There have been a flurry of federal appellate court decisions this year and last scrutinizing and overturning class settlements (see In re HP Inkjet Printer Litig. and Radcliffe v. Experian, merely by way of example). That trend continued on August 2, 2013, with In re Dry Max Pampers Litigation, a case involving Pampers marketed with “Dry Max technology,” where the Sixth Circuit upset a settlement awarding class counsel $2.73 million in attorneys’ fees and the named plaintiffs $1,000 “per ‘affected child.’” The Court found it offered the class representatives and class counsel “preferential treatment” at the expense of unnamed class members, who received nothing save what the Sixth Circuit characterized as “worthless injunctive relief.” Though the latest decisions out of the Third and Seventh Circuits addressing the bona fides of attorneys’ fee awards in class settlements — see Kirsch v. Delta Dental and Silverman v. Motorola — held that the deals there passed muster, both sides of the bar would be well served by taking note of what went wrong in In re Dry Max.
The In re Dry Max settlement was negotiated shortly after investigations of the product in the U.S. and Canada, which originally spawned the consolidated litigation, exculpated the product. Class members were afforded the following relief, which the Sixth Circuit ultimately deemed “illusory”:
- (1) P&G reinstated a previously-offered refund program, for an additional year, entitling each household to a refund for one box of diapers upon presenting a receipt and UPC code for the product; and
- (2) P&G agreed, for two years, to add a sentence to its diaper packaging suggesting consumers call it or consult its website for more information concerning diapering, and further to add more information on diapering to its website.
Class member Daniel Greenberg (represented by the Center for Class Action Fairness) objected, arguing that the settlement was unfair because of the size of the fee award relative to the “utility of the injunctive relief.” While recognizing that “[m]ost class counsel are honorable,” the Sixth Circuit agreed and found that, here, it was “not particularly subtle” that class counsel enjoyed “preferential treatment” as compared to absent class members. The Court noted that class counsel took no depositions or written discovery and did not respond to P&G’s motion to dismiss (the case settled before it was fully briefed). Absent class members, meanwhile, received access to a pre-existing refund program that was “dubious on its face” and of “negligible” value. As for the labeling and website changes, the objector argued, and the Sixth Circuit again agreed, that it was “little more than an advertisement for Pampers.” Nor did the Court ascribe any significant value to the website disclosures since “typing ‘diaper rash’ into the Google search engine produces exponentially more links and information[.]” Accordingly, the Court held that the settlement was “not fair” under Rule 23.
The Court was also persuaded by the objector’s argument that the named plaintiffs were not adequate representatives by reason of the $1,000 “incentive awards” they would have received under the settlement. Since it appeared that these payments would have made the class representatives “more than whole,” they effectively “provided a disincentive for the class members to care about the adequacy of relief afforded unnamed class members, and instead encouraged the class representatives ‘to compromise the interest of the class for personal gain.’” Though refraining from announcing any “categorical rule” as to whether such payments are permissible (the Court has neither approved nor disapproved of such payments), the Court emphasized that Rule 23’s adequacy requirement mandates that the interests of the class representatives and those they purport to represent must be aligned. Here, comparing what the named class representatives would receive ($1,000 per affected child) and what the absent class members would receive (“illusory injunctive relief”), the Court concluded that the interests of the two groups were not “aligned.” Rather, they were plainly in conflict. Putting it simply, the Court stated, “There is no overlap between these deals: they are two separate settlement agreements folded into one.”
In re Dry Max and its ilk make clear that, now more than ever, courts are carefully scrutinizing the fairness of class settlements, weighing class counsel’s fee award against the relief (or lack thereof) they obtained for the class. While both sides to a settlement generally want to see it approved and move on, the defense bar can use decisions like In re Dry Max as bargaining chips at the settlement negotiating table. Where, as in In re Dry Max, the upside to the class is nominal — as warranted by the merits of the case, class counsel have good reason to negotiate fee awards that are likewise modest, reducing the overall payout for the settling defendant.