The Seventh Circuit Court of Appeals rejected a class action settlement because class counsel would have received generous attorney fees for conferring only meager benefits to the class.  Writing for the Court, just as he did a few months earlier in Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), Judge Posner described this settlement as “a selfish deal between class counsel and defendant” that “disserves the class.”

Plaintiffs sued NBTY and Rexall Sundown for violations of consumer protection laws in six states alleging false claims concerning the efficacy of certain nutritional supplements.  Eight months after suit was filed, class counsel for the six cases negotiated a nationwide settlement with the defendants.  The preliminary version of the settlement agreement contained a “clear sailing agreement” that the defendants would not challenge any attorney fee request by class counsel up to $4.5 million.  It also included a “kicker” clause that required any part of the $4.5 million disapproved by the court to revert to defendants rather than becoming available for distribution to the class.

The district court modified the proposed settlement and approved a deal that required the defendants to pay $5.63 million comprised of:  $1.93 million in fees to class counsel plus an additional $179,676 in attorney expenses; $1.5 million in notice and administration costs; $1.13 million to the Orthopedic Research and Education Foundation as a cy pres award; $865,284 to the 30,245 class members who submitted claims; and $5,000 to each of the six named class representatives.  The agreement also included a thirty-month injunction against Rexall making certain claims in advertising or marketing of its supplements.

In rejecting the settlement, the Seventh Circuit began its analysis by noting that a district court is “a fiduciary of the class, who is subject therefore to the high duty of care that the law requires as fiduciaries.”  The Seventh Circuit then criticized the district court’s valuation of the settlement to the class at $20.2 million on two grounds.  First, the district court improperly relied on the potential $14.2 million value of the settlement if all 4.72 million class members who received the postcard notice had filed for a $3 refund instead of the real value of $865,284 based on the claims actually filed. Secondly, the district court erroneously included the maximum $4.5 million attorney fees and $1.5 notice expenses as a benefit to the class. The Seventh Circuit observed that the $20.2 million figure had “barely any connection” to the settlement value to the class.  As a result, the district court’s calculation that its $1.93 million attorney fee award represented only 9.6% of the settlement value was erroneous.  The Seventh Circuit stated that correct ratio was the attorney fee as a percentage of the sum of the fees and class compensation.   Under this ratio, the district court’s fee award constituted an “outlandish 69%” of the total settlement sum. 

The Seventh Circuit continued its analysis by criticizing the complexity of the claims process.  Given the elaborate documentation required to make a claim compared to the small amount of money a class member could claim, Judge Posner stated that it was “hard to resist the inference that Rexall was trying to minimize the number of claims that class members would file, in order to minimize the cost of the settlement to it.” Likewise, Judge Posner found that the $1.13 million cy pres award had “no validity” because the claims process could have been simplified to allow more of the settlement money to go to class members, including the 4.72 million that Rexall knew had purchased at least one bottle of supplements.  Next, Judge Posner determined that the injunction was superfluous or even adverse to consumers and described the kicker clause a “gimmick for defeating objectors”. Finally, Judge Posner disapproved of class counsel’s reliance on a quote from a thirty-four year old Seventh Circuit case downplaying the role of the judiciary in reviewing settlement agreements.  Like he did in the Eubanks v. Pella opinion, Judge Posner described the acute conflict of interest between class counsel and class members in a class settlement compared to settlement of other cases.

In sum, the Seventh Circuit acknowledged that the district court made significant modifications in the settlement “but not enough.”  The approval of the Settlement Agreement was reversed and the case was remanded back to the District Court for proceedings consistent with the 7th Circuit’s opinion. 

Nick Pearson, et al. v. NBTY, Inc., et al, (7th Circuit, November 19, 2014).