Ninth Circuit rejects class action settlement

By Jessica M. Karmasek | Aug 22, 2011


PASADENA, Calif. (Legal Newsline) - A federal appeals court has vacated a district court's approval of a settlement in a case that alleged that Bluetooth manufacturers knowingly failed to disclose the potential risk for hearing loss associated with extended use.

The U.S. Court of Appeals for the Ninth Circuit made its ruling Friday. Senior Circuit Judge Michael Daly Hawkins authored the court's 25-page opinion.

The settlement agreement in the products liability class action against GN Netcom Inc., Motorola Inc. and Plantronics Inc. provided the class $100,000 in cy pres awards and zero dollars for economic injury, while setting aside up to $800,000 for class counsel and $12,000 for the class representatives.

Under the legal doctrine of cy pres, a French term meaning "as close as possible," a court may order that the funds be used for grants to benefit the class members indirectly or as near as possible in order to remedy or compensate for the harm to the class members.

William Brennan and other class members, in this case the "objectors," challenged the fairness and reasonableness of the settlement and appealed both the approval and fee orders.

They argue the district court abused its discretion in failing to consider whether the gross disproportion between the class award and the negotiated fee award was reasonable.

"We agree that the disparity between the value of the class recovery and class counsel's compensation raises at least an inference of unfairness, and that the current record does not adequately dispel the possibility that class counsel bargained away a benefit to the class in exchange for their own interests," Hawkins wrote for the appeals court.

"We therefore vacate both orders and remand so that the district court may conduct a more searching inquiry into the fairness of the negotiated distribution of funds, as well as consider the substantive reasonableness of the attorneys' fee request in light of the degree of success attained."

A similar class action over Apple iPods was dismissed in 2008.

The Center for Class Action Fairness, which argued on behalf of the objecting class members, applauded the appeals court for objecting to a "valueless class action settlement."

Ted Frank, who founded the center in 2009 and argued the appeal, called the ruling a "landmark decision." It is the first time the Ninth Circuit has vacated approval of a class action settlement since 2003, according to the center.

"The Court explicitly upheld the principle that the absence of explicit collusion is not enough for a court to approve a settlement when the attorneys have negotiated a self-serving settlement at the expense of their clients," he said.

"It is important because the court identified as problematic several tactics attorneys use to protect proposed fee awards from scrutiny such as 'clear sailing' clauses that prohibit defendants from challenging proposed fee awards and 'kickers' that preclude the class from receiving any reduction in the fee award."

He added, "The decision further emphasizes that any fee request based on 'lodestar' rates has to be cross-checked against benefits actually received by the class."

Frank, one of the leaders in the cy pres reform movement, said it will now be much more difficult for attorneys to abuse the class action system to negotiate low-value settlements that provide "handsome compensation" for themselves.

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," according to its website.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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