While most class action settlements are awarded preliminary approval (as long as they are deemed fair, adequate  and reasonable), a Florida federal court recently rejected a class action settlement as inadequate in an action involving alleged junk faxes sent in violation of the Telephone Consumer Protection Act (“TCPA”).

The Class Action: Background

In Physicians Healthsource, Inc. v. Doctor Diabetic Supply, LLCet al., 12-CV-22330 (S.D. Fla. 2014), the putative class action plaintiff alleged claims against the defendants for the violation of the TCPA and for conversion arising out of the sending of approximately 17,000 unsolicited fax advertisements to consumers.

Preliminary Approval of the TCPA Class Action Settlement: Denied

Following a year of litigation, the lead defendant entered into a settlement agreement with the putative class action plaintiff.  The agreement included a settlement pot of approximately $8.7 million, which the plaintiffs’ counsel would “pursue and attempt to recover” from, among others, the defendant’s insurers and indemnifiers.  The settlement agreement contained express disclaimers by the defendant that indicated that it was making no warranty or representation that there would be any recovery for the settlement class.

In a one-page Order, the Court held that it would “not approve a settlement with such an uncertain recovery.”  This is not surprising, as there is no guarantee that there ultimately would be any funds recovered for the settlement class.  Thus, under principles of class action law, this settlement was not deemed to be fair, adequate or reasonable vis-à-vis the members of the settlement class.  In a decision filed on the same day, the Court denied the plaintiff’s motion for class certification, but simultaneously granted it leave to re-file the motion at a later date.

Takeaway

Class action lawsuits are time consuming and expensive, often because plaintiffs’ attorneys only get paid at the end of the action (i.e., after a judgment is entered against the defendant).  As such, class action suits generally place significant pressure on defendants to settle.  If and when a settlement is negotiated, the court must approve it twice: initially, by granting preliminary approval and, later, by granting final approval.  Accordingly, the parties must carefully draft their settlement agreement to survive strict judicial scrutiny and to ensure that the settlement is fair and adequate for the entire settlement class.  While settlement agreements often survive the first challenge (preliminary approval), as we have previously reported, there is no guarantee of approval unless the likelihood that class members will receive a reasonable monetary payment is high.