Insurance Class Actions Insider -

Under the coupon settlement provision of the Class Action Fairness Act (CAFA), do attorneys’ fees always have to be based on the value of the coupons redeemed, or can they be based on a lodestar calculation?  The Ninth Circuit recently addressed this question and held, in a 2-1 decision, that any award of fees “attributable to” an award of coupons must take into consideration the value of redeemed coupons.  In re HP Inkjet Printer Litigation, No. 11-16097, 2013 U.S. App. LEXIS 9744 (9th Cir. May 15, 2013).  The majority concluded that lodestar fees would be appropriate only to compensate for non-coupon relief, such as injunctive relief.  A lengthy dissent would have concluded that CAFA permits the use of a lodestar calculation in any case involving a coupon settlement.

This case involved allegations that HP engaged in unfair business practices with respect to ink cartridges for inkjet printers.  The settlement called for HP to provide up to $5 million in “e-credits” for purchases of printers and supplies on its website.  In addition, HP agreed to injunctive relief requiring it to make certain disclosures regarding its business practices.  Under the terms of the settlement, the “e-credits” would not be issued until the settlement was finalized, after appeal, but 122,000 of the millions of class members claimed the “e-credits.”  The district court estimated the value of the settlement to the class at $1.5 million, and awarded attorneys’ fees of $1.5 million and costs of approximately $600,000.  (Notably, the opinion did not comment on the fact that the plaintiffs’ attorneys were awarded essentially the same amount as the entire value of the relief the class received, as calculated by the district court.)  Three class members filed objections, including one filed by Ted Frank of the Center for Class Action Fairness, who argued the appeal (it appears he objected for himself as a class member and also on behalf of another class member). 

The debate between the majority and dissent focused largely on 28 U.S.C. § 1712(a), which provides that:

If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.  (Emphasis added.)

The majority focused primarily on the words “any” and “attributable to,” concluding, based on dictionary definitions, that “an attorneys’ fees award is ‘attributable to’ an award of coupons where the attorneys’ fees award is a ‘consequence’ of the award of coupons.”  Id. at *22.  The majority also reasoned that, where all of the relief is coupons, “the portion of any attorneys’ fees award that is attributable to the award of the coupons must be one hundred percent.”  Id. at *24.  The majority also found support for its interpretation in the other provisions of § 1712, and in the legislative history.  The majority ultimately suggested that the parties erred in providing for the coupons to be issued after the entry of a final judgment, which prevented the district court from taking into consideration the value of the redeemed coupons.  The court suggested that fee awards be bifurcated so that the fee award would not be finalized until the coupons had been redeemed.  Id. at *38-39 & n.19.

Judge Berzon, dissenting, focused on the word “portion,” and would have held that if no “portion” of the fee award is “calculated as a percentage of the coupon value,” a district court would be free to rely entirely on a lodestar calculation.  Id. at *61-65 (Berzon, J., dissenting).  Judge Berzon also found support for her interpretation in the text of § 1712 as a whole, and in the legislative history.

This kind of issue rarely arises in insurance class actions, but might potentially come into play if a settlement offered class members “coupons” towards future purchases of insurance.  The Ninth Circuit noted that “coupon settlements may be appropriate . . . where class members have repeat-business relationships with the defendant,” id. at *11 n.4, which is typically true for insurance.  It seems to me that one way to potentially avoid the problem that arose in this case, if you are negotiating this kind of settlement, is to have the attorneys’ fee award determined in a separate proceeding, after the class has received all of the relief.  This has the benefit of further distancing the plaintiffs’ attorneys’ personal incentives from the negotiation of the class benefits.  They would have to negotiate the deal for the class, while only being able to guess at how that might impact their own fees.  A ceiling probably could still be placed on fees, but the ultimate award would have to take into account the ultimate value of what the class received.

Objectors to class action settlements often argue that the proposed settlement is really benefiting the plaintiffs’ lawyers and not the class.  It’s less common to see an argument that a settlement is benefiting the named plaintiffs at the expense of the class they are representing.  The Sixth Circuit recently found such a problem, and reversed the district court’s order approving the settlement because the named plaintiffs were getting too good a deal in comparison with the class members.

In Vassalle v. Midland Funding LLC, 2013 U.S. App. LEXIS 3914 (6th Cir. Feb. 26, 2013), a class action counterclaim brought by debtors alleged that employees of Midland, in connection with debt collection cases, “robo-signed” affidavits attesting to personal knowledge of the amounts of debts owed to Midland, when the affiants did not have personal knowledge of the accounts.  A settlement was reached, under which a common fund of $5.2 million would be created, with attorneys’ fees of up to $1.5 million and the remainder distributed to class members, who would receive at least $10 each (it turned out to be $17.38 each because of a relatively low claims rate).  The four named plaintiffs would receive $2,000 each as an incentive award, as well as forgiveness of their debts (one of which was about $4,500).  Midland also agreed to institute certain procedures for generating affidavits, at least for one year.  Class members would provide a comprehensive release in favor of Midland.  Id. at *6-7.

The district court approved this deal, but the Sixth Circuit struck it down.  The main problem the court of appeals had with it was the provision forgiving the debts of the named plaintiffs.  We don’t know whether that was essential to getting the named plaintiffs to sign onto the deal, or if it was just a throw in benefit.  The court found the deal unfair because “[t]he $17.38 payment [to class members] can only be described as de minimis, especially in comparison to the now-forgiven debt of $4,516.57” of one of the four named plaintiffs.  Id. at *16.  The court also explained that, after the one-year injunction expired, “Midland is free to resume its predatory practices,” and “the injunction offers only prospective relief that likely does not benefit class members at all.”  Id. at *17.  In addition, the court found that the class representatives, whose debts were being forgiven, did not have an interest in protecting the class members’ rights to take advantage of the allegedly false affidavits in court to contest their debts.  In fact, the settlement gave up those rights.  Id. at *20.  The court of appeals also found that the notice to class members violated due process because it did not adequately inform them that, if they did not opt out, they would lose the right to use the alleged falsity of the affidavits to contest their debts.  This was, according to the court, the greatest interest that the class members had.  Id. at *25-26.

So what is the moral of this story for class action lawyers on both sides?  Don’t give the named plaintiff too sweet a deal, at least outside of the context of a reasonable incentive award.  If you do, it might kill your whole deal.  But most courts (as the Sixth Circuit acknowledged) will allow an incentive fee.  So would the Sixth Circuit have approved an incentive fee of say $6,000 per named plaintiff here instead of $2,000?  We don’t know, but incentive fees in that range have been approved in other cases.  If a $6,000 incentive fee were approved, the named plaintiff with $4,500 of debt could have used the $6,000 to pay that debt off and achieve the same outcome, without having the approval order reversed.  But we don’t know sure if the Sixth Circuit would have blessed that.  Of course, if you don’t do a class action settlement and just settle with the named plaintiffs on an individual basis, you can do whatever you want because there is no requirement of court approval.  What large corporate defendant would not pay $4,500 to a named plaintiff to get rid of costly class litigation?  Given how small the relief typically sought by individual named plaintiffs is, it is of course common for individual settlements to exceed what the named plaintiff might receive on his or her small claim.  But, as this new Sixth Circuit decision teaches, you might not have the same flexibility in compensating the named plaintiff as a part of a class settlement. 

A recent 4-3 decision by the Montana Supreme Court allows objectors to a class action settlement to take fairly broad discovery regarding the terms of the settlement, potentially including deposing class counsel regarding the negotiations and mediation, notwithstanding a Montana statute providing for confidentiality of mediations.  This decision demonstrates the importance of recognizing that, although some courts will protect the confidentiality of the class action settlement discussions, other courts may not, and thus the parties involved may want to conduct themselves as if the discussions are not confidential. 

Pallister v. Blue Cross & Blue Shield of Montana, Inc., No. DA 11-0431, 2012 MT 198, 366 Mont. 175, 2012 Mont. LEXIS 276 (Mont. Sept. 5, 2012) involved a settlement of class action in a case involving allegations that health insurance claims were improperly denied based on exclusions that were subsequently disapproved by the Montana insurance commissioner.  The majority remanded the case to allow objectors to the settlement to take fairly broad discovery, despite a lack of any showing of collusion or misconduct in connection with the settlement.  Here is a key passage from the opinion:

The record here reveals that the objectors' efforts to obtain information about negotiations and the underlying settlement were stymied at every critical turn. The court denied them the right to intervene and denied their request to conduct discovery. The court issued a protective order precluding the dissemination of any settlement information. Thus, the court's conclusion in its order denying the request for discovery that Pallister had failed to show independent evidence of unfairness begs the question of just how such evidence could be obtained in such a closed proceeding. Moreover, the submission by BCBSMT of affidavits and disclosures of the nature and amount of the settlement claims on the morning of the Fairness Hearing—the very information which the objectors had long sought—effectively denied the objectors any reasonable opportunity to digest and analyze the information. The last minute production of this information also arguably impaired the court's ability to determine in a comprehensive manner whether the settlement was "fair, reasonable and adequate."

We emphasize that in reaching this decision, we are not inferring or even suggesting that there was collusion or misconduct of any sort among the parties and their attorneys. Rather, we are simply concluding that in a settlement only class action case— a matter of first impression for this Court—the heightened scrutiny required in such an action mandates that there be sufficient information provided to the class representatives, any objectors, and the district court to enable the parties and the court to reach a well-informed decision of whether the proposed settlement is fair, adequate and reasonable.

On remand, the court shall allow the objectors the opportunity to conduct limited discovery. They should be allowed to explore how the class was chosen, how the medical coding was conducted, and how and why the particular compromises of claims were determined. They should also be allowed to explore how the Settlement Agreement and class counsel's fee were negotiated, and any other area of inquiry the objectors and the court conclude is relevant.

. . .

Citing § 26-1-813, MCA, the dissent argues that our ruling "infringes upon the confidentiality that accompanies settlement negotiations and mediations." We respectfully disagree. Section 26-1-813(1), MCA, contemplates a dispute resolution process whereby a mediator "assists disputing parties to resolve their differences." The parties who participate in such a statutory process are adversaries. By contrast, the objectors' claims here are aligned with those of the class, and are indeed dependent upon the actions of the class representatives. The objectors and the class are not adversaries— rather, BCBSMT is the adversary of both. It is unfortunately emblematic of this case, however, that the class consistently deemed objectors to be the adversaries. The Dissent in its analysis perpetuates this mindset.

Id. at *23-24, 28.

Justice Morris dissented, joined by Chief Justice McGrath and Justice Baker.  Here is the heart of the dissent:

The Court disregards the evidence of collusion standard normally required to trigger a discovery request by an objecting party to a class action settlement. Lobatz v. U.S. West Cellular of Cal., Inc., 222 F.3d 1142, 1148 (9th Cir. 2000). The Court instead authorizes objectors to undertake an open-ended inquiry of the motives and actions of the settlement parties that fails entirely to take into account the apparent fairness of the proposed settlement. I fear that this departure strikes a fatal blow for class-action litigation in Montana as litigants will shy away from settlements that objectors can challenge, and with little or no cause, subject the settlement parties to unprecedented invasions into the details of the agreement.

. . .

The Court reasons that the requirement for an objector to demonstrate evidence of collusion from other sources "begs the question of just how such evidence could be obtained in a closed proceeding." Opinion, ¶ 34. I am aware of no cases, however, in which the settlement negotiations have been open to all comers. Nothing in Lobatz indicates anything other than a closed proceeding produced the settlement. Lobatz, 222 F.3d at 1148. The same holds true for the settlement negotiations in Mars Steel, 834 F.2d at 681, and Hanlon, 150 F.3d at 1018. The Manual for Complex Litigation, Fourth, § 21.643, similarly provides that a court "should not allow discovery into the settlement negotiation process unless the objector makes a preliminary showing of collusion or other improper behavior." The Court seemingly disregards this evidence of collusion requirement in favor of some open-ended discovery requirement regardless of the appearance of an objectively fair settlement.

The Court's open-ended discovery requirement whenever an objector raises directly or implicitly a claim of collusion will likely have a chilling effect on future class action cases. The objectors' newly propounded right to discovery infringes upon the confidentiality that accompanies settlement negotiations and mediations. Section 26-1-813(3), MCA. Confidentiality fosters honest communication between parties, and in turn, this honest communication effectuates settlement. M. R. Evid. 408, Commission Comments. The Court's newly propounded rule strips the ability of parties to a class action to protect such confidential communication. This potential public scrutiny likely will lead class-action parties to be less forthcoming in negotiations, and in turn, leave the parties less likely to settle their dispute. This outcome conflicts with Montana's public policy of promoting settlements.

Id. at *30-31, 47-48 (Morris, J., dissenting).

As the dissent notes, this decision seems contrary to the weight of authority regarding objectors’ ability to take discovery into class action settlements.  It will be interesting to see whether this decision is followed elsewhere.  One approach that parties to class action settlement discussions may wish to consider is to assume that their discussions might not be confidential and conduct themselves accordingly.

One important distinction that Rule 23 makes between different types of class actions is that the rule does not require notice to the class or an opportunity to opt out for 23(b)(1) and (b)(2) classes, but notice and an opportunity to opt out are required for 23(b)(3) classes.  See Fed. R. Civ. P. 23(c)(2)(A), (B).  There are some important constitutional constraints on this, however, as illustrated by a recent Second Circuit decision.  The Second Circuit held last week that due process requires notice and an opportunity to opt out in a (b)(2) class action settlement where a claim for money damages predominates.  The court left open the possibility that notice and an opportunity to opt out might be required even where a claim for damages does not predominate, but is more than incidental.  The Second Circuit also held, unsurprisingly, that one advertisement in USA Today was insufficient notice to a class.  The take away I see here is that this decision  might make it more difficult to settle some smaller class actions where the costs of providing notice that will satisfy due process requirements can exceed the likely settlement value.  In such settlements the relief for the class will need to focus on (and in some cases perhaps consist entirely of) declaratory and injunctive relief.

In Hecht v. United Collection Bureau, No. 11-1327, 2012 U.S. App. LEXIS 17374 (2d Cir. Aug. 17, 2012), the defendant sought dismissal of the plaintiff’s complaint on the grounds that her claim under the Fair Debt Collection Practices Act (“FDCPA”) was barred by res judicata as a result of a prior class action settlement.  The plaintiff challenged the enforceability of the class action settlement on the grounds that the notice to the class was constitutionally inadequate in that it failed to satisfy due process.  The district court (Judge Kravitz of the District of Connecticut) dismissed the complaint, but the Second Circuit reversed.

This was a small class action settlement.  The named plaintiffs received $2,500 each in accordance with the FDCPA, and the class was awarded a mere $13,254, which was 1% of the defendant’s net worth, the maximum recovery available in this type of class action under the FDCPA.  The $13,254 was to be distributed on a cy pres basis.  Class counsel received $90,000 in attorneys’ fees and costs.  Id. at *5.  Notice to class members was limited to one advertisement in USA Today.

The defendant argued that notice was not required because the settlement class was certified under Rule 23(b)(2), which governs class actions seeking declaratory or injunctive relief and, on the face of the rule, does not require notice or an opportunity to opt out.  But the Second Circuit rejected that position.  The court explained that, under the Supreme Court’s decision in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), particularly footnote 3 of that opinion, there is a due process right to notice and an opportunity to opt out if money damages predominate.  The court further explained that “[a]fter the Supreme Court’s decision in Dukes, the right to notice and an opportunity to opt out under Rule 23 now applies not only when a class action is predominantly for money damages, but also when a claim for money damages is more than ‘incidental.’  The Dukes Court, however, avoided deciding the corresponding constitutional question – whether the due process right articulated in Shutts now extends to actions where money damages do not predominate.”  Id. at *9. 

The Second Circuit found that its “old” (pre-Dukes) standard for class certification under Rule 23(b)(2) was still useful for determining whether money damages predominated under Shutts.  The court found that money damages predominated in the FDCPA case at issue because the complaint did not even mention injunctive relief and the class was defined as persons who would be entitled to damages, but might not have standing to seek injunctive relief (which could depend on whether they would be subject to potential future harm).  Id. at *11-12.

The Second Circuit went on to hold that “certification of a class under (b)(2) does not excuse the due process requirement that unnamed class members in a class action predominantly for money damages receive the ‘best practicable’ notice,” and that a single publication in USA Today was insufficient to satisfy constitutional notice requirements.  Id. at *16-18.  (Another way to look at this is that the settlement class really should not have been certified under Rule 23(b)(2) to begin with, rather it was the type of issue that could only be certified under Rule 23(b)(3), at least post-Dukes.  But the class here likely was certified pre-Dukes, so and the court, in the context of this collateral attack on the settlement, was not actually reviewing the propriety of certification in the prior case.)

The reality here is that nationwide notice by publication in a form that would be satisfactory to the court probably would cost more than this settlement would ever warrant paying.  But here, the defendant has now paid 1% of its net worth plus several times that in attorneys’ fees in exchange for a release that did not hold up because of the inadequacy the Second Circuit found in the notice.  Rule 23(b)(2) class action settlements can be helpful in resolving small class actions where the costs of providing notice may exceed the settlement value.  But, as Hecht teaches, in order for a (b)(2) settlement without notice to be viable, the declaratory or injunctive relief must really predominate.  It might even make good sense, in some circumstances, to structure the settlement such that declaratory or injunctive relief is the sole form of relief for the absent class members.  As Hecht also demonstrates, if the settlement class is going to focus on (or exclusively obtain) injunctive or declaratory relief, the class should be defined in such a manner that the persons falling within the class definition have standing to seek such relief.

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.

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.

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. 

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?