Pearson v. Nbty, Inc., s. 14–1198
| Citation | 772 F.3d 778 |
| Decision Date | 19 November 2014 |
| Docket Number | 14–1245,14–1227,14–1389.,Nos. 14–1198,s. 14–1198 |
| Parties | Nick PEARSON, et al., Plaintiffs–Appellees/Cross–Appellants, v. NBTY, INC., et al., Defendants–Appellees, Theodore H. Frank, et al., Objectors–Appellants/Cross–Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
OPINION TEXT STARTS HERE
Elaine A. Ryan, Attorney, Bonnett, Fairbourn, Friedman & Balint PC, Phoenix, AZ, Charles C. Sweedler, Levin, Fishbein, Sedran & Berman, Philadelphia, PA, Stewart M. Weltman, Attorney, Stewart M. Weltman LLC, Chicago, IL, for Plaintiff–Appellee Nick Pearson, for Docket No. 14–1198.
Jeffrey Ian Carton, Denlea & Carton LLP, White Plains, N.Y., for Plaintiff–Appellee Richard Jennings, for Docket Nos. 14–1198 and 14–1389.
Stewart M. Weltman, Attorney, Stewart M. Weltman LLC, Chicago, IL, for Plaintiffs–Appellees Francisco Padilla, Cecilia Linares and Augustina Blanco, for Docket No. 14–1198.
Theodore H. Frank, Melissa Ann Holyoak, Attorneys, Center for Class Action Fairness, Washington, DC, for Objector Appellant, for Docket No. 14–1198.
Robert N. Hochman, Kara L. McCall, Attorneys, Sidley Austin LLP, Chicago, IL, for Defendants–Appellees, for Docket Nos. 14–1198, 14–1227, 14–1389 and 14–1245.
Joseph Darrell Palmer, Attorney, Law Office of Darrell Palmer, Carlsbad, CA, for Objector Appellants, for Docket No. 14–1389.
Before POSNER, ROVNER, and HAMILTON, Circuit Judges.
NBTY and its subsidiary Rexall Sundown manufacture vitamins and nutritional supplements, including glucosamine pills, which are dietary supplements designed to help people with joint disorders, such as osteoarthritis. See “Glucosamine,” Wikipedia, http:// en. wikipedia. org/ wiki/ Glucosamine (visited Nov. 18, 2014, as were the other websites cited in this opinion). Several class action suits have been filed in federal district courts across the country against NBTY, Rexall, and Target (a retail distributor of the pills, which are sold under brand names like “Osteo Bi–Flex” as well as in generic versions sold by pharmacies, such as CVS and Walgreen). The suits charge the defendants with violating several states' consumer protection laws by making false claims for glucosamine's efficacy, such as that it will “help rebuild cartilage,” “support renewal of cartilage,” help “maintain the structural integrity of joints,” “lubricate joints,” and “support [ ] mobility and flexibility.” The district court has jurisdiction of the case under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2).
Eight months after the plaintiffs filed suit in a federal district court in Illinois, class counsel in all six cases negotiated a nationwide settlement with NBTY and Rexall (for simplicity, we'll pretend there is a single defendant and call it “Rex-all”) and submitted it to that court for approval. For it is typical in class action cases of this sort—cases in which class counsel want to maximize the settlement and the defendants don't want to settle except for “global” peace—for the multiple class counsel to negotiate a single nationwide settlement and agree to submit it for approval to just one of the district courts in which the multiple actions had been filed.
The district judge approved the settlement, though with significant modifications. As approved, the settlement requires Rexall to cough up approximately $5.63 million—$1.93 million in fees to class counsel, plus an additional $179,676 in attorney expenses (attorneys' fees cover billable time and overhead expenses such as office space and secretaries, but clients typically are charged extra for such expenses as expert-consultant and expert-witness fees, PACER access, photocopies, and Westlaw research), $1.5 million in notice and administration costs, $1.13 million to the Orthopedic Research and Education Foundation, $865,284 to the 30,245 class members who submitted claims, and $30,000 to the six named plaintiffs ($5,000 apiece) as compensation for their role as the class representatives. The version of the settlement that had received preliminary approval had provided for even higher attorneys' fees—up to $4.5 million—with Rexall stipulating that it wouldn't challenge any attorney-fee requests by class counsel up to that amount. Such a stipulation is called a “clear-sailing” agreement.
The parties further agreed that any part of the $4.5 million that the district judge thought excessive compensation for class counsel would revert to Rexall (such an agreement is called a “reversion” or more commonly a “kicker” clause), rather than becoming available for distribution to the class members or to the Orthopedic Research and Education Foundation, which was to receive the difference between $2 million and what the class members received if they received less than that amount, which they did. The Foundation is not a class member; anything it received would be a “ cy pres ” award, explained later in this opinion. Finally, the approved settlement includes an injunction against Rexall's making certain claims (alleged to mislead) in the advertising or marketing of its glucosamine products for 30 months.
There are six appeals (for remember that the settlement embraces six class actions), which we've consolidated for decision. Several of the appellants are class members, led by Theodore H. Frank of the Center for Class Action Fairness, who, as class members are authorized to do by Fed.R.Civ.P. 23(e)(5), objected to the approval of the settlement. Class counsel are several law firms, which have cross-appealed, arguing that the district court should not have modified the settlement that the parties had agreed to. But we'll see that the problem with the district judge's decision is not that it leans too far in favor of the objectors, as class counsel contend, but that it doesn't lean far enough. Although appellate review of approval of class action settlements is limited, Williams v. Rohm & Haas Pension Plan, 658 F.3d 629, 634 (7th Cir.2011), it is far from pro forma, for we have described the district judge as “a fiduciary of the class, who is subject therefore to the high duty of care that the law requires of fiduciaries.” Reynolds v. Beneficial National Bank, 288 F.3d 277, 280 (7th Cir.2002).
The district judge valued the settlement at the maximum potential payment that class members could receive, which came to $20.2 million. That valuation, which played a critical role in the judge's decision as to how much to award class counsel in attorneys' fees, comprises $14.2 million for class members (based on the contrary-to-fact assumption that every one of the 4.72 million class members who had received postcard rather than publication notice of the class action would file a $3 claim), $1.5 million for the cost of notice to the class, and $4.5 million for fees to class counsel (the judge cut this amount but allowed the amount cut to revert to Rex-all pursuant to the kicker clause and adhered to the $20.2 million estimate of the overall value of the settlement). The judge excluded, however, both the cy pres award of $1.13 million in calculating the benefit to the class, for the obvious reason that the recipient of that award was not a member of the class, and the injunction, which he valued at zero, which was proper too, as we'll see.
The $20.2 million figure has barely any connection to the settlement's value to the class. Notice and fees, which together account for $6 million of the $20.2 million, are costs, not benefits. The attorneys' fees are of course not paid to the class members; and as we said in Redman v. RadioShack Corp., 768 F.3d 622, 630 (7th Cir.2014), The $14.2 million “benefit” to the class members was a fiction too. Only 30,245 claims were filed, yielding total compensation for the class members of less than $1 million.
Because the amount of the attorneys' fees that the judge wanted to award class counsel—$1.93 million—was only 9.6 percent of $20.2 million, he thought the amount reasonable. But as we said in the Redman case, the “ratio that is relevant ... is the ratio of (1) the fee to (2) the fee plus what the class members received.” Id. Basing the award of attorneys' fees on this ratio, which shows how the aggregate value of the settlement is being split between class counsel and the class, gives class counsel an incentive to design the claims process in such a way as will maximize the settlement benefits actually received by the class, rather than to connive with the defendant in formulating claims-filing procedures that discourage filing and so reduce the benefit to the class. But $20.2 million is of course not the value of the settlement, defined as the sum of the awards to the class and to its lawyers. The class received a meager $865,284. This means the attorneys' fees represented not 9.6 percent of the aggregate value but an outlandish 69 percent.
Had the judge approved class counsel's request for $4.5 million in attorneys' fees, those fees would have soared to 84 percent of the pot...
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