United States: Third Time's The Charm? Court Rejects Parties' Second Settlement Agreement For Failure To Provide Sufficient Value To Class Members

District Court Judge Gonzalo Curiel recently considered and rejected—for the second time—a proposed class action settlement involving false advertising claims against a defendant jeans manufacturer. Hofmann v. Dutch, LLC, No. 3:14-cv-02418-GPC-JLB (S.D. Cal. Aug. 16, 2016). The court initially rejected the proposed settlement because of its coupon offer, charitable award unrelated to the issues of the case, and attorneys' fee provision, which the Court found excessive. The court rejected the parties' renewed attempt to secure settlement approval because the problematic provisions remained unchanged and the sole addition – a free denim tote bag – did not adequately address the Court's concerns.

On September 5, 2014, plaintiff Sonia Hofmann sued defendant Dutch, LLC, alleging the denim company manufactured and sold jeans labeled "Made in the USA" that contained foreign-made components (buttons, rivets, zipper assembly, thread, and fabric). Plaintiff alleged four causes of action under California law: violations of the Unfair Competition Law (UCL); violations of the Business and Professions Code § 17533.7 (relating to manufacturers' and retailers' use of the label "Made in the USA"); violations of the Consumer Legal Remedies Act (CLRA); and negligent representation.

Settlement Reached. After litigating the case for just over a year, the parties agreed to a settlement. On October 26, 2015, Plaintiff filed an unopposed motion requesting the court's approval of a settlement agreement including the following terms:

  • an injunction requiring Dutch to change its labels to reflect the country-of-origin of its jeans' component parts;
  • $20 e-gift certificates for participating class members;
  • an award of $250,000 over five years to charities that benefit women; and
  • attorneys' fees and costs not to exceed $175,000.

Initial Settlement Rejected. On April 26, 2016, Judge Curiel rejected the proposed settlement. While the Court had no issue with the injunction, it rejected the $20 gift card offer, charitable award, and attorneys' fees provisions, finding that the first two provisions did not provide sufficient value to potential class members, and the third suggested collusion between the parties.

$20 Gift Card. The parties argued that a $20 gift card was appropriate restitution for class members in light of the risk that they would receive nothing if the case went to trial. The Court disagreed, noting that the average price of a pair of Dutch jeans is $205. Therefore, the $20 offer was merely a coupon or discount requiring class members to spend more money to buy a Dutch product. The Court reasoned that this was an inadequate offer to class members because it would require them to spend additional money on Dutch products, which would result in a net benefit to Dutch.

Charitable Award. The Court also rejected the cy pres provision whereby Dutch would pay $250,000 to various charities that purportedly benefit women, including breast cancer research and juvenile diabetes charities. The Court noted that charitable awards may be acceptable when they benefit a cause related to the litigation and therefore provide an indirect benefit to class members. The parties argued that there was a link between class members, who tended to be women, and charities that benefit women. The Court rejected this argument as too tenuous, finding no link between women-focused charities and a "Made in the USA" class action.

Attorneys' Fees and Costs. The settlement included a "clear sailing" term, whereby Dutch agreed not to contest any attorneys' fees or cost awards that did not exceed $175,000. The Court noted that such provisions create a danger of collusion, because they may encourage plaintiff's counsel to accept an inadequate settlement on behalf of class members in exchange for an excessive fee award, and therefore require close scrutiny. The Court rejected the fee award, reasoning that it was too high in light of the fact that class members received no value from the settlement apart from the $20 discount.

Second Settlement Fails. On June 23, 2016, the parties submitted a second settlement agreement to Judge Curiel. The terms of the agreement remained the same, with one addition: class members were entitled to a denim tote bag valued at $128. Judge Curiel rejected this settlement in short order, sharply noting that none of the problematic terms in the initial agreement had been remedied. The Court reiterated its concerns regarding the coupon provision, charitable award, and fee provision, and was unpersuaded by Dutch's tote bag offer. As before, the Court denied approval, but permitted an additional 60 days for the parties to submit an improved settlement.

Takeaway. Hofmann offers yet another reminder that courts today strictly scrutinize class action settlements to ensure that they provide real value to settlement class members, do not appear collusive, provide sufficient notice, and treat all members of the class fairly. See, e.g., Cotter v. Lyft, No. 13-cv-04065-VC, 2016 U.S. Dist. LEXIS 50579 (N.D. Cal. Apr. 7, 2016) (denying settlement agreement that short-changed members of the class by offering less than half the reimbursement to which they were entitled); Deatrick v. Securitas Sec. Servs., No. 13-cv-050160-JST U.S. Dist. LEXIS 22597 (N.D. Cal. Feb. 24, 2016) (settlement failed to provide clear notice procedures to class members); Thomas v. MagnaChip Semiconductor, Inc., No. 14-cv-01160-JST (N.D. Cal. Apr. 7, 2016) (settlement denied in part for distributing class funds to a charitable recipient without a sufficient nexus to the interests of the class members). Parties submitting a settlement agreement for court approval need to carefully evaluate whether the proposed terms are consistent with current case law in their jurisdiction.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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