotiating class settlements to account for objector fees in settlement agreements up front, or run the risk that an objector will sandbag the settlement by requesting fees later.
The Background Of The Decision
In In Re Southwest Airlines Voucher Litigation, No. 17-3541, 2018 WL 3651028, at *1 (7th Cir. Aug. 2, 2018), the Seventh Circuit addressed the third appeal relating to attorneys’ fees in the settlement of a class action involving Southwest Airline’s cancelled drink vouchers. In the first appeal, the Seventh Circuit modified class counsel’s fee award because class counsel had failed to disclose a potential conflict of interest. After the appeal, however, class counsel sought a supplemental fee award, along with a 1/5 multiplier, for his time spent appealing – a maneuver the Seventh Circuit called “astonishing.” Id. The district court declined to award the multiplier, but nonetheless awarded class counsel one-third of the requested amount, or roughly $455,294.
Subsequently, an objector, Gregory Markow, sought to vacate the settlement agreement and the supplemental fee award. Markow eventually appealed but then dismissed his appeal in exchange for class counsel’s agreement to take half of the supplemental fee award. The district court approved the new settlement, and Southwest distributed the vouchers and paid class counsel.
Then, in what must have come as a complete surprise to class counsel (and the corporate defendant), Markow sought to recover $80,000 in attorneys’ fees, which were to come out of class counsel’s fee award. The district court denied Markow’s fee request, and Markow appealed that denial.
The Seventh Circuit’s Ruling
In this third appeal, the Seventh Circuit reversed and remanded. The Seventh Circuit noted that the underlying settlement agreements were silent on issue of objector’s fees. In the absence of a settlement agreement that addresses objector fees, the Seventh Circuit explained that it looks to the law. “Objectors who add value to a class settlement may be compensated for their efforts,” explained Circuit Judge David Hamilton, writing for the unanimous panel. Id. at 2. “Unless the parties expressly agree otherwise, settlement agreements should not be read to bar attorney fees for objectors who have added genuine value.” Id.
Relying on the common fund doctrine to fill in the gap left by the parties’ agreements, the Seventh Circuit ultimately concluded that it would be inequitable for Markow’s lawyer to receive nothing despite negotiating, in exchange for dropping the second appeal, a tripling of relief to the class and a significant cut to class counsel’s fees.
Despite its remand, the Seventh Circuit expressed frustration over resolving yet another appeal involving attorneys’ fees. “[W]e expect this case to end, ‘so that the tail can stop wagging the dog,’” it warned. Id. at *4. (citation omitted). The Seventh Circuit determined that it was “difficult to reconcile [class counsel’s] rapacious requests for fees in the district court with our decision in the prior appeal that reduced its already generous fee award as a modest penalty for failing to disclose a potential conflict of interest.” Id.
Implication For Employers
Although objectors are often labeled extortionists by virtue of opportunistic obstacles they create to securing approval of class-wide settlements, the ruling in In Re Southwest Airlines Voucher Litigation is clear that objectors are entitled to attorneys’ fees when they add value to the class settlement. Employers navigating class settlements, therefore, should account for objector fees in the settlement agreement. Failure to do so could result in an objector sandbagging the settlement by requesting fees later.
Seyfarth Synopsis: In Pearson v. Target Corp., No. 17-2275, 2018 U.S. App. LEXIS 17337 (7th Cir. June 26, 2018), the U.S. Court of Appeals for the Seventh Circuit took aim at self-serving class settlement objectors and ordered the district court to review whether certain objectors received compensation in exchange for withdrawing objections. While not an employment case, the decision has significant implications for employers involved in class action litigation because it should discourage objectors from delaying class settlement approval by bringing meritless objections solely to receive payment in exchange for withdrawing objections.
Nick Pearson brought a consumer protection class action suit in November 2011. Pearson, No. 17-2275, 2018 U.S. App. LEXIS 17337, at *3. The case settled, and the district court approved the settlement on January 22, 2014. Id. at *3-4.
Theodore Frank, a regular objector to class action settlements that contain “substantial attorneys’ fees but meager benefits for the class,” objected to the settlement on these grounds. Id. at *2. The Seventh Circuit agreed with Frank’s objection and reversed the district court’s decision. Id.
After the case was remanded, the district court approved a new class-wide settlement on August 25, 2016, and dismissed the action without prejudice. Id. at *4. Three objectors subsequently filed objections. Id. All three dismissed their objections before briefing on their objections began. Id. On November 18, 2016, pursuant to a stipulation agreed to by the parties, the district court entered a new order dismissing the class action with prejudice. Id.
Frank – who suspected that the three objectors who withdrew their objections received side settlements in exchange for withdrawing their objections – moved to intervene and disgorge any side settlements paid to the objectors. Id. at *4-5. The district court struck the motion on the grounds that it lacked jurisdiction because the action had been dismissed with prejudice. Id.
Frank then moved to vacate the order dismissing the action with prejudice under Rule 60(b) of the Federal Rules of Civil Procedure. Id. The district court denied the motion, and Frank appealed. Id. at *5.
Seventh Circuit’s Decision
The Seventh Circuit began by considering whether Frank was “a party” who could file a Rule 60(b) motion. Id. at *6. It concluded that Frank was a party within the meaning of the rule because he objected to the initial settlement. Id.
The Seventh Circuit next considered whether Frank met his burden under Rule 60(b). Frank argued that the district court should have vacated the dismissal with prejudice and restated the dismissal without prejudice based on Rule 60(b)(1), which allows a judgment to be vacated based on “errors by judicial officers as well as parties,” and Rule 60(b)(6), which allows a judgment to be vacated in “extraordinary circumstances.” Id. at *6.
The Seventh Circuit found that Frank had not met his burden under Rule 60(b)(1) because the dismissal with prejudice was made subject to a stipulation, finding that agreeing to the stipulation was “a strategic decision” that “is enough to support the denial of a Rule 60(b)(1) motion.” Id. at *6-7.
The Seventh Circuit also determined that the district court should have vacated the dismissal with prejudice under Rule 60(b)(6) for two reasons. First, the Seventh Circuit held that, if a “settlement disappoint[s] expectations,” especially where there is nothing suggesting that an aspect of a class settlement is fair, courts should vacate under Rule 60(b)(6). Id. at *9-10. The Seventh Circuit found those factors present. Id.
Second, the Seventh Circuit opined that dismissal of a settled class action with prejudice is “inherently problematic” when settlement agreements, like the one at issue, provide that a court will have jurisdiction to determine all matters relating to the settlement agreement. Id. at *11. It found that, by dismissing the action with prejudice, the district court materially altered the settlement agreement, which would have required a new round of notice to absent class members. Id. at *11-12.
Accordingly, the Seventh Circuit reversed the district court’s decision denying Frank’s Rule 60(b) motion and ordered the district court to consider Frank’s disgorgement motion. Id. at *13.
After rendering its decision, the Seventh Circuit noted its concern that “selfish settlements by objectors are a serious concern.” Id. It noted that concern might be alleviated if Congress approves an amendment to Rule 23 that would require district court approval for “any ‘payment or other consideration’ provided for ‘foregoing or withdrawing an objection’ or ‘foregoing, dismissing, or abandoning an appeal.’” Id. at *13-14.
Implications For Employers
Employers who settle class action lawsuits do so in large part to have certainty and finality. Objectors can stand in the way of that certainty in certain circumstances. While this decision will not end intervention by objectors to class action settlements, it is a shot across the bow of self-serving objectors who bring meritless objections solely in order to extract a payout. Accordingly, it should discourage such meritless objections that can stand in the way of certainty and finality.
Seyfarth Synopsis: In a class action asserting claims for breach of contract, unjust enrichment, and statutory fraud in regards to the sale of general-use, pre-paid gift cards, the Seventh Circuit affirmed the final approval of a settlement agreement whereby the attorneys’ fees and costs totaled $1.95 million, while the class members would only receive approximately $1.8 million.
This ruling highlights the plaintiff attorney-driven culture of class action litigation, putting businesses and employers on notice as to who they are really defending against in these high-stakes lawsuits.
In Kaufman, et al. v. American Express Travel Related Services Co., Inc., No. 16-1691, 2017 U.S. App. LEXIS 24698 (7th Cir. Dec. 7, 2017), Plaintiffs alleged, among other claims, that American Express general-use, pre-paid gift cards were not “good all over the place” as the labeling had indicated. Id. at *2. Nearly ten years after the lawsuit was filed, the U.S. District Court for the Northern District of Illinois approved the parties’ settlement agreement, which provided that Plaintiffs’ attorneys would receive $1.95 million in attorneys’ fees and costs, while class members would receive approximately $1.8 million in damages. After two intervernors (“Intervenors”) appealed the District Court’s final approval of the settlement agreement, the Seventh Circuit affirmed the approval of the settlement, holding the District Court did not abuse its discretion even though the “settlement [was] not without issues.” Id. at *2.
With the class members’ attorneys earning more in the settlement than the class members themselves, this ruling is instructive for businesses in regards to litigation strategies in the class action landscape.
In 2007, Plaintiffs filed a class action in the Circuit Court of Cook County, Illinois, against American Express. The claims arose out of American Express’s sale of general-use, pre-paid gift cards, where a customer could buy a gift card by paying the amount to be loaded on the card (e.g., $25, $50, or $100) and a purchase fee of less than $5. The packaging in which the gift cards came declared they were “good all over the place.” Id. at *2.
In 2011, after the case was ultimately removed to the District Court, it granted preliminary approval of the settlement and certified the class for settlement purposes. Id. at *8. After multiple amended motions for approval and three rounds of notice to the class, the District Court granted final approval of the settlement in 2016. Id. at *10. In approving the settlement, the District Court awarded $1,000,000 in fees and $40,000 in expenses to Plaintiffs’ counsel, $250,000 in fees to additional class counsel, and $700,000 in fees to counsel for the Intervenors, while class members would receive approximately $1,800,000. The District Court “found [the settlement] acceptable as any reduction in fees would not go to the benefit of the class. Any excess would go either to the cy pres or to Amex.” Id. at *12.
Thereafter, on appeal to the Seventh Circuit, the Intervenors alleged that the District Court erred: (1) by not requiring the filing of briefs in support of the settlement prior to the deadline to object to the settlement; (2) in determining that American Express’s arbitration appeal posed a risk to the class’s success; (3) in approving the settlement given the breadth of the release; and (4) in not awarding most, if not all, of the attorneys’ fees to the Intervenors’ counsel.
The Seventh Circuit’s Decision
The Seventh Circuit affirmed the District Court’s approval of the settlement agreement, holding the District Court did not abuse its discretion. First, the Seventh Circuit held that there is no requirement for the filing of briefs in support of a settlement agreement. Id. at *15.
Second, the Seventh Circuit found that the District Court did not abuse its discretion in concluding that a pending appeal concerning an arbitration provision was a significant potential bar to the class’s success in this action. Id. at *20.
Third, the Seventh Circuit held that the release language in the settlement agreement was not overly broad, as the Intervenors had argued, since there was no admissible evidence that additional purported claims existed, and further, that the total size of the class was unknown. Id. at *22-23.
Fourth, noting that the District Court had dealt with the parties and their counsel for nearly seven years, the Seventh Circuit opined that the District Court was in the best position to determine which parties and attorneys had contributed to the settlement and in what proportions, and therefore it did not abuse its discretion. Id. at *26.
Accordingly, while acknowledging that the District Court “did not approve a perfect settlement,” the Seventh Circuit held that the District Court did not abuse its discretion, and therefore it affirmed the District Court’s approval of the settlement. Id. at *27.
Implications For Employers
Any class action settlement approval order where the plaintiffs’ attorneys walk away with more money than their clients is an eye-opener. While some businesses that have encountered consumer or workplace class actions can point to instances where fighting plaintiffs’ counsel tooth and nail over the course of several years ultimately resulted in a favorable result, the Seventh Circuit’s ruling in Kaufman should serve as a cautionary tale for companies regarding the accumulation of enormous attorneys’ fees. A major takeaway for businesses is that even in situations where the parties in a class action settle within the first few years of its filing, they must be cognizant of how the settlement approval process, including the potential interjection of objectors and intervenors, can quickly become expensive, and perhaps even worth more than the actual claims at issue. As such, even though this settlement approval is more of an exception as opposed to the norm, businesses and their outside counsel must focus on efficiently managing the settlement process to minimize their exposure to attorneys’ fees and costs.
In In Re Southwest Airlines Voucher Litigation, Case No. 13-3264 (7th Cir. Aug. 20, 2015), the U.S. Court of Appeals for the Seventh Circuit upheld a fee award to class counsel in a class action that resulted in a “coupon settlement” – a settlement in which the defendant agrees to issue coupons to the class members. In upholding the fee award, the Seventh Circuit also discussed the propriety of a number of settlement provisions and practices that are frequently at issue in class action settlement negotiations. While not a workplace class action, this decision should be of interest to any employers who are involved in class action litigation because it provides guidance about how courts in the Seventh Circuit and beyond will view certain class action settlement provisions and practices.
Southwest Airlines issued vouchers to its “Business Select” passengers that could be redeemed for one free in-flight alcoholic beverage. Some passengers saved their beverage vouchers so they could use them on later flights. In August 2010, Southwest Airlines announced that these vouchers could only be used on the flight covered by the “Business Select” ticket. The plaintiffs filed a class action against Southwest Airlines for breach of contract, unjust enrichment, and violations of state consumer fraud laws.
The district court dismissed the unjust enrichment and consumer fraud claims as being preempted by the Airline Deregulation Act. The parties subsequently agreed to settle the remaining breach of contract claim on a class-wide basis. Under the terms of the settlement, Southwest Airlines agreed to provide all class members with a voucher that was good for one free in-flight alcoholic beverage and further agreed to pay class counsel $3 million in attorneys’ fees. The parties also agreed on a “clear-sailing” clause that provided that Southwest Airlines would not object to the attorneys’ fee request up to the agreed-to amount, and further agreed to a “kicker” clause, which provided that, if the district court were to reduce the fee award, the reduction would benefit Southwest Airlines rather than the class. The parties also agreed on limited injunctive relief that would constrain how Southwest could issue vouchers in the future.
Several class members objected to the class settlement, focusing primarily on the fee award. They argued that the settlement was a “coupon settlement” within the meaning of the Class Action Fairness Act (“CAFA”), and that therefore the fee award needed to be a percentage of the value of the vouchers actually redeemed by class members. As such, they contended that class counsel sought inflated fees to the detriment of the class. They further argued that the settlement agreement was unfair because it contained the “clear-sailing” and “kicker” clauses, which manifested the lack of a fair and adequate settlement.
The district court agreed that the CAFA applied, but held that attorneys’ fees nonetheless could be calculated using the lodestar method of determining attorneys’ fees. Under this method, fees are calculated by multiplying the hours spent on litigation by a reasonable hourly rate and then adjusting the award based on various factors, such as whether the work was taken on a contingency basis and the quality of the result. Using this method, the district court awarded $1,649,118 in attorneys’ fees. The district court further held that the “clear-sailing” and “kicker” clauses did not render the settlement agreement unfair because the class was receiving what amounted to the full value of their claims. Both class counsel and several class members appealed that decision.
The Seventh Circuit’s Decision
The Seventh Circuit agreed with the district court that the CAFA applied because, in the Seventh Circuit, a voucher is considered to be a coupon. Southwest Airlines, at 7. It then considered whether the district court correctly concluded that the lodestar method nonetheless could be applied to determine the fee award. Disagreeing with the Ninth Circuit’s decision in In Re HP Inkjet Printer Litigation, 716 F.3d 1173 (9th Cir. 2013), the Seventh Circuit concluded that attorneys’ fees could be calculated using the lodestar method in coupon settlements, while simultaneously warning district courts to use the method only after “evaluat[ing] critically the claims of success of a class receiving coupons.” Id. at 16-17.
The Seventh Circuit further considered whether the settlement agreement was fair and reasonable in light of Southwest Airlines’ agreement to pay $3 million in attorneys’ fees and in light of the “clear-sailing” and “kicker” clauses. Addressing the objecting class members’ argument that the fact Southwest Airlines was willing to pay $3 million in attorneys’ fees showed that there was additional money class counsel could have recovered on behalf of the class, the Seventh Circuit held that this argument, while potentially powerful in other cases, was of “little force” here because “the class members [would] receive essentially everything they could have hoped for. As the district court put it, ‘the class members are getting back exactly what they had before, an unexpired drink voucher.’” Id. at 18-20.
The Seventh Circuit also addressed the “clear-sailing” and “kicker” clauses. It pointed out that, while it had “deep skepticism about such clauses, which seem to benefit only class counsel and can be signs of a sell-out,” it would not adopt a rule finding that such clauses per se bar settlement approval. Id. at 21. On the record before it, the Seventh Circuit concluded that the settlement agreement was fair and reasonable despite these clauses because the class members got everything they could have hoped for in the settlement. Id.
Finally, the Seventh Circuit addressed class counsel’s argument that he should receive $3 million in fees because Southwest Airlines agreed to provide that amount. It held that judicial deference to the provisions of class action settlements is not appropriate, and that the district court did not abuse its discretion in awarding class counsel $1.6 million in fees. Id. at 22.
Implications For Employers
Employers who are involved in class action litigation should use this case for guidance on how courts in the Seventh Circuit and beyond will react to proposed class action settlement agreements. Employers should be aware that including “clear-sailing” or “kicker” clauses in such agreements will cause district courts – and any appellate court on appeal if objectors attack the settlement – to more closely examine the fairness of the proposed settlement because such clauses may only benefit class counsel. In the right circumstances, employers may also be able to use this case to argue that they are providing full relief to a class even when they are not providing monetary relief if they can plausibly argue that they are providing something else that remedies a past wrong. Finally, employers who agree to provide nearly full relief to the class to settle a class action can use this case to overrule objections to the terms of a class action settlement.
In In Re Capital One Telephone Consumer Protection Act Litigation, Case No. 12-CV-10064, 2015 WL 605203 (N.D. Ill. Feb. 12, 2015), Judge James Holderman of the U.S. District Court for the Northern District of Illinois recently approved an unprecedented $75,455,099 settlement for 1,378,534 class members in a Telephone Consumer Protection Act (“TCPA”) class action and awarded plaintiffs’ counsel a whopping $15,668,265 in fees. As employers and business are increasingly aware, TCPA class actions are becoming ubiquitous because of the severe penalties imposed by the statute and the ability of plaintiffs’ attorneys to leverage those penalties to acquire large settlements and windfall fee awards.
Though not a traditional workplace class action, In Re Capital One Telephone Consumer Protection Act Litigation teaches many valuable lessons for companies and employers alike. Enterprising plaintiffs’ attorneys continue to take advantage of the onerous requirements, stiff penalties, and unclear language of the TCPA to bring suits and receive large fee awards. Until the FCC provides some clarity, companies should ensure that their practices fit comfortably within the confines of the limited circumstances where the use of autodialing and prerecording is unquestionably allowed under the TCPA and FCC regulations.
In 1991, Congress enacted the TCPA. “The TCPA prohibits callers from using ‘any automatic telephone dialing system or an artificial or prerecorded voice’ to make any non-emergency call to a cell phone, unless they have the ‘prior express consent of the called party.’” Capital One Telephone Consumer Protection Act Litig. at *3 (quoting 47 U.S.C. § 227(b)(1)(A)(iii)). It imposes stiff penalties for violations, providing for statutory damages of $500 per call or $1,500 per call for willful or knowing violations. Id. at *3-4.
During 2011 and 2012, plaintiffs filed a number of class and individual actions against Capital One alleging that it violated the TCPA by calling class members’ cell phones using an automated dialing system and/or by using prerecorded messages in its calls to class members to collect on credit card debit. Id. at *1-2. On December 10, 2012, those cases were consolidated before Judge Holderman in the Northern District of Illinois. Id. at *2.
Capital One argued that it obtained consent to call each class member because in every version of its standard cardholder agreement, Capital One provided that customers consented to receive calls through autodialing technology. Id. at *12. Capital One argued that the TCPA itself allows autodialing and prerecording with “express consent,” and FCC regulations provide that “autodialed collection calls to ‘wireless numbers provided by the called party in connection with an existing debt are made with the ‘prior express consent’ of the called party,’ and are therefore permissible.” Id. (quoting 23 F.C.C.R. 559 ¶ 9).
Plaintiffs pointed to another part of the FCC regulation stating that “prior express consent is deemed to be granted only if the wireless number was provided by the consumer to the creditor, and that such number was provided during the transaction that resulted in the debt owed.” Id. at *12-13 (quoting 23 F.C.C.R. 559 ¶ 9). Plaintiffs argued that, under this part of the regulation, Capital One could only autodial or make prerecorded calls to class members if the class members actually provided their cell phone numbers to Capital One on their respective cardholder agreements. Id.
Despite the fact that it had a strong argument that the class consented to receiving autodialed and prerecorded calls, Capital One agreed to settle the case for $75,455,099 because of the lack of clarity in the FCC regulation and the enormous potential liability if it lost on the merits. Id. at *6, *11. Of the $75,455,099 settlement, $22,636,530 – 30% of the settlement amount – was designated for class counsel’s fee award, with $5,093,000 designated for notice and administration costs and $47,700,569 – or $2.72 per class member/$34.60 per class member who filed a claim form – designated for the class. Id. at *6-7.
The Court approved the class action settlement amount, though it “cut” class counsel’s fee award from $22,636,530 to $15,668,265. Id. at *39. The Court calculated this award by finding that class counsel should receive 36% of the first $10 million recovered, $25% of the next $10 million recovered, $20% of the next $25 million recovered, and 15% of any amounts recovered thereafter. Id. The Court decided that this graduated recovery scheme was appropriate because class counsel should receive a premium on the first $10 million recovered due to the risks in pursuing this litigation while giving class counsel a gradually reduced incentive to seek additional damages to “account for cases where the marginal costs of increasing the class’s damages recovery are low.” Id. at *38. After the reduction in fees, class members who filed claims should receive $39.66 rather than the originally proposed $34.60. This reduced award still provided class counsel with an enormous windfall of 20.77% of a $75.5 million settlement.
Because of the size of the fee award given to plaintiffs’ counsel in this case and the ability to leverage the stiff penalties of the TCPA to force settlement, we expect plaintiffs’ lawyers to continue to search for every opportunity to file TCPA suits. We also expect that plaintiffs’ lawyers will use every ambiguity in the law and FCC regulations and the aforementioned stiff penalties to compel other well-meaning companies to settle dubious TCPA claims and, as a result, receive large fee awards. Because of this, employers who contact their customers via cell phone should be vigilant regarding their compliance with the TCPA. Companies seeking to collect debts should refrain from using automatic dialing and prerecorded messages without first obtaining an express written consent from each customer that identifies the cell phone number to which the company can place automatic-dialed calls.
On January 14, 2015, in Kragnes v. Schroeder, No. 13-2065 (Iowa App. Ct. Jan. 14, 2015), the Iowa Appellate Court upheld the district court’s decision to cut the fees of plaintiffs’ counsel in a successful class action from a requested $15 million to $7 million. Though not a workplace class action, the decision in Kragnes is a case study for the grounds to challenge fee awards in class actions.
In 1960, the City of Des Moines, Iowa, entered into franchise agreements with its electricity and natural gas providers, providing that each provider would pay Des Moines a percentage of its gross receipts for their sales into Des Moines. Kragnes v. City of Des Moines, 714 N.W.2d 632, 633 (Iowa 2006). These agreements were then made into ordinances. Id.
On May 6, 2004, then-Iowa Governor Tom Vilsack signed a law phasing out sales and use tax for the sale of gas and electricity for residential use. Id. at 634. Facing budget shortfalls, Des Moines responded by entering into updated franchise agreements with its electric and gas providers that increased the franchise fee. Id. at 635. Lisa Kragnes then filed a class action on behalf of herself and those similarly situated, arguing that the increased franchise fees were illegal taxes. Id. at 636.
Ultimately, the Iowa courts determined that the increased fees were illegal taxes, and that Des Moines had to refund approximately $40 million to its taxpayers. Shroeder at 2. The $40 million was placed into a fund so that it could be remitted to the Des Moines taxpayers after class counsels’ fees were removed.
Class counsel requested $15 million in fees, or approximately 37% of the $40 million fund. Id. The district court determined that this amount was “not fair to the class members” and that an award of $7 million in fees, or approximately 18% of the fund, was appropriate. Id. at 3. Class counsel appealed the award, claiming it was “unreasonably low.” Id.
The Appellate Court’s Decision
The Iowa Appellate Court first considered whether the district court erred in considering criteria other than those laid out in the Iowa Rules of Civil Procedure and Rules of Professional Conduct in deciding to reduce class counsel’s fee award. Specifically, the Appellate Court considered whether the district court’s decision to consider the fact that “[t]he money used to pay the attorneys’ fees and expenses will come from the very residents who have already been wronged in the illegal extraction of franchise fees” was an abuse of discretion. Id. at 6 (emphasis omitted). The Appellate Court held that the district court properly considered this a factor, since the applicable rules do not preclude consideration of additional factors in fixing a fee award. Id.
The Appellate Court further rejected class counsel’s argument that it was entitled to the 37% fee because that was the amount stated in its contingency fee agreement with the class representative and published to the class. Id. at 7. The Appellate Court pointed out that judges are not bound by fee agreements between class counsel and the class representative, and upheld the district court’s decision that the award could be reduced in spite of the agreed and published fee arrangement. Id. at 7-8.
Finally, the Appellate Court held that an award of 18% of the $40 million fund was not unreasonable. The Appellate Court reasoned that, given the large size of the recovery, the percentage of the recovery should be reduced to make it reasonable. Id. at 8-9.
Implications For Employers
Employers in Iowa and elsewhere who are subject to class actions should use this case to encourage reasonable settlement demands from class counsel. It can be used to convince class counsel that a large settlement or verdict might not necessarily increase their personal recovery, as courts are more likely to reduce the percentage of damages allocated to class counsel’s fees when there are larger verdicts or settlements.
This case also gives employers a new, potentially powerful argument for why class counsel’s fees should be reduced. The Appellate Court found that class counsel’s fees can be reduced as unreasonable if they represent a significant percentage of the recovery because, in the very act of awarding fees, courts force the class to pay class counsel in the form of a smaller recovery for the wrong class counsel claims they suffered. This argument should concern class counsel since, when it is addressed to them, they will have to argue why the class they have been claiming is so hurt that they need an enormous recovery should have their recovery reduced to pay class counsel’s (often) exorbitant fees. That this is potentially concerning to class counsel is confirmed in the Schroeder case itself, with class counsel trying to dodge the issue by asserting the district court abused its discretion by even considering the issue.
Given the sums at issue, we anticipate a further appeal to the Iowa Supreme Court. Stay tuned.