Faught v. American Home Shield Corp.

• Decision Date: 01 February 2012
• Docket Number: 10–12534 and 10–12536.,Nos. 10–12496,s. 10–12496
• Parties: Laura FAUGHT, Steven Faught, on behalf of themselves and all others similarly situated, Plaintiffs–Appellees,John Howe, et al., Intervenors–Plaintiffs, v. AMERICAN HOME SHIELD CORPORATION, Defendant–Appellee,Robert Shepard, Luz Shepard, Janet Tzendzalian, Merlyn D. Lind, Rosalyn Urbanek, Interested–Parties–Appellants.Laura Faught, Steven Faught, on behalf of themselves and all other similar situated, Plaintiffs–Appellees,John Howe, et al., Intervenors–Plaintiffs,Thomas Arrington, Intervenor Plaintiff–Appellant, v. American Home Shield Corporation, Defendant–Appellee.Laura Faught, Steven Faught, on behalf of themselves and all others similarly situated, Plaintiffs–Appellees,John Howe, Jenny Hill, Jennifer Deachin, Michael McKerley, Kenneth Behrend, Pamela Behrend, Jeff Williams, Sabrina Williams, Janet K. Wood, Intervenors–Plaintiffs–Appellants,Thomas Arrington, et al., Intervenors–Plaintiffs, v. American Home Shield Corporation, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

668 F.3d 1233

Laura FAUGHT, Steven Faught, on behalf of themselves and all others similarly situated, Plaintiffs–Appellees,John Howe, et al., Intervenors–Plaintiffs,

v.AMERICAN HOME SHIELD CORPORATION, Defendant–Appellee,Robert Shepard, Luz Shepard, Janet Tzendzalian, Merlyn D. Lind, Rosalyn Urbanek, Interested–Parties–Appellants.Laura Faught, Steven Faught, on behalf of themselves and all other similar situated, Plaintiffs–Appellees,John Howe, et al., Intervenors–Plaintiffs,Thomas Arrington, Intervenor Plaintiff–Appellant,

v.American Home Shield Corporation, Defendant–Appellee.Laura Faught, Steven Faught, on behalf of themselves and all others similarly situated, Plaintiffs–Appellees,John Howe, Jenny Hill, Jennifer Deachin, Michael McKerley, Kenneth Behrend, Pamela Behrend, Jeff Williams, Sabrina Williams, Janet K. Wood, Intervenors–Plaintiffs–Appellants,Thomas Arrington, et al., Intervenors–Plaintiffs,

v.American Home Shield Corporation, Defendant–Appellee.

Nos. 10–12496

10–12534 and 10–12536.

United States Court of Appeals, Eleventh Circuit.

Oct. 31, 2011.As Revised Feb. 1, 2012.

D. Frank Davis, Wesley W. Barnett, John E. Norris, Tyler Vail, Davis & Norris, LLP, R. Lea Bone, Bates & Bone, LLP, Birmingham, AL, for Plaintiffs–Appellees.

Joel S. Feldman, Rachel B. Niewoehner, Julie Weber, Sidley Austin, LLP, Chicago, IL, John E. Goodman, Michael Dale McKibben, Michael R. Pennington, Jason A. Walters, Bradley, Arant, Boult, Cummings, LLP, Birmingham, AL, Doy Leale McCall, III, Robert C. Black, Jr., Hill, Hill, Carter, Franco, Cole & Black, PC, Montgomery, AL, Scott Burnett Smith, Bradley, Arant, Boult, Cummings, LLP, Huntsville, AL, for Defendant–Appellee.

Albert Y. Chang, Johnson Bottini, LLP, San Diego, CA, James M. Evangelista, David James Worley, Evangelista & Associates, LLC, Atlanta, GA, for Interested–Parties–Appellants.Kearney Dee Hutsler, III, Birmingham, AL, for Intervenor–Appellant.Appeals from the United States District Court for the Northern District of Alabama.Before DUBINA, Chief Judge, CARNES, Circuit Judge, and SANDS, ^* District Judge.DUBINA, Chief Judge:

This appeal is the consolidation of three appeals brought by objectors to a class action settlement. The underlying case involved allegations that American Home Shield (“AHS”) engaged in a pattern of wrongly denying claims under its home warranty contracts. Two class action lawsuits resulted from these allegations, the first brought in California state court and this case, originally filed in the Northern District of Alabama. After the California court rejected a proposed settlement in its case, the parties in this case reached a settlement agreement, which the district court approved. Four sets of objectors appeal from the district court's confirmation of the settlement agreement. Their objections fall into the following categories: (1) objections to the class notice, (2) fairness challenges to the settlement, and (3) objections to the attorneys' fees awarded to class counsel.¹ For the reasons set forth below, we affirm the judgment of the district court.

I.

Appellee AHS is in the business of selling, issuing, and administering service contracts for certain home appliances and systems ranging from dishwashers to HVAC systems. In exchange for a fee, AHS contracted with the home owners to arrange for service technicians from their network to repair or replace the systems and appliances under circumstances specified under the home warranty contracts. AHS does not directly service or replace any appliance or system covered by the contracts, but separately contracts with service technicians to conduct the work at a reduced rate.

Since 2007, AHS's business practices have been the subject of two class action lawsuits alleging that AHS engaged in a pattern of wrongly denying claims for alleged failure to maintain or clean the system or appliance, deliberately breaching the service contracts, and entering into contracts with service technicians that incentivize technicians to find issues with the appliances that fall outside of the service contract.

The first class action complaint was filed in 2007 by Karon and L.B. Chip Edleson against American Home Shield of California in California state court (the “ Edleson action”). Three months later, Laura and Steven Faught filed their class action complaint in this case. Many of the allegations in the complaint were the same as in the Edleson complaint, but the Faughts' putative class was narrower and included “[a]ll persons, who in the last six years, have purchased a residential home warranty contract from AHS applicable to a house within the United States, and within the original contract term of one year, had a claim denied for repair or replacement of a major home component based on an alleged failure to clean or maintain.” [R. 1 at 7.] The putative class in Edleson extended to “all persons who made a claim under a home warranty insurance plan obtained from [AHS].” [R. 39, Ex. 1.]

The cases progressed in parallel proceedings. The parties in this case began court ordered mediation in September 2008. In November 2008, after being informed that the Edleson parties reached a tentative settlement agreement, the district court stayed this case.

In exchange for forfeiting their future rights to sue as a class, the Edleson settlement agreement gave the class members the right to resubmit their claims to a Review Desk run by AHS. It did not have any specific standards for adjudicating the claims and did not specify the qualification level for employees assigned to the help desk. The settlement also allowed AHS to offer class members a one year “FlexPlan” extension to their policies at a reduced rate. The settlement included a number of business practice changes including removing incentives from the contracts with service technicians that encouraged them to find problems that would support AHS denying claims under their home warranty contracts. Attorneys' fees under that agreement were set at $2.5 million and did not include any portion of the money received by the class members through the Review Desk.

After a fairness hearing, the Edleson court rejected the settlement. Chief among the Edleson court's concerns was that the settlement gave AHS the right to readjudicate claims. The court expressed concern that the class members would be giving up “viable” and “realistic” rights in exchange only for the hope “that a defendant that has allegedly not acted in good faith” would now act in good faith. The court was especially troubled by the fact that class members' rights to sue in the future might be limited based on the applicable statute of limitations. The Edleson court also disapproved of a provision that allowed AHS to sell additional coverage to class members during the resubmission process, noting “[t]his allows [AHS] to make additional money from the settlement rather than paying it out to plaintiffs.” The Edleson court concluded: “Without more concrete guarantees, plaintiffs ... have gotten very little in return for a waiver of claims against [AHS].... Any settlement must give the plaintiff class some tangible benefits or an unfettered right to bring legal claims against [AHS].”

Immediately following the Edleson court's rejection of the proposed settlement, two things happened: (1) the parties in this case resumed their mediated settlement negotiations, and (2) the Edleson plaintiffs moved for an injunction requiring AHS to keep records of denied claims and to amend their contracts with the service providers to delete any incentives to deny claims. Soon after, the Edleson court conducted a hearing on the request for the injunction. Before the Edleson court ruled on the injunction, however, AHS reached a tentative settlement agreement in this case. As a result, the Edleson court stayed its proceedings to permit the district court an opportunity to make a fairness determination on the proposed agreement.

Based on the outcome of settlement negotiations, the Faughts amended their class action complaint to include “[a]ll persons who have held a residential home warranty contract from AHS applicable to a house within the United States at any time since June 21, 2001.” The settlement agreement has several broad similarities with the proposed Edleson settlement agreement, including the proposed business practice changes and use of an AHS-run Review Desk for the resubmission of denied claims. As part of the settlement, class members forfeit their right to participate in class action lawsuits against AHS and instead must pursue any future claims in individual lawsuits. In exchange, they receive a number of benefits, including the right to resubmit claims to the Review Desk, staffing requirements designed to make the Review Desk more effective, and litigation incentives aimed at ensuring that AHS treats claimants fairly. Class counsel and AHS separately negotiated the class counsel's fee award. That award included a $1.5 million lump sum payment plus 25% of class members' cash awards from the Review Board process.

In granting preliminary approval of the settlement, the district court determined that the proposed settlement is significantly more beneficial to class members than the Edleson settlement and ordered notice be sent to the class members. In total, 1,543 class members requested exclusion or potential exclusion for an opt-out rate of 0.033%. Twenty-four class members and the State of Texas filed objections.

After conducting a fairness hearing, the district court approved the settlement, but reserved ruling on a provision that allowed the Faughts to bypass the Review Desk procedures established by the settlement and to collect a lump sum payment for their claims. The lump sum payment was in addition to the $10,000 incentive payment provided for the class representatives in the settlement. The district court also reserved ruling on objections to class counsel's fees.

By separate order, the...