The U.S. Court of Appeals for the Fourth Circuit recently rejected a challenge to a class action settlement by a group of consumers objecting to the release of statutory and punitive damages claims – but not claims for actual damages – in exchange for non-monetary injunctive relief under the federal Fair Credit Reporting Act ("FCRA"), holding that the district court did not abuse its discretion in approving the settlement or awarding attorney's fees to class counsel.
A copy of the opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/142006.P.pdf
In 2011, a putative class of consumers whose personal information was sold by a well-known "data broker" and computerized legal research provider, sued under the FCRA for allegedly selling consumers' data without complying with the consumer protection provisions of the FCRA.
For years, the defendant data broker allegedly sold proprietary "identity reports" to the debt collection industry, "used to locate people and assets, authenticate identities, and verify credentials" supposedly without complying with the FCRA under the auspices that the identity reports were not a "consumer report" within the meaning of the FCRA.
The complaint alleged that the main defendant violated the FCRA by: 1) selling its identity reports without making sure the buyers were purchasing them for the permissible purposes allowed by the FCRA; 2) refusing to allow consumers to view their reports; and 3) refusing to investigate when consumers disputed information in the reports. The plaintiffs proposed three corresponding classes.
After protracted litigation, the parties reached a settlement pursuant to which the main defendant agreed to pay monetary awards to one class of plaintiffs, and as to another class of plaintiffs to substantially revise the identity reports in order to incorporate various consumer protection provisions in return for a release of statutory damages but not any claims for actual damages.
The district court certified two settlement classes pursuant to the settlement agreement and Federal Rule of Civil Procedure 23(b)(2) and (b)(3) and approved the settlement. The first class, certified under Rule 23(b)(3), included approximately 31,000 persons who requested copies of their reports or tried to dispute information contained therein, who would receive roughly $300 each in exchange for a release of the FCRA claims.
The second, much larger class (the "Rule 23(b)(2)class"), consisted of approximately 200 million people whose personal information was stored on the defendant's database between November of 2006 and April of 2013.
The Rule 23(b)(2) class waived any claim for statutory and punitive damages, but unlike the smaller monetary relief class, retained the right to recover actual damages. In exchange, the Rule 23(b)(2) class received injunctive relief in the form of a fundamental change in the suite of products the main defendant offered for sale.
After a hearing, the district court certified the classes and approved the settlement, reasoning as to the Rule 23(b)(2) class that certification was appropriate "because the relief sought by the class is injunctive, rather than monetary, and 'indivisible' in that it 'will accrue to all members of the [nationwide] class.'" The district court rejected the objectors' argument that the lack of opt-out rights precluded certification, reasoning that class members retained the right to sue for actual damages and waived only statutory damages, which were "uniform as to all class members."
The district court also approved the settlement as "fair, reasonable and adequate" under Federal Rule of Civil Procedure 23(e)(2) because of the extensive negotiations leading to the agreement and the strengths of the parties' claims and defenses. In particular, the district court reasoned that because of the existence of a 2008 Federal Trade Commission Opinion Letter concluding that the identity reports were outside the scope of the FCRA, the objectors' chances of recovering statutory damages based on a willful violation were "speculative at best" such that the release of those claims in exchange for injunctive relief was "demonstrably fair and adequate."
The district court also approved incentive awards of $5,000 to each of the lead plaintiffs and $5.3 million in attorney's fees to class counsel.
A group of class members who claimed they were entitled to opt out of the Rule 23(b)(2) class appealed, objecting to certification of the Rule 23(b)(2) class and the settlement itself.
On appeal, the Fourth Circuit explained that under Rule 23(a), a party seeking class certification must demonstrate "numerosity," "commonality" of questions of law or fact, "typicality" and that the plaintiffs can adequately protect the interests of the class members. If these requirements are met, the proposed class must fall within one of three types of class set forth in Rule 23(b).
The Court noted that case involved Rule 23(b)(2), which allows certification when "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." Because of its uniform nature, this type of class is deemed to be homogenous and "mandatory" in the sense that "opt-out rights" are not required or provided under the rule.
The Fourth Circuit then pointed out that federal circuit courts of appeals, including the Fourth, have held that "mandatory Rule 23(b)(2) classes may be certified in some cases even when monetary relief is at issue. … Where monetary relief predominates, Rule 23(b)(2) certification is inappropriate. … But where monetary relief is 'incidental' to injunctive or declaratory relief, Rule 23(b)(2) certification may be permissible." The reasoning underlying this judicial interpretation is that if individual monetary awards predominate over uniform, class-wide injunctive or declaratory relief, the "'presumption of cohesiveness' breaks down and the procedural safeguard of opt-out rights becomes necessary."
The Court rejected the objectors' argument that certification of the Rule 23(b)(2) class was inappropriate because the statutory damages waived under the settlement agreement predominated over the injunctive relief awarded and thus were not "incidental" to such relief. It reasoned that the case before it was a "paradigmatic" Rule 23(b)(2) case because the injunctive relief was "indivisible" and benefitted all class members simultaneously, and the statutory damages claims released under the settlement were not the kind of "individualized claims that threaten class cohesion" and are thus prohibited under the Supreme Court's 2011 decision in Wal-Mart Stores, Inc. v. Dukes, which held that back-pay damages under Title VII "are not 'incidental' for purposes of Rule 23(b)(2) and may not be certified under that Rule."
The Fourth Circuit also rejected the objectors' argument that the released statutory damages claims were not "incidental" to injunctive relief because the plaintiffs' complaint did not seek injunctive relief, reasoning that even though the FCRA does not expressly provide a private right of action for injunctive relief, the defendant was "free to agree to a settlement enforcing a contractual obligation that could not be imposed without its consent."
The Court found inapposite rulings of the Fifth and Eleventh Circuits which had held that if a statute does not provide for injunctive relief, a Rule 23(b)(2) class cannot be certified because in those cases the defendants did not agree to a settlement but instead opposed certification. According to the Fourth Circuit in this case, the fact that the plaintiffs did not plead injunctive relief in their complaint did not matter because Rule 23(b)(2) by its terms applies only if "final injunctive relief … is appropriate respecting the class as a whole."
Looking to the agreement itself and the final relief it called for in order to determine whether a monetary remedy was appropriate, the Fourth Circuit held that because the relief awarded to the Rule 23(b)(2) class was primarily injunctive, the concern that the request for injunctive relief was illusory and asserted only to rationalize an otherwise improper damages award did not exist.
Relying on dicta in the Supreme Court's Dukes ruling, the objectors argued alternatively that even if the released statutory damages claims were incidental to injunctive relief and did not predominate, certifying the class without opt-out rights violated due process. Agreeing with the district court, the Fourth Circuit found that the holding in Dukes was not as broad as the objectors argued. Instead, the Court noted, Dukes merely held that "claims for individualized monetary relief may not be certified under Rule 23(b)(2)."
The Fourth Circuit reasoned that Dukes did not overturn the established rule that a so-called mandatory Rule 23(b)(2) class seeking monetary relief can be certified "so long as that relief is 'incidental' to injunctive or declaratory relief—meaning that damages must be in the nature of a 'group remedy,' flowing 'directly from liability to the class as a whole." In those types of cases, "opt-out rights are not required because individualized adjudications are unnecessary."
The Court cited 2012 and 2014 decisions from the Seventh and Second Circuits in support for its conclusion that certification is still possible when monetary damages are sought by the class, so long as they are "incidental" to declaratory or injunctive relief, concluding that the procedural safeguards built into Rule 23 sufficiently protect the due process rights of objecting class members.
The Fourth Circuit found it particularly important that the settlement agreement itself made opt-out rights unnecessary because any member of the class could still pursue a claim for actual damages. Because class members could still sue for individualized harm caused by the defendant, the Court held their due process rights were not violated.
The Court reasoned that, practically speaking, the objectors' argument would discourage settlement because defendants would not agree to settlements like the one as issue if they could not thereby achieve "something approaching global peace." Given the procedural protections of Rule 23 and the retention of the right to sue for actual damages, "any marginal benefit that might accrue to disenchanted class members is unlikely to be worth this cost."
Finally, the Fourth Circuit held that the district court did not abuse its discretion in approving the $5,000 incentive awards to the class representatives, rejecting the objectors' argument that representation was inadequate because the awards created a conflict of interest between the lead plaintiffs and other class members. The Court reasoned that the incentive awards are common in class actions and their purpose is to "compensate class representatives for work done on behalf of the class, make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general."
While under certain circumstances preferential treatment of class representatives is not appropriate, such as when incentive agreements are reached at the beginning of the case and thus the lead plaintiffs may "compromise the interest of the class for personal gain," the Fourth Circuit held that in the case at bar, the incentive awards were not agreed upon before the settlement and were not "conditioned on the Class Representatives' support for the Agreement." The Court noted that this was also "not a case in which unnamed class members received 'only perfunctory relief'" because the district court determined that the changes to defendant's business practices provided substantial relief to class members.
The Court then rejected the objectors' argument that the settlement was unfair and inadequate because it released class members' claims for statutory damages without affording them any monetary relief in return, finding that the district court did not abuse its discretion and correctly applied the Rule 23 factors in concluding that the agreement was fair, reasonable and adequate.
The Fourth Circuit reasoned that the district court correctly emphasized the weakness of the plaintiffs' claims on the merits in finding that the agreement was substantively reasonable. In order to recover statutory damages under the FCRA, plaintiffs would have to prove that defendant's actions were "willful," which in turn requires that defendant had taken an "objectively unreasonable" interpretation of the FCRA in concluding that its identity reports were not "consumer reports" under the FCRA. Because the Supreme Court has clarified that when "the statutory text and relevant court and agency guidance allow for more than one reasonable interpretation … a defendant who merely adopts one reasonable interpretation' cannot be held liable as a willful violator..." and the governing regulatory agency, the FTC, had opined that the identity reports were not subject to the FCRA, defendant's interpretation was not unreasonable.
On the other hand, the Court pointed out that the Rule 23(b)(2) settlement provided the class with substantial injunctive relief, including a nationwide program that would result in a "significant shift in industry practices, making [the main defendant] the industry leader in consumer-information protection" and the record contained testimony by an expert that the monetary value of such relief "is in the billions of dollars."
Concluding that the district court did not abuse its discretion in approving the settlement as fair, reasonable and adequate under Rule 23(e), the Fourth Circuit found the objectors' single-minded focus on the lack of monetary relief to be "unsupported by the law and also imprudent as a matter of common sense [because] [t]here was no realistic prospect that [defendant] could or would provide meaningful monetary relief to a class of 200 million people."
The Court also rejected the objectors' argument that the settlement improperly granted immunity to the defendant for future FCRA claims arising from its new "contact and locate" product because it was free to change the product in the future "into a product that is indeed a 'consumer report' under the FCRA, while class members bound by their stipulation, will be unable to respond."
The Fourth reasoned that this argument overstated defendant's freedom to act under the settlement agreement because the agreement established "boundaries for the design and implementation of [the contact and locate product], which assure that the product cannot operate as a 'consumer report' for purposes of the FCRA."
In addition, the settlement agreement provided that the new products would not be considered "consumer reports" under the FCRA "so long as [they] are not used in whole or in part as a factor in determining eligibility for credit or any other purpose that could qualify them as consumer reports." In other words, the Fourth Circuit noted, the defendant did not receive a "free pass from FCRA liability" because the agreement only applied as long as the contact and locate product "remains true to the parties' intent and is not used in a manner that would make it 'consumer report.'"
Turning to the last argument, raised by a single class member as to the district court's attorney's fee award, the Court explained that Federal Rule of Civil Procedure 23(h) authorizes the court to award reasonable attorney's fees authorized by the parties' agreement, and such an award is reviewed under an abuse of discretion standard.
Under Fourth Circuit precedent, review of a fee award is "'sharply circumscribed,' and a fee award 'must not be overturned unless it is clearly wrong.'" The lone objector argued that the district court failed to explain the basis for its award sufficiently and that class counsel's hourly rate and number of hours were unreasonable.
The Court acknowledged that the district court's explanation was brief, only one paragraph, but nevertheless found the explanation was sufficient and concluded the district court did not abuse its discretion in awarding $5.3 million in attorney's fees, reasoning that class counsel invested large amounts of time and labor and obtained an excellent result in a complex case because the agreement "'provides substantial benefits for over 200 million consumers' and 'forces [defendant] to comply with the FCRA.'"
Turning to the reasonableness of class counsel's hourly rate, the Court explained that the district court relied, in addition to counsel's affidavit regarding prevailing market rates, on the testimony of an expert, who opined that class counsel's hourly rates were comparable to those charged in bankruptcy cases and similar class actions. Accordingly, the district court's explanation, while short, was supported by sufficient evidence.
Finally, the Fourth Circuit found significant the fact that only one of 200 million class members objected to the fee award, which bolstered the appellate Court's conclusion that the district court did not abuse its discretion.
Accordingly, the ruling of the district court was affirmed.
Ralph T. Wutscher
Maurice Wutscher LLP
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