In two recent decisions, federal courts of appeals confirmed they are prepared to give close scrutiny to a class settlement that offers a hefty payday to plaintiffs’ counsel with very little genuine benefit to any class.

In Drazen v. Pinto, — F.4th –, 2024 WL 2122466 (11th Cir. May 13, 2024), Plaintiffs alleged that GoDaddy.com, LLC (“GoDaddy”) violated the Telephone Consumer Protection Act in communications made to putative class members.  The parties entered into a class-wide settlement agreement and pressed the court for a rapid final approval because the Supreme Court had granted certiorari in another case on the key legal dispute, and its decision could shift the parties’ bargaining positions.  Although the district court voiced concern about the settlement, it granted final approval before the Supreme Court issued its decision.

In a 40+-page decision authored by Judge Tjoflat, the Eleventh Circuit surgically reviewed the settlement, finding significant procedural and substantive errors that required reversal.  The court held that the district court abused its discretion because it did not ensure the settlement provided adequate relief, in particular by failing to consider evidence concerning the size of the class, the notice the class received, and the low claims rate (less than 2%) that resulted from that notice.  The court also determined the district court erred by improperly “rewrit[ing]” an overbroad release provision, when it should instead have rejected the agreement on that ground.  Id. at *23.

The court was particularly concerned about multiple errors in the way the attorney fee award was calculated in the settlement agreement and presented for court approval, resulting in inadequate notice to class members and a fee award that bore no relationship to benefits actually achieved for the class.  The settlement had been characterized as a common-fund settlement, but it was actually a claims-made settlement only, yet fees were calculated based on the total potential settlement fund amount.  The court rejected the argument that it was reasonable to award fees based on a “percentage of the funds made available to the class” rather than what was actually going to be paid.  Id. at *32.  The court also found that the settlement needed to be treated as a coupon settlement for which CAFA imposes special rules governing fee awards.  In reaching this conclusion, the court rejected the suggestion that the settlement successfully evaded CAFA’s definition of a “coupon settlement” by allowing class members submitting claims to opt for a small direct cash payment in lieu of a significant larger payment in coupon form. 

Throughout its lengthy decision, the court was highly critical of the effort to push through with undue speed a settlement that richly rewarded plaintiffs’ counsel with only small benefit to a tiny portion of the class.

In Alcarez v. Akorn, Inc., 99 F.4th 368 (7th Cir. 2024), the Seventh Circuit took an even more jaded view of what it saw as an abuse of the class action process.  The appeal involved several “strike suits” in which plaintiffs filed putative class actions on behalf of shareholders asserting that a proxy statement published prior to a merger should have contained additional information.  In response to such a suit, the corporation adds the missing information to the proxy statement, then the plaintiffs dismiss the lawsuits after negotiating individual settlements (including attorneys’ fees), referred to as “mootness fees.”  Id. at 372.

In the case of several strike suits related to the merger of Akorn, Inc., an Akorn shareholder sought to intervene, seeking disgorgement of the “mootness fees” as “unjust enrichment,” which he asserted amounts to an “abuse of the legal process.”  Id.  Although highly critical of the settlement, the district court denied the shareholder’s motion, ruling that shareholder lacked standing because the court “did not anticipate awarding any of the remedies” he requested and so determined that “intervention would be ‘moot.’”  Id. at 373.

In an opinion written by Judge Easterbrook, the Seventh Circuit reversed, holding that the district court was wrong to deny intervention on mootness ground because a “case becomes moot only when it is impossible to grant effective relief,” not because the court chooses not to do so.  Id. at 375.  The appellate court found that the shareholder had Article III standing, because he had suffered “some loss from diversion of corporate money” to the contested “mootness fees.”  Id. at 374.  And while agreeing with the district court that disgorgement or an injunction were not appropriate remedies, the appellate court concluded that the district court should have considered whether Rule 11 sanctions were appropriate for the bringing of the lawsuits.  The Seventh Circuit panel agreed with the district court that the settlements “rewarded” counsel for “suggesting immaterial changes to the proxy statements,” and were a “racket” that “must end.”  Id. at 376–77.  The court determined this “racket” could “needlessly increase the cost of litigation” in violation of Rule 11, which warranted reversal and remand of the case so that the district court could consider whether to sanction those involved.  Id. at 376.