Defense Negotiated Class Action Settlement with Florida Class Action Counsel Instead of California Class Action Counsel because of Leverage Over Class Counsel and Class Action Settlement Procedurally and Substantively Unfair Florida Federal Court Holds
Numerous class action and individual lawsuits were filed against Sharper Image alleging that its Ionic Breeze air purifier does not clean and purify the air as advertised and is harmful in that it omits excessive ozone; one such class action was filed in the Florida federal court and ultimately the parties sought court approval of a settlement of the class action. Figueroa v. Sharper Image Corp., ___ F.Supp.2d ___ [Slip Opn., at 1] (S.D. Fla. October 11, 2007). In broad terms, the class action settlement provided for $19 Sharper Image coupons or merchandise credits, an OzoneGuard “to protect against ozone emission,” injunctive relief, and $2 million for class counsel. Id., at 1-2. Defense attorneys stressed that the coupon represented the primary financial benefit to the class, not the OzoneGuard, id., at 2 n.2. The settlement provided to the court for final approval was the third amended class action settlement; the district court had given preliminary approval to an earlier version of the settlement agreement in January 2007, and a hearing on final approval of the proposed settlement was held in August 2007. Id., at 1. The federal court refused to approve the settlement.
The lawsuit was filed in May 2005 as a nationwide class action on behalf of purchasers of Sharper Image “ionizing air purifiers,” including the Ionic Breeze®, and sought damages for breach of contract, breach of warranty, money had and received, and unjust enrichment. Figueroa, at 2. In essence, the class action alleged that Sharper Image engaged in the “unlawful conduct of marketing and selling ionizing air purifiers that do not remove impurities from the air and that fail to perform as advertised and sold” and that “the ionizing air purifiers exposed consumers to hazardous levels of ozone.” Id. Defense attorneys moved to stay, dismiss or transfer the class action on the grounds that it simply copied several class action lawsuits filed in California; in response, plaintiffs’ lawyer sought leave to amend the complaint to add the inventor, Zenion Industries, as a party defendant, so the district court denied the defense motion as moot and granted plaintiffs leave to amend. Id., at 2-3. The federal court subsequently dismissed Zenion from the class action for lack of jurisdiction, id., at 5.
Before the district court ruled on plaintiffs’ motion to certify the lawsuit as a class action, the parties advised the court that “an agreement on all aspects of the class claims on a nationwide basis, and that what remained to be resolved was the issue of attorney’s fees.” Figueroa, at 5. The court therefore continued the hearing on the class certification motion in order to allow the parties to present a “complete package” for approval by the court. Id. Soon thereafter, however, class counsel for the certified nationwide class action pending in California contacted the district court and advised that he had “reason to believe that the parties here are attempting to settle the claims belonging to the California Actions class, without the knowledge or consent of the class representatives or Class Counsel” and that the parties to the Florida class action had refused voluntarily to provide information in this regard. Id., at 5-6. California counsel also sought discovery of documents filed under seal with the Florida district court, id., at 5, and, following a hearing and over defense objection, the federal court ordered defense counsel to produce certain documents, id., at 6. At that time, the court expressed concern “with the parties’ practice of filing documents under seal in a purported class action lawsuit.” Id., at 6.
The parties filed a proposed class action settlement that, which the district court summarized at pages 6 and 7 as follows: “The essence of this first Settlement Agreement was to provide to class members, limit one per household, a $19 merchandise credit, valid for one year, for use at Sharper Image retail stores on Sharper Image branded products. The first Agreement also provided class members the ability to purchase (during a six-month period of time) an OzoneGuard attachment, for Ionic Breeze® floor models only, for $7. Sharper Image also agreed to make modifications with respect to its advertisements of the Ionic Breeze®, for example, to not state that the Ionic Breeze® is a medical device and to remove the British Allergy Foundation and the Asthma and Allergy Foundation of America seals from its advertising.” The parties also represented to the court that the Florida class action was “significantly broader” than the California class action, particularly as the California class actions were “limited to claims under California state law,” and jointly moved the court to enjoin competing class actions from proceeding “in order to facilitate an efficient and expeditious settlement and approval process, and to preserve the Court’s jurisdiction to adjudicate the settlement.” Id., at 7. The federal court characterized as a “consistent theme” the argument that Sharper Image “was on the verge of bankruptcy, and that the proposal then under consideration was the best deal that could be arranged.” Id., at 30.
The district court received several objections to the proposed class action settlement and requests by class members for leave to intervene in the Florida action. The filings included objections from class counsel in the California class action and by 34 State Attorney General offices and the District of Columbia. Several objections focused on the coupon settlement aspect of agreement. Figueroa, at 13-14. Among the objections raised by individual objectors were claims that the $19 coupon was inadequate, that the OzoneGuard solution was inadequate, and that the injunctive relief did not benefit the class. Id., at 14-15. We do not here discuss the various sequential revisions to the proposed settlement or the objections to each new incarnation of the agreement. See id., at 14-30. We note that ultimately the court granted preliminary approval to a subsequent proposed settlement, and ordered that notification be served on the proposed class. Id., at 8-9.
In the Eleventh Circuit, district courts are to consider the following factors in evaluating a proposed class action settlement: “(1) the likelihood of success at trial; (2) the range of possible recovery; (3) the point on or below the range of possible recovery at which a settlement is fair, adequate and reasonable; (4) the complexity, expense and duration of litigation; (5) the substance and amount of opposition to the settlement; and (6) the stage of proceedings at which the settlement was achieved.” Figueroa, at 44 (quoting Bennett v. Behring Corp., 737 F.2d 982, 986 (11th Cir. 1984)). The court must be careful, however, not to “substitute…her own judgment for that of counsel,” id., at 44-45 (quoting In re Smith, 926 F.2d 1027, 1028 (11th Cir. 1991)), and “must guard against the temptation to become an advocate” in favor or against the proposed settlement,” id., at 45 (citation omitted).
The district court first turned to the “procedural fairness” of the settlement, which requires a determination that the agreement “was achieved through arms-length negotiations by counsel with the experience and ability to effectively represent the class’s interests.” Figueroa, at 47 (citation omitted). The court readily found that there was neither fraud nor collusion involved in the settlement negotiations, id.; however, the court held that Florida class counsel “negotiated from a position of weakness,” id., at 49. The federal court summarized its concerns at page 48:
What cannot be so easily eliminated is the perception, and the [court’s] conviction, that Sharper Image selected counsel confronted with a most precarious position, insisted upon amendments to the pleading to broaden the scope of this litigation to obtain a global peace, and then proceeded to offer and convince Class Counsel to accept highly undesirable terms to settle the case. What followed, the tinkering with the settlement proposals, has resulted in a near-perfect coupon settlement…but which is the product of procedural unfairness.
The court’s concern was fueled in large part by defendant’s failure to renew its motion to stay or dismiss the Florida action in favor of the earlier-filed California class actions once Zenion was dismissed from the case, explaining at page 48:
Sharper Image vigorously litigated its request that the undersigned abate, stay or dismiss the action in favor of the California actions, and it was only the presence of Zenion that prevented a stay from being granted. Once the undersigned found, however, that it had no jurisdiction over Zenion, and dismissed Zenion from the suit, the case was susceptible to Sharper Image re-asserting its two earlier motions to abate and/or dismiss. Indeed, such a request by Sharper Image is what the undersigned anticipated would follow from Zenion’s exit from the case. [¶] Instead of that occurring, however, and prior to any decision on class certification, Sharper Image began and pursued negotiations with Plaintiffs’ counsel, doing so with sealed filings and proceedings on the eve of a class certification process, abandoning its earlier efforts to have the case stayed. Plaintiffs’ counsel were fully aware that a request for a stay might very well be granted given that Zenion was no longer a party-defendant. Thus, Plaintiffs’ counsel necessarily negotiated from a position of weakness, with the specter of a stay of this case a constant companion. The email communication between counsel for Sharper Image and Class Counsel, wherein the former warns the latter that Defendant may opt “in favor of taking the Judge’s lead and Staying/Abating the case, to focus exclusively on the upcoming [California class action] trial in Potter,” may have been stated in reference to a disagreement over fees following initial “settlement,” but it is indicative of the pressure Class Counsel were under to reach a settlement before Defendant renewed its request for an abatement a third time. (Italics added.)
The court was concerned also by the fact that “within two weeks” class counsel dropped their coupon demand from $280 to $28.50, and then “in the space of 11 hours” to $19 “[without] any attempt to determine whether the products had any value to the clients making them worth only $19 less than Plaintiffs had paid for them, or any other reason why $19 was an acceptable number.” Figueroa, at 49. Class counsel thus lacked the information necessary to “reasonably assess” the terms of the settlement, id. And while “a significant broadening of the claims” in the class action complaint is not “in and of itself…suspect,” in this case “the broadening of the claims, certainly made to assure Sharper Image that all possible claims could be resolved in this case, as compared to the narrower universe of claims addressed in the California actions, is further evidence of Sharper Image controlling the course of the negotiations.” Id., at 49-50. The fact the parties subsequently incorporated changes to address many of the objections to the coupon settlement further evidenced that class counsel was negotiating from a position of weakness, id., at 50-51. Accordingly, the district court held that the proposed settlement was not procedural fair. Id., at 51.
As to the issue of substantive fairness, the district court concluded that plaintiffs were likely to prevail on the merits at trial, see Figueroa, at 51-55, that the value of the proposed settlement “is below the range of recovery in which a settlement of this case may be considered fair,” id., at 58, that “the complexity and expense of litigating this case, rather than settling it now” favors litigation because it will not require much additional time or money to prepare the case for trial thus making “the small risk of receiving nothing” a risk “worth taking” in light of the “negligible value” of the proposed settlement, id., at 59, that the “substance and amount of opposition” weighs against approval because (1) even though only a few objections were filed, the objectors opposed the settlement “most strenuously and with valuable insights” directly causing “many of the revisions to the initial terms of the proposed settlement,” and because of (2) “the singular appearance of the Attorneys General of thirty-five states and the District of Columbia, representing hundreds of thousands, if not millions, of eligible class members” who have “objected at every turn to each version of the parties’ proposed coupon settlement,” id., at 59, and that class counsel “had insufficient information available to adequately evaluate the merits of the case and weigh the benefits of settlement against further litigation,” id., at 60.
NOTE: “The Attorneys General…identified three major problems with coupon settlements: they often do not provide meaningful compensation to class members; they often fail to disgorge ill-gotten gains from the defendant; and they often require class members to do future business with the defendant in order to receive compensation.” Figueroa, at 14 (citation omitted). They also argued that the coupon settlement failed to satisfy the “heightened scrutiny of coupon settlements mandated by the Class Action Fairness Act of 2005,” id.