MIAMI (Legal Newsline) – A federal appeals court has ruled a magistrate judge abused her discretion to approve a class action settlement by giving the green light to an agreement that required members to give up their rights to seek damages in exchange for injunctive relief that had no value.

The U.S. Court of Appeals for the Ninth Circuit on Jan. 25 found U.S. Magistrate Judge Karen Crawford, of the Southern District of California, should not have approved a Fair Debt Collection Practices Act settlement with ARS National Services in the case Koby v. Helmuth.

Carlton Fields attorney Gary Pappas, who wrote a blog post on the case, told Legal Newsline, "The Ninth Circuit held that she had the authority to certify the class under the circumstances, but her exercise of that authority was an abuse of discretion based on the evidence, or lack thereof, in the record," Pappas said. 

According to Ninth Circuit Judge Paul Watford's opinion, the original case came about in April 2009 when Michael Koby, Michael Simmons and Jonathan Supler sued the debt collection agency ARS National Services Inc., alleging that ARS violated sections of the Fair Debt Collection Practices Act when the agency's callers failed to notify the plaintiffs via voicemail that they worked for ARS, that ARS is a debt collection agency, and that the callers were calling to collect a debt.

According to Watford's opinion, Koby, Simmons and Supler sued on behalf of everyone in the United States who received an ARS voicemail in which they were not given that information, which made the class include 4 million people around the U.S.

According to Watford's opinion, Koby, Simmons and Supler wanted the most they could get in statutory damages, but Watford explained that under the Act, that amount changes depending on the action brought forward.

He wrote as part of his opinion that when an individual sues under the Act, that individual can receive actual damages and then statutory damages of a maximum of $1,000. Watford also explained in his opinion that when people pursue a class action lawsuit, the damages and statutory damages for named plaintiffs are the same as an individual lawsuit, but the rest of the class is limited to the lesser amount between $500,000 and 1 percent of the net worth of the defendant.

In his opinion, Watford explained that ARS' motion to dismiss the case on the pleadings got rejected by a district court, and that the plaintiffs and defendant began to discuss settlement. While it discussed settlement, ARS decided on its own to implement a standard for voicemail messages by which its callers would address the three areas that the plaintiffs alleged in the class-action lawsuit that they failed to address, and both parties agreed that the company now complied with the Act.

According to Watford's opinion, a magistrate judge helped the parties discuss settlement for more than a year, and the plaintiffs and defendant allowed this magistrate judge the authority to rule over all the proceedings the case would require from then on. In January 2013, the parties agreed to a deal following an all-day conference that the magistrate judge made mandatory for settlement to happen.

In this deal, according to Watford's opinion, ARS agreed to pay Koby, Simmons and Supler each $1,000, and it was decided that none of them had suffered actual damages. The 4 million other class members, which included people that received calls in which ARS failed to notify them of those three pieces of information alleged by the class action lawsuit between April 2008 and August 2011, were not going to receive any compensation.

The benefit they would receive from the deal would be that ARS would be required to use the new voicemail standard the company implemented of its own doing for two more years following the deal in exchange for giving up their rights to go after ARS in a class action lawsuit for damages.

Watford explained in the opinion that ARS told the magistrate judge its net worth was $3.5 million, allowing the 4 million other class members to collect as a group only up to $35,000. Watford said in his opinion that there was no clear evidence that the magistrate judge proved that $3.5 million to be true. According to his opinion, because it would not be possible to distribute out $35,000 fairly to all other class members, ARS agreed to send cy pres award in that amount to a charity in San Diego.

Watford outlined in his opinion that Bernadette Helmuth was initially part of the class, and that she filed an objection to the settlement to argue that it was unfair for the class to give up their rights to seek damages in a class action lawsuit while receiving nothing in return. He also outlined that Helmuth is the named plaintiff in a class action lawsuit with a smaller class against ARS that is pending in the Southern District of Florida.

Watford explained in his opinion that the magistrate judge held a fairness hearing for Helmuth's counsel, ARS' counsel and class counsel to argue and then proceeded to rule that it was a fair, reasonable, and adequate settlement. Watford said in his opinion that because Helmuth objected in the district court, she could appeal the court's ruling.

Pappas said that decisions on classaction lawsuits are not normally left up to magistrate judges.

"This ruling, combined with many other previous opinions in similar cases, will assist magistrate judges and Article III judges [in] evaluat[ing] future motions by the parties to approve a settlement class," Pappas said.

Want to get notified whenever we write about 9th Circuit Appellate Court, San Francisco ?
Next time we write about 9th Circuit Appellate Court, San Francisco, we'll email you a link to the story. You may edit your settings or unsubscribe at any time.

Organizations in this Story

9th Circuit Appellate Court, San Francisco
95 7th Street
San Francisco, CA 94103

More News