A seemingly innocuous recruitment text message from the United States Navy has led to the official unraveling of a tactic long-used and widely-favored by defendants to escape a class action lawsuit before class certification. In a 6-3 decision, the United States Supreme Court rejected the argument that an unaccepted settlement offer or offer of judgment moots a plaintiff’s claim and thus a class action as well.

Background and Procedural History

In Campbell-Ewald Company v. Gomez, Petitioner, Campbell-Ewald Company, was retained by the United States Navy to conduct a multimedia recruitment campaign aimed at young adults. One branch of this campaign included sending text messages to potential recruits encouraging them to consider the Navy. The Navy approved the text messages as long as they were only sent to those who “opted-in” to receive marketing materials.

Campbell then contracted with another company, Mindmatics LLC, to identify cell-phone users between 18 and 24 years old who had consented to receiving text messages from the Navy. In May of 2006, Mindmatics transmitted the Navy’s recruitment text to over 100,000 recipients.

One of those recipients was the Respondent, Jose Gomez. Gomez was, at the time, a 40-year-old man who had not consented to receiving text messages from the Navy. Gomez alleged that Campbell violated the Telephone Consumer Protection Act (TCPA), which “prohibits any person, absent the prior express consent of a telephone-call recipient, from “mak[ing] any call . . . using any automatic telephone dialing system . . . to any telephone number assigned to a paging service [or] cellular telephone service.” 47 U.S.C. §227(b)(1)(A)(iii).

Gomez filed a class action complaint in the District Court for the Central District of California seeking treble and statutory damages, costs, and attorney’s fees, as well as an injunction against Campbell’s involvement in unsolicited messaging.  Prior to the deadline for filing a motion for class certification, Campbell made a Rule 68 offer of judgment that included paying Gomez his costs excluding attorneys’ fees, $1,503 per message received and an injunction which barred Campbell from sending text messages in violation of the TCPA, but denied any liability. Gomez did not accept the offer. Before Gomez filed his motion for class certification, Campbell filed a motion to dismiss, arguing the district court lacked subject matter jurisdiction over the matter since no case or controversy remained now that Gomez had been provided with complete relief for his injury, and thus the putative class claims also became moot. The district court denied the motion.

Campbell subsequently filed a motion for summary judgment, arguing the U.S. Navy enjoys sovereign immunity from the TCPA and that as a contractor for the Navy, Campbell acquired that immunity. The district court agreed and dismissed the case. The Ninth Circuit Court of Appeals reversed the lower court, holding that Campbell was not entitled to sovereign immunity and that an unaccepted Rule 68 offer of judgment does not moot an individual claim or a class action. The Supreme Court granted certiorari to settle a disagreement amongst the courts of appeals as to whether a Rule 68 offer of judgment does or does not moot a plaintiff’s claim.

The Supreme Court Opinion

Adopting Justice Kagan’s reasoning from her dissenting opinion in Genesis HealthCare Corp. v. Symczyk (in which the Court reserved the issue of whether an offer of judgment moots a claim) the Court found that, “[w]hen a plaintiff rejects such an offer—however good the terms—her interest in the lawsuit remains just what it was before. And so too does the court’s ability to grant her relief. An unaccepted settlement offer—like any unaccepted contract offer—is a legal nullity, with no operative effect.”

The Court further reasoned that once the offer expired, the parties remained adversaries, as both retained the same stake in the litigation they had at the outset. The Court noted that Rule 68 provides that an unaccepted offer is only admissible when determining costs, and for no other reason.

Since Gomez’s individual claim still stood, the Court ruled “a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted.”

Of note, however, is the caveat offered by the Court at the end of its analysis, in which it reserves ruling on a hypothetical situation in which “a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”

The Court also rejected Campbell’s sovereign immunity argument, determining that it did not follow the Navy’s implicit instructions to confirm the messages complied with the TCPA.

Conclusion and Implications

The Supreme Court’s ruling settles once and for all the effect of an unaccepted Rule 68 offer of judgment or settlement offer on a plaintiff’s claim. However, the Court appears to have left the door cracked for defendants via its unanswered hypothetical on the possibility of depositing the full amount of plaintiff’s claim into a bank account payable to the plaintiff. While it is unclear how the Court would rule in such a case, it will not likely be long before a defendant tests the waters.

WebinarOn Tuesday, May 26, 2015 at 12:00 p.m. Central, Jason P. Stiehl, Giovanna A. Ferrari and Jordan P. Vick will present the first installment of the 2015 Class Action Webinar series. They will provide a summary of key decisions from 2014, identify key trends for companies to watch for in 2015, as well as practical “best practices” and risk management for the future.

In 2014, companies saw a major change in the focus and risk of class action litigation. According to one industry survey, the percentage of class actions qualifying as “high risk” or “bet-the-company” tripled from 4.5 percent to 16.4 percent. This no doubt derives from the increase in volume of large settlements and continued increase in volume of suits under statutes with minimum statutory penalties, such as the Telephone Consumer Protection Act (TCPA).

The webinar will be provide insight on:

  • The landscape for in-house counsel, including identifying the legal market spend and risk for class actions
  • Case law and trends from 2014, including:
    • evolving class certification standards post-Comcast
    • increased scrutiny of class settlements
    • continued TCPA filings and large settlements
    • post-Concepcion waiver decisions and the CFPB’s arbitration study
    • standing and privacy/data breach cases
  • Highlights from 2015, including:
    • increase use of motion to strike class allegations
    • CAFA challenges
    • TCPA decisions
    • DirecTV Supreme Court arbitration case
    • International expansion of class action vehicle in Europe
  • Practical considerations and takeaways

register

Registration: there is no cost to attend this program, however, registration is required.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

If you have any questions, please contact events@seyfarth.com.

By Eddy Salcedo

The Seventh Circuit recently weighed in on the circuit split over whether a federal court, after preliminarily approving a class action settlement but before final approval, may enjoin class members from pursuing litigation related to the underlying class claims.  In Adkins v. Nestle Purina PetCare,the court ruled that such injunctions were improper.  — F.3d — (7th Cir. Mar. 2, 2015).dog food inage

Background

Plaintiffs argued that their dogs became ill and were injured after being fed treats sold by Nestle Purina PetCare Co. and a co-defendant. The United States District Court for the Northern District of Illinois preliminarily approved a settlement in the action pending a fairness hearing, and enjoined all class members from prosecuting litigation about the dog treats in any other forum. This ruling enjoined a statewide class action pending in Missouri relating to the same dog treats. The Missouri case pre-dated Adkins, had been pending for two years and was shortly scheduled for trial. After the federal court rejected the Missouri representative’s challenge to the injunction, the case went up to the Seventh Circuit on appeal.

Outcome

The Seventh Circuit ruled that to obtain an injunction barring state-court litigation, the moving party must satisfy the standard elements for obtaining injunctive relief, as well as the heightened standards of the Anti-Injunction Act, which provides that a federal court may only grant an injunction “where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”  Because it was undisputed that the trial or a judgment in the Missouri litigation would not “imperil the district court’s ability and authority to adjudicate the federal suit,” the court found that the injunction was not necessary to aid of the district court’s jurisdiction.  This was true even if the Missouri litigation caused the settlement in the federal case to fall apart because “a need to adjudicate a suit on the merits after settlement negotiations fail does not undermine the nature or extent of a court’s jurisdiction.”  The court did note, however, that injunctive relief of this nature might be permitted under the Anti-Injunction Act to protect a final judgment resolving a federal class action.

In its ruling, the Seventh Circuit rejected contrary authority from other jurisdictions, including the Third Circuit, which ruled that an injunction barring class members from proceeding with state court litigation may be justified where an earlier state court judgment could disrupt the settlement negotiations in federal court.  See In re Diet Drugs, 282 F.3d 220, 236 (3d Cir. 2002).  To the extent  such authority “supports injunctive relief before the settlement of a federal class action has become final,” the Seventh Circuit ruled that it failed “to discuss the Supreme Court’s understanding of ‘jurisdiction’ and predates its reminder in [Smith v. Bayer, 131 S. Ct. 2368 (2011)] that doubts must be resolved in favor of allowing state courts to proceed with litigation pending there.”

Implications

The arguments raised by the court in Adkins should be considered by practitioners in all circuits, particularly in so far as Adkins questions whether contrary authority which predates Bayer can still stand.  At a minimum, Adkins strongly suggests that global settlement discussions with class counsel in all related actions is prudent because reliance on a preliminary approval in a federal settlement alone to enjoin state court litigation may be misplaced.  Alternatively, defendants and class counsel are also incentivized to “fast track” obtaining final approval of their settlements so that they can trigger the “final federal judgment” mechanism of the Anti-Injunction Act and by-pass the Adkins roadblock to an injunction on a related state court action.

The Seventh Circuit Court of Appeals recently invalidated a nationwide settlement agreement covering six consumer fraud class actions (“Settlement Agreement”) brought against NBTY, Inc., Rexall Sundown, Inc., and Target Corporation (“Defendants”).  See Pearson v. NBTY, Inc., No. 14-1198 (decided Nov. 19, 2014).  Each case was premised on Defendants’ allegedly deceptive marketing and sale of glucosamine supplements, which are marketed as promoting joint health.

Background

Defendants are in the business of marketing, selling, and distributing a line of joint-health dietary supplements, the active ingredient of which was glucosamine. Plaintiffs sued after they purchased and allegedly used the dietary supplements as directed but did not experience any of the promised health benefits as represented on the packaging.  (See Case No. 11-7975 (N.D. Ill.), Jan. 3, 2014 Mem. Op. & Order at 2, Dkt. No. 143).   Plaintiffs also claimed that they later learned of several studies which suggested that glucosamine was ineffective at relieving or curing joint related ailments. (Id.)  Plaintiffs sought damages in the amount of the purchase price of the products.

On April 15, 2013, the parties executed the Settlement Agreement, which covered approximately 12 million class members and provided for a total fund of $20.2 Million, only $2M of which was guaranteed to be paid to class members.  (Id. at 6).  On the other hand, $4.5 Million was guaranteed to class counsel for their fees.  (Id.)  The balance, less notice and administrative costs, would revert to defendants.  Theoretically, each class member could receive $3 for an undocumented purchase and $50 for a documented purchase.  (Id.)  As is common in consumer class actions with individual relief of small value, however, the settlement resulted in a very low claim rate.  (Id. at 14).  As of the claims deadline, only 0.25% of the proposed settlement class returned claims, totaling $865,284 (Id. at 14).  The remaining $1,134,716 of the guaranteed fund of $2M was to be remitted in cy pres to an educational foundation.  (Id.).

When Plaintiffs’ moved for Final Approval, certain class members objected, arguing that the settlement agreement was not “fair, adequate and reasonable” within the meaning of Federal Rule of Civil Procedure 23(h) given that class members was receiving less than $1 Million dollars, approximately 4% of the settlement fund, while class counsel was receiving $4.5 Million. (Id. at 9.)

On January 3, 2014, the District Court for the Northern District of Illinois approved the final settlement but reduced the attorneys’ fees to $1.9 Million.  (Id. at 18).  The objectors then appealed to the Seventh Circuit.

Appellate Review

The objectors’ opening brief asserts that “[t]he self-dealing here not only included a disproportionate fee, but a clear sailing agreement and a segregated fund for the proposed attorneys’ fees that would revert to the defendant here rather than the class.”  (Opening Brief of Appellants at 18.)  The objectors argued that this unfairly insulated the fee request from scrutiny and forced them to object to the settlement in order to challenge the fee award.  (Id.)  Appellants maintained that, while in hindsight the fee award exceeded the benefit to the class, that did not make the settlement per se unfair or show collusion or self-dealing.  (Response Brief at 20-23.)

During oral argument, the Panel made clear that they had grave concerns about the $4.5 million in fees requested by plaintiffs’ attorneys and whether there was collusion.  Judge Posner commented that the settlement claim form and informational website were “extremely confusing” for a $3 refund on a product that averaged around $20 per bottle and suggested that the forms were clearly designed “to discourage people from applying.” Similarly, Judge Rovner questioned the propriety of making class members attest, under penalty of perjury, as to what month they bought a bottle of pills years after their purchase of the product.

As expected, on November 19, 2014, the Seventh Circuit reversed the district court’s confirmation of the settlement, which it described as a “selfish deal between class counsel and the defendants.”  (Slip Op. at 18).  Judge Posner mocked class counsel for shedding “crocodile tears over Rexall’s misrepresentations” to class members and then turning around and agreeing to a settlement that actually “disserves the class” in order to maximize their award of attorneys’ fees.   (Id.)

Taking a brutal view of class settlement negotiations, the court explained how counsel for both sides often has an incentive to make the claim forms as burdensome as possible to minimize the claims rate.  Like all defendants, Rexall had “no reason to care about the allocation of its cost of settlement between class counsel and class members; all it cares about as a rational maximizer of its net worth is the bottom line – how much the settlement is likely to cost.”  (Id. at 10).  The problem in this case was that class counsel too had an incentive to minimize class claims and therefore were agreeable to a more burdensome claims process, “because the fewer the claims, the more money Rexall would be willing to give class counsel to induce settlement.”  (Id.).

The Court also took aim at the Settlement Agreement’s reversion or “kicker clause” which provided that if the judge were to reduce the attorneys’ fees award, the savings would “enure not to the class but to the defendant.”  (Id. at 16).  The Seventh Circuit ruled that such a clause was “a gimmick for defeating objectors” and presumptively invalid.  (Id.)

The Court concluded that, “Class Counsel could have done much better by the class had they been willing to accept lower fees in their negotiation with Rexall. But realism requires recognition that probably all that class counsel really care about is their fees — for $865,284 spread over 12 million class members is only 7 cents apiece.”  (Id. at 10).

In order to mitigate the effect of such dynamics in the future, the Court ruled that the reasonableness of the attorneys’ fees allowed to class counsel should be judged against the “actual or at least reasonably foreseeable benefits to the class,” not the mere potential benefit.  (Id.).

Implications

The Seventh Circuit was unequivocal in its opinion that the settlement in this case did not come close to comporting with the fairness requirements of Fed. R. Civ. P. 23(h) due to the disparity between the plaintiffs’ attorneys’ fees award and the actual benefit to the class.  This and other recent federal court decisions indicate that judicial scrutiny of consumer class action settlements is growing.  Both defense and class counsel are encouraged to be mindful of the actual benefit to the class when negotiating the attorneys’ fee award and reversion provisions in class action settlements, or face the risk that the fairness of the settlement will be challenged.

First off, Happy New Year to our Blog Readers. Thank you for your patronage last year and we look forward to another year rolling over the legal class action landscape together.

As you may have recognized, either in reading our blog or simply reading the paper, a vast majority of the consumer class docket last year across the country was stuffed with cases brought under the Telephone Consumer Protection Act (“TCPA”).  The decisions ran the gamut, from insurance coverage disputes to class certification issues to cy pres conflicts.  The past year also found increased traffic on the administrative side, with nearly a dozen petitions filed with the Federal Communications Commission seeking clarification and assistance in restraining the proliferation of class action litigation under the TCPA.  These petitions seek guidance on the hottest topics being litigated, including: (1) what constitutes an autodialer; (2) whether informational cell phone calls require prior written consent; (3) whether the Act applies to documents transmitted via the Internet; and (4) whether opt-out notices are required on faxes sent with prior express consent.

While this statute created a boom for creative plaintiff’s lawyers, its uncontrolled expansion across the country (watch out New York) has become a drain upon not only the defendants to those suits, but small businesses and even the government.  We have unfortunately witnessed at our firm lawsuits targeting “mom and pop” businesses, apparently brought by plaintiffs with hopes of striking gold through an insurance policy without exclusions.  Further, the Wall Street Journal reported last November that the TCPA has hindered the federal government from efficiently recovering approximately $120 million in unpaid taxes.

Fresh off the New Year, two separate cases are postured to allow the United Supreme Court to address several of pressing issues under the TCPA, as well as to perhaps add some common sense to the interpretation of the statute, as Judge Benitez of the Southern District did late last year.   See Chyba v. First Financial Asset Management, 12-cv-1721 (S.D.N.Y. Nov. 20, 2013).

First, in Turza v. Holtzman, the defendant has petitioned the United States Supreme Court on several bubbling issues, one of which, the availability of cy pres, may be enough to pique the interest of the sitting justices.  Turza is an attorney who sent facsimiles to a purchased list of contacts.  The faxes took the form of a newsletter called the “Daily Plan-It”, which provided industry news and generic legal advice to the recipients.  The bottom portion of the fax provided contact information for Turza.  The lower court found that the faxes were unsolicited advertisements and entered judgement against Turza for $4.2 million, ordering that 1/3 of that amount, or $1.4 million, be paid to the plaintiff’s counsel, with the remaining money constituting a common fund.  Any moneys not claimed, the court held, would be then paid to a cy pres legal aid clinic.  On appeal, the Seventh Circuit upheld the judgment, but remanded to the lower court, taking issue with the designation of the judgment as a common fund, as well as the cy pres designation, but, nonetheless, ordering the solo practitioner to turn over the $4.2 million in a court-maintained account until resolution of the issue on remand.  Turza has now appealed the decision to the United States Supreme Court, challenging not only the issues of the common fund and cy pres, but also the underlying decision related to the designation of the facsimile as an advertisement.  The petition is pending on the United States Supreme Court docket as Case No. 13-760.

Second, in Uesco Industries Inc. et al. v. Poolman of Wisconsin Inc, the plaintiff is seeking a direct appeal to the United States Supreme Court on denial of its motion for class certification.  In Uesco, the defendant was solicited by a marketing agency to utilize the services of that company to send facsimiles.  Ultimately, the defendant acquiesced, but provided explicit instruction on the types of industries it wanted to target.  According to the defendant, against those wishes, the marketing agency sent facsimiles to a larger group of companies, including the plaintiff.  Before the lower court, the defendant argued that no vicarious liability could attach to it, as the marketing company exceeded the scope of its authority.  On appeal, the First District reversed, holding that the express language of the statute, and controlling precedent, required the agent to act within its scope before the defendant could be liable under the TCPA.  The petition is on the United States Supreme Court’s docket as Case No. 13-771.

The new year brings new hope that somewhere, someone will add a pound of sense to the Cerberus-like statute.  In the meantime, we will continue to assist our clients in avoiding the many pitfalls the statute presents, as well as identifying creative solutions to resolving pending litigation.

On Friday, December 13th, a Brooklyn federal judge approved a $7.25 billion settlement of an eight-year-old antitrust class action brought against Visa and MasterCard for an alleged conspiracy to fix credit card swipe fees.  In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 05-MD-1720 (JG)(JO) (E.D.N.Y. Dec. 13, 2013, R. 6124).

In approving the settlement, Judge John Gleeson overruled objections made by dozens of department stores, supermarkets, wholesalers, restaurants, retailers, trade groups, and many others.  At least three sets of objecting plaintiffs have already appealed Judge Gleeson’s ruling to the Second Circuit, two appeals being filed the same day that the court issued its decision.

The Swipe Fees at Issue.

The lawsuit alleged that Visa’s and MasterCard’s interchange rules governing their credit card transactions at over 21 million[1] of the nation’s “merchants” violated federal antitrust laws by artificially inflating the interchange fees (or “swipe fees”) paid by merchants for each transaction.  Plaintiffs alleged that the combined effect of Visa’s and MasterCard’s mandatory minimum swipe fees (“default interchange rule”), “honor all cards rules,” and “anti-steering rules,” was to eliminate competition among card-issuing banks to lower swipe fees below the mandatory minimum, thus unlawfully fixing the swipe fees at that minimum level.

In general terms, a normal credit card purchase works like this:  a purchaser pays a merchant for goods and services with a credit card.  That transaction is routed first to the “acquiring bank,” which processes the transaction and then transmits it to Visa or MasterCard.  The card company then transmits the purchase to the bank that issued the credit card (“issuing bank”).  The issuing bank then pays the merchant the price of the purchase, less the applicable swipe fees.  Some fees are higher than others, depending on the type of card (i.e. the richness of the accountholder’s reward benefits, as in the case of a Visa Signature or MasterCard Word Elite card), and other factors.  The default interchange rule required a minimum swipe fee for all card purchases.

The other swipe fee rules included the “honor-all-cards rule” and “anti-steering rules,” which, according to plaintiffs, ensured payment of the mandatory minimum fee.  The honor-all-cards rules required merchants to accept all cards, regardless the swipe fees associated with each card, which merchants were required to absorb.  Under the anti-steering rules, merchants could not recoup those higher fees by surcharging higher-fee card purchases, or by “steering” customers to lower-fee payment methods (i.e. checks, cards issued by the merchant) by discounting the price on purchases made by those methods.  Though merchants and issuing banks could agree on their own swipe fees (no easy task, considering the number of merchants, banks, and negotiating factors), issuing banks had no incentive to charge below the default mandatory minimum.  The net result of the fees regime, according to plaintiffs, was a fixed price for merchants to pay for Visa and MasterCard transactions, in violation of federal antitrust laws.

While the suit was pending, a few major developments significantly changed the swipe-fee landscape, which factored heavily into Judge Gleeson’s fairness analysis.  Between 2006 and 2008, MasterCard and Visa went public, converting from bank-member ownership to independent companies with no bank governance.  Their rules, therefore, were no longer largely controlled by issuing banks, and the banks thus lost some of their fee-setting influence.

Further, in 2010, Congress, with the Durbin Amendment to the Dodd-Frank Act, removed the no-merchant-discount restriction under the anti-steering rules.  15 U.S.C. §1693O-2(b)(3)(A)(i).  Thus, merchants could discount purchases made with their own cards, allowing them in the end to avoid or recoup some of the higher swipe fees.

In 2011, to resolve DOJ investigations aided by plaintiffs, Visa and MasterCard agreed to allow merchants to discount purchases based on the type of card used – i.e., a credit or debit card, high-reward or low-reward card.  These consent decrees gave merchants more ability to steer purchases to lower-fee or no-fee transactions.

Also in 2011, the DOJ declined to take any enforcement action against Visa and MasterCard regarding the remaining no-surcharge rules, thus raising doubts as to whether the court in the pending case would find that those rules violated antitrust laws.

The Settlement.

In addition to the cash settlement, Visa and MasterCard agreed to (i) allow merchants to surcharge purchases made with either brand’s cards, regardless the card type or the richness of the card’s rewards, (ii) negotiate in good faith with merchant buying groups (not unlike a collective bargaining situation, thus increasing merchant leverage over fees), (iii) allow larger merchants to accept Visa and MasterCard at fewer than all of its banner businesses, and (iv) lock-in the Durbin Amendment’s merchant-discounts provisions and the 2011 product-level discount consent decrees.

The new surcharge system under the agreement has four elements:  (1) merchants may recoup the full average discount fee that the issuing bank charges the merchant, (2) merchants may surcharge all Visas and MasterCards, or distinct card groups (i.e. Visa Signature cards or MasterCard World Elite cards with higher swipe fees), (3) mandatory disclosure to purchasers of the amount of the surcharge and that it does not exceed the merchant’s acceptance cost, and (4) the “level-playing-field” provision, where merchants must surcharge all of its accepted card transactions (i.e. American Express and Discover purchases) if it decides to surcharge its Visa and MasterCard transactions.

The settlement was reached after years of negotiations, which became more frequent and intense in late 2011 and the first half of 2012.  Judge Gleeson and Magistrate Judge James Orenstein presided over a number of lengthy settlement conferences, as did two outside mediators (retired Judge Edward Infante and Professor Eric Green).  The parties filed a memorandum of understanding of the settlement in mid-July 2012, and the court thereafter conducted the notice and fairness procedures.

The Approval Decision.

In a 50-page opinion (issued three months after the September 13th fairness hearing), Judge Gleeson approved the settlement for the 12 million-member class, and overruled the objections that the deal’s cash components and rules changes were insufficient.

In determining fairness and ruling on the objections, the court considered the age of the case, the fact and expert discovery conducted, the fully briefed summary judgment motions, the prior settlement negotiations, prior industry developments regarding swipe fees, the class members’ reactions to the proposed settlement (i.e. number and nature of objections and opt-outs), plaintiffs’ chances of establishing liability and damages at trial, the value of the settlement compared to (i) those chances and risks, and (ii) defendants’ ability to pay, and the plan for allocating the settlement proceeds.

The court paid particular attention to (i) the seemingly high hurdles to plaintiffs’ establishing antitrust liability, and (ii) relatedly, the procompetitive benefits of the elimination of the no-surcharge rules.  One liability hurdle, which was briefed in defendants’ summary judgment motions, was whether plaintiff merchants had proper antitrust standing.  With limited exceptions, only direct purchasers have standing under federal antitrust laws, per Illinois Brick Co. v. Ill., 431 U.S. 720, 736 (1977).  Downstream market participants (often called “indirect purchasers”) do not (though they may under some states’ antitrust statutes).  Merchant plaintiffs were not necessarily the direct purchasers, the court wrote; rather, the “acquiring banks” (the link between the merchant and Visa / MasterCard in a card purchase) were arguably the only direct purchasers with proper standing.  The merchant plaintiffs risked losing the case on this ground alone, the court said.

Another liability hurdle, also briefed on summary judgment, was that the mandatory minimums and honor-all-cards rules were arguably permissible, procompetitive checks on the heavy negotiation costs of individual interchange agreements, and because they incentivized issuing banks to compete for cardholders with more lucrative account rewards, lower finance charges, and by absorbing fraudulent purchases.  The court noted that prior courts and commentators had upheld or validated the mandatory minimums and honor-all-card rules against antitrust challenges, citing their usefulness in avoiding negotiation of individual fees, and assuring universal acceptance of Visas and MasterCards.

Regarding the elimination of the no-surcharge rules, the court said, “…this rule change, which Class Plaintiffs and the Individual Plaintiffs fought very hard to obtain, and an indisputably procompetitive development that hast the potential to alter the very core of the problem this lawsuit was brought to challenge.”  (p. 31).  The objectors, on the other hand, argued that the rule change was “essentially worthless” because (i) ten states still prohibited surcharges, (ii) American Express still prohibits surcharging, and thus the great many merchants accepting American Express cards will not be able to surcharge Visa or MasterCard purchases under the level-playing-field provision, and (iii) the mandatory disclosure rules were unfair, and unsophisticated merchants would not understand, or implement them.  The court overruled these objections as insufficient to strike down the settlement.

Conclusion

We will keep our eyes on this case as it makes its way through the Second Circuit, and possibly to the Supreme Court.  In addition, it is inevitable that this settlement will spawn a host of spinoff class actions against the underlying issuing banks.  We will keep our avid readers apprised as things develop.


[1] During the fairness stage, the proposed class consisted of approximately 12 million merchants, after netting out merchants which did not return their claim forms and those plaintiffs which opted out.

Apparently, Chief Justice Roberts has added to the United States Supreme Court’s wish list: a case that would allow the Court to address the “fundamental concerns” surrounding the use of cy pres remedies in class action settlements.

What is Cy Pres?

A cy pres remedy provides indirect benefits to class members (usually through defendant donations to a third party) in lieu of a direct monetary payment.  This remedy is normally utilized to distribute settlement funds that are unclaimed or incapable of individual distribution because the proof of individual claims would be burdensome or individual distribution of funds would be too costly.

The Lower Court Opinions

The Supreme Court’s public statement of its desire to review the propriety and limits of cy pres settlement agreements arises from the Ninth Circuit’s approval of a settlement in a putative class action relating to Facebook’s “Beacon” program.  Marek v. Lane, No. 13-136 (Nov. 4, 2013).  Beacon was a short-lived program instituted by Facebook in November 2007, that allowed Facebook to publish its members’ activities on participating companies’ websites (such as renting movies from Blockbuster.com or booking flights on Hotwire.com) to the member’s profile and the member’s friends network.  Initially, Beacon was an “opt out” program but, after public opposition, was changed to an “opt in” program where a member’s activity would not be broadcast unless the member expressly agreed to its dissemination.  We previously sent notification to our clients, http://www.seyfarth.com/publications/OMM092512b,  of the Ninth Circuit’s opinion affirming the district court’s approval of a $9.5 million settlement between Facebook and putative class members who alleged violations of state and federal privacy laws.  Lane v. Facebook, Inc., 696 F.3d 911 (2012).  Approximately $3 million of the settlement amount was allocated for plaintiffs’ attorneys’ fees and incentive payments for the named plaintiffs.  The remaining $6.5 million was earmarked for distribution to a newly formed charitable foundation whose purpose is to fund other organizations dedicated to educating the public about online privacy.  Class members who objected to approval of the settlement filed a petition for writ of certiorari to the United States Supreme Court.

Justice Roberts’ Warning Shot

Ultimately, the Court denied the petition because appellants’ challenge was focused on the particular terms of the specific cy pres settlement agreement at issue.  Chief Justice Roberts stated that review of this case may not afford the Court an opportunity to address more fundamental concerns surrounding the use of cy pres remedies in class action litigation, stating:

Marek’s challenge is focused on the particular features of the specific cy pres settlement at issue.  Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on.  This Court has not previously addressed any of these issues.  Cy Pres remedies, however, are a growing feature of class action settlements.  In a suitable case, this Court may need to clarify the limits on the use of such remedies.

What This Means

Chief Justice Roberts’ statement reflects the increasing scrutiny courts have of the use of cy pres awards in class settlements, and loudly signals that continued scrutiny of these awards will intensify.  It thus becomes paramount for counsel, during settlement negotiations for class resolution, to give careful consideration to Justice Roberts’ warning shot in Marek.

As some of you may recall, we reported in our sister blog last May on the Illinois Supreme Court’s decision in Standard Mutual Ins. Co. v. Lay, 2013 IL 114617, holding that statutory damages under the Telephone Consumer Protection Act (“TCPA”) are not punitive, but remedial.   On Friday, we saw one of the first aftershocks of that Illinois high Court’s decision, when Judge Lefkow, district judge for the Northern District of Illinois, held that the defendant, M&M Retail Center, Inc. acted with a reasonable anticipation of its liabilities by entering into a $6 million settlement with the plaintiff without input from its Insurers.   Maxum Indemnity Co. and Security Ins. Co. of Hartford v. Eclipse Mfg. Co., et al., Case No. 06-cv-4946 (N.D. Ill. Nov. 1, 2013).

Factual Background

In November 2005, Eclipse Manufacturing (“Eclipse”) brought suit against M&M Retail Center (“M&M”) alleging that M&M had transmitted unsolicited advertisements related to event planning, on several occasions, in violation of the TCPA.  Although Plaintiff claimed receipt of five faxes, it only produced two of the five faxes.  On summary judgment, the Court determined that both faxes were unsolicited advertisements, that 7,725 faxes had been distributed, and awarded the class statutory damages in the amount of $3,862,500.  After entry of judgment, the parties engaged in settlement negotiations, and ultimately M&M and one of its insureds, FSIC,  along with two other named parties, entered into a settlement agreement resolving the entire controversy for a consent judgment against M&M in the amount of $5,817, 150.  Maxum, 795 F. Supp. 2d 722, 730 (N.D. Ill. 2001). At the time of the consent order, FSIC had covered over $500,000 in defense costs.

Subsequent to the consent order, FSIC, along with two other insurance companies, sought a declaration as to their duties and obligations to defend the case.  Id.  In early 2012, Judge Lefkow entered a final opinion, holding that FSIC did not have a duty to defend, but that M&M’s two other insurers, Maxum Indemnity Co. (“Maxum”) and Security Ins. Co. of Hartford (“Security”) did have such a duty, therefore holding that Maxum and Security had an obligation to reimburse FSIC for the costs and fees incurred in defending M&M.  Id. at 739-40.  The issue of the obligation to indemnify M&M, and, thus, cover the settlement amount agreed to by M&M, remained an open issue.  Id.

The District Court’s Opinion

On renewed motions for summary judgment, Judge Lefkow revisited the issue of Maxum and Security’s obligations to indemnify.  Just before Maxum and Security filed their renewed motions, however, the Illinois Supreme court issued its decision in Lay, foreclosing the insurers’ argument that they did not need to  indemnify for punitive statutory damages.  Maxum II, slip op. at 10.  Maxum & Security did not participate in the settlement efforts that ultimately led to the resolution of the case, and thus argued that they had no obligation to cover.  To rebut that presumption, M&M needed to establish that the settlement was reached in reasonable anticipation of liability.  Notably, an insured need not establish actual liability.  Id. at 11.

The carriers alleged that the additional settlement amount beyond the initial judgment for the additional three faxes (in the amount of $2 million) amounted to a collusive effort between the insured and the putative class to put the carriers on the hook for the settlement.  Judge Lefkow disagreed, noting that the negotiations were significantly discounted, conducted before a seasoned magistrate, and the carriers had been invited to participate but declined.  Id. at 11-13.

In the alternative, the carriers argued that the settlement only covered property damage, not coverage-triggering privacy invasions, as the Court previously allowed only the named plaintiff to proceed on property injury theories.  Judge Lefkow rejected this argument as well, identifying intervening case law holding that, under Illinois law, advertising injury related to invasion of privacy also applies to corporations, not only “natural” persons.  Id. at 16. 

Implications

This case further raises the stakes for insurance companies regarding their coverage obligations related to actions brought under the TCPA.  Most assuredly, the carriers in this case will seek review by the Seventh Circuit, as Judge Lefkow herself acknowledges that she is departing from a previous Seventh Circuit decision, Am. States Ins. Co. v. Capital Assocs. of Jackson Cnty., Inc., 392 F.3d 939, 942 (7th Cir. 2004), a decision she identifies as predicting “wrongly” Illinois law on the issue.  As the Northern District remains a hotbed for TCPA cases, insurance companies should carefully consider (and, perhaps, reconsider) their obligations and duties in light of this development.

A threshold– and critical– determination in the defense of litigation brought pursuant to the Telephone Consumer Protection Act, 47 U.S.C. Sec. 227 et seq. (“TCPA” or “Act”) is whether an insurance policy provides coverage of the allegations set forth in the Complaint.  In a recent decision by the Missouri Supreme Court in Columbia Casualty Company v. Hiar Holding, L.L.C., SC 93026, the Court sent a loud warning to insurance companies to carefully undertake the determination of whether to provide defense and coverage in TCPA litigation, affirming the trial court’s determination that Columbia Casualty Company (“Columbia”) must indemnify Hiar Holdings, L.L.C. (“Hiar”)  for the entire $5 million settlement, $3 million beyond the policy coverage limits.

Factual Background

The TCPA allows for a private right of action for recipients of unsolicited communications sent through the use of automatic dialers, or that may otherwise violate the Act.  47 U.S.C. Sec.  227(b)(3).  A recipient may bring an action to recover $500 per violation, as well as treble damages for willful violations of the Act.  Id.  Hiar, a hotel proprietor, used a marketing service to send approximately 12,500 unsolicited facsimiles to individuals in the St. Louis area, and, in 2003,  Karen S. Little LLC brought a class action suit seeking recovery on behalf of the class.  Opinion, pg. 3.  At the time, Hiar was insured under a commercial general liability policy from Columbia, which provided coverage for both property damage and advertising injury.  Id.  Pursuant to the policy, Hiar tendered defense of the suit to Columbia, which denied coverage. Id.  In March 2005, the plaintiff made a settlement offer within the $2 million policy limits.  Hiar forwarded the demand to Columbia, which again refused to defend or cover the claim, and further indicated its refusal to participate in any further settlement negotiations. Id.   In January 2007, after having defended the suit at its own expense, Hiar agreed to a class-wide settlement of $5 million.  Id.  The settlement was approved by the trial court after an evidentiary hearing, judgment was entered and the Court approved the assignment by Hiar of any claim to insurance proceeeds to the class.  Id. at 4.   Thereafter, the class brought a garnishment action against Columbia, alleging that the policy provided for coverage for both “property damage” and “advertising injury.”  Columbia objected and filed a declaratory action seeking clarification of its obligations under its policy.  Id.

The Trial Court’s Decision

Relying upon the Missouri Supreme Court’s decision in Schmitz v. Great American Assurance Co., 337 S.W.3d 700 (Mo. 2011) (en banc), the trial court held that where an insurer wrongfully refuses to defend, it cannot later litigate the reasonableness of an indemnification amount, and therefore becomes liable for the entire underlying judgment.  The court determined that Columbia had acted unreasonably and in bad faith in handling the Hiar claim for coverage under the TCPA, and reiterated that because the court had determined the settlement to reasonable and negotiated in good faith, Columbia could not now relitigate that issue.  The court further refused to allow Columbia to add the excess insurer to the litigation, and denied Columbia’s motion to amend or reconsider its judgment.  Columbia subsequently appealed.

The Missouri Supreme Court Decision

In reviewing the applicability of the Schmitz decision, the Court reinforced the long-standing principle that where a “complaint merely alleges facts that give rise to a claim potentially within the policy’s coverage, the insurer has a duty to defend.”  Id. at 8, n. 10.   Further, the Court reiterated that an insurer “cannot have its cake and eat it too by both refusing coverage and at the same time continuing to control the terms of the settlement in defense of an action it had refused to defend.”  Id. at 8.    Similar to a recent argument made, and rejected, before the Illinois Supreme Court (See Std. Mut. Ins. Co. v. Lay, 2013 IL 114617 (Ill. 2013). and our previous client alert here.), Columbia argued that the $500 statutory damages amount was a penalty, not damage, as contemplated by the policy.  At the time, Columbia’s position would not have seen outrageous, as the Missouri appellate court had held just that in Olsen v. Siddiqi, 371 S.W.3d 93 (Mo. App. 2012).  However, the Court rejected the Olsen decision, finding that it was incongruous with the Eight Circuit’s decision in Universal Underwriters Insurance Co. v. Lou Fusz Automotive Network. Inc., which determined that the $500-per-occurence award was simply not a “penalty.”  401 F.3d 876 (8th Cir. 2005).   The Court continued, determining that the sending of the fax constituted both “property damage,” as it was not done intentionally, but negligently, and “advertising injury,” as the policy was not precise enough in precluding claims for a violation of privacy rights. Id. at 14-16.   Columbia further argued that Hiar did not cooperate, as required under the policy, and therefore this “vitiated coverage.”  Id. at 18.  The Court likewise rejected this argument, holding that as Columbia “sought to be wholly unconnected from the proceedings,” it could not now seek to use that disconnectiveness to bar coverage. Id. at 20.  Finally, the Court rejected Columbia’s attempt to limit its indemnification obligations to the policy limits.  In so doing, the Court noted that its liability is not bound by the limits of the policy; rather, Columbia is “suffering the consequences of its breach of its duty to defend and its failure to settle within its policy limits.”  Id. at 22.  The Court ultimately upheld the trial court’s judgment against Columbia in the entire amount of the class settlement– $5 million.

Implications

The Hiar decision should raise a flag for lawyers, litigants and insurance companies.  The decision raises a panoply of pitfalls for each group.  It does, however, provide both guidance and advise to each group on how best to deal with actions brought under the TCPA.   We would expect Columbia will challenge this decision, and, if so, will continue to track this, and other, relevant TCPA decisions across the country.

Adding to the growing list of Defendants forced into large settlements under the Telephone Consumer Protection Act (“TCPA”), the Northern District of California approved a $6 million common fund class settlement, inclusive of a 25%, or $1.5 million, attorneys’ fees allocation.

Factual Background

On May 27, 2011, two individuals filed a class action lawsuit against Google and its then-recently acquired subsidiary, Slide,  alleging that the companies violated the TCPA by sending text messages to cell phone’s without the consumer’s consent.    Google and Slide had just released a “group texting” tool, called “Disco,” that allows an individual to send text message to a large group of people using one cell phone number provided by Disco.  According to the complaint, the program allowed messages to be sent through the program without consent, and would only prevent messages once a person affirmatively opted out.  The problems compounded, according to the complaint, when one unwilling recipient continued to receive hundreds of text messages from other confused recipients, wondering who was sending the text, and why.

Throughout the litigation, Google attempted several defenses. For example, in early 2012, it argued that the TCPA statute violated the First Amendment, as the text messages sent from friend to friend were protected speech.  The judge, Hon. Yvonne Gonzalez Rogers, rejected the argument, holding that the message constituted unprotected commercial speech.  Following, Google filed a petition with the FCC, seeking a declaratory ruling that the TCPA did not apply to group texting.  With the petition pending, the Court agreed to stay discovery, during which the parties engaged in settlement negotiations, ultimately reaching settlement in October 2012.

The Settlement

On June 26, 2013, the Court entered a final approval of the settlement.  The parties agreed to a $6 million common fund, benefiting a settlement class of:

All persons who received the Disco Mobile App Text or other text message sent by or through the Disco Messaging Service
informing such Persons about Disco Messaging Service. [omitting exclusions]

The Court further determined the common fund of $6 million to be fair, allowing for a “full” recovery, as, although the messages were sent to 185,688 unique telephone numbers, only a small portion of the Settlement Class was expected to file claims.  On this basis, the Court also approved a $1.5 million attorneys’ fees award, noting that 25% of the common fund is the benchmark in the Ninth Circuit.  In conducting its analysis of the factors governing approval, however, the Court did reduce the claimed lodestar hours, noting “numerous inefficiencies” and “excessive billing for unnecessary work.”

Conclusion

Facing a $500 per violation statutory risk, Defendants frequently find themselves forced into a settlement posture under the TCPA.  As noted above, it is extremely important for companies to explore all possible statutory defenses (such as consent and/or permission) early in litigation.  Furthermore, given the volume of decision across the country, several creative tactics can be employed to either reduce, or avoid, liability under this statute.  This settlement, however, serves as a reminder that the TCPA remains a very real, and very troublesome, statute.  It is critical to understand the nuances of the statute before initiating any marketing campaigns.  In a twist on the old Ben Franklin adage, an ounce of prevention will save you many pounds to cure.