Judge Richard Posner of the Seventh Circuit Court of Appeals has unleashed another zinger at class-action attorneys, trashing a settlement over joint-pain pills that would have paid attorneys $2 million in fees, more than double what their clients got. And in so doing, he cites no less an authority than FORBES, specifically a May post on this blog.
Posner, ruling in favor of objectors in Pearson v. NBTY, outlines a series of conflicts and deceptions that any class-action lawyer worth her salt would sue over in an instant. But in this case it was the lawyers who perpetrated them, with the help of a judge who was all too willing to overlook the economic realities of the consumer class-action business.
"Class counsel could have done much better by the class had they been willing to accept lower fees,” Posner writes. “But realism requires recognition that probably all that class counsel really care about is their fees — for $865,284 spread over 12 million class members is only 7 cents apiece.”
The lawsuits, all six of ‘em, accused
The cases were consolidated and then lawyers at Denlea & Carton, Bonnett Fairbourn Friedman & Balint, and Levin Fishbein Sedran and Berman set to the real work: Negotiating a settlement that would end NTBY’s liability forever and give them a nice fee.
It took all of eight months from the first federal filing to work out a deal in which the company agreed to pay as much as $20.2 million in refunds. An estimated 4.7 million class members stood to get $3 a bottle for up to four bottles if they waded through a 10-page legal document online and mailed in their claim; if they'd kept their receipts they could get $5 a bottle up to 10 bottles. The lawyers would ask the court for $4.5 million in fees under a reversion, or “kicker” clause that remitted back to the defendant any portion of the fee request the judge didn’t authorize.
Since nobody involved thought anywhere close to 4.7 million people would mail in claims for $3 or $5 a bottle (the actual number was 30,245), the lawyers also arranged for Rexall to pay $1.1 million to the Orthopedic Research and Education Foundation, which had absolutely no connection to the case other than it studies bones and joints and somebody among the lawyers thought it would be nice to give them a big check.
Oh, and there was a 30-day “injunction” under which Rexall had to make slight labeling changes, after which it could revert to the language it had been using for 10 years without fear of being sued again.The plaintiff lawyers spent some money on an economic expert, Keith A. Reutter, who said the labeling changes were worth $46 million to consumers. Even U.S. District Judge James Zagel, who otherwise seemed disinclined to question the settlement, valued that component at zero.
So what’s wrong with this deal? Let Judge Posner count the ways. First, the “kicker” clause: Class-action lawyers love them because they think they are a clever way to keep busybody objectors like Ted Frank of the Center for Class Action Fairness, who was an objector here, from breaking up their deals. If any fee reduction flows back to the company, the class members have nothing to gain by challenging the fee, see? No standing to sue! That’s what you go to law school for!
But Posner called it “a gimmick” and did a favor to consumers everywhere by saying there should be “a strong presumption for its invalidity.” That’s judging!
Next the fee. Judge Zagel apparently bought the $20 million estimated value of the settlement, even though a vanishingly small number of consumers actually avail themselves of class actions. His proposed $2 million fee was only 9.6% of that. But Posner – citing my May 8 post on the topic – dismisses the $20 million figure as having “barely any connection to the settlement’s value to the class.” Posner proposed a new rule that maybe judges will start following: The fee should be judged according to what class members actually received and the fee itself, since defendants don’t care whether their dollars go to class members or lawyers.
Adding the fees into the equation, he said, “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.”
In this case the class received a grand total of $865,284, Posner says, so the fees weren’t 9.6% “but an outlandish 69 percent.” He also had a problem with the rate of $538 an hour , which implies “few if any associates or paralegals had actually worked on the case, even though most of the legal work was routine trial preparation.” Another proposed rule: Judges should appoint an independent auditor, Posner said, authorized under Federal Rules of Evidence 706, to evaluate billing rates.
In this case the fee should have ranged “between $436,642 and $865,284 — a far cry from the $1.93 million that the judge awarded, and absurdly far from the $4.5 million that class counsel requested, with the connivance of Rexall, which doubtless looked forward to recapturing , as it did, a big chunk of that amount.”
Next, the claims process:
It’s hard to resist the inference that Rexall was trying to minimize the number of claims that class members would file , in order to minimize the cost of the settlement to it. Class counsel also benefited from minimization of the claims , because the fewer the claims, the more money Rexall would be willing to give class counsel to induce settlement.
How about that contribution to an unrelated charity? Posner clearly doesn’t think much of cy pres, the hopelessly tortured revival of an ancient legal concept designed to steer money from obsolete trusts to new causes. Rather than give the money away, Posner says, the claims process could have been simplified or Rexall simply could have mailed checks to the 4 million people who got class notification postcards. That is what lawyers are paid for, to negotiate the best possible terms for their clients.
Finally, Posner took a slap at one of the lawyers who thought it would be clever to quote the judge’s own words at him, in which Posner suggested “judges should not substitute their own judgment as to optimal settlement terms.”
That quotation is from 34 years ago and in the decades since judges have accrued much more experience with class actions and have learned that class action settlements are often quite different from settlements of other types of cases , which indeed are bargained exchanges between the opposing litigants. Class counsel rarely have clients to whom they are responsive. The named plaintiffs in a class action, though supposed to be the representatives of the class, are typically chosen by class counsel; the other class members are not parties and have no control over class counsel. The result is an acute conflict of interest between class counsel, whose pecuniary interest is in their fees, and class members, whose pecuniary interest is in the award to the class.
The settlement, a selfish deal between class counsel and the defendant , disserves the class. Class counsel shed crocodile tears over Rexall’s misrepresentations, describing them as “demonstrably false,” “consumer fraud,” “false representations,” and so on, and point ed out that most of the consumers of Rexall’s glucosamine pills are elderly, bought the product in containers the labels of which recite the misrepresentations — and number some 12 million. Yet only one-fourth of one percent of these fraud victims will receive even modest compensation, and for a limited period the labels will be changed, in trivial respects unlikely to influence or inform consumers. And for conferring these meager benefits class counsel should receive almost $2 million?
Couldn’t have said it better myself.
