Settlement class can't stand where settlement notice gave mistaken info

Duran v. Obesity Research Institute, LLC, No. D067917, 2016 WL 3913205 (Cal. Ct. App. Jun. 23, 2016)

Duran sued ORI and Wal-Mart for allegedly falsely advertising the weight loss benefits of Lipozene and MetaboUp. The court approved a claims-made settlement providing that class members submitting a claim without proof of purchase would receive $15, and those submitting receipt(s) would receive one refund of double the unit price paid. (A claims-made settlement isn’t a fixed fund but depends on the number of claims submitted; “[s]uch settlements may promise far more than they deliver because the claiming rate is notoriously low.”) The settlement also provided that ORI would cease making certain advertising claims, and that defendants wouldn’t oppose a motion seeking $100,000 in attorney fees to class counsel.  The class is estimated at between 400,000 and 600,000 consumers.  In total, 895 claims were submitted, in the total amount of $31,800, or 0.179% of the class (assuming 500,000 class members)—about six cents per class member.  Objectors appealed, and the court ruled that the notice, which was emailed to consumers who bought online directly from ORA and also appeared in USA Today, was insufficient.

The notice here depended on the settlement website.  The email, which went to 237,334 class members, didn’t include the terms, but just told recipients to click on a link to the settlement website.  The USA Today notice explained the method of calculating settlement payments and generally described the injunctive relief, but also referred readers to the settlement Web site “[f]or additional information on submitting a claim ....“ The settlement Web site said that submitting a valid claim form was the only way to get a cash payment.  But the downloadable claim form, integral to the settlement, was wrong.  Instead of stating that class members who submitted receipts would get one refund of double the purchase price, it said they’d get a refund of all products bought during the class period, resulting in overvaluing or undervaluing claims.

The online claim form also misstated the product involved—it referred to Hydroxycut products, not involved here—and the scope of the release involved in taking the settlement (the trial court had rejected a release of unknown claims, but the claim form included it).  These issues weren’t raised in the trial court, even by objectors, but class counsel and defendants argued that the settlement was fine and a remand was necessary only to decide the “details and logistics“ of giving corrected class notice.  The court disagreed.  “The judgment must be reversed because the class notice failed in its fundamental purpose—to apprise class members of the terms of the proposed settlement.”

The court found that the problems its independent review of the claim form revealed weren’t waived.  The relevant facts were undisputed and couldn’t have been changed by presenting addditional evidence.  And the trial court couldn’t have cured the error at the final approval hearing because the claims process was over.  Further, “[t]he court’s responsibility to protect absent class members” justified an exception to waiver or forfeiture.

Defendants and class counsel argued that, even though the notice was bad, the finding that the settlement was reasonable, fair, and adequate should be left untouched.  But the adequacy of class notice of settlement was too intertwined with the reasonableness of the settlement to accept that argument, since, among other things, “the amount offered in settlement“ and “the reaction of the class members to the proposed settlement” are relevant to the court’s assessment.

As for notice to class members, “process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.”  ORI sent notice by email to its direct website customers.  Objectors argued that Wal-Mart.com purchasers could have been given email notice too, and that the parties should have subpoenaed records from other retailers, such as Amazon, CVS, and Walgreens, to obtain addresses of other class members.  Wal-Mart argued that it couldn’t get addresses for those who purchased from its online store because the entity operating Wal-Mart.com—Wal-Mart.com USA, LLC—wasn’t the entity Duran sued, which was Wal-Mart Stores, Inc.  ORI’s attorney filed a declaration stating he “reached out“ to “several retailers“ to obtain customer contact information, but was told that “obtaining such information is illegal, unavailable or improper.”

“On remand, class counsel and defendants will have to provide a better foundation to support a ruling that direct notice need not be given.”  Among other things, the fact that the brick and mortar store was owned by one entity, and the online store by another, didn’t by itself establish the requested information wasn’t reasonably obtainable.  What’s required is “a notice plan that one would implement if one genuinely wanted to inform someone, all relevant factors considered.”  It wasn’t enough to say, vaguely, that counsel “reached out to several retailers.”  Direct notice might not be required for online purchasers other than those who used ORI’s website, but the court needed more information.

Objectors also submitted a declaration from a media expert asserting the USA Today notice reached only approximately 1.06% of class members. She used “industry-standard research data” about “demographic, lifestyle, product usage and exposure,” using data for audiences targeted with a definition of “Meal/Dietary/Weight Loss Supplements Used For Weight Loss in Last 6 Months.”  There was no evidence disputing her opinion or even evidence that Lipozene was advertised in USA Today.  ORI didn’t explain how a settlement class member who didn’t receive e-mail notice and who didn’t read the notice in USA Today would even know to look for a Lipozene settlement Web site.  The idea of using publications targeting class members needed to be explored.

As for injunctive relief, the settlement required ORI to change its advertising and some other business practices.  Among other things, ORI agreed to add a disclaimer regarding Lipozene’s effectiveness, including links to studies about Glucomannan, an ingredient contained in Lipozene. It would also add, “For best results, use in conjunction with reasonable diet and exercise.“ ORI also agreed to end its pay-per-click Internet advertising, increase its return policy from 30 to 45 days to claim a refund, and use “best efforts“ to “eliminate all testimonials created prior to January 1, 2010.”

Objectors argued that the injunctive relief was illusory; on this record, the court of appeals agreed.  Adding language about how “study participants” had been helped by Lipozene wasn’t helpful in correcting the allegedly false claims.  Nor was changing that  Lipozene has “effectively helped millions of people”  to Lipozene has “effectively helped countless people.”  There was no evidence that the extra 15 days in the return period offered any material benefit to consumers.  As for the diet/exercise statement, ORI was already working under a stipulated judgment with the FTC prohibiting ORI from representing that Lipozene or MetaboUp products “[c]auses rapid or substantial weight loss without the need to reduce caloric intake or increase physical activity.” Requiring ORI to obey an existing judgment didn’t add value.