This month, we’ve seen a couple of cases dealing with class action settlements and neither of them, frankly, leaves us with much confidence in the process.  We’re referring to Dennis v. Kellogg Co., ___ F.3d ___, 2012 WL 2870128 (9th Cir. July 13, 2012), and In re Budeprion XL Marketing & Sales Litigation, 2012 WL 2527021 (E.D. Pa. July 2, 2012).

The Ninth Circuit Dennis (we’d add “the Menace” to the name) case involved food, not drugs. It is a poster child for the abuse of “cy pres” distribution in a class action settlement − so much so that even the Ninth Circuit, notoriously liberal on such things, couldn’t stomach it.  California has become a center of food class action litigation, and in this particular instance the charge was that the defendant advertised certain cereals as “scientifically proven to improve children’s cognitive functions for several hours after breakfast.”  2012 WL 2870128, at *1.  For present purposes it doesn’t matter whether the allegation has any merit or not, since the action was settled.

But what a settlement:

  • A “claims-made” fund of $2.75 million where class members able to prove their purchases could get up to $15 (three boxtops) in refunds.  Anything left over would be distributed cy pres to “charities chosen by the parties and approved by the court.”  Id. at *2.
  • An in-kind cy pres distribution of “$5 million worth” of the defendant’s food “to charities that feed the indigent,” with valuation apparently left to the defendant (although this is not clear).  Id.
  • The defendant would refrain from making the challenged claim for three years, but would be allowed to make a related claim of “11% better attentiveness” proven by “clinical studies.”  Id.
  • Counsel fees for class counsel of $2 million.  Id.

According to class counsel, the total amount of refunds paid from the claims-made fund was $800,000.  Id. at *2 n.1.  Even though this figure was unverified and counsel had every incentive to overstate the payout, we’ll take it as face value.

Thus, of the nominal $9.75 million in value that purportedly changed hands (we’ll pass over the interesting discussion of the “value” of $5 million in-kind contribution, its tax deductibility, and whether the donation would have been made in any event, see id. at *7), all of $800,000 went to the supposed class.  That’s a little more than 8%.

The attorneys for the class took home two and a half times more dollars than did the entire class.  Divided by the hours the class attorneys spent, they received an hourly rate of $2100 − that’s right, over two-thousand dollars an hour.  2012 WL 2870128, at *1.

On top of that, the injunctive relief was worthless to the class, since membership in the class was defined as past purchasers (during the time of the challenged ads) and the injunction only governed future conduct.  Any overlap between past and future cereal purchasers was entirely coincidental and had nothing to do with the structure of the class settlement.

Notice was by publication only − with the usual excuse that it would be too expensive to let class members actually know that most of their supposed recovery was going to other people.

How could money supposedly owed to a class be given away to others not involved in the litigation in any way (putting aside the $2100 per hour fee)?  Welcome to the wonderful world of cy pres.

Cy pres is a doctrine of convenience, made up by courts to give away money theoretically owed to unwitting members of questionable classes to others who have the advantage of not costing anything to identify.  Its real purpose is, as in Dennis, is to inflate the denominator of a class action settlement to justify a higher fee, even though the litigation itself is incapable of benefiting the purportedly injured class directly.  As stated in Dennis:

Used in lieu of direct distribution of damages to silent class members, this [cy pres] alternative allows for aggregate calculation of damages, the use of summary claim procedures, and distribution of unclaimed funds to indirectly benefit the entire class.

2012 WL 2870128, at *4.  That’s “indirectly” as in “not at all.”

Cy pres started out with residual − so-called “unclaimed” − funds, such as the remaining $1.95 million in the “refund” pot in Dennis.  But the doctrine has metastasized to include the practice of simply giving class funds to charities from the get-go (in Dennis the $5 million in in-kind food) without any pretense of it ever belonging to the supposed plaintiffs in the class.

One major reason for both the creation and metastasis of cy pres is, of course, unduly permissive substantive law.  When the law is interpreted in such a way as to allow minuscule claims by unidentifiable plaintiffs − as the California consumer protection statutes have been − such rulings will inevitably create pressure for corresponding distortions of procedural law.  But even cy pres is supposed to have some limits.  One is that the charities have something to do with the class:

Not just any worthy recipient can qualify as an appropriate cy pres beneficiary. To avoid the many nascent dangers to the fairness of the distribution process, we require that there be a driving nexus between the plaintiff class and the cy pres beneficiaries.

2012 WL 2870128, at *4 (citations and quotation marks omitted).

What was the supposed nexus between cereal buyers and feeding the indigent?

According to class counsel food is food is food.  That was too much, even for the liberal Ninth Circuit:

[C]ounsel frequently asserted that donating food to charities who feed the indigent relates to the underlying class claims because this case is about “the nutritional value of food.”  With respect, that is simply not true, and saying it repeatedly does not make it so.  The complaint nowhere alleged that the cereal was unhealthy or lacked nutritional value.  And no law allows a consumer to sue a company for selling cereal that does not improve attentiveness.

Id. at *6.

That was good as far as it went, but then what?  Did the court shut down the litigation by pointing out its bogus nature since the supposedly injured persons could never be identified?  Did the court hold that this kind of claim was ill-suited to litigation at all and should be pursued, if at all, by the responsible government agencies?

No, of course not.  This is the Ninth Circuit.

Dennis simply suggests that different charities would have been more appropriate:

Thus, appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising.

2012 WL 2870128, at *6.

Amazing.  What the court suggests as “appropriate” is that class action lawyers divert client funds to supposed charities “dedicated to . . . redressing injuries caused by false advertising.”  Heck, in the rest of the country class action lawyers at least have to pay for their own advertising.  After Dennis they can found non-profits and use money ostensibly belonging to their purported clients to bring in more business − a self-perpetuating litigation machine.

Cy pres is one of a number of purely utilitarian things that courts have done over the years to encourage the proliferation of mass litigation.  There’s no basis in any statute or common-law tort doctrine for it.  Its source is murky at best − an analogy to equitable powers involving trusts and estates (that is, voluntary bequests, as opposed to damages extracted through litigation):

Although the cy pres doctrine originated in the area of wills as a way to effectuate the testator’s intent in making charitable gifts, federal courts now frequently apply it in the settlement of class actions where the proof of individual claims would be burdensome or distribution of damages costly.

Dennis, 2012 WL 2870128, at *4.  “Frequently.”  But as Dennis pointed out “saying it repeatedly does not make it so.”

The alternative, of course, would be for courts to admit that some disputes simply do not belong in the judicial system, at least as private suits.  That’s what we have regulators for − to step in for the public as a whole and fine wrongdoers in cases of prohibited conduct, regardless of injury.  But that result would mean no attorneys fees, and also no sycophantic charities knocking at the door and awarding “honors” to their patrons, those being the lawyers and judges.

We’d love to see one of these cy pres cases get to the Supreme Court.  We think cy pres could be the Lexecon (that is the Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998), decision reining in another form of ultra vires judicial action) of the Twenty-First Century, that is if another of our pet peeves (cost assessment orders against non-parties) doesn’t make it there first.

The second recent class action settlement case that caught our eye is In re Budeprion Xl Marketing & Sales Litigation, 2012 WL 2527021 (E.D. Pa. July 2, 2012).  This one does involve drugs − generic drugs − and for that reason it shouldn’t have been settled at all, but rather dismissed.  The claims (allegations of failure to warn that the generic version of a drug supposedly wasn’t really as safe or effective as the original branded version) were flat out preempted by PLIVA, Inc. v. Mensing, 131 S. Ct. 2567 (2011) − indeed the Budeprion claims were if anything worse than Mensing, because they implicitly challenged the validity of the drug’s ANDA approval ab initio (that’s legal Latin for “from the beginning”).  Since Mensing held that discrepant warnings were preemptive conflicts, challenging the very existence of the generic drug is a lot bigger conflict justifying preemption even more strongly.

It so happens that Mensing came down in the middle of the lengthy Budeprion litigation.  2012 WL 2527021, at *4.  We won’t characterize the ensuing negotiations, because we weren’t there, but the result was a another class action settlement that, like Dennis, leaves us scratching our heads.

In Budeprion it’s a mandatory Rule 23(b)(2) class action settlement of economic loss claims under the same California consumer fraud statute at issue in Dennis.  But….

First, the class definition appears “unascertainable” − that’s legal lingo for a class being defined in such a way that simply to determine who the members are involves an individualized inquiry into each class member’s circumstances.  The litigation involves “a class of individuals who had taken [the generic drug] and whose conditions had worsened after switching to the drug.”  Id. at *3 (emphasis added).  The problem in Budeprion is that, while only consumer fraud (economic loss) claims were pursued, it’s still a personal injury case in disguise − to determine class membership, one has to determine whether any given purchaser’s medical condition “worsened” − that’s an individualized inquiry.

Second, the nature of the claims being settled is unclear and perhaps illusory.  Budeprion purports to be a nationwide class settlement, 2012 WL 2527021, at *5 (“[a]ll individuals in the United States”), but it also appears to be brought entirely under California consumer protection statute.  Id. at *7 (“in violation of California consumer protection laws”), *8 (“Plaintiffs sought to bring this litigation as a nationwide class action applying California law.”).  However, the California consumer protection statute can’t be used that way − it doesn’t have extraterritorial application beyond the boundaries of that state.  See Sullivan v. Oracle Corp., 254 P.3d 237, 248 (Cal. 2011) (“[n]either the language of the UCL nor its legislative history provides any basis for concluding the Legislature intended the UCL to operate extraterritorially”).  So to the extent that the class extends beyond California (which it certainly is presented as doing), it settles claims that the non-California members of the putative class can’t have (under California law), while possibly (we’re not sure) precluding claims that the other class members might actually have (under analogous statutes of states where the members live).

Third, exactly zero dollars changes hands.  The mandatory class ((b)(2) plaintiffs have no opt out rights) gets nothing except “injunctive relief.”  See 2012 WL 2527021, at *5 (points a-g).  Here we see the impact of Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011), which essentially prohibits the use of (b)(2) mandatory classes for awarding money.  The case for any injunctive relief sounds pretty thin, since the defendant was apparently doing these things anyway.  Budeprion, 2012 WL 2527021, at *19.

Moreover, the Budeprion settlement suffers from the same fundamental incongruity between the class and the relief that we mentioned with respect to Dennis − the injunction doesn’t benefit the class because while the class consists of past buyers, the injunction restrains only future conduct.  Any benefit that the class members receive from the injunction is purely coincidental.  We blogged not too long ago about Haggard v. Endogastric Solutions, Inc., 2012 U.S. Dist. Lexis 89767 (W.D. Pa. June 28, 2012), where we think the court got it right about (b)(2) “injunctive” classes:

Even more essentially fatal to his motion for certification under (b)(2) is that Plaintiff only seeks to enjoin Defendant from making representations to future potential [product using] patients; i.e., to individuals who are not members of the class as defined.

Id. at *20 (emphasis original).

So in Budeprion the class gets nothing from the settlement.  We’re not sure what the defendant gets either, since it’s unclear from the opinion whether the same claims brought under the consumer fraud claims of the 49 states that aren’t California are or are not barred.  But as in Dennis, somebody does walk away with a lot of cold, hard cash:

For their efforts, Class counsel seek $4.5 million in attorneys’ fees, costs, and incentive awards to certain class representatives.  Specifically, Class counsel request $3.2 million in fees, $1.3 million in costs, and $55,000 in incentive awards to nine named Class representatives.

2012 U.S. Dist. Lexis 89767, at *20.

There are plenty of reasons we don’t like class actions − litigated or settled − Dennis and Budeprion are two of them.  These settlements are worse than the coupon gimmicks banned by CAFA.