The U.S. Court of Appeals for the Seventh Circuit recently rejected and reversed a district court’s approval of an attorney’s fees award of almost $2 million in a class action settlement.
A copy of the opinion is available at: Link to Opinion
Several plaintiffs (“Plaintiffs”) filed a class action against a manufacturer (“Manufacturer”) alleging it made false claims and representations concerning the efficacy of its glucosamine pills in aiding individuals with joint disorders, including osteoarthritis. Plaintiffs alleged that Manufacturer’s representations violated several state consumer protection laws.
Eight months after filing its class action, Plaintiffs’ counsel (“Class Counsel”) reached a class settlement with Manufacturer and submitted the proposed settlement to the district court for approval. The district court approved the settlement, but significantly modified its terms.
Specifically, the district court’s approved settlement required Manufacturer to pay a total $5.63 million as follows:
(1) $1.93 million in attorneys’ fees to Class Counsel; (2) $179,676 in costs (3) $1.5 million in notice and administration costs; (4) $1.13 million to the Orthopedic Research and Education Foundation; (5) $865,284 to the 30,245 class members who submitted claims; and (6) $30,000 to each named class representative ($5,000 per individual).
In addition, the approved settlement included an injunction preventing Manufacturer from making certain claims and advertisements concerning the efficacy of its glucosamine pills for a period of 30 months.
The original settlement agreement, which the district court modified, provided an award of up to $4.5 million in attorneys’ fees to Class Counsel. The original settlement agreement further stated that any part of the $4.5 million the district court determined to be excessive would revert back to Manufacturer instead of being distributed to the settlement class or going to the Orthopedic Research and Education Foundation.
Six separate appeals of the district court’s settlement approval ensued. Several members of the settlement class objected to the district court’s approval of the settlement while Class Counsel cross-appealed arguing the district court should not have modified the original settlement agreement.
On appeal, the Seventh Circuit began its analysis by reviewing the district court’s determination that the potential maximum payment to the settlement class was valued at $20.2 million.
The Court’s valuation of the maximum payment to the settlement class is as follows:
(1) $14.2 million for class members based on the assumption that every one of the 4.72 million class members who received a postcard would file a $3 claim; (2) $1.5 million for class notice and related administrative costs; (3) $4.5 million for fees to Class Counsel; (4) zero value given to the injunction; and (5) excluding the $1.3 million donated to the Orthopedic Research and Education Foundation because it was not a class member.
However, the Seventh Circuit determined the $20.2 million valuation had little to no connection to the actual settlement value’s worth to the settlement class. First, the Court explained that $6 million of the $20 million was attributable to attorneys’ fees and associated costs, and thus did not benefit the settlement class as “administrative costs should not be included in calculating the division of the spoils between class counsel and class members.” “Those costs are part of the settlement, but not part of the value received from the settlement by the members of the class.” Redman v. RadioShack Corp., 768 F.3d 622, 630 (7th Cir. 2014).
The Seventh Circuit next determined that the $14.2 million “benefit” to the settlement class was “fiction” because only 30,245 claims were filed, meaning the actual total compensation paid to the settlement class was less than $1 million (the actual amount totaled $865,284).
The Court proceeded to examine whether the district court’s award of $1.93 million in attorneys’ fees to Class Counsel was reasonable.
The district court determined its attorneys’ fees award to be reasonable because it was only 9.6% of the $20.2 million valuation. However, the ratio to be used in determining the reasonableness of fees awarded to counsel in a class action “is the ratio of (1) the fee to (2) the fee plus what the class members received.” Redman, 768 F.3d at 630.
Using the above ratio, the Seventh Circuit determined the district court’s attorneys’ fee award was not 9.6 percent of the aggregate value, but rather was an “outlandish 69 percent.”
Moreover, the Court held, if the district court awarded the original settlement agreement’s request for $4.5 million in attorneys’ fees then “those fees would have soared to 84 percent of the pot to be divided between class members and class counsel.” The Court also noted that an award of $4.5 million in attorneys’ fees would have equaled a billable hourly rate of $1,254.
The Court explained that a billable hourly rate of $538.00, the rate the district court approved, was excessive because it meant that “few if any associates or paralegals had actually been used on the case, even though most of the legal work was routine pretrial preparation.” The Court found this to be “further indication that class counsel sought and was awarded excessive compensation.”
Next, the Seventh Circuit noted that Class Counsel was experienced in class action litigation, and thus had to know its extravagant notice and claim forms as well as the modest monetary award for class members would discourage filings. Class Counsel benefitted from the low amount of claims made, because the fewer the claims, the more money Manufacturer would be willing to give to Class Counsel in the way of attorneys’ fees to induce settlement.
The Court explained that “when the parties to a class action expect that the reasonableness of the attorneys’ fees allowed to class counsel will be judged against the potential rather than actual or at least reasonably foreseeable benefits to the class, class counsel lack any incentive to push back against the defendant's creating a burdensome claims process in order to minimize the number of claims.”
The Court proceeded to examine the $1.13 million cy pres award given to the Orthopedic Research and Education Foundation. As you will recall, a cy pres award is a “benefit to be given other than to the intended beneficiary or for the intended purpose because changed circumstances make it impossible to carry out the benefactor’s intent.” “A cy pres award is supposed to be limited to money that can’t feasibly be awarded to the intended beneficiaries, here consisting of the class members.”
The Court held neither Class Counsel nor Manufacturer demonstrated it was infeasible to provide the cy pres award compensation to the settlement class before it was given to the Orthopedic Research and Education Foundation. Accordingly, the Court struck down the cy pres award.
Next, the Seventh Circuit analyzed the district court’s zero percent valuation of the 30-month injunction preventing Manufacturer from representing its products rebuild, build, or renews cartilage.
First, the Court pointed out that the 30-month injunction was actually a 24-month injunction because the settlement agreement’s language gave Manufacturer 6 months to begin shipping its products with the agreed upon packaging changes. The Court further questioned why the injunction prevented Manufacturer from making the alleged false representations for only a 30 month period as opposed to permanently preventing such false representations.
More importantly, the Seventh Circuit took issue with the fact the injunction appeared to be superfluous and even adverse to consumers. It explained the injunction actually gave Manufacturer judicial protection because it required “purely cosmetic changes in wording,” and thus preserved the substance of its product’s claims and representations.
In support of the injunction, Class Counsel argued that: (1) the changes were not purely cosmetic as the language required by the injunction is not as “strongly worded” as the language previously used by Manufacturer; (2) and that Manufacturer would have to make a decision whether to use the old labeling after 30 months. However, Class Counsel provided no support for its arguments, and thus the Court quickly rejected the arguments.
Lastly, the Court examined the settlement agreement’s reversion clause. The class settlement agreement’s reversion clause stated that if “the judge reduced the amount of fees that the proposed settlement awards to class counsel, the savings shall enure not to the class but to the defendant.”
The Seventh Circuit explained that a reversion clause is merely “gimmick” for defeating objectors because the objector, as a class member, does not have standing to object to the reduction of an attorneys’ fees award as he or she has no stake in the outcome of that dispute. The Court held the simple way to correct an excessive attorneys’ fees award is “to increase the share of the settlement received by the class, at the expense of class counsel.” See Redman v. RadioShack Corp., supra, 768 F.3d at 632. However, the Seventh Circuit noted, a court can only do so if it invalidates a settlement agreement’s reversion clause.
Class Counsel argued that it often negotiates for the class members’ benefit prior to negotiating its own fee award. The Seventh Circuit found no merit in this argument, stating that whether Class Counsel negotiates for the class members’ benefit first or last makes no difference, and further held there was no justification for the settlement agreement’s reversion clause.
As a result, the Court invalidated the settlement agreement’s reversion clause.
In closing, the Court disapproved the following quotation cited by Class Counsel:
“because settlement of a class action, like settlement of any litigation, is basically a bargained exchange between the litigants, the judiciary’s role is properly limited to the minimum necessary to protect the interests of the class and the public. Judges should not substitute their own judgment as to optimal settlement terms for the judgment of the litigants and their counsel.” Armstrong v. Board of School Directors of City of Milwaukee, 616 F.2d 305, 315 (7th Cir. 1980).
The Court explained its reason for disapproval was it has learned that class action settlements are very different from settlements of any other types of cases, which are bargained for exchanges between litigants.
The Seventh Circuit explained that class actions have class representatives usually chosen by class counsel while the unnamed class members are not parties and have no control over class counsel. This creates a conflict of interest as class counsel’s pecuniary interest is in its fees while class members’ only interest is the award to the class. Defendants are only interested in the total amount they have to pay, and have no interest how the settlement amount is divided between class members and class counsel’s attorneys’ fees.
Thus, “the incentive of class counsel, in complicity with the defendant’s counsel, to sell out the class by agreeing with the defendant to recommend that a judge approve a settlement involving a meager recovery for the class but generous compensation for the lawyers -- the deal that promotes the self-interest of both class counsel and the defendant and is therefore optimal from the standpoint of their private interests.” Eubank v. Pella Corp., 753 F.3d 718, 720 (7th Cir. 2014).
The Court held that the subject settlement was “a selfish deal between class counsel and the defendant” and is a disservice to the settlement class. Thus, despite the fact the district court modified the settlement agreement, it did not modify it enough.
Accordingly, the Court reversed the district court’s judgment.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mwbllp.com
Admitted to practice law in Illinois
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