NY appellate court keelhauls Pirate's Booty settlement

Klein v. Robert's American Gourmet Food, Inc., --- N.Y.S.2d ----, 2006 WL 240592 (N.Y.A.D. 2 Dept.)

This appeal was brought by an objector to the certification of a nationwide settlement class for fraud and violation of, among other laws, New York's General Business Law, sections 349 and 350, which cover deceptive advertising. The defendant sells snacks known as Pirate's Booty, Fruity Booty, and Veggie Booty (celebrated in a Salon article here as "crack for babies"). The lawsuit, like others in California, Florida, and New Jersey, began after the Booties were revealed to have higher fat and calorie contents than the label indicated – more background here.

The proposed settlement involved $3.5 million in coupons for defendant's snacks, for about 20% of the retail price, distributed so as to result in the redemption of approximately $780,000 per 6-month period. In addition, the snacks were to be tested for fat and calorie content at regular intervals and the results reported to class counsel for four years. Finally, defendant would pay up to $790,000 in attorney's fees.

The lower court conditionally certified the class for settlement purposes only. The appellant was the plaintiff in an individual action in New York who became a member of the class and objected. Her objections included that the settlement didn't provide enough value for the class and that the proposed fees were excessive. When her objection was rejected, she sought to opt-out; this led the defendant to argue that she lacked standing. Then she rescinded her opt-out, but the lower court agreed with the defendant. The appellate court concluded that she had standing both because her opt-out notice was defective and untimely and because she opted back in before the final deadline.

New York class actions work pretty much like federal ones. The appellate court, acting as guardian of absent class members, had three concerns. First, the class definition. Except for GBL § 349, all the causes of action required proof of reliance. But the class encompassed all purchasers during the relevant period, even though some – perhaps many – of the buyers would have bought it even if they'd known they were getting 8.5 grams of fat instead of 2.5. Given that there was no reason to adopt a fraud-on-the-market theory here, the class definition was too broad. And there was no record evidence supporting the trial court's conclusion that common issues of law and fact predominated, since reliance would be determined individually.

The GBL § 349 claim doesn't require proof of reliance, but is strictly limited to purchases made in New York, while the class is a US class.

Doesn’t this reasoning make it impossible for deceptive trade practices cases to be litigated or settled as class actions? No, the court says: The existence of individual issues is just one of several factors to be weighed by the court. But the record here doesn't show the trial court considered that factor at all, so remand is required.

Second and independently, the reasonableness of the settlement is at issue. There was no indication that the proposed discount coupons had any intrinsic cash value, or that they could be assigned, aggregated, or transferred in any way, which made it harder to find that they provided definite value to the class. Moreover, the settlement didn't propose to distribute the coupons directly to the class, but instead to the general public. Where it's difficult to locate class members or distribute funds directly to them, this cy pres distribution may be a "useful complement" to more traditional formulas. But the record didn't show that the trial court considered the alternatives, and this is particularly troubling because the coupons are unlikely to benefit class members with the most serious grievances.

After all, the defendant changed the label, not the fat and calorie content. People who relied on the misrepresentation are unlikely to buy the correctly labeled product.

Though this also required remand, the court made a very important point: given the absence of proof of purchase, the cost of litigation, and the individually modest sums at stake, many of the class members would face significant obstacles litigating individually and might not pursue their claims at all. (As is true of almost any consumer class action.) This broadens the range of reasonableness against which the settlement's value should be measured.)

Third, the court was concerned about the attorney's fees because the record was insufficient to show the value of services rendered.

So, it was back to the trial court. Any bets on a final settlement?