This continues articles posted on Insurance Claims and Bad Faith Law Blog on Tuesday, December 2, 2014 and on Thursday, December 4, 2014.
In Pearson v. NBTY, Inc., ___ F.3d ___, 2014 WL 6466128 (7th Cir. November 19, 2014), Judge Richard Posner wrote for a unanimous Seventh Circuit panel. The Court set standards for evaluating Federal class action settlements that are likely to be applied in the great majority of other Federal Circuits, in Federal District Courts, and in most State Courts with class action rules which are in any way similar to the Federal Class Action Rule, Fed. R. Civ. P. 23.
The Pearson appeal involved a collection of cases brought under State Consumer Protection Laws. The suits were collectively settled and the settlement was rejected by the Seventh Circuit. Judge Posner’s opinion in the Pearson case is nothing less than a tour de force.
The Seventh Circuit listed at least a dozen factors which the Court considered in rejecting the class action settlement in this matter:
- Only 0.25% of class members received compensation under the proposed settlement;
- The District Court’s valuation of the settlement was based on potential value to the class rather than actual value as required;
- The District Court’s calculation of “value” to class members, moreover, improperly included such things as administrative costs and attorney’s fees;
- The total actual compensation to class members would have been “$865,254 to the 30,245 class members who submitted claims”;
- The District Court revised the attorney’s fees request downward and still the District Court’s award of fees represented 69% of what the class members would receive, at an average rate of $538/hour for each attorney at every level of practice and for each paralegal;
- The proposed settlement was reached in a case involving no fund and no litigated judgment;
- No reasonable expectation existed that more class members would submit claims than actually did submit claims before the deadline;
- The process of submitting claims on the class action settlement appeared to be structured in such a way as to discourage, not encourage, potential class members to submit claims;
- There was no legitimate benefit to be found to the class for the settlement agreement’s injunction against misleading claims;
- The settlement agreement contained a “reversion” or a “kicker clause,” identified by the Court, under which any unclaimed funds that were originally contributed to the settlement amount would revert back to the defendant;
- The settlement agreement included an award of $1,130,000.00 to a laudable orthopedic foundation, an award which, however laudable the recipient organization is, would have been an award which neither benefitted the class nor was truly a cy pres award; and last but not least,
- In sum the benefits of this proposed settlement agreement did not actually accrue to the class:
And for conferring these meager benefits class counsel should receive almost $2 million?
The factors considered by the Court appear throughout the Court’s opinion. The quote immediately above ends the Court’s discussion and can be found at Pearson v. NBTY, Inc., ___ F.3d ___, 2014 WL 6466128 *9 (7th Cir. November 19, 2014).
Class action settlements are submitted to Judges and approved on a regular basis in many kinds of litigation, including lender force-placed insurance cases and products liability cases. The Pearson decision represents the loudest rocket if not the first to be launched in a burst of judicial activity requiring more than mechanical approval of class action settlements.
The author is at work on a book on “Lender Force-Placed Insurance” which the American Bar Association is scheduling for publication in the Spring of 2015.
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