Seyfarth Synopsis: In In Re Subway Footlong Sandwich Mktg. & Sales Practices Litig., No. 16-1652 (7th Cir. Aug. 25, 2017), the U.S. Court of Appeals for the Seventh Circuit overturned a district court’s approval of a class action settlement involving Subway sandwich purchasers who sued for alleged consumer fraud. The Seventh Circuit called the settlement “worthless” in terms of alleged relief to the class. The decision illustrates that companies defending class action litigation cannot exit such lawsuits by simply “buying peace” by paying-off plaintiffs’ lawyers without providing any value to the class. In this respect, it is one of those unique rulings that is well worth a read by corporate counsel and business executive alike.
In In Re Subway Footlong Sandwich Mktg. & Sales Practices Litig., No. 16-1652, 2017 U.S. App. LEXIS 16260 (7th Cir. Aug. 25, 2017), the U.S. Court of Appeals for the Seventh Circuit addressed the propriety of an injunctive relief settlement for a class of Subway “Footlong” sandwich purchasers.
A number of state-law consumer protection class actions were filed against Subway based on Subway’s alleged failure to ensure that its Footlong sandwiches were actually 12 inches long. Id. at *3-5. Limited discovery showed that the claims had little merit. Subway had always taken steps to ensure that its sandwiches were proper length, but bread length nonetheless varies due to natural and unpreventable variation in the bread-baking process. Id. at *5.
Rather than pursue resolution on the merits, the parties reached a class-wide settlement for injunctive relief whereby Subway agreed to implement redundant and futile measures in an attempt to ensure Footlongs lived up to their name. Id. at *7. Plaintiffs’ attorneys received $520,000 in return for attorneys’ fees. Id. at *8. The district court approved of the settlement over objections by certain class members. Id.
On appeal, the Seventh Circuit reversed, finding that the settlement was “worthless” to the class. Id. at *14.
In 2013, after an online photo went viral showing one customer’s Footlong Subway sandwich was in fact only 11 inches, a slew of plaintiffs’ attorneys filed putative class actions against Subway for damages and injunctive relief. Id. at *3-4. The class actions were consolidated in a multidistrict litigation in the U.S. District Court for the Eastern District of Wisconsin. Id. at *4-5.
Limited discovery revealed that the claims had little merit as: (i) Subway had taken steps to ensure that its Footlongs were in fact 12 inches long; (ii) the minor variability in bread length revealed was due to natural and unpreventable variability in the baking process; and (iii) irrespective of bread length, customers received the same amount of meat, cheese, and other toppings on a sandwich. Id. Such facts eliminated any hope of certification of a damages class under Rule 23(b)(3), so class counsel focused on certification of a Rule 23(b)(2) injunctive relief class instead. Id. at *5-6.
The parties subsequently reached a settlement for injunctive relief whereby Subway agreed to implement measures aimed at ensuring Subway Footlongs were in fact 12 inches long, including: (i) requiring franchisees to use a measuring tool for sandwiches; (ii) requiring corporate quality-control inspectors to measure baked bread and check oven operation during regularly scheduled visits; and (iii) posting a notice on its website and in restaurants notifying customers of the variability in baked bread. Id. at *7.
In return, the plaintiffs agreed to cap their requests for attorneys’ fees at $525,000 and incentive awards at $1,000. Id. The district court preliminarily approved the settlement, and class counsel filed a motion seeking $520,000 in fees for class counsel and $500 incentive awards for each named plaintiff. Id. at *8.
A professional objector who was also a member of the class objected to the settlement. However, the district court overruled the objection, approved the settlement, and certified a class of persons nationwide who had purchased six-inch and Footlong Subway sandwiches between 2003 and 2015. Id.
The objector appealed.
On appeal, the U.S. Court of Appeals for the Seventh Circuit reversed the district court’s approval of the class action settlement. Id. at *14.
The Seventh Circuit found that the settlement was “worthless” and that “[n]o class action settlement that yields zero benefits for the class should be approved[.]” Id. at *11. The Seventh Circuit explained that irrespective of the measures Subway promised to take under the settlement, “there’s still the same small chance that Subway will sell a class member a sandwich that is slightly shorter than advertised.” Id. at *13 (emphasis in original).
Moreover, the Seventh Circuit found that class members’ right under the settlement to hold Subway in contempt for violating the injunction did not add any value. Id. at *14. “Contempt as a remedy to enforce a worthless settlement is itself worthless. Zero plus zero equals zero.” Id.
Finally, though not part of its holding, the Seventh Circuit expressed its disdain for the Footlong lawsuits by proclaiming that, because the consolidated class actions sought worthless relief, they “should have been dismissed out of hand.” Id. at *14 (internal quotations and citation omitted).
Implication For Employers
As shown by the Seventh Circuit’s decision, paying-off class action plaintiffs’ counsel can be a poor strategy for efficient resolution of class litigation. If an employer wishes to realize the cost-savings of early settlement, it must ensure that settlement provides actual value to the class and fees to class counsel commensurate with that value. Otherwise, expected cost-savings are squandered on opposing objectors (or the trial judge), with the possibility that the trial or an appellate court rejects the settlement and returns the litigation to where settlement talks began.
As an alternative approach, employers should consider efficient and realistic paths to summary judgment. That approach can make good sense in the face of attorney-driven class litigation with no emotional appeal like the Subway case. The Seventh Circuit’s emphatic command that meritless class actions should be “dismissed out of hand” should give employers and counsel more confidence in that regard.