Duran v. Obesity Research Inst., LLC, D067917

• Decision Date: 23 June 2016
• Docket Number: D067917
• Citation: 204 Cal.Rptr.3d 896,1 Cal.App.5th 635
• Court: California Court of Appeals Court of Appeals
• Parties: Fred DURAN, Plaintiff and Respondent, v. OBESITY RESEARCH INSTITUTE, LLC et al., Defendants and Respondents; DeMarie Fernandez et al., Objectors and Appellants.

1 Cal.App.5th 635

204 Cal.Rptr.3d 896

Fred DURAN, Plaintiff and Respondent

v. OBESITY RESEARCH INSTITUTE, LLC et al., Defendants and Respondents;DeMarie Fernandez et al., Objectors and Appellants.

D067917

Court of Appeal, Fourth District, Division 1, California.

Filed June 23, 2016

Bursor & Fisher, Scott A. Bursor, L. Timothy Fisher, Annick M. Persinger, Walnut Creek, and Neal J. Deckant for Objectors and Appellants.

Nicholas & Tomasevic, Alex Tomasevic, San Diego, and Craig M. Nicholas for Plaintiff and Respondent.

Newport Trial Group, Scott J. Ferrell, David W. Reid, Newport Beach; Gordon & Rees and Richard P. Sybert, Carlsbad, for Defendant and Respondent Obesity Research Institute, LLC.

Shook, Hardy & Bacon, Frank C. Rothrock, D. Susan Wiens and Paul B. La Scala, Irvine, for Defendant and Respondent Wal–Mart Stores, Inc.

NARES, J.

Fred Duran filed a putative class action complaint against Obesity Research Institute, LLC (ORI) and Wal–Mart Stores, Inc. (Wal–Mart) (collectively, defendants). Duran alleges defendants falsely claimed that ORI's products, Lipozene and MetaboUp, have weight loss benefits. The court approved a claims-made settlement providing that class members submitting a claim without proof of purchase would receive $15, and those submitting receipt(s) would receive one refund of double the unit price paid. The settlement also provided that ORI would cease making certain assertions in product advertising. Defendants also agreed to not oppose a motion seeking $100,000 in attorney fees to class counsel.

In a class estimated to consist of between 400,000 and 600,000 consumers, 895 claims were submitted, in the total amount of $31,800. Assuming there were 500,000 class members, less than two-tenths of 1 percent (0.179 percent) submitted claims. Thus, the proposed settlement buys a nationwide release for the price of about six cents ($0.064) per class member. And for achieving this result, class counsel receive $100,000 in attorney fees—about 75 percent of the total amount paid.

Objectors, class members DeMarie Fernandez, Alfonso Mendoza, and Brian Horowitz (collectively, objectors) appeal, contending the settlement is the product of collusion. Objectors assert the class did not receive sufficient notice of settlement, and the settlement is unreasonable and inadequate. They also contend the attorney fee award is excessive.

As we explain, the downloadable online claim form, a part of the class notice of settlement, misrepresents three material terms of the settlement: (1) the amount of payment to class members is misstated; (2) the claim form refers to Hydroxycut products, which are not involved in this case; and (3) a Civil Code section 1542 release was included in the claim form, although at the preliminary approval hearing the court stated it would not approve such a release.

After we called these errors in the claim form to counsels' attention (no one raised this issue in the trial court) and requested supplemental briefing, class counsel and defendants candidly conceded, “[T]he class members were not clearly informed of what the terms of the settlement were, and what benefits they would receive and what claims they would release if they submitted a claim.” Nevertheless, class counsel and defendants contend the trial court's determination that the settlement is fair and reasonable should be affirmed, and the case should be remanded only to decide the “details and logistics” of giving corrected class notice.

Remand cannot be limited to giving a corrected class notice. The judgment must be reversed because the class notice failed in its fundamental purpose—to apprise class members of the terms of the proposed settlement. The erroneous notice injected a fatal flaw into the entire settlement process and undermines the court's analysis of the settlement's fairness. (See Petrone v. Veritas Software Corp. (In re Veritas Software Corp. Sec. Lit. ) (9th Cir. 2007) 496 F.3d 962, 972 (Veritas ).)

Although reversal on this ground makes it unnecessary to consider other issues objectors raise, in the interests of judicial economy, we also discuss two issues that will likely arise on remand: (1) the manner of giving class notice of settlement, and (2) whether the trial court properly considered the injunctive relief portion of the settlement as “the most important part” in determining its reasonableness.

FACTUAL AND PROCEDURAL BACKGROUND

A. Duran's Putative Class Action Complaint

In May 2013 Duran filed a putative class action complaint against ORI and Wal–Mart for alleged violations of the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq. ), Unfair Competition Law ( Bus. & Prof. Code, § 17200 et seq. ), False Advertising Law (Bus. & Prof. Code, § 17500 et seq. ) and other state law claims. Duran filed the action on behalf of himself and “[a]ll persons, nationwide” who purchased ORI diet products for personal use “after August 10, 2012 until the date notice is disseminated.”

Duran's complaint identifies ORI's products as Lipozene and MetaboUp. He alleged ORI “markets and sells” these products as a “ ‘weight-loss breakthrough’ ” that is “ ‘clinically proven to help you lose weight and pure body fat’ ” and represents these products “ ‘can help you lose weight without a change in lifestyle.’ ” Duran alleged these representations were false and misleading and that “Lipozene is not, in fact, effective for weight control.” He alleged that ORI's promises and representations that its diet products are “clinically proven and guaranteed weight loss miracle are false and have been used to unfairly deceive millions of consumers into buying” ORI's products. Duran alleged that Wal–Mart “promotes and disseminates” ORI's “deceptive advertising claims by carrying and distributing the Lipozene and/or MetaboUp products.”

B. Motion for Class Certification

In July 2013 Duran filed a motion for class certification, set for hearing in December 2013. In seeking class certification, class counsel stated, “Lipozene and MetaboUp are not, in fact, ‘clinically proven’ to be weight-loss miracle pills and Defendants have simply swindled consumers out of millions of dollars based on a uniform set of misrepresentations that make up a marketing story.”

C. The First Motion for Preliminary Approval

In November 2013—before the class certification motion was heard—Duran and ORI jointly moved for preliminary approval of settlement. The settlement included certification of a settlement class defined as “all persons in the United States who purchased ORI's products during the Class Period for personal or household use....”

The settlement provided that class members submitting a valid claim without proof of purchase would receive $15, and those submitting proof of purchase would receive double the unit price paid (between $28 and $68), limited to one such refund. The settlement agreement provides that claims will be paid from a “Non-Reversionary Fund.”¹

The settlement also provided that ORI will establish a “Reserved Fund” of $500,000 to pay the costs of administration, notice, incentive awards and attorney fees. This fund would be retained “internally” by ORI. Any reserved amounts not used to pay these expenses would “cease to be internally reserved by ORI” when the judgment is final.

At the time of this first motion for preliminary approval, the settlement agreement also included a waiver by class members of unknown claims and a waiver of their rights under Civil Code section 1542.²

Additionally, defendants agreed to not oppose a request by class counsel for up to $100,000 in attorney fees and costs. Class counsel would seek a $2,500 “incentive award” for Duran as class representative.

The court declined to rule on the motion for preliminary approval, instead raising “several concerns regarding the proposed settlement.” The court's concerns included: (1) “Is publication on the internet and in one newspaper sufficient?”; (2) “Counsel has not submitted a copy of the claim form”; (3) “[T]he court will not approve a [Civil Code] section 1542 waiver.”

D. The Second Motion for Preliminary Approval

After revising the settlement agreement in an attempt to address the court's concerns, Duran and ORI filed a second motion for preliminary approval. Class counsel stated the settlement was the result of “arms-length settlement negotiations during a mediation” conducted by a retired superior court judge, Herbert B. Hoffman. Judge Hoffman submitted a declaration stating he “supervised the mediation between the parties in this case” and that “[a]fter many hours of negotiations, the parties were able to reach a resolution that [he] believe[s] is reasonable....”

The monetary recovery for class members and structure of the settlement remained the same as the parties presented in the first motion for preliminary approval: Class members submitting a valid claim form with no proof of purchase would receive $15. Those submitting a valid claim form with proof(s) of purchase would receive one refund of double the unit price paid.

Claims forms could be obtained by calling a toll-free number established for that purpose, by requesting one by mail, or by downloading the form from a Web site established by the settlement administrator. Completed claim forms could be submitted online or by mail. The parties provided the court with an exemplar claim form, which correctly reflected the settlement payouts.

The parties proposed to give class notice of the settlement in three ways: (1) publication in USA Today ; (2) e-mail notice to class members “with known electronic mail addresses”;³ and (3) a settlement Web site.

As revised, the settlement agreement did not require claimants to waive rights under Civil Code section 1542.

E. Class Notice of Settlement

The court granted this (second) motion for preliminary approval. In August 2014 notice of settlement was published in a Monday edition of USA Today . The published notice directed readers to a Web site, www.oriclassactionlawsuit.com, for...