Seventh Circuit Rejects Unbalanced “Division of Spoils” Between Class Counsel and Class Members in RadioShack Settlement

In Redman v. RadioShack Corp., the Court of Appeals for the Seventh Circuit, in an opinion by Judge Richard Posner, reversed and remanded the district court’s judgment approving the settlement terms for a class action filed against RadioShack Corp. alleging violation of the Fair and Accurate Credit Transactions Act. The court expressed concern about “the division of spoils between class counsel and class members” and found it likely that “each class member has a valid claim to a good deal more than one $10 coupon, and it would seem therefore that the equities favor a reallocation of some of what we are calling the spoils from class counsel to class members who have submitted claims for the coupons.”

In May of 2013, “the named plaintiffs (realistically, class counsel) agreed with RadioShack on the terms of settlement” under which each class member who responded to the notice of settlement and selected to participate would receive a $10 RadioShack coupon. Ultimately, however, only about 83,000 out of an estimated 16,000,000 class members, approximately 0.5% of all class members, submitted claims for coupons.

The Seventh Circuit characterized the magistrate judge’s conclusion that the class generally approves of the settlement because over 99.99% of members did not object as “naïve.” According to the court, “[t]he fact that the vast majority of the recipients of notice did not submit claims hardly shows ‘acceptance’ of the proposed settlement: rather it shows oversight, indifference, rejection, or transaction costs.” The panel also found that the magistrate judge “questionably treats one-half of one percent as being a ‘considerable portion’” of class members approving the settlement.

Regarding the allocation of the settlement amount, the Seventh Circuit explained that “[t]he ratio that is relevant to assessing the reasonableness of the attorneys’ fee that the parties agreed to is the ratio of (1) the fee to (2) the fee plus what the class members received.” Therefore, “in a case in which the agreed-upon attorneys’ fee is grossly disproportionate to the award of damages to the class,” one solution is “to increase the share of the settlement received by the class, at the expense of class counsel.” Moreover, in analyzing reasonableness of the attorneys’ fee, “the central consideration is what class counsel achieved for the members of the class rather than how much effort class counsel invested in the litigation.”

Thus, the opinion makes it clear that “[t]he judge asked to approve the settlement of a class action is not to assume the passive role that is appropriate when there is genuine adverseness between the parties,” but rather “must assess the value of the settlement to the class and the reasonableness of the agreed-upon attorneys’ fees for class counsel, bearing in mind that the higher the fees the less compensation will be received by the class members.” Consequently, it is critical that class counsel and defense counsel take caution when negotiating a class settlement and strive to fashion a resolution that will yield a reasonable participation rate from class members but avoid unreasonable counsel fees.

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