Unrelated cy pres recipient and disfavored coupon offer doom settlement approval

Hofmann v. Dutch LLC, No. 14-cv-02418, 2017 WL 840646 (S.D. Cal. Mar. 2, 2017)

The court rejected plaintiff’s unopposed third motion for preliminary approval of the proposed class settlement in this case involving allegedly false “Made in the USA” claims for jeans.  The initial proposed settlement provided for: (1) $20 worth of e-gift certificates for each of the class members; (2) $250,000 in cy pres awards; and (3) up to $175,000 in plaintiff’s attorney’s fees with a “clear sailing” provision attached.  The court didn’t like (1) that the e-gift certificates effectively constituted coupons because they required class members to pay out of their own pocket before they could redeem them; (2) that the cy pres award failed to meet the objectives of the underlying consumer protection statutes; and (3) that, when considered in conjunction with the other provisions of the proposed settlement, the “clear sailing” provision “created at least a danger of collusion during the settlement negotiations which is not refuted by the record.”

For the second attempt to propose a settlement, Hofmann proposed to add one denim tote bag ($128 retail value) to the initial settlement, but the court found that the problems remained.  This third attempt added “multiples of $20.00 corresponding to the number of units of Class Products purchased during the Class Period” to individual e-gift certificates and injunctive relief.

The court was not impressed.  Under California statutes, a product may not be represented as “Made in U.S.A.” if the product itself “or any article, unit, or part thereof, has been entirely or substantially made outside the United States,” or if the product or its components were “entirely or substantially made, manufactured, or produced outside the United States.” That a product is designed, engineered, finished, or otherwise processed in the United States does not make “the foreign work performed on the part unsubstantial.”  Hofmann alleged that the “made in USA”-labeled jeans she bought contained foreign-made buttons, rivets, zipper assembly, thread, and/or fabric; the defendant voluntarily revised its label.

“Given these relevant legal standards and the record available to the Court, the Court observes that Plaintiff’s case is relatively strong,” though there had been no rulings on dispositive motions or factual disputes, and the risk, expense, complexity, and duration of any litigation, in addition to the risk of maintaining class certification throughout the suit, weighed heavily in favor of settlement. In particular, it’s difficult for plaintiffs in false advertising cases to calculate and prove damages for the entire class. Questions about how to quantify the consumer impact of a “Made in the U.S.A.” would pose “a formidable challenge” to Hofmann’s case.  Other factors also pointed in favor of settlement, given counsel’s experience in consumer class actions.

Nonetheless, the problems remained, chief among them the cy pres award.  “An award that does not target the plaintiff class or that fails to provide reasonable certainty that any member will be benefitted by the award, will not satisfy the fairness inquiry.”  The current proposal was that defendant would donate $200,000, over four years, to a scholarship endowment at the consumer science department of a not-for-profit institution of higher education and an additional $50,000 to Step Up Women’s Network.   But these targets didn’t have a sufficient nexus to objects of the underlying statutes allegedly violated in this case.  “The chosen charities do not promote consumer protection. Rather the chosen charities’ missions are: offering mentorship programs to at risk teenage girls [Step Up]....” “Continuing to repeat the fact that Defendant’s clientele is mostly women does not somehow make Defendant’s charitable donation to Step Up legally sufficient. The Ninth Circuit’s jurisprudence on cy pres awards is not optional or vague, but binding and unequivocal.”  An “unnamed, unidentified scholarship endowment at a consumer science department like the one at California State University, Northridge” was also deficient, because “making a scholarship to one or two individuals who intend to study consumer science, does not target the plaintiff class and fails to provide reasonable certainty that any class member will be benefitted by the award” and they didn’t identify a specific cy pres beneficiary whose qualifications might be evaluated.

The gift codes were also a problem, as coupons that would require class members to pay their own money before they can take advantage of the coupon. “Both the courts and Congress generally disfavor coupon settlements.” Even in multiples, the gift cards were worth significantly less than their face value, as compared to the non-frivolous claims they were settling.  Even with the tote bag added, “Plaintiff’s repeated failure to fashion a settlement that comports with its concerns, only gives the Court more reason to be suspicious of whether Plaintiff’s counsel are acting in the interest of the class members.”

The tote bag does have transferable value (retail value $128), and plaintiff’s counsel  argued that the tote bag was is worth the eight to ten cents that arguably represented the difference between the American-made parts and the foreign-made parts in the jeans.  But, of course, that amount wasn’t the essence of the lawsuit; it was the allegedly false labeling. The court was skeptical that the tote bag providesd value to the class members, who bought jeans, not a tote bag. “And there is no evidence in the record explaining the real economic value of the tote bag, the likely resale value of the tote bag, or whether the class members are likely to find value in the tote bag.”  There was just too little information before the court, though plaintiff would be given another chance to prove that the settlement was in absent class members’ interests.

The permanent injunction didn’t add anything because of defendant’s voluntary discontinuance.  Also, the “clear sailing” provision stating, in relevant part, that plaintiff’s attorneys would seek no more than $175,000 in fees and the defense would not oppose the fee petition was not a bar to settlement, but it was a sign of some collusion/a red flag. The settlement as a whole had to stand or fall together; for now, it fell.