Murray v. McDonald

Citation: Not availableDocket: 21-1931P

Court: Court of Appeals for the First Circuit; December 15, 2022; Federal Appellate Court

Original Court Document: View Document

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The United States Court of Appeals for the First Circuit is reviewing a class-action settlement approval involving plaintiffs Grace Murray and others against Grocery Delivery E-Services USA Inc. (HelloFresh). The appeal stems from a challenge to the adequacy of representation in the settlement process, specifically the lack of separate counsel for different groups of class members, which complicates the assessment of equitable treatment among them. The court vacated the approval of the settlement based on this concern but affirmed that incentive payments to named class representatives are permissible under Federal Rule of Civil Procedure 23(e).

The case arises from allegations against HelloFresh regarding its 2015 "win back" marketing campaign, which purportedly violated the Telephone Consumer Protection Act (TCPA) in three ways: using an automated dialer for calls, contacting individuals on the National Do-Not-Call registry, and calling those on HelloFresh's internal do-not-call list. Following litigation, HelloFresh and the plaintiffs reached a proposed settlement of $14 million, with a certified class of approximately 4.8 million affected customers from September 5, 2015, to December 31, 2019, encompassing individuals subjected to the alleged TCPA violations.

Email notices were sent to 4.4 million class members, and postcard notices to 400,000, resulting in approximately 100,000 valid claims submitted and 270 opt-outs. Under the preliminarily approved settlement, claimants were to receive about $89 each after counsel fees and expenses. Three objections were filed, with Sarah McDonald’s being the most significant. She claimed the $14 million payout was too small relative to potential statutory damages exceeding $2.4 billion and argued that the settlement inadequately represented three subgroups with differing claims, particularly disadvantaging those on the NDNC registry. McDonald also objected to incentive awards for named plaintiffs, argued that class counsel's fees were excessive, sought additional restrictions on HelloFresh’s future telemarketing practices, and questioned the justification for litigation expenses.

During the final approval hearing on May 11, 2021, the district court acknowledged McDonald's objections but did not determine their impact on the final order. The court raised concerns regarding the settlement’s potential conflict with mandatory arbitration clauses affecting class members. At a follow-up hearing on June 9, 2021, the court rejected the settlement over these arbitration issues but indicated it would approve it if HelloFresh agreed not to enforce arbitration for future claims. The parties subsequently amended the settlement to address these concerns. 

At the final hearing on September 29, 2021, the court increased the settlement award to $100 per claimant, reducing class counsel's share from approximately 33% to about 25.5%, aligning with one of McDonald's objections. The district court approved the revised settlement as 'fair, adequate, and reasonable,' noting it had considered the objections but did not elaborate on rejecting most of them. An order and judgment certifying the class and approving the settlement were entered on October 15, 2021, prompting McDonald to appeal the approval.

Approval or rejection of a class-action settlement is subject to the district court's discretion, which is reviewed for abuse, involving de novo scrutiny of legal issues and clear error examination of factual findings. McDonald argues that individuals on the NDNC registry possess more valuable claims than other class members, asserting that equal representation by the same counsel led to unfair treatment and an inequitable distribution of settlement proceeds. She further contends that the inclusion of incentive awards for class representatives taints the settlement. 

The adequacy of representation is assessed under Rule 23(e), which overlaps with Rule 23(a) regarding class representation standards. Rule 23(e) mandates consideration of factors determining whether a settlement is fair, reasonable, and adequate, including procedural aspects like adequate representation by class counsel and arm's length negotiation, as well as substantive aspects ensuring equitable treatment among class members. The procedural checks are prioritized as they establish a foundation for evaluating the settlement's fairness.

The adequate representation analysis aims to identify conflicts of interest that could compromise fair representation for all class members. Such conflicts may arise in scenarios where a common fund must be distributed among class members, potentially disadvantaging some in favor of others. This risk raises concerns that class representatives or counsel may allocate resources inequitably, undermining the interests of certain class members.

Adequate representation in class action settlements may necessitate separate representation for class members with differing interests, although not all conflicts warrant this. The benchmark for determining whether separate representation is needed is not a perfect alignment of interests but rather whether conflicts are fundamental to the litigation. Only substantial intra-class conflicts that overshadow common interests trigger the need for separate representation. 

Class actions where members have materially common claims typically do not require separate representation, as minor differences in claim value are unlikely to disrupt overall class interests or settlement fairness. However, in cases where there are distinct categories of claimants with significantly different claims or defenses, the absence of separate representation risks skewing the relief available to certain subsets of class members. 

Significant differences in claims necessitate that these variances be considered during settlement negotiations, as a uniform monetary remedy may not be fair. Each group of similarly situated class members should ideally negotiate through counsel dedicated solely to their interests to ensure that disparities in claims are reflected in the settlement. A single lawyer representing diverse groups faces inherent challenges in advocating for each, as benefiting one group could detrimentally affect another. Therefore, structural conflicts can arise when a common representative cannot adequately support all claimants' best interests due to conflicting obligations.

Class members with differing claims must have separate representation to ensure fair settlement distribution; otherwise, the court lacks assurance of equitable treatment among groups. The Second Circuit, in *In re Literary Works in Elec. Databases Copyright Litig.*, emphasized the need for separately represented subclasses to adequately advocate for varying claims, as the interests of one claim category could undermine another. 

In the current case involving allegations against HelloFresh for violating the Telephone Consumer Protection Act (TCPA), it is crucial to recognize that the TCPA encompasses multiple distinct claims rather than a singular cause of action. Specifically, claims arise under different provisions of the TCPA: 

1. **NDNC claims** focus on residential subscribers on a national do-not-call list.
2. **Auto-Dialer claims** pertain to calls made using an automatic dialing system without consent.
3. **IDNC claims** involve residential subscribers who have requested not to receive calls for telemarketing purposes.

Each claim type has unique elements and defenses, including some defenses that apply universally across claims, such as liability concerns regarding third-party vendors and arbitration clauses that may prevent class certification. Other defenses, however, are specific to particular claim types. The diversity of claims and defenses among class members highlights the necessity for distinct representation to ensure all interests are properly addressed.

Cell phone users are not classified as 'residential telephone subscribers' for purposes of NDNC (National Do Not Call) and IDNC (Internal Do Not Call) claims, impacting the legal arguments related to compliance and the necessity for individualized inquiries, which complicates class certification. HelloFresh contends it took steps to adhere to NDNC and IDNC regulations, asserting that any violations were unintentional. The defenses presented by HelloFresh vary in strength among class members, particularly regarding the arbitration and class-action waiver, which applies more strongly to those who signed up after February 2017. 

Additionally, arguments regarding the classification of cell phone users pertain only to those who received calls on cell phones, while the 'established business relationship' defense does not apply to NDNC class members who canceled subscriptions more than eighteen months prior to receiving calls. The district court faced a complex array of claims with differing elements and defenses, suggesting that some subgroups may prevail while others may not. 

However, some differences, such as the NDNC and IDNC claims requiring proof of being on different lists, may not necessitate separate representation due to the absence of evidence showing HelloFresh's failure to maintain its internal list. The FCC has clarified that cell phones fall under the definition of 'residential subscribers,' which complicates HelloFresh's argument. Nonetheless, certain significant differences, like the unique requirements of the Auto-Dialer claim, require careful consideration, particularly in light of Supreme Court precedent regarding the definition of an 'automatic telephone dialing system.'

McDonald contends that HelloFresh's position aligns with his, while plaintiffs assert that HelloFresh's contractors might have employed random or sequential number generators. However, no evidence supports this speculation, despite plaintiffs claiming a comprehensive understanding of their case following extensive discovery yielding over 20,000 documents. It's uncertain whether attorneys for class members with non-Auto Dialer claims would advocate for a larger share of the $14 million settlement. Plaintiffs argue that the Supreme Court's Duguid decision is largely irrelevant since the class settlement was agreed upon beforehand. However, the unanimous outcome in Duguid was foreseeable, given the timeline of the Supreme Court proceedings, which began before the settlement discussions. HelloFresh's willingness to pay $14 million for claims that included many Auto-Dialer disputes remained unchanged post-Duguid, indicating a stable valuation of these claims.

Furthermore, the definition of the class introduces significant disparities among members' claims. Individuals with an "established business relationship" with HelloFresh at the time of calls cannot pursue viable NDNC claims, particularly those who had previously purchased from HelloFresh within eighteen months prior to the calls. The claims of these individuals are less robust compared to those who had terminated their subscriptions more than eighteen months before receiving calls. Additionally, the TCPA stipulates that individuals must have received more than one call in a twelve-month period to initiate an IDNC claim, yet the settlement does not differentiate between those who received one versus multiple calls. This lack of distinction among class members contrasts sharply with the intra-class conflicts addressed in Cohen, which involved gender equity in athletics, where the court found separate representation unnecessary.

Class members in this case possess claims with significantly different elements compared to a prior case, where the claims related to a Title IX violation had uniformity and minimal conflict regarding potential remedies. In the earlier case, the main issue was the elevation or demotion of teams, a decision outside class members' control, leading to no significant skewing of negotiations. Conversely, in the current case, each group has distinct claims against HelloFresh, with a legal basis to demand varying settlements, particularly regarding monetary damages. HelloFresh's argument that overlapping claims among class members suggest similar interests was rebutted; evidence provided did not demonstrate relevant overlap, as it did not reflect the entire class. Moreover, the distinction in claim values is emphasized, with the Auto-Dialer claims facing more substantial defenses than other claims. HelloFresh’s willingness to settle for $14 million contradicts the assertion that all claims hold equal value. Attempts by both parties to equate the differing claims’ values overlook the necessity for distinct negotiations by separately counseled representatives. The court is not inclined to independently assess the value of these differing claims under Rule 23, which does not support such an approach unless the differences are evidently insignificant to settlement value.

Rule 23(e) establishes procedural requirements for class action settlements, emphasizing that settlements must result from 'arm's length' negotiations by adequately representing individuals. This rule aims to ensure fair representation before court approval. It mandates negotiations among counsel for class members with differing interests to determine how settlement amounts should be allocated, especially when claims have significantly different characteristics. The court noted that claims categorized as Category C are known to be worth less than registered claims but lacks clarity on the extent of this difference without independent representation. This procedural safeguard is intended to prevent subjective judicial evaluations of settlement fairness.

The findings indicate that the certified class comprises members with claims of notably different elements and defenses, and the relative values of these claims are not sufficiently clear for court approval of the proposed allocation without informed negotiations. Consequently, the district court lacked a solid basis for certifying the settlement class and approving the $14 million allocation as fair, reasonable, and adequate.

Additionally, McDonald challenged the incentive awards granted to named plaintiffs, which ranged from $2,000 to $10,000. He argued that the Supreme Court had banned such payments in two 19th-century cases, which he claimed rendered the named plaintiffs inadequate representatives. The court countered that the Supreme Court has not categorically rejected incentive awards for named plaintiffs in modern class actions under Rule 23. While historical cases prohibited specific payments in creditor lawsuits, courts have permitted incentive payments for class representatives for several decades.

Modern incentive awards in class-action litigation have evolved significantly from the principles established in Greenough, which is now viewed as outdated. Some circuits, like the Second and Seventh, have differentiated themselves from the Greenough precedent and do not impose a blanket prohibition on incentive payments. However, the Eleventh Circuit has recently aligned with the Greenough rationale, suggesting that incentive awards are similar to payments for personal services, which raises concerns about potential intermeddling with fiduciary duties in fund management.

The Supreme Court in Greenough expressed concern that allowing compensation for managing funds could tempt creditors to interfere with trustees' responsibilities. This concern differs from the rationale attributed to Greenough regarding class representatives adequately representing class interests. Furthermore, Rule 23(e) mandates that incentive payments cannot result in unfair settlements, requiring that settlements be fair, reasonable, and equitable among class members. Courts actively enforce these requirements regarding incentive payments, as seen in various cases where requests for such awards were denied or reduced based on plaintiffs' actual participation.

While Greenough sought to prevent interference in fund management, Rule 23 aims to empower individuals with small claims to seek justice and hold wrongdoers accountable, reinforcing the role of class actions in enabling citizens to act as private attorneys general for statutory damages.

Named plaintiffs in Rule 23 class actions bear significant litigation burdens, including document collection and trial testimony, which could lead to a net loss unless these costs are fairly allocated to those whose interests are represented. Incentive payments help mitigate this burden, aligning with Rule 23(e)(2)(D) by ensuring equitable treatment of class members. Courts have historically permitted such payments, and a blanket prohibition would undermine class recoveries. McDonald’s claim that incentive payments create a conflict of interest for named plaintiffs is unsupported; her argument lacks specific analysis and relies on a presumption that these payments compromise representation. Additionally, she does not challenge the payment of attorneys' fees from the settlement, which suggests inconsistency in her position. Consequently, the court vacated the district court’s approval of the proposed settlement and remanded the case for further proceedings, with costs taxed in favor of appellant Sarah McDonald against the appellees.