Class Settlement in the United States

Class Settlement and Action Lawsuit

By Pamela A. MacLean. She is a freelance writer based in the Bay Area, and has reported on state and federal courts for 25 years.

The class settlement sounded well and good. After years of pretrial sparring, Dell Computer offered approximately $30 million to compensate up to 4.7 million California and Arizona consumers who contended they were misled about the cost of repair contracts or the timeliness of repair services. The court announced the settlement proposal and scheduled a fairness hearing for March 21.

Now here’s the way it really came down: The settlement was a claims-made deal, meaning that Dell pays only for the actual claims filed by class members; unclaimed funds revert back to the company. By the time of the hearing, fewer than 32,000 eligible consumers–not even 1 percent–had gone online to file claims worth just $4, $8, or $10 apiece. At that point, the total proposed class recovery was only $251,604 (Fiori v. Dell Inc., No. 09-1518 (N.D. Cal. Apr. 1, 2011) (order approving settlement)).

But the three Los Angeles plaintiffs lawyers representing the class–Brian R. Strange and Gretchen A. Carpenter of Strange & Carpenter and sole practitioner Randall S. Rothschild–wanted to be paid $5.3 million in fees apart from their clients’ cash benefit–that is, 15 percent of the potential $30 million recovery. Even so, agreeing to that deal saved Dell at least $24 million in payouts and extinguished any future class claims.

Claims-made settlements, sometimes called reversions, are like bad pennies: They keep turning up in consumer class action negotiations, and they arguably short-change class members. There are few estimates of how many class members actually file claims. But in a recent Maine case, a settlement administrator who’d been involved in more than 175 class action deals nationwide reported that rates are “10 percent or less in the vast majority of settlements that require filing a notice of claim.” (Sylvester v. Cigna Corp., 369 F. Supp. 2d 34, 44 (D. Me. 2005).)

Closer to home, a recent federal case in San Francisco produced a response of less than 1 percent: In a class of 3.8 million members, only about 29,000 claims, worth $15.50 each, were filed. U.S. District Judge Charles R. Breyer called the deal “a virtually worthless settlement of a meritless case,” and he slashed the requested fee award from $1.5 million to $326,000 (Yeagley v. Wells Fargo & Co., 2008 WL 171083 at *1 (N.D. Cal.)).

Charles Chalmers, a San Rafael sole practitioner who represents an objector to the Dell settlement, says class defendants agree to these deals because they know small individual payouts will produce a low percentage of claims. “Coupon settlements was the dodge before CAFA [the Class Action Fairness Act of 2005 (Pub. L. No. 109-2)]” targeted such settlements, Chalmers says. “Now it’s claims-made settlements.”

Until recent settlement denials in federal court, reversions were fashionable in wage-and-hour cases, says Michael D. Singer, a plaintiffs class action lawyer in San Diego’s Cohelan Khoury & Singer. He says some companies threatened they would settle only with a reversion agreement.

Michael J. Loeb, a JAMS mediator in San Francisco who focuses on employment cases, says the claims-made option “crops up in almost every settlement discussion” because it offers a way to reach agreement in hotly contested cases. Loeb, who spent 30 years as an employment lawyer before joining JAMS in 2006, has seen his share of wage-and-hour agreements. “I can’t stress enough that this is a very judge-centric issue,” he says. “It depends on the courts and the judge whether claims-made settlements and the amount of attorney fees will be approved. There are no hard and fast rules.”

Under rule 23(e) of the Federal Rules of Civil Procedure, district courts approving a class settlement must find that the proposal is “fair, reasonable, and adequate.” But state and federal appellate courts offer little guidance on factors that trial courts should consider when examining these deals, leaving terms and fees largely to their discretion. Increasingly, however, trial judges are asking tougher questions.

Alameda County Superior Court Judge Steven A. Brick, who presides over complex litigation, says the perverse financial incentives that claims-made settlements can create for defendants are difficult for judges to evaluate. According to Brick, those incentives may induce the parties to produce complicated forms, impose an arduous filing process, and limit who receives class notice. Reversions, he says, provide disproportionate attorneys fees compared with class benefits.

In February 2009 Brick issued courtroom guidelines that make clear he is hesitant to approve settlement applications that include reversions or claims-only terms without good reason. A year later judges in the Los Angeles County Superior Court’s Central Division adopted similar guidelines. Because of his public stance, Brick notes, “Most of the cases I see now are structured without reversions, though some still have claims-made terms.”
Since February, U.S. District Judge William Alsup in San Francisco has sent presettlement warnings in at least four class cases, saying in one instance that he considers agreements that allow funds to revert to the defendant “a red flag, for it runs the risk of an illusory settlement.” (Dardarian v. Restoration Hardware Inc., No. 11-946 (N.D. Cal. Apr. 27, 2011).)

Alsup got the ball rolling in 2007 when he rejected a claims-made settlement in a wage-and-hour case involving 1,500 Oracle employees (Kakani v. Oracle Corp., 2007 WL 1793774 (N.D. Cal.)). The plaintiffs lawyers–Todd M. Schneider of Schneider Wallace Cottrell Brayton Konecky in San Francisco and sole practitioner Christina Djernaes of Santa Barbara–wanted $2.25 million in fees. Alsup called that amount a “bonanza,” pointing out that the attorneys might end up getting more than the entire class. He ultimately approved $664,000 in attorneys fees for a $9 million settlement, with about $1.4 million reverting to Oracle (Kakani v. Oracle Corp., 2007 WL 4570190 (N.D. Cal.)).

Claims-made deals also regularly include “clear sailing” provisions, in which the defense promises not to contest plaintiffs attorneys fees if the overall award to class members stays beneath a negotiated ceiling. A recent state court ruling found that such provisions facilitate settlement (In re Consumer Privacy Cases, 175 Cal. App. 4th 545 (2009)). And some federal judges have read Ninth Circuit law as barring consideration of a class’s actual recovery in assessing the fee award (Williams v. MGM-Pathe Communications Co., 129 F.3d 1026 (9th Cir. 1997).

In Yeagley, however, Judge Breyer held that Williams did not require the court “to adopt the fiction” that a settlement is worth the total amount of the potential claims. “To award class counsel the same fee regardless of the claim participation rate, that is, regardless of the enthusiasm of the class for the benefits purportedly negotiated on their behalf, would reduce the incentive in future cases for class counsel to create a settlement which actually addresses the needs of the class,” Breyer wrote (Yeagley, 2008 WL 171083 at *9).

In the Dell case, U.S. District Judge James S. Ware approved the proposed settlement in April, saying that objectors made no showing of a collusive settlement or fee negotiation. But he held off on approving attorneys fees until he sees a final claims tally–which objector’s attorney Chalmers considers a small victory. The plaintiffs’ lawyers then offered to spend $11,000 of their own money to email 1.1 million reminders to class members, and asked for a twelve-day extension of the deadline for supporting their fee request.

Darrell Palmer, a sole practitioner in Solana Beach who represents another objector to the Dell deal, has filed a challenge to the settlement with the Ninth U.S. Circuit Court of Appeals, setting up the potential for the case to break new ground (Fiori v. Dell, No. 11-16109 (9th Cir. filed Apr. 26, 2011)).

Plaintiffs attorney Strange countered in a court filing that Chalmers and Palmer are simply “professional objectors.” He says Dell fought “tooth and nail” for six years before reaching the settlement, which he declines to discuss. But he says judges should determine whether a proposed settlement has overall value for the class, rather than just counting how many class members actually file claims. “You can lead a horse to water, but it doesn’t mean [the deal] is unfair because the class members won’t take it,” he says.

Dell’s lawyers did not respond to requests for comment. But the company argued in court papers that, absent a settlement, the plaintiffs face “substantial obstacles” as well as a “small chance of recovery, delayed by years of litigation and appeal.” Citing a then-pending U.S. Supreme Court case, the defense noted that a “rollback” in case law permitting challenges to class arbitrations in California “would have the potential to end these class actions outright.” The brief anticipated the Court’s ruling that the Federal Arbitration Act preempts the ability of states to void certain class action waivers in arbitration agreements (AT&T Mobility v. Concepcion, 2011 WL 1561956).

But according to Chalmers, claims-made settlements in class actions may not be over. He says that the basis for claims by two subgroups of Dell plaintiffs was misrepresentation or nondisclosure–amounting to allegations of fraud not covered by an arbitration clause, and thus very much alive.

Class Settlement Program

See Capital One TCPA Settlement Program.

Settlement Class Action Facebook

A class action lawsuit against Facebook, Inc. (“Facebook”) claimed that Facebook unlawfully used Class Members’ names, profile pictures and photographs. Lane v. Facebook was a class-action lawsuit in the United States District Court for the Northern District of California regarding internet privacy and social media.

It must be taking in account that users from the US and Canada have a contract with Facebook USA. The rest of the world has a contract with Facebook Ireland.

In other case, Nasdaq settled a Facebook IPO lawsuit for $26.5 million (In re Facebook, Inc. IPO Securities and Derivative Litigation).