Now That That’s Settled: The Status Of Class Action Settlements In The Seventh Circuit After Pella, Radioshack And NBTY

Over the last several months, Judge Richard Posner has authored a triumvirate of opinions reversing the district courts' approval, over objections, of consumer class action settlements—Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), Redman v. RadioShack Corp., 768 F.3d 622 (7th Cir. 2014), and Pearson v. NBTY, Inc., No. 12-1245, 2014 WL 6466128 (7th Cir. Nov. 19, 2014)—each of which could charitably be described as scathing. Among other things, Judge Posner takes aim at the manner in which a settlement is valued for purposes of determining attorney's fees (administration costs and cy pres awards are not part of the value to the settlement class), the method of calculating attorney's fees (a ratio based on actual value to the class, not the maximum potential value), and the manner and content of notice to the class as well as the claims process (simplification is key). While the class action bar awaits the impact of these decisions, there are several key lessons to be learned.

In Pella— a settlement described by Judge Posner as "scandalous"—a class action was brought over allegedly defective windows. After nearly seven years of litigation, the district court granted final approval, valuing class relief at $90 million and approving an $11 million attorney's fee award. Judge Posner found two issues especially troubling. First, the claims process was structured to depress claims—or in Judge Posner's words, "strew[] obstacles in the path of any owner of a defective [window]." Among the many issues: (i) the claims form was 12-13 pages long, (ii) the claim form was needlessly complicated and made obtaining relief difficult, (iii) the notice was divided into 27 sections, many of which had subsections, and (iv) the notice was "incomplete and misleading." Second, the attorney's fees award was based on an "inflated" value of relief to the class—for which there was no independent valuation. Judge Posner found the total relief to the class worth, at most, $8.5 million. Though he did not say so directly, Judge Posner indicated (perhaps foreshadowing his Radioshack and NBTY opinions) that a fee equal to 56% of the settlement (56% = $8.5m + $11m / $11m) is excessive. And this is not to mention the umbrage Judge Posner took with a provision in the settlement agreement that any money cut from attorney's fees would revert to the defendant rather than the class—a provision he later refers to in NBTY as a "kicker" clause.

Radioshack involved a class action...