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.

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