Consumer Class Action Blog

News, analysis and commentary on state and federal consumer class action litigation

Archive for September, 2009

CAN-SPAM preemption – broad yet narrow

Posted by Philip Kay on September 25, 2009

The California Court of Appeals for the Fourth District recently addressed the preemptive scope of the Controlling the Assault of Non-Solicited Pornography And Marketing Act of 2003 (“CAN-SPAM,” 15 USC § 7701 et seq) in Powers v. Pottery Barn, Inc., 2009 WL 2991358 (Cal.App. 4 Dist., Sept. 21, 2009), a consumer class action filed against Pottery Barn in California state court.

Powers alleged she visited a Pottery Barn store, selected an item to buy and, when she used her credit card to buy it, was asked to provide an e-mail address. Powers gave the sales clerk her e-mail address and saw the clerk enter the address into the store’s electronic cash register.  Powers then brought suit against Pottery Barn under California’s Song-Beverly Credit Card Act of 1971 (Song-Beverly) which limits the information that may be requested of a consumer when the consumer uses a credit card to transact business.  In particular, Song-Beverly prohibits businesses from requesting or requiring credit card customers to provide “personal identification information,” such as their addresses and telephone numbers.

Pottery Barn moved to dismiss the complaint, arguing that regulation of the collection of e-mail addresses was preempted by CAN-SPAM.

Some background:  CAN-SPAM was enacted in 2003. Under CAN-SPAM the sender of any unsolicited “commercial electronic mail message” is subject to civil liability unless the e-mail contains: a mechanism which permits the addressee to “opt-out” or unsubscribe from further e-mails, an accurate identification of the sender, an accurate subject line, a physical address of the sender and a warning label if the e-mail contains adult content. CAN-SPAM also makes it a crime to send e-mail through a computer without the permission of the owner of the computer (“open-relay”) or place false information in the e-mail header.

By its terms, CAN-SPAM pre-empts any state law that “specifically regulates the use of electronic mail to send commercial messages.”

The trial court agreed with Pottery Barn and dismissed Powers’ complaint, ruling that Powers’ claims were preempted by CAN-SPAM.  Powers appealed.

The California Court of Appeals reversed, finding that while CAN-SPAM pre-empts any state law that “specifically regulates the use of electronic mail to send commercial messages,” it does not pre-empt state laws that “are not specific to electronic mail” and have only incidental impact on e-mail use.  Because Song-Beverly’s regulation of what may be asked of credit card customers is not a regulation of what can be sent in commercial e-mails and is not in any manner specific to e-mail, Song-Beverly is not pre-empted by CAN-SPAM.

The Powers Court got this one right.  While CAN-SPAM’s preemption clause is broad in application – it preempts all state statutes and regulations that purport to regulate commercial e-mail and saves from preemption only those state statutes or regs that target “fraud or deception” – it is narrow in scope because a state statute or reg is only preempted in the first place if it specifically regulates the use of commercial e-mail.  As the Powers court pointed out, incidental effect on commercial e-mail is not enough to invoke CAN-SPAM preemption.  In fact, across the board, every attempt to expand CAN-SPAM’s preemption clause to state statutes which do not specifically regulate e-mail has failed.  See, e.g., Ferron v. SubscriberBase Holdings, Inc., 2009 WL 650731 (S.D.Ohio Mar 11, 2009) (“[b]ecause OCSPA is a consumer protection statute, not limited to matters of electronic mail, CAN-SPAM does not preempt Ohio Revised Code § 1345.02).


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Incentive award for pro-se objector? 10th Cir. says “no,” but leaves door open

Posted by Philip Kay on September 19, 2009

The 10th Circuit addressed a novel issue in UFCW Local 880-Retail Food Employers Joint Pension Fund v. Newmont Mining Corp., 2009 WL 2902565 (10th Cir., Sep 11, 2009):  whether pro-se class action objectors are entitled to incentive awards.

The underlying case was a securities fraud class action commenced in June 2005 in my home District of Colorado.  The case was settled in early 2008.  The settlement called for defendants to create a fund of $15 million, from which various litigation expenses would be paid before the remainder was paid out to the class members.  Class counsel initially requested a fee of $5 million.  Class member Lawrence W. Schonbrun, acting pro se, and another class member, Natasha Engan, represented by counsel, filed objections to the amount of fees requested by class counsel.  Based on the objections, proceedings were held and ultimately the attorney fee award was reduced to $450K.

Mr. Schonbrun then filed an application for an incentive award based on his time and effort spent in the attorney fee proceedings.  The district judge (Judge Marcia Krieger, one of the smartest judges on the bench in my opinion) denied Mr. Schonbrun’s request but granted fellow-objector Ms. Engan her attorney fees because “the services she provided conferred a benefit on class members sufficient to entitle her to a reasonable fee award.”

Mr. Schonberg appealed, claiming that the district court erred in finding that his objection to class counsel’s attorney fees did not benefit the class sufficiently to entitle him to an incentive award. Mr. Schonbrun argued that he was entitled to a pro se incentive award on the same or similar basis as a named class representative.

The 10th Circuit disagreed.  But, it expressly declined to directly decide the issue of whether pro se objectors can ever be entitled to incentive awards.  Instead, the Court focused solely on whether Mr. Schonbrun conferred a benefit on the class and whether Judge Krieger abused her discretion in ruling that he did not.  The Court acknowledged that “[a]n objector whose arguments result in a reduction of attorney-fee and expense awards provides a benefit to the class,” but in this case Mr. Schonbrun’s objections merely mimicked Ms. Engan’s objections and were lacking in any meaningful independent value.  Thus, Mr. Schonbrun did not confer a benefit to the class that was not already provided by Ms. Engan.  “[G]eneral, garden-variety objections usually are not helpful to the court, nor do they benefit the class.”

The Court also declined Mr. Schonbrun’s invitation to apply to his pro se request for an incentive award the same standards applicable to an objector’s request for an attorney fee.  The Court correctly noted the distinction between an objector seeking his own incentive award and an objector seeking payment for his attorney fees.  “A pro se objector’s time and effort is not the same as an attorney fee incurred by an objector… Mr. Schonbrun did not incur attorney fees; therefore, we do not apply the same standards as if he had.”

So, can a pro se objector ever be entitled to an incentive award?  While the Court declined to directly answer the question, it implied that in appropriate circumstances the answer could be “yes.”  But, the threshold requirement is that the objector confer a benefit on the class.  Further, the Court implied that to receive an incentive award, an objector must also put himself “at risk” in the litigation.  Regarding this requirement, see Parker v. Time Warner Entertainment Co., L.P., 2009 WL 1940791 (E.D.N.Y., Jul. 06, 2009): “The amount of the incentive award is related to the personal risk incurred by the individual or any additional effort expended by the individual for the benefit of the lawsuit”.

I’m not aware of any federal circuits that have directly addressed the issue of whether, and in what circumstances, a pro se objector is entitled to an incentive award.  I think the 10th Circuit’s reasoning would likely be followed by other circuits facing this issue and they would require an objector to (1) confer a benefit on the class and (2) incur personal risk in order to be entitled to an incentive award.

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Beware of lodestar “cross-checks”

Posted by Philip Kay on September 13, 2009

The 3rd Circuit affirmed an attorney fee award of $29,950,000 in conjunction with the approval of two settlement agreements in In re Insurance Brokerage Antitrust Litigation, 2009 WL 2855855 (3rd Cir., Sept. 8, 2009), a consolidated class action alleging that insurance brokers had solicited fixed bids from insurance companies and had then received improper payments for directing customers to those companies.

The origins of this case date back to October 2004 when the New York State Attorney General, Eliot Spitzer (yes, that Eliot Spitzer), filed a civil complaint against the insurance broker Marsh & McLennan in New York state court, alleging that Marsh had solicited fixed bids from insurance companies and had then received improper payments for directing customers to those companies. In November 2004, a multi-state group consisting of twelve attorneys general and several state insurance departments began investigating the alleged bid rigging and steering activities of brokers and insurers in the property and casualty insurance industry. Private parties commenced numerous putative class actions in federal courts across the country as well.

The Judicial Panel on Multidistrict Litigation consolidated these private civil actions from multiple jurisdictions and transferred the cases to the United States District Court for the District of New Jersey for pretrial proceedings.  The plaintiffs claimed a vast conspiracy between some of the nation’s largest insurance brokers and insurance carriers involving bid rigging and allocating or steering customers to defeat competition in the insurance market in exchange for high brokerage commissions.

Ultimately, the district court approved the settlement agreements entered into between the plaintiffs and Zurich ($100,000,000) and the plaintiffs and Gallagher (approx. $27,000,000).  The district court also approved an attorney fee award of $29,950,000 attendant to the Zurich settlement.  Various members of the class objected to various aspects of the settlement agreements, and they appealed to the 3rd Circuit following the district court’s final approval of the agreements.

The 3rd Circuit affirmed the approval of the settlement agreements and the attorney fee award.

Most interesting to me was the Court’s discussion of the attorney fee award.  In assessing the reasonableness of the award, the Court analyzed such factors as the size of the settlement fund created, the number of persons benefitted, etc.  The Court then calculated the lodestar to “cross-check” the reasonableness of the award.  Interestingly, the Court accepted the total number of hours submitted by class counsel – 200,000 hours – despite class counsel’s inclusion of all of the time spent to date in the entire consolidated case as opposed to the time spent just in the Zurich component of the case, and despite the appellants’ allegation that the excessive amount of time allegedly spent by some of the firms “raises the possibility of fraud.”

Regarding the inclusion of the entire 200,000 hours in the lodestar calculation, the Court seemed to accept the district court’s finding that “there are situations where the plaintiff’s claims for relief will involve a common core of facts or will be based on related legal theories and that much of counsel’s time will be devoted generally to the litigation as a whole, making it difficult to divide the hours expended on a claim-by-claim basis.”  The Court also seemed to accept class counsel’s argument that “Class Counsel’s efforts cannot be compartmentalized, as a number of their actions against all the Defendants provide a benefit to the Class and clearly had a bearing on the Zurich Defendants’ interest in and willingness to settle.”  Thus, the Court allowed the lodestar calculation to be based on the entire 200,000 hours expended in the overall MDL litigation.

Since the district court’s calculation of the lodestar multiplier was .4 (based on the 200,000 hours at $365 per hour), the Court concluded that it was reasonable since it was less than 1 “and thus reveals that Class Counsel’s fee request constitutes only a fraction of the work that they billed in conjunction with the Zurich Settlement Agreement.”

Addressing the appellants’ allegations of “billing inflation,” the Court stated:

“Even assuming there was some inflation of the hours billed in relation to the Zurich Settlement or some duplicative work       involved in the total hours count, a significant adjustment would have to be made to the hours calculation before the lodestar multiplier (here, a fraction) would even begin to approach one. While district courts must be aware of the potential for manipulation of the lodestar and lodestar multiplier, we are satisfied that in the present case the District Court’s lodestar cross-check confirmed the reasonableness of the fee request.”

As a matter of principle, I disagree with lodestar cross-checks.  The reasonableness of class counsel’s attorney fee award can be accurately determined without resort to the lodestar analysis, see the 3rd Circuit’s discussion of the seven Gunter factors, and by suggesting that an attorney fee award is prima facie unreasonable if the lodestar multiplier is more than “1” ignores the economic realities of class action litigation.  If class counsel takes the economic risk, their fee should reflect that risk and not be tied to the sing-song hours worked multiplied by a “reasonable” hourly rate.  Personal injury attorneys routinely take cases on a contingency fee basis, and if they score a quick settlement, they deserve their 33% cut regardless of the hours spent on the case because they took the economic risk.  I’ve never heard of anyone “cross-checking” a PI attorney’s contingency fee against the lodestar to determine the reasonableness of his fee.  It should be no different here.  When class counsel invests time, money and resources successfully pursuing a large class action, their fee award should reflect their economic risk and not be artificially “cross-checked” against the lodestar.

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To Intervene or Not Intervene

Posted by Philip Kay on September 7, 2009

The 1st Circuit issued a warning to would-be class action intervenors that they better move early or forever hold their peace.

In National Ass’n of Chain Drug Stores v. New England Carpenters Health Benefits Fund, 2009 WL 2824867 (1st Cir., Sep 03, 2009), the Court affirmed the district court’s judgment approving the settlement of Average Wholesale Price (AWP) class claims against First Databank and Medi-Span, two publishers of drug pricing data.  The Court held that the defendants’ agreement to lower (“roll back”) their published AWP figures to a 1.2 markup (from 1.25) did not violate the Due Process Clause, did not violate Rule 19 of the Federal Rules of Civil Procedure, and satisfied Rule 23(e)(2)’s reasonableness standard.

The actions were brought by purchasers of pharmaceutical drugs against First DataBank, Medi-Span and McKesson (a major drug wholesaler that also owns pharmacy-related businesses).  The complaints alleged that the defendants wrongfully inflated the AWP figure on over 1,400 drug products, resulting in overpayments by third-party payors, insurers and consumers.

First DataBank and Medi-Span agreed to settle the claims against it.  (McKesson also settled the claims against it for $350 million, but that settlement was not part of this appeal).  As part of the settlement, First DataBank and Medi-Span agreed to roll back their published AWP figures.  The trial court issued its final order and judgment on March 30, 2009 in which it certified the class and approved the settlement agreements.  The court delayed implementation of the rollback until September 26, 2009.

The principal objections to the settlements came from non-party pharmacy interests concerned that the rollbacks would reduce the payments to them made by third-party payors.  These non-parties appealed to the 1st Circuit to overturn the district court and un-do the settlements.

The 1st Circuit held that although the pharmacy interests likely stand to lose revenues as a result of the rollback intended by the settlement, the rollbacks do not offend the Due Process Clause or Rule 19.  The Court noted that impacted non-parties can always seek to intervene or otherwise express their views in litigation that may affect their practical interests, and thus were not denied due process.  Further, the appellants forfeited their Rule 19 argument by failing to raise it in the district court.

The Court also held that the settlement was fair and reasonable under Rule 23(e)(2).  The Court stated that the rollback made sense absent some extreme circumstance such as gains for buyers greatly exceeding the original losses or likely to force large numbers of pharmacies out of business.  Since the appellants failed to establish such extreme circumstances, the rollbacks “[were] within the ambit of reasonable choices available to the district judge” and may stand.

Most interesting to me was the Court’s treatment of who had standing to appeal the settlements.   The Court divided the appellants into three categories.

The first category was comprised of entities who objected to the settlement in the district court and who asserted status as members of the class.  None of the appellees disputed that these entities were members of the class and thus the Court concluded that they had the right to appeal whether their interests were typical of the class or not.

The second category was comprised of entities that were not class members but moved to intervene in the district court.  The district court denied their motions to intervene as untimely.  These entities did not immediately appeal the district court’s denial under the collateral order doctrine but waited until after the final judgment to appeal.  The Court bypassed the question whether intervention was properly denied in the district court and permitted intervention on appeal to those entities which sought intervention below. The Court implied, however, that it might not be so generous to future intervenors.

The third category was comprised of would-be appellants who neither asserted class membership nor attempted to intervene in the district court but claimed a right to appeal or appear as parties on appeal simply because their interests were affected by the outcome.  The Court ruled that the entities in this category did not have standing to appeal.  If they wanted to be heard, they should have intervened in the district court:  “[T]he fact that a decision against a defendant may practically impact a third party is not ordinarily enough for appellant status absent intervention or joinder in the trial court.” The Court noted that its decision might be different if the final judgment had purported to alter the legal rights of these non-party non-intervenors, but the final judgment in this case did not have any such effect.  See above discussion re the Due Process Clause and Rule 19.

So what does it all mean, Basil?  If your client may be adversely affected by a class action settlement, move to intervene in the trial court and do it early.  If the trial court denies your motion, immediately file an appeal under the collateral order doctrine.  The 1st Circuit threw the second category of appellants a bone by hearing them on appeal despite their failure to immediately appeal the district court’s denial of their motion to intervene, but I wouldn’t bet the farm on such future charity from the 1st or any other circuit.

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7th Cir. Weighs In On Class Action Circuit Split

Posted by Philip Kay on September 3, 2009

If the named plaintiff in a putative class action settles her own claim but reserves the right to appeal the denial of class certification, can she appeal the denial of class certification?  This was the question facing the 7th Circuit in Muro v. Target Corp., 2009 WL 2707537 (7th Cir. Aug 31, 2009).

In Muro, Target mailed a Target Visa Card to Ms. Muro along with a credit agreement.  The problem was that Muro never applied for the card.  Muro had a Target credit card years before but paid the balance and closed the account.  She did not activate the new Visa Card and did not incur any charges or fees associated with the card.

Muro filed a TILA class action against Target based on the unsolicited credit card.  Her suit alleged that Target violated TILA sections 1642 and 1637.  The court denied class certification of the 1642 claim on typicality grounds and granted summary judgment to Target on the 1637 claim.

Muro and Target then settled the 1642 claim.  In the settlement agreement, Muro “reserved her right” to appeal the denial of class certification.  Muro then appealed the denial of 1642 class certification and the 1637 summary judgment.

On appeal, the 7th Circuit addressed an issue that has split the circuits:  whether a reservation of the right to appeal the class certification issue is sufficient to permit a named plaintiff in a putative class action who has settled her individual claim to appeal the class certification ruling.

The Court answered “no” to the question.  The Court noted that several circuits have confronted the more general issue of whether a prospective class representative who has settled her personal claim can still appeal the denial of class certification.  All of the circuits acknowledge that a plaintiff seeking to appeal such a ruling must have a “personal stake in the definitive adjudication of the class-certification issue.”  Thus, most of the circuits that have considered the issue have held that “a named plaintiff’s unqualified release of claims relinquishes not only his interest in his individual claims but also his interest in class certification.”

There is, however, disagreement among the circuits as to whether a reservation of the right to appeal the class certification issue is sufficient to permit a prospective class representative who has settled her individual claim to appeal the class certification ruling. The 4th and 8th Circuits have made it clear that, in their view, the mere recitation in a settlement agreement that the plaintiff reserves the right to appeal the denial of class certification is not sufficient to create the sort of concrete interest in the class certification issue required for the plaintiff to have standing to prosecute the appeal.  By contrast, the 5th and 11th Circuits have indicated that a reservation of the right to appeal the class certification issue in a settlement agreement is sufficient to give the proposed class representative standing to appeal the class certification issue without any further showing of a concrete interest in the resolution of the issue.  In fact, the 11th Circuit has implied that a proposed class representative who settles her individual claim may appeal the denial of class certification even without an explicit reservation of the right to appeal that issue.

The Muro Court agreed with the 4th and 8th Circuits on this issue and held that issues personal to the prospective class representative must “remain alive in the litigation”  for the plaintiff to have standing to prosecute the appeal.  Thus, when a plaintiff settles her claim, “the settling individual has elected to divorce himself from the litigation and no longer retains a community of interests with the prospective class” and does not have standing to prosecute the appeal even if he “reserves” his right to appeal.

My gut says the Supreme Court would agree with the 4th, 7th and 8th Circuits on this issue.  The Supreme Court is pretty strict about the case-or-controversy requirement and won’t hesitate to dismiss a case for lack of standing as they very recently demonstrated in Summers v. Earth Island Institute, 129 S.Ct. 1142 (March 3, 2009).

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