Dremak v. Iovate Health Sciences Group, Inc. et al

Filing 291

ORDER Denying 201 Final Approval of Class Action Settlement. Signed by Judge Barry Ted Moskowitz on 11/19/2013. (rlu)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

SOUTHERN DISTRICT OF CALIFORNIA

10
11
12

CASE NO. 09md2087 BTM (KSC)

14

IN RE HYDROXYCUT
MARKETING AND SALES
PRACTICES LITIGATION

15

____________________________

13

16
17

ANDREW DREMAK, on Behalf of
Himself, All Others Similarly
Situated and the General Public,

20
21

ORDER DENYING FINAL
APPROVAL OF CLASS ACTION
SETTLEMENT

Plaintiff,

18
19

CASE NO. 09cv1088 BTM(KSC)

v.
IOVATE HEALTH SCIENCES
GROUP, INC., et al.,
Defendants.

22
23
24

Co-Lead Class Counsel (and Proposed Class Counsel for the Settlement

25

Class) have filed a Motion for Final Approval of Class Action Settlement. The

26

Court held a hearing on the motion on October 22, 2013. For the reasons set

27

forth below, the Court DENIES the motion for final approval of the settlement.

28

1

09md2087

I. SETTLEMENT TERMS

1
2
3

The terms of the Settlement Agreement are set forth in the Amended
Stipulation of Settlement (“Am. Stip.”). (09cv1088 - Doc. 238.)

4

The “Settlement Class” is defined as including those persons who

5

purchased in the United States any of the Hydroxycut Products (specific products

6

set forth in § II.A.23 of the Am. Stip.) between May 9, 2006 and May 1, 2009,

7

inclusive. (Am. Stip. § II.A.46.) Excluded from the Settlement Class are (1)

8

persons who purchased Hydroxycut Products for the purpose of resale; (2) Iovate

9

and its officers, directors, and employees; (3) any person who filed a valid and

10

timely Request for Exclusion; and (4) the Judges to whom this action is assigned

11

and any members of their immediate families.1

12

The settlement relief consists of a $10 million Cash Component and a $10

13

million Product Component. Settlement Class Members who opt to receive cash

14

will receive $25 for each Hydroxycut Product they purchased. (Am. Stip. §

15

IV.A.2.) No proof of purchase is required to receive $25. Requests for payment

16

for more than one unit of Hydroxycut Product require proof of purchase. In lieu

17

of cash, Settlement Class Members can elect to receive a Product Bundle for

18

each purchase of a Hydroxycut Product. (Am. Stip. § IV.A.3.) Each Product

19

Bundle shall have an aggregate retail price of not less than $50. Authorized

20

claimants requesting one Product Bundle will be provided with the Product

21

Bundle without proof of purchase. A request for more than one Product Bundle

22

requires proof of purchase.

23
24
25
26
27
28

1

In the original Stipulation of Settlement, the Settlement Class excluded persons with
claims for personal injuries arising from the ingestion of one or more Hydroxycut Products.
However, the definition of the Settlement Class was amended after the Court raised concerns
that the cy pres distribution of residual settlement fund amounts would be used to compensate
consumers who suffered personal injuries from taking Hydroxycut Products, even though these
personal injury plaintiffs were specifically excluded from the class definition.

2

09md2087

1

Any amount remaining in the Cash Component after payment of Notice and

2

Claim Administration Expenses, necessary taxes and tax expenses, and Eligible

3

Cash Claims constitutes the “Residual Settlement Amount.”

4

IV.C.1.a.) Any amount remaining in the Product Component after payment of

5

Eligible Product Claims, Product Bundle Shipping Expenses, and any amounts

6

needed to pay Eligible Cash Claims,2 shall, at Iovate’s option, either (1) be

7

provided by Iovate to the general public pursuant to the cy pres doctrine in the

8

form of Additional Product; or (2) be added to the Residual Settlement Amount.

9

(Am. Stip. § IV.C.2.a.)

(Am. Stip. §

10

The Residual Settlement Amount shall be held in trust by an Escrow Agent.

11

(Am. Stip. § IV.C.1.b.) A Personal Injury Claimant – defined as persons who

12

have lawsuits pending in federal or state courts, or who have executed tolling

13

agreements as of September 1, 2012, and allege personal injury resulting from

14

the ingestion of one or more Hydroxycut Products (Am. Stip. § II.A.33) – may

15

submit a Residual Settlement Claim Form to the Escrow Agent if the claimant is

16

a party to a settlement or final judgment. Upon receipt of the Residual Settlement

17

Amount Claim Form, the Escrow Agent shall be authorized to pay the amount of

18

such judgments or settlements, on a first-come, first-served basis, without any

19

pro rata or per capita adjustment, until the Residual Settlement Amount is

20

exhausted. (Am. Stip. § IV.C.1.b.)

21

If any funds remain after six years from the Effective Date (date of entry

22

of final judgment or the date after an appeal has been concluded and is no longer

23

subject to review), the remaining funds shall be paid to ChangeLab Solutions or

24

some other similar organization pursuant to the cy pres doctrine. (Am. Stip. §

25

IV.C.1.d.)

26
27
28

2

Section IV. B. provides that up to $ 4 million from the Product Component can be used
to pay Eligible Cash Claims if the aggregate Eligible Cash Claims, Notice and Claim
Administration Expenses, and necessary taxes and tax expenses exceed the $10 million Cash
Component.
3

09md2087

1

Iovate agrees not to oppose an application for an award of attorney’s fees

2

not to exceed $5,000,000, and for an award of out-of-pocket expenses not to

3

exceed $300,000. (Am. Stip. § X.A.) Class Counsel seeks fees in the amount

4

of $5,000,000 and expenses in the amount of $ 193,656.64. According to Class

5

Counsel, the combined fee and expense award amounts to 21% of the settlement

6

value created by plaintiffs’ counsel’s efforts ($20 million Settlement Fund, plus $5

7

million in attorneys’ fees, and up to $300,000 in expenses).

8
9

II. STANDARD

10

A district court can approve a class action settlement if the court finds that

11

the settlement is “fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e). When

12

the settlement is reached before formal class certification, settlement requires a

13

“higher standard of fairness” and “a more probing inquiry than may normally be

14

required under Rule 23(e).” Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th

15

Cir. 1998). The reason for the higher level of scrutiny is that there is “greater

16

potential for a breach of fiduciary duty owed the class during settlement.” In re

17

Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 946 (9th Cir. 2011).

18

“Collusion may not always be evident on the face of a settlement, and courts

19

therefore must be particularly vigilant not only for explicit collusion, but also for

20

more subtle signs that class counsel have allowed pursuit of their own self-

21

interests and that of certain class members to infect the negotiations.” Id. at 947.

22
23

III. DISCUSSION

24

At the final approval hearing, the Court questioned Class Counsel and

25

Iovate’s attorney about the cy pres distribution provisions of the settlement.

26

Based on the information obtained at the hearing, the Court finds that the cy pres

27

remedy does not satisfy the standards for cy pres relief set forth by the Ninth

28

4

09md2087

1

Circuit. Therefore, the Court cannot find that the settlement is fair, adequate, and

2

reasonable, and the motion for final approval of the settlement must be DENIED.

3

The cy pres doctrine allows a court to distribute unclaimed or non-

4

distributable portions of a class action settlement fund to indirectly benefit the

5

entire class. Six Mexican Workers v. Ariz.Citrus Growers, 904 F.2d 1301, 1305

6

(9th Cir. 1990). When employing the cy pres doctrine, unclaimed funds should be

7

put to their next best use, e.g., for “the aggregate, indirect, prospective benefit of

8

the class.” Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011) (quoting

9

Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007)).

10

The Ninth Circuit has held that cy pres distribution must be “guided by (1) the

11

objectives of the underlying statute(s); and (2) the interests of the silent class

12

members.” Six Mexican Workers, 904 F.2d at 1307. A cy pres distribution is an

13

abuse of discretion if there is “no reasonable certainty” that any class member

14

would benefit from it. Dennis v. Kellogg Co., 697 F.3d 858, 865 (9th Cir. 2012)

15

(quoting Six Mexican Workers, 904 F.2d at 1308)). A court should not find that

16

a settlement is fair, adequate, and reasonable unless the cy pres remedy

17

“account[s] for the nature of the plaintiffs’ lawsuit, the objectives of the underlying

18

statutes, and the interests of the silent class members . . . .” Lane v. Facebook,

19

696 F.3d 811, 819-20 (9th Cir. 2012) (quoting Nachshin, 663 F.3d at 1036).

20

The biggest problem with the proposed cy pres distribution in this

21

settlement is that it simply does not benefit the class. At the hearing, counsel for

22

Iovate explained that under the master settlement agreement governing the

23

personal injury cases in this multi-district litigation, personal injury claimants are

24

to be paid out of a $14 million settlement fund. Amounts paid to personal injury

25

claimants from the Residual Settlement Amount in this action will be credited

26

towards the $14 million personal injury fund. A personal injury claimant who is

27

paid out of the Residual Settlement Amount cannot also recover against the

28

personal injury settlement fund – i.e. the personal injury claimant’s recovery is

5

09md2087

1

limited to what he or she is entitled to under the applicable final judgment or

2

settlement. Thus, cy pres distributions to personal injury claimants in this action

3

reduce the amount that Iovate must pay into the personal injury fund while

4

providing no additional benefit to the personal injury claimants and no benefit at

5

all to the class members who suffered no personal injury.

6

Class Counsel argues that the cy pres remedy provides a benefit to the

7

class members because the master settlement in the personal injury cases was

8

reached based on the assumptions underlying the settlement of this class action.

9

In other words, class members who suffered personal injury benefit from the cy

10

pres remedy, because without the cy pres provisions in this settlement, the

11

settlement of the personal injury cases might not have occurred.

12

attorney adds that without the cy pres remedy, the class action settlement may

13

fall apart and, therefore, the non-personal injury class members also receive a

14

benefit from the inclusion of the cy pres provisions. The Court is not convinced

15

by these arguments. The Court doubts that causing a benefit in the form of

16

facilitating settlement in this action or the separate personal injury actions is the

17

type of “indirect benefit” that cy pres remedies are meant to provide. The focus

18

should be on whether the funds themselves are being used for the benefit of the

19

class.

Iovate’s

20

Furthermore, whatever the circumstances surrounding the creation of the

21

master settlement in the personal injury cases, the settlement is now in place.

22

Iovate is obligated to fund the settlement, and participating claimants are entitled

23

to their awards, whether paid from the Residual Settlement Amount in this case

24

or not. Accordingly, the Court disagrees that the cy pres distribution benefits the

25

personal injury claimants.

26

The cy pres remedy is also problematic because it allows for a grossly

27

disproportionate distribution of settlement funds to personal injury claimants. In

28

doing so, the cy pres remedy fails to take into account the interests of the silent

6

09md2087

1

class members, most of whom did not suffer any personal injury, and the nature

2

of this action, which concerns unfair competition, consumer protection, and

3

product warranty claims, not personal injury liability.

4

claimants make up only a tiny fraction of the overall class. There are 550

5

personal injury plaintiffs, whereas approximately 48,000 settlement claims3 have

6

been made. According to Iovate’s counsel, the amount of cash claims that have

7

been made totals approximately $1 million, while the amount of product claims

8

that have been made totals approximately $400,000. Therefore, the remaining

9

$18.6 million, minus Notice and Claim Administration Expenses and taxes and

10

tax expenses, may be used for cy pres distribution to the personal injury

11

claimants.

The personal injury

12

The Court is concerned that so little of the sizeable settlement fund directly

13

benefits the class. Under the terms of the settlement, most of the fund will be

14

channeled into cy pres distribution, without any consideration of whether further

15

distributions can be made directly to claimants on a pro rata basis. The American

16

Law Institute’s Principles of the Law of Aggregate Litigation (“ALI Principles”)

17

provide that where a settlement involves individual distributions to class members

18

and there are funds remaining after the distributions, “the settlement should

19

presumptively provide for further distributions to participating class members

20

unless the amounts involved are too small to make individual distributions

21

economically viable or other specific reasons exist that would make such further

22

distributions impossible or unfair.” ALI Principles § 3.07(b) (2010). Similarly, the

23

Fifth Circuit has held:

24
25

Where it is still logistically feasible and economically viable to make
additional pro rata distributions to class members, the district court
should do so, except where an additional distribution would provide

26
27
28

3

Iovate’s counsel represented that there were about 40,000 cash claims, most of the
claims being for a single unit of Hydroxycut Product. The Court approximates that there were
8,000 product claims based on the total of the product claims ($400,000) divided by the value
of a single product bundle ($50).
7

09md2087

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

a windfall to class members with liquidated-damages claims that were
100 percent satisfied by the initial distribution. A cy pres distribution
puts settlement funds to their next-best use by providing an indirect
benefit to the class. That option arises only if it is not possible to put
those funds to their very best use: benefitting the class members
directly.
Klier v. Elf Atochem North America, Inc., 658 F.3d 468, 475 (5th Cir. 2011).
The Third Circuit agrees that cy pres distributions are “most appropriate
where further individual distributions are economically infeasible,” but has
declined to hold that cy pres distributions are only appropriate under those
circumstances. In re Baby Products Antitrust Lit., 708 F.3d 163, 173 (3d Cir.
2013). Instead, the Third Circuit has held that in analyzing whether a class
settlement is fair, reasonable, and adequate, the Court should consider, among
other things, the degree of direct benefit provided to the class:
In making this determination, a district court may consider, among
other things, the number of individual awards compared to both the
number of claims and the estimated number of class members, the
size of the individual awards compared to claimants' estimated
damages, and the claims process used to determine individual
awards. Barring sufficient justification, cy pres awards should
generally represent a small percentage of total settlement funds.
Id. at 174. (Emphasis added.)
Whether the Ninth Circuit agrees with the Fifth Circuit’s or Third Circuit’s
approach, the cy pres distribution in this case falls short of the mark. The Court
is not convinced that the claimants have been fully compensated for their
damages because proof of purchase is needed to make more than one cash
claim or product bundle claim. The vast majority of the claims have been for one
unit of product even though it seems likely that many claimants purchased more
than one Hydroxycut Product. Accordingly, the claimants would not necessarily
receive a windfall if additional funds were distributed. Iovate has not claimed that
it would be infeasible to make additional distributions. Therefore, the degree of
direct benefit provided to the class by the settlement ($1.4 million out of $20
million) is insufficient. This is especially so in light of the fact that class counsel

28

8

09md2087

1

seeks $5 million in attorney’s fees based in part on a percentage of the total $20

2

million settlement fund.

3

In sum, the Court finds that the cy pres distribution is not “guided by (1) the

4

objectives of the underlying statute(s); and (2) the interests of the silent class

5

members.” Six Mexican Workers, 904 F.2d at 1307. It appears that the cy pres

6

relief is being used as a vehicle to settle the personal injury cases, not to provide

7

an indirect prospective benefit to the entire class.

8

distribution violates the Ninth Circuit’s standards governing cy pres awards, the

9

Court cannot find that the settlement is fair, reasonable, and adequate. Dennis,

10

Because the cy pres

697 F.3d at 868; Lane, 696 F.3d at 819-20.

11

IV. CONCLUSION

12
13
14

For the reasons discussed above, the motion for final approval of class
action settlement [09md2087- Doc. 1637; 09cv1088 - Doc. 201] is DENIED.

15
16

IT IS SO ORDERED.

17

DATED: November 19, 2013

18
19

BARRY TED MOSKOWITZ, Chief Judge
United States District Court

20
21
22
23
24
25
26
27
28

9

09md2087