Groupon Marketing class action settlement

There was a lot of publicity about the "$8.5 million" Groupon will pay to settle a class action over expiration dates; several class members complained about the settlement to me, mostly because they viewed the lawsuit as silly. (So did Groupon, before their lawyers made them take down the original blog post criticizing the first of the many class actions brought against them.) But the settlement is even worse than it looks. Before the settlement, if a Groupon customer had a problem with a Groupon, they contacted customer service, indicated dissatisfaction, and got a full cash refund. After the settlement, if a Groupon customer has a problem with a Groupon that they purchased during the class period, they contact customer service, and customer service refers them to the class action settlement website, where they can fill out a claim form; after several months (and perhaps years), the class action settlement administrator will give the class member a pro rata share of the settlement fund—which, though the publicity says is $8.5 million, less than $6 million of it will be likely available to the class. In other words, the class action attorneys have negotiated a settlement that makes their clients—who had suffered no damages because of the availability of refunds—worse off, and are asking for millions of dollars for their efforts. I discovered this the hard way: I purchased a Groupon Voucher for a restaurant that closed, and tried to get my money back from Groupon. They told me to file a claim form. Fortunately, when I suggested that this was subpar customer service, they gave me a credit—which goes to show further that this is not a marginal benefit to the class of $8.5 million, but a change in accounting entries to rationalize a $2.125 million request for attorneys' fees. Today I filed an objection. The case is In re: Groupon, Inc., Marketing and Sales Practices Litigation, No. 3:11-md-2238-DMS-RBB (S.D. Cal.), and the fairness hearing is scheduled for September 7. Lead class counsel is Robbins Geller.

In re Baby Products update

Briefing is complete, and oral argument will be some time in the second half of September. Details at Point of Law.

Next steps

Over the years, we have gotten lots of inquiries about objecting to bad shareholder derivative settlements. We'd largely passed, because we had high hopes for our pending case in the Seventh Circuit, and wanted to have that precedent in hand before we asked courts to recognize the issue of Rule 23.1 adequate representation. Now that we do, we are very interested in expanding our work objecting to bad shareholder derivative settlements. However, we face two barriers to entry that make objecting difficult.

First, the law has developed in a bad way so as to give very substandard notice to individual shareholders who hold their certificates through brokers. The settling parties typically wait until the last minute to notify brokers, asking them to comply with unrealistic deadlines, and the individual shareholders who work with Schwab or Merrill Lynch or the like don't get notice until a few days before the objection deadline, and sometimes after the objection deadline. That's often not enough time to investigate and handle the logistics of representation, especially if one needs to hire local counsel and request pro hac vice status. One of our long-term goals is to move the precedent in this area, but, until that happens, we need institutional-investor clients—hedge funds, pension funds—who get notice well in advance of objection deadlines and would like to work with us to end the problem of rent-seeking shareholder-derivative strike suits that hurt shareholders.

The second problem is that local-counsel requirement we just mentioned. I'm licensed in California, Illinois, D.C., and a couple of other federal courts that offer reciprocity, but many of these shareholder suits are in state courts or federal courts with burdensome local counsel requirements. (I also suspect we'll be seeing many fewer shareholder suits in Illinois federal courts as plaintiffs forum-shop.) Large law firms are frequently unwilling to represent us for conflicts reasons; many other firms don't want to alienate the powerful shareholder-plaintiffs' bar. We could very much use attorneys licensed in Delaware and D. Delaware to assist us. We'd obviously prefer pro bono help, but budget to pay reasonable fees for local counsel where necessary.

Victory in the W.D. Washington: Classmates.com

When attorneys affiliated with CCAF first objected on behalf of Professor Michael Krauss in the Classmates.com settlement, that case paid $52,000 to class members and over a million dollars to the attorneys and the class representatives (while falsely characterizing it as a $9.5 million settlement); Gregg Easterbrook of ESPN called it the worst class action settlement of the year. We objected, and the court struck down the settlement. The parties went back to the drawing board without including us in the process, and they came back with a settlement that guaranteed $2.5 million for class members, while still paying the attorneys over a million dollars. The settlement, as we pointed out in a second objection, still overpaid the attorneys and had Bluetooth reversion problems to boot: any fee reduction, notwithstanding clear sailing, would go to the defendant rather than the class. The parties quickly eliminated the kicker: now any fee reduction would go to the class, and the judge agreed with us at the fairness hearing that there should be a fee reduction.

Given that we had won over $2 million for the class, we thought we might be entitled to a token fee award; given our non-profit status, we planned to ask for something in the $40,000 to $50,000 range, reflecting both the benefit to the class and a sub-lodestar amount for multiple rounds of briefing, two trips to Seattle for fairness hearings, and the cost of hiring local counsel. But before we even put pen to paper on the fee request briefing, class counsel retaliated against us for our success in objecting by hitting us with super-burdensome fishing-expedition subpoenas, on, inter alia, a conspiracy theory of cross-referencing our donors with donors to institutions where Professor Krauss had performed work, such that someone paid Cato ten years ago to have Krauss write a paper so that he would successfully object ten years later represented by attorneys affiliated with CCAF to a settlement of a lawsuit against a company that didn't even exist yet. (Dozens of class members contacted us about this bad settlement. As we were figuring out who would be the best objector, Professor Krauss contacted us, and we agreed to represent him within minutes because he taught legal ethics, which added a modicum of ethos to our objection.) We were already overextended with appellate briefing schedules, so we had a choice: we could spend tens of thousands of dollars on outside counsel to resist facially invalid subpoenas requiring a response over the Christmas holidays, and be faced with an additional discovery bill of tens of thousands of dollars if we lost (and thus be put in a position where we might be worse off for requesting fees) or drop the fee request rather than prejudice our other clients. Professor Krauss was generous enough to give us permission to drop the fee request, and we did so. But we asked the court to award sanctions against class counsel on behalf of the class for the abuse of the discovery process to deter future abuses against objectors.

The court did so, deducting $100,000 from the class counsel's fee request and awarding it to the class. So if you're keeping score, class counsel tried to abuse the discovery process to prevent us from collecting a $40,000 fee, and ended up costing themselves $100,000 (plus whatever attorney time they wasted having to defend themselves in the sanctions motion and on their own discovery) in the process. The class will get $2.753 million in cash instead of $0.052 million in cash. The opinion by Judge Richard Jones generously praises us for being the attorneys most interested in class recovery. Congratulations to our patient client, Professor Krauss, and to attorney Dan Greenberg, who argued at the second fairness hearing.

Victory in the Seventh Circuit

As both Daniel Fisher and the Economist documented recently, the percentage of M&A transactions worth over $500 million that result in shareholder derivative suits has risen from 39% to 96%. [Fisher; Economist; Reuters (quoting me); OL; see also Johnson @ SSRN]

It's surely not the case that every merger is the result of a breach of fiduciary duty. What's happening is that entrepreneurial lawyers have discovered a profitable means of rent-seeking: with the help of a cooperative shareholder, bring a meritless shareholder derivative suit on some technical ground or the other, threaten to impose millions of dollars of discovery expenses and hassle on the officers and directors of the company, and collect an attorneys' fee for settling the case for a token change of no benefit to the shareholders. As I told Reuters in 2011, "Judges should consider whether these provisions actually create value for shareholders, or amount to a rearranging of the deck chairs to create the illusion of value to justify attorneys' fees."

Under FRCP 23.1(a) and its state-law equivalents, a shareholder derivative suit isn't supposed to proceed unless the shareholders bringing the suit adequately represent the shareholders. If the suit is meant to profit the plaintiffs' lawyers at the expense of the corporation (and thus the shareholders), how can the bringers of a strike suit be adequate representatives of the shareholders? I've thus argued that the correct role for courts in such situations is to throw these cases out entirely (or approve the settlement but award only a token amount in attorneys' fees).

I found myself the "beneficiary" of one of these $0 strike-suit settlements in Robert F. Booth Trust v. Crowley; the settlement would have paid the attorneys $925,000 under a clear-sailing clause, and, when the district court rejected my attempt to intervene to dismiss the suit, I appealed to the Seventh Circuit. 

Yesterday, I won a complete victory with a landmark Frank Easterbrook opinion that I hope will provide protection for shareholders against future shareholder derivative strike suits. The suit, the Court said, "serves no goal other than to move money from the corporate treasury to the attorneys’ coffers.... It is an abuse of the legal system to cram unnecessary litigation down the throats of firms ... and then use the high costs ... to extort settlements (including undeserved attorneys’ fees) from the targets." It thus reversed the district court's denial of my motion to intervene, and remanded with instructions to dismiss the case, as I had asked below. [Reuters; Fisher @ Forbes; analysis by Wolfman; WSJ Law Blog (failing to recognize that the case involves a lawyer they profiled in October); Bashman; Overlawyered; Litigation Daily ($) ("Ted Frank, the indefatigable scourge of underwhelming class action settlements, scored a remarkable win on Wednesday"); Volokh on a punctuational quirk] 

This is the fifth federal appellate opinion in a CCAF case; CCAF is now 4-1 in federal appeals, which is remarkable, given that CCAF-affiliated attorneys represent the appellant in each case and there are rarely as many as four reversals of class action settlement-related district court opinions in a single year from all objectors combined.

CCAF is assisting an objector in a Texas-state-court strike suit currently on appeal, and we hope to extend this precedent to other state courts. The main difficulty we face is that individual investors rarely get adequate notice of these bad settlements: courts condone notice provisions that virtually guarantee that an investor who uses a broker will not get notice in time to file an objection. (In the Sears case, I benefited because of a rare agreement to extend notice at the district court level.) We would like to work with institutional investors to promote this precedent and put an end to the practice of rent-seeking strike suits that hurt shareholders. Please contact me if this describes and interests you.

Victory in Dewey v. Volkswagen!

WASHINGTON, DC - The Center for Class Action Fairness LLC announced today its victory in the U.S. Court of Appeals for the Third Circuit objecting to a class action settlement that arbitrarily froze out over a million class members from meaningful recovery while paying the attorneys over $9.2 million. On Thursday, the appellate court vacated a district court's 2010 approval of a settlement of a lawsuit over allegedly defectively leaky Volkswagen and Audi sunroofs. While the settlement permitted many class members to submit claims for water damage, an uncertified and unrepresented “subclass” of over a million car owners received no financial compensation. The settling parties defended this unjust result by arguing that the settlement provided these owners with a letter notifying them of the need for additional maintenance, and submitted an implausible economic expert report (adopted by the trial court) that this letter was worth millions of dollars. The Third Circuit rejected the proposition that class members in the same class with the same claims could receive such disparate treatment.

Ted Frank, who argued the appeal in March, has now won three out of the four challenges to class action settlement approvals federal appellate courts have decided since he founded CCAF in 2009.  This case is particularly important because, in late 2011, an en banc panel of the Third Circuit decided in Sullivan v. DB Investments to reduce the scrutiny given to intra-class conflicts in class action settlements; today's decision confirms that Sullivan does not given carte blanche to unfair treatment of class members.

The case is Dewey v.Volkswagen  AG, No. 10-3618.

The Center for Class Action Fairness is a not-for-profit program that provides pro bono representation to consumers and shareholders aggrieved by class action attorneys who negotiate settlements that benefit themselves at the expense of their putative clients. With a skeleton staff, it has won millions of dollars for class members over the last three years; it has won rejections of unfair settlements, pecuniary benefits for the class, and over $150 million in fee reductions in eighteen different cases. Attorneys affiliated with the Center have eight cases pending on appeal in the federal courts, and a ninth in Texas state court.

Press coverage of the Center's work is available at http://tedfrank.com/press.

Mr. Frank is available for comment on this case and other issues relating to class actions, lawsuit abuse, and the civil justice system.

FOR MORE INFORMATION:
http://centerforclassactionfairness.blogspot.com
http://tedfrank.com

Follow the Center on Facebook!

May update

• A disappointing loss in Cobell v. Salazar, the first time I lost a federal appeal I've argued. We're still evaluating our options. Lots of links and analysis at Point of Law.
• Briefing and oral argument in Robert F. Booth Trust v. Crowley. I'm looking forward to the Seventh Circuit opinion.
• Odd shenanigans in Brazil v. Dell: see Point of Law; Reuters coverage; Reuters follow-up coverage.
• We completed Sixth Circuit briefing in the Pampers Dry Max case, and will discuss in a future post.
• The district court approved the Costco "hot fuel" settlement, though it at least refused to credit the junk economics expert; several other defendants are settling, and, if they're similar settlements where the benefits go entirely to the class counsel, we'll file objections there, too. Some objectors have appealed; we don't believe there's appellate jurisdiction yet.