Seventh Circuit Reverses Order Approving Settlement of Class Action Finding District Court Failed to Critically Analyze Fairness of Settlement Because it Failed to Determine the Value of the Plaintiff’s Case or the Value of the Settlement to the Class
Plaintiff filed a class action against Airborne Express (now DHL) alleging that its practice of charging customers the cost of shipping a five-pound package as a “default rate” if the customer failed to write down the weight of the package violated federal common law. In practice, this meant that if a customer used an Airborne envelope intended for shipping eight ounces or less (called “Letter Express”) but the customer failed to note the actual weight of the package or write the number “1” in the weight section, then Airborne charged the customer “a default rate equivalent to the cost of sending a five pound shipment,” which was approximately $5 more than the regular rate for such envelopes. Synfuel Technologies, Inc. v. DHL Express (USA), Inc., 463 F.3d 646, 648-49 (7th Cir. 2006). After the district court denied a defense motion to dismiss the class action complaint, the parties reached a settlement. The district court approved the settlement, but the Seventh Circuit reversed.
The Circuit Court summarized the terms of the proposed settlement at page 649 as follows:
The proposed settlement . . . defines a settlement class of Airborne customers who were charged the default rate between April 11, 1992, and November 30, 2003. It allows each class member to submit a proof of claim form and supporting documentation and receive pre-paid Letter Express packages, worth approximately $13 each, according to the following schedule:
1-3 default charges = 1 package
4-7 default charges = 2 packages
8-12 default charges = 3 packages
12+ default charges = 4 packages
Alternatively, a class member may opt to receive a cash payment instead of the pre-paid packages:
1 default charge = $2.50
2 default charges = $5.00
3 default charges = $7.50
4-6 default charges = $2.00 per charge
>6 default charges = $1.50 per charge up to a maximum of $30.
A class member who submits a proof of claim form without providing supporting documentation is entitled to a single pre-paid Letter Express package. * * * Finally, the settlement calls for Airborne to pay class counsel . . . $4.95 million in attorneys’ fees and up to $45,000 in costs, and for class counsel Synfuel.
The district court conditionally approved the settlement and scheduled a fairness hearing. In response to notices mailed to 240,000 potential class members and published nationally, only 7000 proofs of claim were filed. Eight objections were filed. DHL, at 649-50. The district court dismissed the objection that the settlement value was too low stating, finding it was “generous in light of the fact that Plaintiff’s case is subject to a number of strong defenses.” Id., at 650.
The Seventh Circuit characterized the objection to the fairness of the settlement as “the most substantial challenge raised by the objectors on the merits.” DHL, at 652. While the standard of review for court approval of a class action settlement is whether approval was an abuse of discretion, “the court’s role [is] akin ‘to the high duty of care that the law requires of fiduciaries.’” Id., at 652-53. The most important of the several factors to be considered by a court in determining the fairness of a class action settlement is “‘the strength of plaintiff’s case on the merits balanced against the amount offered in the settlement.’” Id., at 653 (citation omitted). This requires that the district court determine at the very least a “ballpark valuation” of the plaintiff’s case. Id. The Circuit Court noted that the district court failed to determine the value of plaintiffs’ case or the value of the proposed settlement to the class. In fact, the only valuation came from objectors, who estimated that Airborne overcharged class members by $75 million, but the district court rejected this estimate as “irrelevant” to a determination of the fairness of the settlement. Id., at 654,
Objectors complained also that the “capped regressive scale” worked to the disadvantage of those class members who were charged Airborne’s default rate numerous times, and that the pre-paid packages were akin to “coupons,” which have been criticized as failing to “‘provide meaningful compensation to most class members.’” DHL, at 653 (citation omitted). As to the regressive scale complaint, the Circuit Court noted that the district court failed to critically analyze class counsel’s argument “that the regressive payment schedule and $30 cap appropriately reflected the impact of the statute of limitations and the voluntary payment doctrine on the class’s claims against Airborne.” Id. The district court believed that the more often a class member was charged the default rate, the more difficult it would be for the class member to recover damages because they were more likely to have “full knowledge of the facts,” but the court failed to estimate how many class claims would be barred by the statute of limitations or the voluntary payment doctrine. Id., at 653-54.
With respect to the coupon objection, the Seventh Circuit stated, “Our confidence in the fairness of the settlement is further undermined by the agreement’s bias toward compensating class members with pre-paid Letter Express envelopes instead of cash. Pre-paid envelopes, like coupons, are a form of in-kind compensation.” DHL, at 654. In-kind compensation is worth less to class members because some will never be used and thus will not be a cost to the defendant. In-kind compensation also benefits the defendant because it requires class members to continue doing business with him. Id. Finally, the Court rejected the argument that operational changes will benefit class members: “It is future customers who are not plaintiffs in this suit who will reap most of the benefit from these changes.” Id.
The Circuit Court concluded that the district court abused its discretion in approving the settlement and reversed the order. DHL, at 654.
NOTE: The lawsuit was originally filed in federal court alleging federal common law as the basis for subject matter jurisdiction. Plaintiff later amended the complaint to assert class claims and to alternatively plead diversity jurisdiction, but the factual allegations necessary to support diversity jurisdiction were not alleged. The Circuit Court clearly was not pleased with the fact that “only after several supplemental filing have we finally been able to assure ourselves that the district court’s jurisdiction was proper,” DHL, at 650, as it noted that there was “no excuse” for this because “the rules concerning the plaintiff’s duty to support subject matter jurisdiction in the federal court are too well established to require citation,” id., at 651.
We note also that the Seventh Circuit was persuaded by the “heightened judicial scrutiny of coupon-based settlements” required by the Class Action Fairness Act of 2005 (CAFA), even though the case did not fall within CAFA. DHL, at 654.