Synfuel Technologies v. Dhl Express (Usa)

• Decision Date: 11 September 2006
• Docket Number: No. 05-2914.,No. 05-1450.,No. 05-3022.,No. 05-1596.,05-1450.,05-1596.,05-2914.,05-3022.
• Citation: 463 F.3d 646
• Parties: SYNFUEL TECHNOLOGIES, INC., Plaintiff-Appellee, v. DHL EXPRESS (USA), INC., Defendant-Appellee, Appeals of: Kearney D. Hutsler, P.C., et al., Joel M. Shapiro, and W. Andrew Hoffman, et al., Objectors-Appellants, and Cross-Appeal of: Korein Tillery, Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

463 F.3d 646

SYNFUEL TECHNOLOGIES, INC., Plaintiff-Appellee, v. DHL EXPRESS (USA), INC., Defendant-Appellee, Appeals of: Kearney D. Hutsler, P.C., et al., Joel M. Shapiro, and W. Andrew Hoffman, et al., Objectors-Appellants, and Cross-Appeal of: Korein Tillery, Cross-Appellant.

No. 05-1450.

No. 05-1596.

No. 05-2914.

No. 05-3022.

United States Court of Appeals, Seventh Circuit.

Argued November 28, 2005.

Decided September 11, 2006.

Steven A. Katz (argued), Douglas R. Sprong, Korein Tillery, St. Louis, MO, for Plaintiff-Appellee.

Jeffrey P. Lennard, Mark L. Hanover (argued), Leah R. Bruno, Sonnenschein, Nath & Rosenthal, Chicago, IL, for Defendant-Appellee.

John J. Pentz, Maynard, MA, Kearney D. Hutsler, III (argued), Birmingham, AL, for Appellant, Joel M. Shapiro.

Robert J. Stein, III, Stein Bogot, Chicago, IL, Kearney D. Hutsler, III, Birmingham, AL, for Appellant, Kearney Dee Hutsler.

W. Jeffrey Muskopf, Freeark, Harvey, Mendillo. Dennis, Wuller & Cain, Belleville, IL, Edward W. Cochran (argued), Shaker Heights, OH, for Appellants, W. Andrew Hoffman, Pritchard, McCall & Jones, Professional Asset Strategies, Inc., Asset Strategies, Inc. and N. Albert Bacharach, Jr.

Steven A. Katz (argued), Korein Tillery, St. Louis, MO, for Appellant, Korein Tillery.

Before KANNE, ROVNER, and WOOD, Circuit Judges.

WOOD, Circuit Judge.

Airborne Express, Inc. (now known as DHL Express (USA), Inc., but referred to as "Airborne" throughout this opinion) is in the business of delivering packages. In 2002, Synfuel Technologies, Inc., filed this lawsuit on behalf of itself and other Airborne customers claiming that the shipper's practice of charging customers a five pound default rate if they failed to identify the weight of their package violated federal common law. After the district court denied Airborne's motion to dismiss, the company decided to come to the table. A settlement worked out by the parties proposed to compensate class members with up to four pre-paid Airborne shipping envelopes or $30 in cash and to require Airborne to make changes to its billing practices. Several class members filed objections to the settlement, maintaining, among other things, that the compensation provided to class members was nominal. Nevertheless, after a hearing, the district court approved the settlement and awarded class counsel over $600,000 in attorneys' fees.

Several objectors filed appeals. All the objectors argue that the district court lacked jurisdiction over this suit. Objectors Kearney D. Hutsler, P.C., and Thompson, Hutsler & Carson (the "Hutsler objectors") additionally contend that the settlement is unfair to the class members. Objector Joel Shapiro argues that the settlement notice approved by the district court was insufficient. Objectors W. Andrew Hoffman of the Hoffman Legal Group, Pritchard, McCall & Jones, LLC, Professional Asset Strategies, Inc., Asset Strategies, Inc., and N. Albert Bacharach, Jr. (the "Hoffman objectors") argue that the district court wrongly denied their motion to intervene. Finally, class counsel Korein Tillery appeals the district court's attorneys' fees award, contending that it was too low.

We conclude that subject matter jurisdiction exists, although based on diversity jurisdiction, not federal common law. On the merits, we vacate the district court's approval of the settlement agreement because the court did not adequately evaluate whether the settlement is fair to class members. We do not reach the other issues raised by the objectors and class counsel.

I

Prior to this lawsuit, if a customer shipping a Letter Express package (an envelope intended to carry eight ounces or less at a special fixed rate) with Airborne failed either to indicate the actual weight of the package on the airbill or to write the number "1" in the weight section, she was charged a default rate equivalent to the cost of sending a five pound shipment. The actual cost of these shipments varied depending on the customer's particular arrangement with Airborne, but the record indicates that the default charge was typically about $5 higher than the regular Letter Express rate.

In April 2002, Synfuel filed a complaint against Airborne, asserting that the company's practice of charging a default rate constitutes a "penalty" and that "[f]ederal common law prohibits the imposition of a penalty, as opposed to liquidated damages, under any contract." Although Synfuel filed the initial suit only on its own behalf, an amended complaint added class allegations and sought to certify a class made up of "All Airborne Express, Inc. customers who have been assessed Letter Express charges based on a five pound default rate within the last ten years." Airborne moved to dismiss the suit, contending that application of a default rate was not a penalty but rather "an alternative contractual rate that determines how the sender will be charged for shipment." In support of this argument, Airborne attached a copy of one of its airbill forms, which states on its face: "If you fail to record the weight of the shipment on the airbill at the time of tender, we may, at our discretion, apply either a default rate or an additional service charge."

In October 2002, the district court denied Airborne's motion to dismiss, reasoning that "the default weight provision resembles a penalty provision, rather than a liquidated damages provision or an alternative contract." The parties then entered into settlement discussions, eventually reaching an agreement in October 2003. The proposed settlement defines a settlement class of Airborne customers who were charged the default rate between April 11, 1992, and November 30, 2003. It allows each class member to submit a proof of claim form and supporting documentation and receive pre-paid Letter Express packages, worth approximately $13 each, according to the following schedule:

                  1-3 default charges = 1 package
                  4-7 default charges = 2 packages
                  8-12 default charges = 3 packages
                  12+ default charges = 4 packages
                

Alternatively, a class member may opt to receive a cash payment instead of the pre-paid packages:

                  1 default charge = $2.50
                  2 default charges = $5.00
                  3 default charges = $7.50
                  4-6 default charges = $2.00 per
                  charge
                  >6 default charges = $1.50 per charge
                  up to a maximum of $30
                

A class member who submits a proof of claim form without providing supporting documentation is entitled to a single pre-paid Letter Express package.

In addition to compensating class members directly, the settlement requires Airborne to "implement new ... training/enforcement measures intended to substantially increase the likelihood that packages are properly identified as Letter Express packages and that customers will include the necessary information in airbills," and it requires Airborne drivers to fill in missing package weights on airbills. The agreement does not, however, altogether prohibit Airborne from charging the default rate. Finally, the settlement calls for Airborne to pay class counsel Korein Tillery $4.95 million in attorneys' fees and up to $45,000 in costs, and for class counsel to petition the court for an incentive award of $10,000 to be paid to Synfuel.

The district court conditionally certified the settlement class, approved a notice to be mailed to over 240,000 potential class members and printed in several national-circulation publications, and scheduled a fairness hearing for April 2004. By the date of the hearing, approximately 7,000 individuals (a paltry three percent) had filed proofs of claim and eight objections had been filed.

After hearing oral argument by the parties and objectors at the fairness hearing, the district court approved the settlement in a January 2005 order. The court rejected the complaint raised by the Hutsler objectors that the settlement provided insufficient compensation to class members, stating that it was "generous in light of the fact that Plaintiff's case is subject to a number of strong defenses." The district court also rejected the argument raised by objector Shapiro that the notice provided to class members was inadequate because several publications incorrectly stated that claims were due by June 23, 2004, as opposed to the deadline called for in the agreement of 60 days after final approval of the settlement. The Hutsler objectors and Shapiro filed timely appeals of the district court's approval of the settlement.

After a separate hearing, the court awarded class counsel Korein Tillery $600,250 in fees, significantly less than the settlement agreement contemplated. In response to this order, the Hoffman objectors, who had not previously appealed the district court's approval of the settlement almost a year earlier, filed a motion to intervene to "preclud[e] reversion of the $4.4 million fee reduction to [Airborne]." The district court denied this motion because, among other reasons, it was untimely and class counsel had already filed a motion seeking "the exact same relief."

II

A

Although the issue of subject matter jurisdiction was not addressed below, it should have been; only after several supplemental filings have we finally been able to assure ourselves that the district court's jurisdiction was proper. Before the district court, class counsel maintained that jurisdiction was proper under 28 U.S.C. § 1331 because its claim arose under "federal common law." This is obviously wrong. Later, the possibility of diversity jurisdiction under 28 U.S.C. § 1332 emerged; we discuss that below.

The Supreme Court has stressed that, when it comes to jurisdiction, the "cases in which judicial creation of a special federal rule would be justified ... are ... few and restricted," Atherton v. FDIC, 519 U.S. 213, 218, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997) (quoting O'Melveny & Myers v. FDIC, 512 U.S. 79, 87, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994)), and are limited to those involving "uniquely federal interests." Boyle v. United Technologies Corp., ...