Elvey v. TD Ameritrade, Inc.

Filing 93

ORDER GRANTING preliminary approval of the proposed settlement (vrwlc2, COURT STAFF) (Filed on 5/1/2009)

1 2 3 4 5 6 7 8 9 10 United United States District Court For the Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 In re TD AMERITRADE ACCOUNTHOLDER LITIGATION _________________________________ This Document Relates to: All Actions / This is a proposed class action against TD Ameritrade for a security breach that exposed TD Ameritrade accountholder private information to "spammers" and rendered the same information vulnerable to others. Doc #60 at 1-6. TD Ameritrade and IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA Master File No C 07-2852 VRW ORDER Class Action

plaintiffs Brad Zigler and Joel Griffiths (collectively the "Parties") seek approval pursuant to FRCP 23(e) of a settlement and notice to the purported class. Plaintiffs moved for preliminary approval of the class action settlement on May 30, 2008. Doc #53. On June 13, 2008, the

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court denied approval for several reasons.

These included the

failure of the parties to establish facts necessary for the court to evaluate the settlement and the attorney fee request (Doc #61 at 2-3) and objections voiced by Matthew Elvey, one of the class representatives. At a hearing the previous day, Elvey had

expressed numerous "reservations" about the settlement (Doc #61 at 3). On August 29, 2008, attorney Mark Chavez entered his appearance on behalf of Elvey. Doc #71. Subsequently, Elvey

submitted a memorandum opposing preliminary approval of the settlement. Doc #73. Elvey argued that the proposed settlement

inadequately compensated the plaintiffs for their injuries related to the security breach and mischaracterized the nature of the risks associated with the breach. Id at 6.

At a hearing on October 6, 2008, the court granted attorney Gregory Beck's application to represent Elvey on a pro hac vice basis (Doc #83) and then asked both Chavez and Beck if they would be willing to represent the entire class in an effort to seek a more favorable settlement or to go to trial. Both attorneys declined to do this. Id. Doc #87 at 4-5.

Chavez and Beck, instead,

offered to assist the Parties in achieving adequate notice to the class. Id at 30. TD Ameritrade submitted the proposed settlement terms and the proposed notice to be given to the class on October 20, 2008. Doc #86. In return for the class dropping its claims against TD

Ameritrade, TD Ameritrade offered to (1) post a warning on its website "regarding stock spam"; (2) "continue to retain independent experts" to test TD Ameritrade's security vulnerabilities; (3) 2

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continue "account seeding" to determine whether unauthorized persons have acquired customer email addresses, (4) provide each settlement class member with a unique identifier number that can be used to obtain a one-year subscription to an anti-virus, anti-spam internet security product; (5) retain a company to perform one analysis to determine whether any incidents of organized misuse of personal information had occurred involving data in the TD Ameritrade database (four such analysis had already been performed) and to inform settlement class members whose personal information is discovered to be the subject of organized misuse; (6) donate $55,000 to specified cyber-security projects; and (7) pay claims administration and notice expenses for the settlement. Exh 5 at 9-12. On November 13, 2008, the Texas Attorney General submitted objections to the proposed settlement. Attachment 1. Doc #86-6,

The Texas Attorney General noted that approximately 415,089 Texans were included in the proposed settlement class and described four objections to the proposed settlement: (1) the proposed settlement agreement offered "no meaningful relief to the class members"; (2) the award of proposed fees to class counsel was excessive; (3) the proposed settlement failed to address the harm of identity theft adequately; and (4) the proposed release was too broad. The Texas

Attorney General contended that the settlement was essentially worthless because the "warning" to be placed on the TD Ameritrade website would largely go unseen by consumers most vulnerable to stock spam, the security measures TD Ameritrade agreed to conduct should have been conducted by "any reputable company" anyway and the coupon for security software was of little value because 3

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similar software was largely available to most Internet users for free or at low cost. Attachment 1 at 2. Furthermore, the Texas

Attorney General noted that the class members were to receive no monetary recovery while the proposed attorney fee award for class counsel was substantial ---- $1.87 million. Id at 2. The proposed

settlement agreement, according to the Texas Attorney General, did not address adequately the potential harm to class members from identity theft. Id at 3. The Texas Attorney General further

argued that the settlement agreement should make clear that the individuals who engaged in the unauthorized access are not "Released Parties" and "Releasing Parties" should be amended to make clear that government entities such as the Texas Attorney General has not released any claims to relief related to this security breach. Id at 3-4.

On December 5, 2008, the Texas Attorney General informed the court that it was "engaged in a promising dialogue about its concerns with counsel for the plaintiffs and the class." at 1. Doc #88-2

According to a supplemental filing by counsel for the

plaintiffs, the Parties held a series of discussions with the Texas Attorney General's Office over four months addressing the objections to the proposed settlement outlined above. 2. Then on March 2, 2009, the Texas Attorney General notified the court that the Parties proposed a list of amendments to the proposed settlement agreement and notice to address the Texas Attorney General's concerns. amendments included the following: // 4 Doc #90-2, Exh A at 2-3. These Doc #90 at

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In the Settlement Agreement: Broadening the carve-out for identity theft-related claims in the "Released Claims" section to ensure that Settlement Class Members are able to pursue future claims that arise due to identity theft; Removing the language that purports to release claims that may be brought by a governmental entity and explicitly stating that such claims are not released; Excluding persons who participated in the security breach or assisted those who did from the definition of "Released Parties" and "Third Party Beneficiaries," thereby preventing them from receiving any benefit or protection from the Settlement Agreement; Ensuring that the opportunity for the Settlement Class Members to take advantage of the Trend Micro Internet Security Products granted under the Settlement Agreement is extended until January 1, 2010; Including a definition of the term "organized misuse," in order to make the Settlement Agreement more understandable, on its face, to a Settlement Class Member; Amending the section regarding the "Voluntary Identity Theft Benefits" that TD Ameritrade may extend to Identified Class Members to: (1) eliminate confusion between that process and claims that may be brought in court, and (2) avoid the unintended release of such claims; Under the Voluntary Identity Theft Benefits program, expanding the window of time for an Identified Class Member to respond to TD Ameritrade regarding the Member's intention to seek such benefits from 30 days to 90 days; Under the Voluntary Identity Theft Benefits program, clarifying that an Identified Class Member's right to file suit against TD Ameritrade for identity-theft related harm is preserved up until the point that the Identified Class Member submits a claim in a binding arbitration process; and TD Ameritrade agreeing to provide all Settlement Class Members, not just Identified Class Members, with dedicated customer support for relating [sic] to the benefits provided under the Settlement Agreement and questions 5

1 2 3 4 5 6 7 8 9 10 United States District Court For the Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 fairness." notice.

concerning spam and identity theft for a full twelve months. In the Notice and related correspondence: Providing an explanation of the basis of the suit that includes the fact that TD Ameritrade's computer database suffered a data security breach and exposed the Class Members to the risk of identity theft (as opposed to an "unauthorized acquisition") so that Class Members have more information on which to base their decision to remain in the class, opt out, or object to the settlement. Doc #90-2, Exh A at 2-3. The Texas Attorney General's Office

withdrew its objections to the proposed settlement provided that the above amendments were implemented. On March 19, the Parties submitted a supplemental statement with a revised proposed settlement agreement and forms of Doc #90. The revised proposed settlement agreement and

forms of notice incorporates the amendments urged by the Texas Attorney General as a condition for withdrawing the objections on behalf of the state of Texas. Doc 90, Exh B-E.

I Federal Rule of Civil Procedure 23(e) requires court approval for the settlement of any class action. In order to be

approved, a settlement must be "fundamentally fair, adequate and reasonable." Torrisi v Tucson Elec Power Co, 8 F3d 1370, 1375 (9th

Cir 1993), quoting Class Plaintiffs v Seattle, 955 F2d 1268, 1276 (9th Cir 1992). Class action settlement approval that takes place prior to the class certification stage requires "a higher standard of Hanlon, 150 F3d at 1026. 6 The judge must conduct a

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"more probing inquiry" in order to protect the plaintiff class because there is a danger of collusion between class counsel and the defendant. See id. As Judge Friendly explained in the

stockholder derivative class action context, "[o]nce a settlement is agreed, the attorneys for the plaintiff stockholders link arms with their former adversaries to defend joint handiwork." Alleghany Corp v Kirby, 333 F.2d 327, 347 (2d Cir 1964). Nevertheless, because a settlement seeks to avoid trial and wasteful litigation, "the court must not turn the settlement hearing `into a trial or rehearsal of the trial.'" Saylor v Lindsley, 456 F2d 896, 904 (2d Cir 1972) (Friendly, J). The question currently before the court is whether this settlement should be preliminarily approved. "[The] preliminary determination establishes an initial presumption of fairness * * *." In re General Motors Corp, 55 F3d 768, 784 (3d Cir 1995) (emphasis added). As noted in the Manual for Complex Litigation, Second, "[i]f the proposed settlement appears to be the product of serious, informed, non-collusive negotiations, has no obvious deficiencies, does not improperly grant preferential treatment to class representatives or segments of the class, and falls within the range of possible approval, then the court should direct that the notice be given to the class members of a formal fairness hearing * * *." Manual for Complex Litigation, Second § 30.44 (1985). In addition, "[t]he court may find that the settlement proposal contains some merit, is within the range of reasonableness required for a settlement offer, or is presumptively valid." Newberg on Class Actions § 11.25 (1992). Schwartz v Dallas Cowboys Football Club, Ltd, 157 F Supp 2d 561, 570 n12 (ED Pa 2001). In other words, preliminary approval of a

settlement has both a procedural and a substantive component. The court has some serious misgivings about this proposed settlement. The court is particularly concerned that TD Ameritrade

has agreed to pay the class counsel $1.87 million (Doc #90-3, Exh B 7

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at 18) and yet the class itself will receive no monetary award. Additionally, it appears that, as both the Texas Attorney General and Elvey suggest in their objections to the proposed settlement, part of the consideration TD Ameritrade offers is merely a promise to conduct security measures that a responsible company should conduct anyway. Nevertheless, in light of the amended agreement between the Parties and the withdrawal of objections by the Texas Attorney General, the court finds that the amended proposed settlement is "within the range of possible approval." at 570 n12. Schwartz, 157 F Supp 2d

The Texas Attorney General injected the negotiations The Parties and

here with a needed dose of adversarial process.

the Texas Attorney General's Office engaged in a series of serious and informed discussions over four months that led to significant changes to the proposed settlement that satisfied both sides. ##90 at 2, 90-2, Exh A at 2-3. Moreover, the court expects that if there were a large disparity between the consideration obtained by the class in the revised settlement agreement and the expected benefit to the class from taking the case to trial, there would be no shortage of counsel willing to take up representation of the entire class in pursuit of a better result. At a hearing, the court asked both Doc

Chavez and Beck, attorneys for Elvey, if they were willing to represent the class and both declined. Doc #87 at 4-5. Elvey

suggested at the same hearing that he was struggling to find alternative counsel willing to take the case. Id at 31-32. This

lack of a willing successor counsel further supports the finding that this settlement is within the range of reasonableness. 8

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The court next takes up the form of notice.

Class

members are entitled to the "best notice that is practicable under the circumstances." FRCP 23(c)(2)(B). The Parties propose the

following notice plan: (1) an individual e-mail summary form notice to any settlement class member whose e-mail address was provided to [TD Ameritrade]; (2) summary form notice by postcard (via United States mail) to settlement class members who did not provide e-mail addresses to [TD Ameritrade] or whose e-mail notices are returned as, or are otherwise known to be, undeliverable; and (3) publication of the summary form notice in one daily and one weekend issue of the USA Today. The summary form notice will include a toll free number and a dedicated website address that can be used to obtain a copy of a long form notice. Doc #86 at 2-3. See Doc #90, Exhs C-E (presenting the proposed

form of the e-mail, postcard and newspaper publication notice). The court finds that notice primarily by e-mail in addition to a newspaper publication is appropriate in this case, where the class includes over six million members. With regard to the content of the proposed notice, the Texas Attorney General agreed to withdraw its objections as each form of notice was amended to explain that the basis of the lawsuit includes a data security breach that exposes the class to the risk of identity theft. Doc #90-2, Exh A at 3. The proposed e-mail,

postcard and newspaper publication have all been amended to include the following: "The Complaint seeks monetary and injunctive relief for any alleged injuries arising from the data breach, including alleged receipt of spam and identity theft, if it were to occur." Doc ##90-4, Exh C at 2, 90-5, Exh D at 3, 90-6, Exh E at 2. As a

consequence, the amended proposed form of notice provides class members with more information on which to base their decision to remain in the class, opt out or object to the settlement. 9

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Accordingly, the court APPROVES the proposed form of notice, as to both form and content. In sum, the court GRANTS the Parties' motion for preliminary approval of the proposed settlement and provisional certification of the settlement class and APPROVES the forms and manner of notice described in the revised proposed settlement agreement and forms of notice. Doc #90, Exhs B-E. The class is

defined as all persons who are or were accountholders or prospective accountholders of TD Ameritrade and who provided physical or e-mail addresses to TD Ameritrade on or before September 14, 2007. The court confirms KamberEdelson, LLC and

Parisi & Havens LLP as class counsel, Scott A Kamber and Ethan Preston of KamberEdelson, LLC as lead counsel and Joel Griffiths, Gadgetwiz, Inc and Brad Zigler as class representatives. Additionally, the court ORDERS the following schedule for further proceedings: Date On or before May 14, 2009 July 9, 2009 August 20, 2009 September 10, 2009 // // // // // 10 Event Publication in USA Today Deadline to postmark objections or opt out Deadline for filing briefing in support of final approval of settlement Hearing on final approval of settlement

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At the final approval hearing on September 10, 2009, at 2:30 pm, the court will determine: (1) whether the revised

proposed settlement agreement and forms of notice should be approved as fair, reasonable and adequate; (2) the merits of objections, if any, made to the settlement or any of its terms; (3) the amount of litigation costs, expenses and attorney fees, if any, that should be awarded to class counsel and (4) other matters related to the settlement.

IT IS SO ORDERED.

VAUGHN R WALKER United States District Chief Judge

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Attachment 1