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In February 2018, I reported on a 20-state objection brief, filed with the U.S. Supreme Court, asking the Court to reverse the approval of the class action settlement in Gaos v. Google.  That deal would have distributed a few million dollars to nonprofit groups, while the AGs wanted money paid to real people, even if that meant holding a lottery to do it.  Today, although the Supreme Court reversed the settlement, it did so on standing grounds and did not address whether a class action can be settled solely through “cy pres” settlements to non-profits.

The Supreme Court cited its recent Spokeo v. Robins decision in which it held that plaintiffs must allege concrete harm, and not just a bare statutory violation, in order to have Article III standing to sue in federal court.  Spokeo was not the Court’s most edifying decision and lower courts have split wildly on what it means in practice.  The Court’s decision today didn’t address that split; it just told the lower courts to analyze the Gaos plaintiffs’ standing in light of Spokeo without opining on the issue one way or the other.

Justice Thomas dissented alone.  He expressed his disagreement with Spokeo, believing that if Congress made conduct illegal, violating that statute suffices to confer standing.  He then said he would have reversed the settlement.  In Justice Thomas’s view, if a settlement provides no benefit to class members, and looks to be solely a means to extinguish a claim, courts should not approve it.

Perhaps the biggest takeaway from today’s decision, therefore, is that eight of the nine Justices think differently from Justice Thomas on this issue.  How differently, only time will tell.

Last week, in Cline v. Touchtunes Music Corp., No. 18-1756,  the Second Circuit Court of Appeals upheld a Manhattan district judge’s decision to approve a low-cost class action settlement in what the judge termed a “nuisance” case, while basically zeroing out the $100,000 fee requested by the plaintiffs’ class counsel.

Defendants who have faced silly but not entirely motionable class actions can momentarily enjoy the schadenfreude of watching a plaintiff’s law firm come away with nothing for its efforts.  The problem with decisions like Cline, however, is that they may make plaintiffs’ counsel more hesitant to settle a cheap case on cheap terms.  For the class action defense bar, raising potential settlement costs is nothing to celebrate.

The facts of Cline are almost too silly to merit repeating.  The defendant provided a digital jukebox application to (for example) bars and restaurants.  Patrons could pay money to play songs, and the app’s terms told the patrons clearly that their songs weren’t guaranteed to play and that no refunds would be provided under any circumstances.  What the terms didn’t disclose, however, is that the restaurant manager had the ability to manually skip songs.  The plaintiff, ostensibly on behalf of a class of people whose songs were skipped, sued for the lost value—about 40 cents each—of not hearing the songs be played.

The defendant, after two tries, couldn’t quite get the whole suit dismissed.  A highly experienced district judge left alive a false advertising claim for the non-disclosure.  At that point, early last year, the parties agreed to a settlement.  About 166,000 patrons whose songs weren’t played, and for whom the defendant had contact information, received a code by email good for one free song play on any of the defendant’s jukeboxes.  Other people could file claims for codes, and 2,200 people did so.

The plaintiff’s counsel sought a $100,000 fee for themselves and a $2,000 incentive fee for the plaintiff.  The judge approved the settlement but not these fees.  He rejected the incentive award and, in place of the $100,000 fee, which plaintiffs’ counsel contended was their “lodestar” of hours worked, the judge instead granted a fee of 20 cents per song code that class members actually redeem within the one-year expiration period.  That fee is likely to be less than $1,000.  The plaintiffs’ counsel appealed that reduction, but the Second Circuit upheld it in a summary order, finding that the district judge acted within his discretion, especially in a “coupon”-type settlement.

What should not be lost in any analysis of Cline is this key statement in the Second Circuit’s opinion:  “[C]lass counsel’s lodestar fee application was not supported by contemporaneous billing records, and…no substantial explanation had been provided for a $10,000 ‘consulting fee’ for which reimbursement was sought.”  The Second Circuit thus reinforced that plaintiffs’ counsel absolutely can still seek lodestar-based fees even when settling for coupons or in-kind goods, provided that they support those fees with appropriate billing detail.

If plaintiffs’ counsel try to tell you that they don’t want to enter into a coupon or in-kind settlement because Cline makes them fearful of receiving no fee in the case, therefore, remind them that the problem in Cline wasn’t the settlement structure; it was the law firm’s failure to document its fees.  Don’t make that mistake, and Cline shouldn’t be an issue.  Low-value cases like Cline still should be able to settle on low-value terms.

 

It’s no secret that the Justice Department and state Attorneys General don’t like coupon settlements in class actions.  Since 2007, groups of state AGs have been objecting regularly to coupon settlements that would force class members to pay more money to defendants accused of consumer fraud.  On February 4, the Justice Department filed an amicus brief in Chapman v. Tristar Products, Inc., asking the Sixth Circuit to reverse approval of a coupon deal.

What’s most notable about this Chapman objection is that even though officials have been telling the class action bar for over a decade how not to structure coupon settlements, parties still occasionally poke the bear by proposing exactly the kinds of terms that these officials have said, over and over again, they will never condone.  Class action settlements still can work in federal court, but settling parties have to think very carefully about how to use them.  Restrictions like quick expiration, no ability to transfer, and a limited universe of products just won’t fly.

The plaintiffs in Chapman alleged that the defendant’s pressure cookers were defective, prone to explode if opened too quickly, and therefore worthless.  A federal judge in Ohio certified a class in 2017, after which the case settled.  Class members could receive warranty extensions and $72.50 coupons usable on their choice of only three new kitchen appliances the defendant sold with undiscounted price tags of $159 (not including shipping).  The coupons were non-transferable, non-agreeable, and expired after 90 days.  The Justice Department also noted that Amazon.com sold the same appliances for far less than the defendant did, thus making the coupons “essentially worthless.”  Only 13,000 people, or 0.4 percent of the 3.2 million class members, filed claims for these coupons (the process for which, among other things, required them to watch a safety video).

The restrictive terms and settlement hurdles alone likely would have been enough to ensure government opposition to the settlement, but the Chapman plaintiffs’ counsel compounded the problem by seeking a $2.3 million fee and justifying it based on what the Justice Department termed “erroneous assumptions about the value and redemption rate of the coupons.”

So what can a class action defendant do if it wants to make coupons a main component of a class settlement?  The Chapman brief offers a road map.

First, offer a cash alternative to the coupons.  The amount can be less than the coupon’s face value and it can take the form of “residual” cash value if class members don’t redeem their coupons.  The key is to avoid leaving class members with no choice but to fork over more money to the defendant if they want to obtain benefits from a consumer fraud settlement.

Second, make the coupons as permissive as possible.  Give them the longest expiration periods you can tolerate and allow class members to transfer them and aggregate them.  (In other words, let Jane give or sell her coupon to Joe and let Joe use multiple coupons together on the same purchase and thereby perhaps get an item for free.)  Make the coupon usable on the broadest possible range of your products and, if possible, treat the coupons as “rebates” so that class members can purchase the items from third-party sites and then have you refund the coupon amount.

Importantly, some defendants simply will not be able to offer a settlement with all of these features.  When a deal can’t meet these minimums, however, the parties have to be ready to explain to the court in detail why they are not feasible in the particular case.  This should be done proactively rather than waiting for objections that would be nearly inevitable.

Then, when plaintiffs’ counsel make their request for attorneys’ fees, remember that the Class Action Fairness Act, 28 U.S.C. § 1712(a), means exactly what it says:  If a settlement offers coupons, “the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed,” period.  Class counsel can instead seek a fee “based upon the amount of time [they] reasonably working on the action”—their lodestar, from which they can request a “multiplier”—but if they choose that route, they can never seek to justify a multiplier based on how class members theoretically might claim and redeem settlement coupons.

The Chapman settlement, like virtually all prior deals that drew government objections, violated all three of these rules, without what the government considered sufficient justification.  The Sixth Circuit may affirm the settlement anyway.  That seems unlikely, however, and in any event, the case has become longer and more expensive because of governmental objections that were predictable and avoidable.

On January 14, Plaintiffs in the consolidated case of Veera v. Banana Republic, LLC, et al., filed for approval of a preliminary class action settlement after Plaintiffs Veera and Etman successfully argued that “frustration” and “embarrassment” over unclear discounts is sufficient to meet the requirements for injury.

According to separate lawsuits filed against Banana Republic and The Gap, the companies displayed in-store signs promoting a class of merchandise for sale at a stated price (e.g., 40% off sweaters) or subject to a stated discount (e.g., “40% off your purchase”) without clearly and conspicuously identifying the items that were excluded from the offer. The lawsuits alleged that these signs were either not accompanied by any disclosure of limitations, or were accompanied by a disclosure so small and closely colored to the sign background as to not be noticeable.

In an action under California’s Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumers Legal Remedies Act (CLRA), Plaintiffs claimed that, in reliance on the signs, they selected various items for purchase at the advertised discount, and out of frustration and embarrassment, ultimately bought some of the items, even after learning that the discount did not apply.

Although a lower court granted summary judgment in favor of the retailers, the California Court of Appeals concluded that Plaintiffs met the requirements to allege injury. “Injury in fact is not a substantial or insurmountable hurdle,” the Court noted, “Rather, it suffices to allege some specific, identifiable trifle of injury.” The Court agreed with the Plaintiffs claim that, but for the allegedly misleading signs, Plaintiffs would not have made the clothing purchases (even after hearing of the non-discounted price at the register).

The parties agreed upon the proposed settlement hours before the class certification hearings. The key terms of the settlement provide that The Gap will provide a one-time coupon for the purchase of up to 4 items in a Banana Republic or The Gap store at 30% off regular price to certain customers who purchased items from The Gap or Banana Republic stores in California, for use on a future purchase. The Plaintiffs in the action will also receive $8,000 each under the proposed settlement. The Gap will also pay $1 million in fees and costs, and all costs of administering the proposed settlement.

A hearing is set for March 1st on the motion for preliminary approval of the settlement.

This proposed settlement serves as a reminder about the importance of clearly and conspicuously disclosing the limitations of any offer, including the terms of a sale. We will watch the California Court of Appeals for further willingness to allow cases to go forward even when Plaintiffs claim little to no injury beyond “embarrassment.”

The recent Netflix and Hulu documentaries about the Fyre Festival have thrust the failed event back into the spotlight. That was a few scandals ago, so for those of you who don’t remember it, here’s a short recap.

Billy MacFarland and Ja Rule wanted to host a luxury festival on a deserted island. They found an island that belonged to Pablo Escobar, and secured a lease on the condition that they wouldn’t mention the drug lord’s name. Not long after that, Fyre used Escobar’s name in a social media post. And not long after that, the company was forced to find a new deserted island – or find a way to make an inhabited one look deserted. (They chose option B.)

Meanwhile, a group of over 60 influencers – including Kendall Jenner and Emily Ratajkowski – got to work promoting the festival on Instagram, without disclosing that Fyre Logothey had been paid to do so. (According to some reports, the initial group of influencers were paid between $20,000 and $250,000 each.) This resulted in over 300 million impressions in 24 hours. The hype worked, and people started paying up to $12,000 for tickets.

Things on the ground were going less smoothly. When guests arrived, instead of finding the luxury accommodations, gourmet food, and big-name bands they were promised, they found FEMA tents, a food shortage, and none of those bands. If you’re wondering whether any of this is fraud, Ja Rule directly addressed that question in the Netflix documentary. During a phone call, he assured his colleagues that it’s not fraud – it’s just “false advertising.” (Note to Mr. Rule’s lawyer: maybe keep him off the witness stand.)

As MacFarland sits in jail and Ja Rule and his colleagues fight lawsuits, a federal judge gave a bankruptcy trustee permission to subpoena Kendall Jenner’s company, some of the agencies that represented other influencers, and other vendors who were paid to organize or promote the festival. It’s too early to tell what will happen next, but these developments are likely to lead to more scrutiny about how companies advertise on social media and use influencers.

We’ve posted about these issues many times before. To summarize:

  1. Social media posts are subject to advertising laws, so those posts must be truthful and not misleading;
  2. Influencers need to disclose their connections to the companies they are promoting; and
  3. Companies need to take steps to manage their influencers.

But if you don’t have time to read those posts, watch one of the documentaries, see what the Fyre organizers did, and do the opposite.

Defendants have had a nice run recently in winning pleading-stage dismissal of “reasonable consumer” false advertising cases.  That run came to an end yesterday, however, when the Second Circuit Court of Appeals in New York reversed the dismissal of claims regarding Kellogg’s “Cheez-It” crackers.  The front of the “Cheez-It” package prominently describes the crackers as “Whole Grain,” but as a quick look at the Nutrition Facts panel on the side label would confirm, the crackers’ main ingredient is enriched white flour, not whole grain.

New York, California, and numerous other states apply a “reasonable consumer” test to false advertising claims.  The test is meant to be objective, with courts asking whether an advertisement would mislead an objectively reasonable consumer, not whether the actual plaintiff was or was not misled.  Federal courts regularly, and rightly, dismiss false advertising claims at the pleading stage where, as one court put it in a “slack fill” case involving an over-the-counter pain reliever, “the[] failure to read an unambiguous tablet count does not pass the proverbial laugh test.”

Courts have been much less likely to see the humor, though, in cases where a food package includes statements that plaintiffs contend are affirmatively misleading.  In yesterday’s case of Mantikas v. Kellogg Co., the Second Circuit agreed with the plaintiffs, at least at the pleading stage.  In the Court’s view, “the large, bold-faced claims of ‘WHOLE GRAIN’” on the front of the package could be construed as “misleading because they falsely imply that the grain content is entirely or at least predominantly whole grain.”  Quoting an oft-cited Ninth Circuit case, the Court wrote that the Nutrition Facts panel did not “cure[] the deceptive quality of the ‘WHOLE GRAIN’ claims because “reasonable consumers should not be expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list in small print on the side of the box.”

The main good news in this bad outcome for the defendant is that the Second Circuit reiterated another core principle in cases like this:  When ruling on an advertising claim, courts must “consider the challenged advertisements as a whole, including disclaimers and qualifying language.”  Plaintiffs, in other words, cannot just include snippets of a package in their complaint and hope to avoid judicial scrutiny of the entire package at the pleading stage.

A second good sign is that the Second Circuit distinguished—and thus impliedly blessed—other district court decisions dismissing similar claims on “reasonable consumer” grounds.  In one case the Court examined, for example, the plaintiffs claimed to have believed that crackers advertised as “made with real vegetables” contained a larger amount of vegetables than they actually did.  The district court in that other case thought reasonable consumers know “the fact of life that a cracker is not composed of primarily fresh vegetables.”  In the Cheez-It case, by contrast, reasonable consumers “understand that crackers are typically made predominantly of grain” and “look to the bold assertions on the packaging to discern what type of grain.”  The case survived, therefore, only because the alleged affirmative misrepresentation went to a central and material fact about the food product’s nature.

Because of these limitations, the Second Circuit’s decision should not be viewed as anything other than the reaffirmation of an established principle:  Food product manufacturers cannot expect to win dismissal of a false advertising case at the pleading stage by claiming that an accurate ingredient label cures an affirmatively misleading material statement on the front of a package.  If, by contrast, a plaintiff’s purported read of an advertisement is objectively unreasonable, courts still can and should examine the entire package and dismiss claims that fail the “laugh test.”

In July, a DC District Court ruled that eBay could not compel a user of its services to arbitrate a dispute, even though the user had agreed to by bound by eBay’s User Agreement. That Agreement stated that the company had a right to modify the terms, and eBay had later modified those terms to include an arbitration clause for purposes of dispute resolution. Specifically, the Court held that eBay’s act of posting the updated terms did not constitute sufficient notice, and that the company had not presented proof sufficient to show that it had notified the user via email. Although the result is troubling for many companies who approach changes to website terms in the same manner that eBay did, the decision does provide some hints for what companies can do to provide support for arguments that their changes are enforceable.

Read our article in Digital Business Lawyer to learn more about the case and what you can do to help ensure that your website terms will be deemed enforceable.

The debate between two Third Circuit judges and a dissenting colleague in In re Johnson & Johnson Talcum Powder Products Marketing, Sales Practices and Liability Litigation, a case decided last Thursday, is the best distillation I have seen of a debate raging in federal and state courts throughout the country:  When, if ever, can a plaintiff who purchased and used a product without incident, and did not pay a price premium for it, sue for “consumer fraud”?

The plaintiff, Mona Estrada, purchased baby powder made from talc.  She alleged, and of course the defendant disputed, that baby powder made from talc can cause ovarian cancer.  But Estrada herself neither contracted cancer nor alleged that her use of the product put her at higher risk of contracting cancer.  Instead, she sued for “consumer fraud” under California law, contending that the defendant implicitly promised a safe product but did not live up to that promise.  (The case was transferred to the District of New Jersey as part of an MDL.)

Estrada alleged that she continues to buy baby powder, although she now chooses powder made from corn starch rather than talc.  She conceded that  when she bought the talc product, she did not pay a “price premium” for it.  She also conceded that that the defendant did not advertise its product as better than competing products.  Of equal importance to the majority, she conceded that she used the entire product she purchased and that it delivered all of the benefits the defendant explicitly promised.  On both grounds, this distinguished her claims from those in the California Supreme Court’s Kwikset Lock case, where plaintiffs alleged they paid a premium for locks falsely advertised as “Made in the USA.”

The Third Circuit panel thus characterized, and dismissed, Estrada’s allegations on the following terms: she “purchased and received Baby Powder that successfully did what the parties had bargained for and expected it to do; eliminate friction on the skin, absorb excess moisture, and maintain freshness.”  Absent a price premium or a promise of superiority, she simply had nothing about which to complain, and her “wish to be reimbursed for a functional product that she has already consumed without incident does not itself constitute an economic injury within the meaning of Article III.”

Defendants facing “no injury” consumer fraud class actions can stop here, celebrate the Third Circuit’s conclusion, and figure out the best way to bring it to their own courts’ attention.  Particularly where the absence of a pleaded economic injury can be characterized as a failure of statutory standing, which would preclude a claim from being litigation in federal court or state court, rather than just a failure of Article III standing, which might allow the plaintiff dismissed from federal court to replead claims in state court, the Third Circuit’s precedential decision may become a powerful defense weapon.

Where the debate will rage, however, is in cases where plaintiffs allege consumer fraud on the basis that a product “may” be “unsafe,” even if that alleged risk did not manifest in the plaintiff’s own case.

From the majority’s perspective, Estrada’s “own allegations require us to conclude that the powder she received was, in fact, safe as to her.”  She “chose not to allege any risk of developing ovarian cancer in the future,” and “[g]iven the absence of such an allegation, Estrada cannot now claim that she was ever at risk of developing ovarian cancer.”  The court therefore construed her claim as alleging “benefit of the bargain,” but the claim fell short because she failed to allege “that the economic benefit she received in purchasing the powder was worth less than the economic benefit for which she bargained.”

Judge Julio Fuentes, in dissent, said he would have held that “the safety of the product—as a general proposition, not specifically as to Estrada herself—was an essential component of the benefit of Estrada’s bargain.”  Judge Fuentes would have allowed Estrada to proceed to discovery, and if she could have established that the powder was indeed unsafe, “[t]he price increase…caused by the company’s alleged misrepresentation as to safety” may well have been “the total sum she paid for the product.”  In other words, she could have claimed a full refund, even though she purchased and used the product, it delivered its promised benefits, and it caused no harm.

Last week’s decision may not be the end of the road in this case.  The majority and dissent argued over whether the decision conflicts with two other Third Circuit precedents that found standing to exist, one involving event tickets and another involving prescription eye drops.  En banc review, therefore, is at least possible.  If the panel’s decision stands, however, its application in the lower courts, and its persuasiveness in federal and state courts elsewhere, will be fascinating to observe.

Lawyers who file “slack-fill” cases against food manufacturers found a friendly venue in Missouri.  Missouri has a broad consumer fraud law and multiple courts have denied motions to dismiss slack-fill claims pleaded under that statute.  But the real fight in class actions—where the money is, in a bank robber’s parlance—is over class certification, and on Tuesday, a Missouri judge denied certification in one of the closely-watched slack-fill cases against a candy maker.

In White v. Just Born, Inc., a Missouri case against the maker of Mike and Ike® candies, it was no great shock that the Court denied multi-state class certification.  Convincing a court to certify a multi-state class is a tough slog for plaintiffs in any state law-based case, especially so if the case has only one plaintiff, rather than a plaintiff from each of the states in question.  Even a single-state class can pose the threat of massive statutory damages, however, so the real victory in White was the Court’s refusal to certify even a Missouri-only class.

The plaintiff in White bought two boxes of the defendant’s candy at a dollar store.  He pleaded that he personally “attached importance” to the “size” of the candy boxes and thought he was buying “more Product than [he] actually received.”  Bully for him, the Court thought, but “the question of whether any [consumer fraud] violation injured each class member will require individualized inquiry” because “if an individual [already] knew how much slack-fill was in a candy box before he purchased it, he suffered no injury.”  It does not matter at the class certification stage that a “reasonable consumer” may have been deceived.  What matters instead is whether the practice actually caused injury to all putative class members in a common and centrally determinable manner. In a slack-fill case over a dollar’s worth of candy, it seems, it cannot. Continue Reading Slack Fill Plaintiffs May Win Battles But Lose the War

Early this year, a Ninth Circuit panel upended a major nationwide class action settlement because it found that the District Court had not sufficiently considered material differences among the 50 states’ relevant laws.  I called that decision—now likely headed for en banc review–“Regrettable But Forgettable” because the district court should be able to correct the error the Ninth Circuit identified.  The district court had not conducted any predominance analysis at all, which always is required, even for settlement classes.  Had it done so, it very likely could have found that for settlement purposes, with no questions for a jury to try, variations in state law would not have been material.

Yesterday, the Second Circuit reminded us that for litigation classes, variations in state laws absolutely can and should tank class certification.  Langan v. Johnson & Johnson Consumer Cos., No. 17-1605 (2d Cir. July 24, 2018) is a “natural” case, challenging that label on two several baby-oriented bath products.  The plaintiff allegedly purchased some in Connecticut and contended that 20 other states have similar consumer fraud laws.  The district court certified a 21-state class, after which J&J successfully petitioned the Second Circuit, under Rule 23(f), to hear an interlocutory appeal. 

J&J tried to argue that the plaintiff lacked Article III (constitutional “case or controversy”) standing to sue on behalf of purchasers in other states, but the Second Circuit rejected that contention.  “[A]s long as the named plaintiffs have standing to sue the named defendants, any concern about whether it is proper for a class to include out-of-state, nonparty class members with claims subject to different state laws is a question of predominance under Rule 23(b)(3), not a question of ‘adjudicatory competence’ under Article III.”  The court recognized some tension in case law over this question, but thought that Supreme Court guidance counseled treating “modest variations between class members’ claims as substantive questions, not jurisdictional ones.” Continue Reading Second Circuit Bounces Multistate “Natural” Class. Now, Keep An Eye On the Ninth Circuit