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.

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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.

Case Background

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.