Bezdek v. Vibram: The First Circuit Upholds a Class Settlement

On December 31st, the First Circuit approved a class action settlement in a case involving claims of deceptive advertising.  While breaking no new ground, the court’s decision provides useful guidance to parties negotiating a class settlement.

The case involved claims that defendants’ marketing of certain footwear made false claims about the products’ health benefits.  After discovery but before plaintiffs moved for class certification, the parties entered into a settlement agreement.  The agreement called for a $3.75 million settlement fund to provide refunds to class members who submit claims.  The agreement suggested that it was reasonable to expect class members may receive payment in the range of $20 to $50 per pair, but while there was a maximum recovery per claim, there was no minimum.

As it turned out, because of a higher than expected claim rate, the estimated refund was $8.44 per pair.  Objections were filed by a group of objectors, who did not submit any proof of purchase, which was a condition for objecting.  Despite this omission, the district court said that it would “consider the merits of the objectors’ assertions to the extent they raise questions [it] would ask independently in [its] own review of the proposed settlement.”  It then found the settlement fair, reasonable and adequate, and granted final approval.

The First Circuit, applying the appropriate abuse of discretion standard of review, affirmed.  It considered several arguments raised by the objectors.  First, the objectors complained about the disparity between the actual amount claimants would receive under the settlement and the higher amount that had been projected at the time of preliminary approval.  Although the Class Notice included the higher estimate, the court found it sufficient that the Summary Settlement Notice and the Postcard Notice both explained that the number of valid claims received would affect the amount recovered on each claim.  Further, the court held that “[t]here was no abuse of discretion in the district court’s conclusion that a refund of $8.44 per pair, although modest, was a fair compromise that accounted for the risks faced by both parties if litigation had continued.”

The objectors complained that class counsel should have anticipated the potential for a higher number of claims that would reduce the per claim recovery, and contended that the settlement should have included countermeasures to prevent dilution of the claims.  The court disagreed, holding that “[t]he fact that a better deal for class members is imaginable does not mean that such a deal would have been attainable in these negotiations, or that the deal that was actually obtained is not within the range of reasonable outcomes.”

Next, the court addressed the objectors’ complaint that requiring objectors to submit a proof of purchase imposed an unreasonable burden that would deter objections.  The court held that “[t]he ultimate question for the district court was whether the settlement was fair, reasonable, and adequate,” and “if the fairness of the settlement ultimately stands up to scrutiny, then the imposition of disparate requirements on objectors does not provide an independent basis for invalidating the settlement.”  Because the district court did not abuse its discretion in concluding that the settlement was fair, the objectors’ argument about the proof of purchase had no merit.  On this point, it obviously was helpful to the settling parties that the district court considered the merits of the objections despite the objectors’ failure to submit their own proofs of purchase.

In a footnote, the First Circuit limited the scope of its ruling, stating that while the disparate requirement “imposed on objectors does not change the result in this case, we do not rule out the possibility that it could ever be relevant in some other respect.”  It pointed out that, “[b]y monitoring class counsel and providing courts with crucial information on which to evaluate proposed settlements, meritorious objectors can be of immense help to a district court in evaluating the fairness of a settlement,” but also that it is “important for district courts to screen out improper objections because objectors can, by holding up a settlement for the rest of the class, essentially extort a settlement of even unmeritorious objections.”

The court next rejected the objectors’ argument that the settlement’s provision of injunctive relief was illusory, finding that the requirement that the defendant discontinue its allegedly false advertising campaign unless it obtains reliable scientific evidence to support it was “a meaningful concession.”

Finally, the court addressed the objectors’ concerns about the clear-sailing provision with respect to class counsel’s request for attorneys’ fees.  Defendant had agreed not to oppose a request for attorneys’ fees that do not exceed 25% of the settlement fund.  The First Circuit observed that it had previously held “that a clear-sailing agreement is not per se unreasonable,” but that “courts are directed to give extra scrutiny to such agreements.”  In this case, the district court did so, reviewing the amount of fees under both the percentage of fund method and the lodestar method, and concluding that the fees were reasonable under both.  The objectors argued that the fees were unreasonable because there had been very little activity in the case.  The district court rejected this argument, finding that there had been “extensive fact discovery,” “some significant motion practice,” and an attempt at mediation.  The First Circuit found no abuse of discretion.

Written by former litigation partner, Donald R. Frederico.