COLUMN-Foretelling the end of money-for-nothing class actions

Mon Aug 20, 2012 11:13pm IST

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By Alison Frankel

Aug 20 (Reuters) - A year ago, representing the "victims" of corporate privacy breaches seemed like a decent business model. In a very instructive chart Reuters prepared in June 2011, my colleague Terry Baynes detailed the outcome of six privacy breach settlements, in which class action lawyers sued companies whose customer information was hacked.

Most of the settlements involved payments to name plaintiffs ranging from $250 to $10,000. Other class members usually received no cash -- but their lawyers were awarded between $500,000 and $6.5 million.

Yes, we all know the lawyers had to work for their money. They filed complaints, probably withstood motions to dismiss, and negotiated settlements that included some kind of promise that defendants would change troublesome behavior. They also had to have their fees approved by federal judges.

But I believe Baynes' chart may well represent the high point for contingency-fee lawyers who engineer settlements with no tangible benefit for class members. There is a recent wave of skepticism among the judges who evaluate class action settlements, which suggests that the days of money-for-nothing deals are coming to an end.

The most recent example: On Friday, U.S. District Judge Richard Seeborg of San Francisco refused to approve a proposed settlement of claims that Facebook Inc violated users' privacy rights by rebroadcasting their "likes" of certain advertisements.

As we predicted, the judge took issue with the structure of the settlement, which would have delivered $10 million in funds to an unidentified charity in lieu of any cash recovery to a potential class of 100 million Facebook users. (That kind of agreement, in which money that is either unclaimed by class members or undistributed because the amount is too small, is known as a cy pres settlement.)

But Seeborg also had a problem with the settlement's proposed $10 million fee award to class counsel. Plaintiffs' lawyers at The Arns Law Firm and Jonathan Jaffe Law have not yet applied for fees, the judge noted. Nevertheless, he said, the arguments they have offered so far to justify a $10 million award do not add up.

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Class counsel said the injunctive relief they obtained, in which Facebook agreed to give members a choice about disclosing their likes, was worth more than $103 million, which would mean their $10 million award was less than 10 percent of the value of the settlement. Seeborg said the $103 million number was entirely unfounded, even though it was supposedly based on the value to Facebook of continuing to publish users' likes.

"Plaintiffs have presented no reason in logic or law that supports calculating the value of injunctive relief in such a manner," the judge said. To allay his "serious concerns" with the $10 million fee award contemplated in the proposed settlement, Seeborg instructed both sides to include some authority for calculating the value of that injunctive relief in a new settlement proposal.

Seeborg is not the only judge who has recently expressed qualms about fee awards based on noncash relief to class members. In June, you will recall, the 9th Circuit Court of Appeals rejected a $2 million fee award in a deceptive advertising case against Kellogg Co. Last month, the 1st Circuit sent a $30 million fee award in a class action against German luxury car maker Audi, a division of Volkswagen AG , back to the trial court for recalculation.

In Delaware Chancery Court, meanwhile, Vice Chancellor Travis Laster went on a bit of a rant in July about plaintiffs' firms in M&A cases that obtain nothing more for shareholders than additional proxy disclosures, yet ask for millions in fees.

We are also seeing some pushback from defendants on plaintiffs' fees, which is more unusual than you might think. Typically, defendants hold their noses and agree to fees as a price for making class actions go away. But in two recent derivative cases - one against Moody's Corp and the other against Bank of America Corp - defense counsel refused to accede to fee requests by plaintiffs' firms.

In the Moody's case, defendants ultimately signed a settlement that calls for $4.5 million to go to shareholders' lawyers (and no cash to go to shareholders). In the BofA derivative case, meanwhile, defendants agreed to a $20 million settlement for shareholders but reserved the right to oppose a $13.6 million fee request.

You could say that I am plucking out exceptions, that in the overwhelming number of class actions, fee requests are approved. That is true. But it is also true that skepticism is contagious. Once someone says the emperor has no clothes, the rest of the crowd sees the emperor with new eyes.

If I were a class action lawyer, I would be very worried that injunctive relief makes for pretty flimsy clothing.

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