Cy Pres Distribution of Class Action Settlement Funds: First Circuit Provides New Guidance

Posted on May 01, 2012 by Wystan M. Ackerman

Last week, in In re Lupron Marketing & Sales Practices Litigation, Nos. 10-2494, 11-1329, 2012 U.S. App. LEXIS 8263 (1st Cir. Apr. 24, 2012), the First Circuit issued a significant opinion providing substantial guidance on distribution of excess funds in a class action settlement on a cy pres basis. This situation typically occurs when there is a settlement fund capped at a particular amount, the class members are required to submit claim forms and have their claims approved in order to receive payment from the fund, and the total amount paid to those class members who submit claim forms is less than the total settlement fund.  The court must then determine how to distribute the remaining funds to class members or on a cy pres basis, or whether to return them to the defendant, or whether to send another notice and provide class members an additional opportunity to make a claim.  In Lupron, the First Circuit heard an appeal by objectors challenging a cy pres distribution of excess settlement funds.  Retired Supreme Court Justice David Souter sat on the panel for this case. 

The First Circuit cited with approval and extensively discussed the ALI Principles of the Law of Aggregate Litigation § 3.07 (2010) (for more on these principles, see my September 8, 2011 blog post).  Here is what I saw as the key points the court made:

  • If the class members who participate in the settlement were not fully compensated by the claims process, the first preference should be to provide the class members with additional pro rata compensation.  Id. at *27.  As the court noted, this likely will be how excess settlement funds are distributed in most settlements because class action settlements are usually compromises that typically do not provide full, 100% compensation.  In the Lupron case, however, the class members were fully compensated for the loss they sustained (i.e., being improperly charged an unduly high amount for the Lupron prescription drug).  Thus, the question was whether the class members who made claims should be provided additional payments in excess of their losses or if the money should be returned to the defendant or distributed on a cy pres basis (typically to a nonprofit organization or in some other manner that would attempt to reach or aid those members of the class who did not make claims in the claim process).
  • The court explained that returning the remaining funds to the defendant is not favored under the ALI Principles because it “would undermine the deterrence function of class actions and the underlying substantive-law basis of the recovery by rewarding the alleged wrongdoer simply because distribution to the class would not be viable."  Id. at *28.  Thus, from the defendant’s viewpoint, if you want to have excess settlement funds revert back to the defendant, make sure that is agreed to up front and presented to the court for approval as part of the settlement.
  • The court adopted a “reasonable approximation” test, set forth in the ALI Principles, for cy pres awards: 

ALI Principles § 3.07(c) sets up an order of preference: when feasible, the recipients should be those "whose interests reasonably approximate those being pursued by the class." Id. If no recipients "whose interests reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve a recipient that does not reasonably approximate the interests being pursued by the class." Id.

Both case law and the ALI Principles support our adoption of the "reasonable approximation" test. As to whether distributions reasonably approximate the interests of the class members, we consider a number of factors, which are not exclusive. These include the purposes of the underlying statutes claimed to have been violated, the nature of the injury to the class members, the characteristics and interests of the class members, the geographical scope of the class, the reasons why the settlement funds have gone unclaimed, and the closeness of the fit between the class and the cy pres recipient.  Failure to meet the reasonable approximation test can lead to reversal.

Id. at *28-29 (boldface added).  In applying this test, the court of appeals found no abuse of discretion in the district court’s award of a cy pres fund to the Dana Farber/Harvard Cancer Center for research on diseases for which the Lupron medication was prescribed.  The court concluded that: (a) there was no evidence that Dana Farber profited from the alleged fraudulent scheme; (b) the Dana Farber proposal appropriately would fund research impacting the treatment of all diseases treated by Lupron; (c) although Dana Farber is located in Boston where the court sits, the projects would be national and even international in scope; and (d) the objectors had waived any possible basis for recusing the district court judge based on his disclosure that he is a member of the board of a hospital that was affiliated with another hospital that was affiliated with Dana Farber.

  • It is preferable for the parties to designate in their settlement agreement appropriate cy pres recipient(s).  This is because “the adversary process is better suited to the parties making the decisions and leaving less to the discretion of the judges.”  Id. at *45.  The First Circuit explained that distributing cy pres funds is not a traditional judicial function, and “having judges decide how to distribute cy pres awards both taxes judicial resources and risks creating the appearance of judicial impropriety.”  Id.  Although it might be easier for the parties to not worry about identifying a cy pres recipient in the settlement agreement, particularly where it may be unnecessary, the First Circuit clearly prefers that.  It can avoid the kind of collateral, post-settlement dispute that led to additional litigation at the trial and appellate levels in the Lupron matter.

In insurance class actions, I can see some potential practical problems in trying to satisfy the First Circuit’s “reasonable approximation” test, assuming the class members were fully compensated by the settlement, which is rare.  In property insurance coverage-related cases, the Red Cross, which provides assistance to victims of fires and disasters, would probably qualify.  But in auto or life insurance cases, or those involving underwriting issues, it will be more difficult to find a way to distribute a cy pres award that would meet the First Circuit’s test.  There are some groups that sometimes file amicus briefs in support of policyholders in insurance cases, usually on coverage issues, but that does not seem to be the type of organization that would meet the First Circuit’s test.  If you expect a significant chance that a cy pres award will need to be made in connection with a class action settlement, it’s worth giving some thought early in the process to how such an award could be distributed consistent with court requirements.   As the First Circuit notes, reaching an agreement on that up front can avoid a headache down the road.

Insurance Class Action Settlements: Eleventh Circuit Approves An Interesting New Approach

Posted on November 17, 2011 by Wystan M. Ackerman

Insurance companies often view class actions as meritless suits driven by plaintiffs’ lawyers and perhaps one or two disgruntled insureds.  But they often want to resolve small disputes with their customers, and give insureds the benefit of the doubt.  After all, keeping insureds happy and retaining their business year after year is very important.  So insurers sometimes explore whether it is possible to settle a class action in a way that allows customers who feel they were mistreated to resubmit their claims for reevaluation by the company.  Sometimes plaintiffs’ counsel objects to this and insists on a special master or some other neutral making the rulings.  The Eleventh Circuit recently upheld a settlement in which the defendant would do the reevaluations of claims.  This wasn’t exactly an insurance case but closely analogous. 

In Faught v. American Home Shield Corp., 2011 U.S. App. LEXIS 22073 (11th Cir. Oct. 31, 2011), the plaintiffs’ claims involved home warranty contracts issued by American Home Shield (AHS).  These contracts covered failures of items such as heating and air conditioning systems and appliances.  The plaintiffs claimed that AHS improperly denied claims on the ground that homeowners failed to maintain or clean the system or appliance, and that AHS had an improper practice of incentivizing repairpersons to deny claims.  The proposed settlement called for the establishment of a “Review Desk” at AHS that would reevaluate claims.  The “Review Desk” would be required to overturn the denial if it was based on the homeowners’ failure to have annual maintenance performed, with some discretion to consider other factors.  The court described the basic settlement terms as follows:

As part of the settlement, class members forfeit their right to participate in class action lawsuits against AHS and instead must pursue any future claims in individual lawsuits. In exchange, they receive a number of benefits, including the right to resubmit claims to the Review Desk, staffing requirements designed to make the Review Desk more effective, and litigation incentives aimed at ensuring that AHS treats claimants fairly. Class counsel and AHS separately negotiated the class counsel's fee award. That award included a $1.5 million lump sum payment plus 25% of class members' cash awards from the Review Board process.

Id. at *7-8.  The litigation incentives were that claimants who retained counsel and were awarded more in court than the Review Desk offered would receive attorneys’ fees, generally capped at $5,000.  Claimants who represented themselves in court would get an additional $1,000 payment if they won more than the Review Desk offered.  Any claimant could opt out of the Review Desk process altogether and simply file an individual lawsuit.  Id. at *16.

The main argument made by the objectors to the settlement was that it was improper to have AHS decide which claims should be paid without any review by a neutral (except if suit was filed, which would typically be in small claims court).  The Eleventh Circuit rejected this argument.  It did not explain its reasoning in detail but found that the approval of the settlement was not an abuse of discretion.

This is a model for a type of settlement that might work well in an appropriate insurance case.  Insurance companies typically would be most comfortable with having their own claim professionals reevaluate claims, as long as the workload does not become overwhelming.  The litigation incentives in this proposed settlement should ensure that settlement offers are reasonable where appropriate, without unduly penalizing the insurer if the insured chooses to go to court and collects more.   The disadvantage here is that, unlike in most class action settlements, the insurer does not get a complete release – the class members cannot pursue further class actions, but they retain the right to pursue individual claims.  In order for this to make sense from the insurer’s perspective, the carrier must be sufficiently comfortable that the chances are relatively small that the settlement will result in a large number of individual suits.  In any event, this is an interesting model that now has the blessing of a federal appeals court and is worth considering in appropriate cases.

Class Action Settlements: New Ninth Circuit Opinion Vacating Approval of Settlement Teaches Some Lessons

Posted on September 01, 2011 by Wystan M. Ackerman

The Ninth Circuit recently vacated the approval of a class action settlement where the class received non-monetary relief and $100,000 of cy pres awards, and class counsel was awarded $800,000 in attorneys’ fees.  The Center for Class Action Fairness objected, focusing on the size of the attorneys’ fees award in comparison to the benefit to the class.  The opinion teaches some lessons for both plaintiffs and defendants in seeking approval of class action settlements, most notably the importance of attempting to place a value on non-monetary relief in presenting the proposed settlement to the district court, and adequately substantiating the lodestar method for evaluating an attorneys’ fees award.  The opinion also seems to send a signal that plaintiffs’ counsel desiring to settle a case like this needs to accept lower attorneys’ fees. 

In re Bluetooth Headset Prods. Liab. Litig., 2011 U.S. App. LEXIS 17224 (9th Cir. Aug. 19, 2011) involved allegations that manufacturers of Bluetooth headsets for mobile phones failed to disclose to users that using the headsets at high volume for extended periods can cause hearing loss.  Id. at *2-3.  Maybe there is more too this than meets the eye, but this strikes me as the kind of thing that is common sense and most people would think should not be the subject of a lawsuit.  Parents and teachers are always telling children to turn their music player down because it can hurt their ears.  Do we really need warnings on or inside a product package telling people that? 

On the other hand, if class action cases with minimal merit are going to be settled to avoid the costs and the time and effort involved in litigating the merits, there has to be a mechanism to settle this kind of case at a reasonable cost.  (In some of these cases, the notice costs alone are going to outstrip the settlement value of the case; here the notice costs alone were $1.2 million.  Until courts regularly recognize that methods of notice other than individual mailing are appropriate where mailing addresses are available, that will remain a major obstacle to settlements.)  

The key takeaways I see here are: 

  1. The parties must demonstrate the value of injunctive or other non-monetary relief.  Here, they failed to do that, and the district court made no finding on that, so the Ninth Circuit gave no value to the warnings added on defendants’ websites and in product manuals.  The court also noted that the defendants had agreed to do this before the settlement talks concluded.  Id. at *23 n.8.  In my mind, however, that does not mean that the warnings have no value, it appears they were prompted by the lawsuit, even if there might also be a good business reason to provide them.
  2. A district court should do a detailed lodestar calculation of attorneys’ fees, if that is the method being used.  The Ninth Circuit says that either 25% of the benefit to the class (here, a much smaller number than the award) or a lodestar calculation are generally appropriate.   Here, the district court was presented with a purported $1.6 million of time entries by plaintiffs’ lawyers.  The court found numerous problems with the time entries but concluded that the $800,000 being requested, given that it was half of the amount submitted, was appropriate.  The Ninth Circuit opinion requires the district court to go through the time entries with a fine-toothed comb and come up with an actual calculation.  Reading between the lines, I think the Ninth Circuit was somewhat shocked by the size of the $800,000 award in comparison with the benefit to the class.
  3. Arrangements in which attorneys’ fees agreed to but not awarded revert to the defendant may be looked upon with disfavor.  The Ninth Circuit says that the benefit to the class and the attorneys’ fees should be evaluated as a “package deal,” and that “there is no apparent reason the class should not benefit from the excess allotted for fees” if the court does not award the full amount agreed to.  The court’s reasoning is that  defendants are only concerned about the total payout, so if the attorneys’ fees are too high the excess should benefit the class.  Id. at *33-35.  I’m not sure this makes sense because typically the benefit to the class is negotiated separately from attorneys’ fees, and defendants may feel pressure to agree to a fee award in the second stage of negotiations to get the deal done, even where the fees requested seem excessive.  One other approach would be not to agree on the fee award and just agree on the class relief and then let the court award what it determines to be reasonable attorneys’ fees.  In that situation, the defendant can challenge the proposed fee award if it feels it is excessive and the court has the benefit of the adversarial process.  In the negotiations, both sides should have some idea of what a reasonable attorneys’ fee will be, based on what the agreed relief is for the class, and how the case has been litigated.  Another approach is to place a cap or range on the possible award but without an agreement that the defendant will not argue for a lower fee if it feels the request is excessive.

Farmers Insurance Announces Settlement of Nationwide Med-Pay and PIP Class Action

Posted on August 10, 2011 by Wystan M. Ackerman

On August 5th, Farmers Insurance announced a settlement of a nationwide class action in the District Court of Canadian County, Oklahoma, involving med-pay and PIP (personal injury protection) benefits under auto insurance policies.  It was reported in a number of media sources, including the Insurance Journal.  A class had been certified and the certification affirmed by the Oklahoma Court of Civil Appeals (see In re Farmers Med-Pay Litigation, 229 P.3d 551 (Okla. Civ. App. 2009)), with certiorari denied by the state supreme court.

This case involves a system whereby med-pay and PIP claims would be reviewed by Zurich Services Corporation (an affiliate of Farmers) for reasonableness.  A computer database of charges for medical services was used, and a bill would be flagged as potentially unreasonable if it exceeded the 80th percentile for charges in the relevant geographic area.  (This type of issue is fairly common in recent auto insurance class actions, see my prior blog posts on the Strawn v. Farmers decision by the Oregon Supreme Court, a new class action filing against Nationwide, and the Bemis v. Safeco decision by the Illinois Appellate Court.)  While Farmers asserted that the database was used only as a guide and individual determinations would be made as to the reasonableness of the charges, the trial court had found evidence that individual determinations were not being made.  The court of appeals found that the issue of what Farmers’ actual practices were was a “merits” issue not appropriate for decision at the class certification stage under Oklahoma law.

The key terms of the stipulation of settlement are:  Class members (which include both insureds and medical providers) will be required to submit a notarized, detailed claim form asserting, among other things, that their claim was adjusted based on a recommended reduction from Zurich Services Corporation (I’m not sure how a typical insured would know that unless they received something explaining that).  They will have 30 days from the final settlement hearing to submit the form.  Class members who submit a valid form will receive essentially 60% of what they are claiming they are entitled to.  The only notice of this settlement (other than to the named plaintiffs) is proposed to be by publication notice, on the grounds that Farmers does not have a list of people who were paid less on their claims because of a recommendation by Zurich Services Corporation, and the only type of list it could generate would be very overbroad in some respects and underinclusive in others.  Attorneys’ fees are proposed at $6.5 million, without any explanation of how this compares to what the class is expected to receive.

I’m not going to try to assess the reasonableness of this proposal with the limited information I have, but the summary above should be helpful to readers of this blog who may want to gauge what plaintiffs’ attorneys in this kind of case will agree to in a settlement, after a class is certified and appellate courts have upheld certification.  Some of the plaintiffs’ lawyers in this case have brought other prominent class actions against insurers.

Injunctions of State Court Proceedings Pending Approval of a Proposed Class Action Settlement in Federal Court: Injunction Issued in Chinese Drywall MDL

Posted on July 05, 2011 by Wystan M. Ackerman

When a federal court grants preliminary approval to a proposed class action settlement, can it enjoin parallel state court proceedings while the notice and final approval process take place?  Judge Fallon of the Eastern District of Louisiana recently found such an injunction appropriate in In re Chinese-Manufactured Drywall Products Liability Litigation, 2011 U.S. Dist. LEXIS 62222 (E.D. La. June 9, 2011). 

In this case, a proposed class action settlement was reached between the Plaintiffs’ Steering Committee and Interior Exterior Building Supply, LP, Arch Insurance Company and Liberty Mutual Fire Insurance Company, involving tendering the policy limits for the coverage provided by Arch and Liberty Mutual.  Southern Homes, LLC, a homebuilder, had also sued Interior Exterior in Louisiana state court in Orleans Parish, and had a summary judgment motion pending in state court when the federal class action settlement came up for preliminary approval.

Judge Fallon’s opinion focuses on the exception to the Anti-Injunction Act that allows a federal court to enjoin state proceedings “where it is necessary in aid of jurisdiction.”  The opinion states that ordinarily this exception is applicable where the federal court has in rem jurisdiction, and is rarely applicable to in personam jurisdiction.  Judge Fallon explains that there is a circuit split on the question of whether, or under what circumstances, such an injunction is appropriate in aid of an MDL court’s jurisdiction given the nature and complexity of MDL proceedings.  Judge Fallon concludes that the injunction in the Chinese Drywall litigation was appropriate because the MDL proceeding was analogous to an in rem proceeding:

The Court finds that a conceptional res has been created in this MDL litigation, as evidenced by the complexity of the proceedings and claims, the fact the litigation has been underway for almost two years, and the substantial amount of effort and expense put into the litigation by the parties and Court alike. The MDL litigation, as it more specifically pertains to the present Motion, is sufficiently progressed: the parties have engaged in extensive discovery and depositions, a motion for class certification seeking to create a class with claims against InEx was filed and set for hearing, a trial against InEx was scheduled and a case management order issued, and most importantly, the InEx Settlement Agreement is a class action settlement agreement of the InEx-related claims, the Court has preliminarily approved this Agreement, and notice is in the process of issuance. Additionally, an actual res has been created now by the InEx Settlement Agreement which involves the tendering of all of InEx's primary insurance coverage. Because there is a possibility that Southern's state court hearing and proceedings could affect and potentially disrupt the InEx Settlement Agreement and the res created thereby, these proceedings should be stayed. Notably, the stay is only temporary and contingent upon the successful final approval by the Court of the InEx Settlement Agreement; thus, in the case the Court does not give its final approval, Southern will then be free to pursue its state court case against InEx, and if the Agreement is finally approved then presumably Southern will benefit as a class member or choose to opt-out.  (In re Chinese-Manufactured Drywall Litigation, 2011 U.S. Dist. LEXIS 62222, at *18-19.)

This is an important issue because when a class action settlement is reached, both sides understandably want to bring other litigation on the same issues to a halt, both to avoid litigation costs and to prevent developments in parallel litigation that might impact the settlement or its approval.  The availability of this kind of temporary stay to allow a proposed class action settlement to be considered should not depend on whether the litigation is an MDL or other complex litigation, or how much work has been done in the case.  An amendment to the Anti-Injunction Act or to the Federal Rules of Civil Procedure might be appropriate to address this narrow but important issue. 

 

Proposed Settlement of Consumer Class Action Includes a Ban on Future Class Actions

Posted on June 08, 2011 by Wystan M. Ackerman

I found very interesting a recent post by Russell Jackson on his Consumer Class Actions and Mass Torts Blog, discussing a proposed settlement in In re Dry Max Pampers Litigation, which includes a ban on future class actions.  This MDL involved claims that Dry Max diapers, a relatively new product introduced by Pampers, purportedly caused diaper rash, although CPSC and Health Canada studies failed to demonstrate any connection between these diapers and diaper rash.  The proposed settlement involves equitable relief – providing certain educational information to consumers, and reinstating a money-back guarantee – along with cy pres relief (funding for certain medical research on infant skin health).  The class members would give up their right to bring equitable claims (including incidental monetary damages that might be awarded on equitable claims), but would retain their right to sue for personal injuries and actual damages. 

Most significantly, the class members would give up their right to bring future class action lawsuits on the issue presented by this case.  Whether a denial of class certification by a federal court can bar future class actions in state courts is before the Supreme Court in the Smith v. Bayer Corp. case, which I previously posted about.  This seems to be an effort to ensure that, regardless of the outcome of Smith v. Bayer Corp., class members in this case, assuming the settlement is approved, will not be able to bring new class actions, since they will get notice and expressly give up that right.  I’m not sure I agree with Russell that Smith v. Bayer Corp. might make this settlement unworkable, but you never know what the Supreme Court might say.  I agree that a ruling for the plaintiffs in Wal-mart v. Dukes could throw into question the aspect of this settlement that involves the class giving up certain rights to equitable claims for monetary relief.  With the Supreme Court term ending soon, we’ll know where those things stand within a few weeks. 

Also very interesting here is the proposal for notice to be entirely Internet based (a press release and website).  Often one of the major obstacles to settling “nuisance” class actions is that notice costs may outstrip the case’s settlement value.  If courts approve this form of notice, it will make it easier for parties to settle these kinds of cases.

Insurance companies may well be able to take advantage of this kind of a settlement if courts approve it.  Insurers are often faced with putative class actions on which a denial of class certification is very likely, but plaintiffs’ attorneys tend to bring numerous putative class actions on the very same issue.  This type of settlement could be a potential solution to the cost of repeated class action litigation on the same issue – individual insureds would not give up their right to sue for damages individually, but they would give up the right to bring a class action, in exchange for some equitable and/or cy pres relief.  Another solution to this type of problem might be a favorable result in Smith v. Bayer Corp., depending on how that case comes down and how the opinion is written. 

Class Action Settlement by Farmers Insurance: Too Onerous for Class Members?

Posted on April 20, 2011 by Wystan M. Ackerman

A recent article in the Los Angeles Times regarding a class action settlement by Farmers Insurance suggests that there is something improper about a class settlement that requires class members to submit a form under penalty of perjury, and allowing money that is not paid out to revert to the insurer:

Here's how to make a $455-million consumer class-action settlement disappear.

First, require the aggrieved customers to sign and mail in a claim form comprising 10 pages of legal Esperanto before receiving any money. Make sure the customers know they're signing "under penalty of perjury."

Second, let the company keep any money that isn't paid out.

I have not studied the court file or orders in this case, but the article seems to miss some key points.  It's typical for courts to require class members to submit claim forms under penalty of perjury.  Courts must do their best to ensure that money goes only to people who are entitled to it -- class action settlements are ripe for fraud, just like rebates that are issued by stores when you purchase a product.  It's also not uncommon for courts to allow uncollected money to revert back to the defendant.  The total dollar amount of a proposed settlement is sometimes based on an estimate of what might be owed to the class, where there is no way of knowing what actually is owed. 

The article seems to deride Farmers' position but says very little about the $90 million of attorneys' fee award.  What work did plaintiffs' counsel do to earn such a large fee?  Will the actual fee take into account what the class actually receives in compensation?