The U.S. Court of Appeals for the Seventh Circuit recently held, over extensive objections by intervenors, that the trial court did not abuse its discretion in approving a class action settlement, despite alleged problems with the class notice and the fact that the attorneys’ fees award exceeded the total award to the class.
In so ruling, the Court rejected the intervenors’ argument that the proponents of a class settlement must file briefs in support of settlement before the deadline to object.
A copy of the opinion is available at: Link to Opinion.
In 2007, a consumer filed a putative class action lawsuit against a financial services corporation best known for its consumer credit cards (“card issuer”), challenging various aspects of a gift card product of the card issuer.
Despite supposed representations that the card issuer’s prepaid gift cards were “good all over the place,” the consumer alleged that merchants were unable to process “split-tender” transactions where a cardholder attempted to purchase an item that cost more than the value remaining on his card, thereby leaving small amounts remaining on the cards.
In addition, the plaintiff alleged, cardholders were charged a $2 “monthly service fee” after 12 months of their issuance. The plaintiff alleged that, although a cardholder could request a check to recover the remaining balance, the card issuer charged a $10 check-issuance fee.
The putative class action complaint asserted claims against the card issuer for breach of contract, unjust enrichment, and statutory fraud, for allegedly designing its gift cards to make it purposefully difficult for cardholders to exhaust their balances.
The card issuer moved to compel arbitration pursuant to the provision within the cardholder agreement included in the gift cards. After the trial court denied the card issuer’s motion, the card issuer appealed to the Seventh Circuit.
On appeal, the parties engaged in settlement negotiations through the appellate court’s mediation program, and requested a limited remand of the appeal for the purpose of presenting their settlement to the trial court for approval. The Seventh Circuit granted the parties’ request for limited remand in February 2009.
On remand, two intervenors sought entry into the action, based, respectively, upon (i) similar complaints against the card issuer as lead plaintiff in the U.S. District Court for the Eastern District of New York and, (ii) claims that alleged purchase of a $100 gift card had no value when she attempted to use it. The trial court granted the motion to intervene on July 15, 2009.
Two days earlier, the consumer, joined by a new co-plaintiff, individually and on behalf of all others similarly situated (“plaintiffs”) filed an amended class action complaint and motion for preliminary settlement approval. Before the motion was decided, it was amended by the plaintiffs.
The amended motion sought approval of a settlement for a $3 million fund, through which settlement class members could receive either (i) up to $20 in reimbursement for monthly fees actually paid due to refused split-tender transactions; (ii) up to $8 for monthly fees paid; (iii) up to $5 in reimbursement of any check-issuance fee paid; and (iv) up to $5 in reimbursement for monthly fees paid by attesting that such fees were paid. Up to $200,000 of any such remaining funds would go to a charitable organization as cy pres, and up to $650,000 of any funds remaining thereafter would go to the card issuer as reimbursement for costs of notice and administration.
The proposed settlement also allowed settlement class members to take part in either: (i) the “balance refund program” for a refund of any balance of less than $25 on the gift cards without paying the check-issuance fee, or; (ii) the “purchase fee and shipping/handling fee waiver,” to purchase a new $100 gift card without payment of purchase or shipping and handling fee (approximately $10 savings).
On Dec. 22, 2009, the trial court certified the class for settlement purposes to “all purchasers, recipients, holders and uses of any and all of the gift cards issued by [the card issuer] from January 1, 2002 through the date of preliminary approval of the settlement…” However, the trial court denied preliminary approval of the settlement over concerns of the adequacy of the proposed notice, both in form and substance.
On Aug. 19, 2010, the trial court entered an order noting that, although the parties’ proposed notice had been improved, it was too complicated and required a concise summary. The order further declined to excuse individual notice upon the card issuer’s disclosure that it did have some personal-identifying information for gift card holders.
Thereafter, the plaintiffs filed a second amended motion for preliminary approval of the settlement, which increased the settlement fund to $6,753,269.50, leaving the class member benefits substantially the same, but removing the proposed reimbursement for the card issuer. To satisfy the notice requirements, the second amended motion proposed notice by publication and direct mail to every class member for which the card issuer had information. The trial court granted preliminary approval of the settlement on Sept. 21, 2011 and appointed the named plaintiffs’ counsel as lead class counsel, and the intervenors’ counsel as additional class counsel.
However, response to the notice was “abysmal” – of the approximately 70 million gift cards sold, only 3,456 benefits had been requested, amounting to $41,510.35. Citing a woefully imbalanced fee-to-claims ratio (class counsel requested $1,525,000), on Feb. 16, 2012, the trial court rejected the parties’ motion for final approval of the settlement, and appointed a notice expert, and agreed to appoint the intervenors’ recommended expert following their objection to the court’s expert due to conflict.
After the parties and notice expert implemented a supplemental notice program, the parties again moved for approval of the settlement on May 28, 2014, citing over 32,500 claims and notice reaching approximately 70 percent of the class. Nonetheless, the trial court denied final approval, objecting to the reimbursement to the card issuer for the costs of providing the first, unsuccessful notice, and citing the Seventh Circuit’s decision in Redman v. RadioShack Corp., 768 F.3d 622, 637-38 (7th Cir. 2014), to command another round of notice concerning motions for attorneys’ fees.
Finally, after the third round of notice, the final approval of the settlement was granted on March 2, 2016, with the trial court finding that the settlement was fair, reasonable and adequate. Based upon an affidavit of the card issuer, the trial court determined that the $1.8 million benefit to the class was reasonable given the class’s likelihood of not recovering the full $9.6 million, while noting the small rate of opt-outs and objectors and that the settlement was seven years in the making.
Still, the trial court referred to final approval as the “least bad option.”
As to fees, the trial court awarded: (i) $1 million to plaintiffs’ counsel ($235,000 less than requested), plus $40,000 in expenses; (ii) $250,000 to additional class counsel as requested, and; (iii) $700,000 to counsel for the intervenors—an $800,000 reduction from the $1.5 million requested.
The intervenors appealed approval of the settlement to the Seventh Circuit, arguing that the trial court erred by: (i) not requiring the filing of briefs in support of the settlement prior to the deadline to object to the settlement; (ii) determining that the card issuer’s arbitration appeal posed a risk to the class’s success; (iii) approving the settlement given the breadth of the release; and (iv) not awarding most, if not all, of the attorneys’ fees to the intervenors’ counsel.
First, as to the filing of briefs, the intervenors argued that while there is no express requirement under federal rules requiring proponents of a class action settlement to file briefs in support of the settlement prior to expiration of the time to object, that such is compelled as a matter of due process, and a natural extension of the Seventh Circuit’s opinion in Redman, and the Ninth Circuit’s decision in In re Mercury Interactive Corp. Securities Litigation, 618 F. 3d 988 (9th Cir. 2010), upon which Redman relied.
In Mercury Interactive Corp., the Ninth Circuit held that a trial court must “set the deadline for objections to counsel’s fee request on a date after the motion and documents supporting it have been filed,” based on “[t]he plain text of [Rule 23(h)],” which provides that requests for attorneys’ fees must be made by motion and that class members “may object to the motion.” Id at 993-994. In Redman, the Seventh Circuit adopted this reasoning to reverse approval of a class action settlement in part because the trial court had provided for the filing of motions seeking attorneys’ fees after the deadline for class members to object to the settlement. See 768 F.3d at 637–38.
Here, the Seventh Circuit rejected the intervenors’ argument that Redman’s reach should apply to the filing of briefs in support of settlement before the deadline to object, noting that Rule 23(h) deals exclusively with attorneys’ fees and that the federal rules do not provide any such requirement for the filing of briefs in support of a settlement agreement. On the contrary, Rule 23(e) only requires that class members be given an opportunity to object to the proposed settlement—the rule has no provision that would require parties to file briefs in support of the settlement prior to the deadline to file objections.
Accordingly, the Appellate Court held that the trial court did not abuse its discretion in approving the class settlement by not requiring briefs supporting approval of the settlement to be filed prior to the deadline to object to it.
Next, the intervenors argued that the trial court improperly gave too much weight to the card issuer’s potential arbitration defense in concluding that the $1.8 million class recovery was reasonable in light of the risk that the class plaintiffs would receive nothing in arbitration in the event that the appellate court reversed the trial court’s denial of the card issuer’s motion to compel arbitration.
The Seventh Circuit noted that in denying the cardholder’s motion to compel arbitration, it relied upon its opinions in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), and Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997), which held that contract terms contained on the inside of a product’s packaging (and thus only discoverable after purchase) become part of the contract between the purchaser and the seller so long as the purchaser had “an opportunity to read the terms and to reject them by returning the product.” Gateway at 1148. Applying this precedent to the cardholder agreement at issue, the trial court concluded that there was not “a sufficient opportunity to reject the terms of the agreement by returning the card, so the terms contained inside the packaging were not terms of the contract between [the consumer] and [the card issuer],” while declining to address its enforceability.
While acknowledging that the trial court’s reasoning in approving settlement “puts the enforceability cart before the contractual horse,” as the order denying the card issuer’s motion to compel arbitration remains pending, the Seventh Circuit held that the trial court did not abuse its discretion in concluding that the class settlement was fair, as the pending appeal concerning the arbitration remained a significant potential bar to the class’s success.
The Seventh Circuit next examined the intervenors’ claim that the release was overbroad, highlighting the claim of one of its intervenors who alleges that a $100 gift card she purchased was literally unusable because it had no value, despite paying the purchase fee. As the class settlement only proposed compensation for the $2 monthly maintenance and check issuance fees, the intervenors argued that her case was one of many, constituting “hundreds of millions of dollars of unjustified ‘up-front’ fees.”
However, the Appellate Court concluded that the trial court did not abuse its discretion because no party — not even the intervenor — provided any admissible evidence that such purported claims existed. While acknowledging that “it is not an objector’s duty to show that the settlement is inadequate,” the Seventh Circuit noted that “the burden on the proponents to support the settlement should not extend to an affirmative to rebut every allegation an objector makes,” in rejecting the intervenors’ argument. See Gautreaux v. Pierce, 690 F.2d 616, 630 (7th Cir. 1982).
Lastly, the intervenors argued that the trial court erred in failing to award them most, if not all, of the attorneys’ fees, despite their contention that they worked to further the interests of the class, while the named plaintiffs’ counsel purportedly colluded with the card issuer.
The trial court had acknowledged that the intervenors’ counsel was instrumental in getting the card issuer to divulge information on class members and in suggesting the notice expert ultimately appointed by the court. However, the Seventh Circuit also noted that the trial court observed that the intervenors filed “a number of repetitive and meritless objections,” and that it was unclear to what extent they could claim responsibility for the supplemental notice programs.
Having dealt with the parties and their counsel for nearly seven years, the Appellate Court concluded that the trial court was in the best position to determine which parties and attorneys contributed to the settlement in which proportions, and that there was no abuse of discretion in its award of attorneys’ fees.
As the Seventh Circuit concluded that the trial court did not abuse its discretion as to any parts of its approval of the class settlement despite its “issues,” the approval of the class settlement and attorneys’ fees awards was affirmed.