United States Court of Appeals For the First Circuit
No. 21-1931
GRACE MURRAY; AMANDA ENGEN; STEPHEN BAUER; JEANNE TIPPETT; ROBIN TUBESING; NIKOLE SIMECEK; MICHELLE MCOSKER; JACQUELINE GROFF; HEATHER HALL, on behalf of themselves and all others similarly situated,
Plaintiffs, Appellees,
v.
GROCERY DELIVERY E-SERVICES USA INC., d/b/a HelloFresh
Defendant, Appellee,
SARAH MCDONALD,
Objector, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Lynch, Kayatta, and Gelpí, Circuit Judges.
Eric Alan Isaacson, with whom C. Benjamin Nutley was on brief, for appellant. Stacey Slaughter, with whom Brenda L. Joly, Marcus A. Guith, Robins Kaplan LLP, Anthony I. Paronich, Samuel J. Strauss, and Turke & Strauss LLP were on brief, for appellees Grace Murray, Amanda Engen, Stephen Bauer, Jeanne Tippett, Robin Tubesing, Nikole Simecek, Michelle Mcosker, Jacqueline Groff, and Heather Hall. Shannon Z. Petersen, with whom Karin Dougan Vogel and Sheppard, Mullin, Richter & Hampton LLP were on brief, for appellee Grocery Delivery E-Services USA Inc.
December 16, 2022 KAYATTA, Circuit Judge. We consider in this case a
challenge to the approval of a class-action settlement under
Federal Rule of Civil Procedure 23(e). For reasons we will
explain, we vacate the approval because the absence of separate
settlement counsel for distinct groups of class members makes it
too difficult to determine whether the settlement treated class
members equitably. We also hold that incentive payments to named
class representatives are not prohibited as long as they fit within
the bounds of Rule 23(e).
I.
HelloFresh is a subscription service that ships a recipe
and ingredients for a meal to your doorstep. In 2015, HelloFresh
initiated a so-called "win back" marketing campaign, in which it
used telemarketing contractors to contact former subscribers in an
attempt to win them back as customers. Plaintiffs in this class
action allege that this marketing campaign violated the Telephone
Consumer Protection Act (TCPA) in three different ways: (1) by
using an automated dialer to place marketing calls to some people,
47 U.S.C. § 227(b)(1)(A); (2) by calling some people listed on the
National Do-Not-Call (NDNC) registry, 47 U.S.C. § 227(c)(5); 47
C.F.R. § 64.1200(c)(2); and (3) by calling some people who had
requested that HelloFresh not call them (and therefore were
required to be on HelloFresh's federally mandated internal do-not-
call (IDNC) list), 47 U.S.C. § 227(c)(5); 47 C.F.R. § 64.1200(d).
- 3 - We will call those three claims, respectively, the Auto-Dialer
claim, the NDNC claim, and the IDNC claim.
After litigation commenced, HelloFresh entered mediated
settlement discussions with the named plaintiffs. In the
settlement negotiations, plaintiffs' counsel acted jointly on
behalf of all prospective class members possessing one or more of
the three potential claims arising out of HelloFresh's "win back"
campaign. The parties eventually arrived at a proposed settlement
conditioned on court approval. The district court preliminarily
approved the settlement, pursuant to which HelloFresh agreed to
pay $14 million to a settlement class. For purposes of the
settlement only, see Fed. R. Civ. P. 23(e), the district court
certified a single class, with no subclasses, consisting of about
4.8 million customers and former customers defined as follows:
All persons in the United States from September 5, 2015 to December 31, 2019 to whom HelloFresh, either directly or by a vendor of HelloFresh, (a) placed one or more calls on their cellphones via a dialing platform; (b) placed at least two telemarketing calls during any 12-month period where their phone numbers appeared on the NDNCR for at least 31 days before the calls; and/or (c) placed one or more calls after registering the landline, wireless, cell, or mobile telephone number on HelloFresh's Internal Do-Not-Call List.
Email notice to 4.4 million class members and post card
notice to 400,000 class members ensued. Approximately 100,000
class members submitted valid claims, while 270 opted out. Under
- 4 - the settlement as preliminarily approved, each class member who
submitted a valid claim would have received about $89 (net of
proposed counsel fees and expenses).
Three individuals filed objections. One contended that
HelloFresh should pay nothing. Another asserted that class members
were not being paid enough. The third objector -- Sarah McDonald,
appellant here -- filed the most substantial objections. McDonald
explained why she viewed the $14 million payout as too small
compared to potential statutory damages of over $2.4 billion. She
argued that no single lawyer or group of lawyers could adequately
negotiate and recommend a settlement jointly on behalf of three
subgroups having materially different claims. As a result, she
contended, the settlement sold out class members who were on the
NDNC registry -- whose claims she says are the most valuable -- by
placing them on equal footing with members in the other two groups,
whose claims she says are virtually worthless. McDonald also
objected to the use of incentive awards for the named plaintiffs.
Finally, she contended that class counsel were getting too much of
the pie, that the settlement should add restrictions on
HelloFresh's future use of phone calls, and that class counsel
failed to support their claim for litigation expenses.
On the first day of the final approval hearing on May 11,
2021, the district court gave McDonald's counsel and plaintiffs'
counsel time to discuss each of McDonald's objections. After
- 5 - argument, the court stated that the objections were "most
respectfully taken into account" and that it had not yet determined
how they would "work their way into the Court's final order." The
court independently asked counsel to brief whether the settlement
protected the class from being subject to "an anticonsumer
mandatory arbitration clause."
At a follow-up hearing on June 9, 2021, the court
rejected the settlement because of the arbitration issue. It
explained that it would approve the settlement if HelloFresh would
not require the arbitration of any future claim by any class
member, to ensure that "HelloFresh will not, in the future, use a
consumer mandatory arbitration clause as a cover." The court did
not express any concerns about the amount of the settlement fund.
The parties then submitted an amended settlement
agreement that addressed the court's arbitration concerns. Under
the amendment, HelloFresh agreed that it would not seek to compel
arbitration of future TCPA claims that class members might bring.
On the final day of the hearing, September 29, 2021, the district
court began by stating that each class member submitting a claim
should receive more of the settlement award -- $100 rather than
$89. This was in line with one of McDonald's concerns. The
district court explained that this change would reduce class
counsel's share from about 33% to about 25.5%. After HelloFresh
and class counsel agreed to the adjustment, the district court
- 6 - approved the settlement as "fair, adequate, and reasonable."
Although the court explained that it had "noted and indeed in
slight measure t[ook] into account [the] objections," it did not
provide detailed reasoning for rejecting most of the objections.
The court decided to "adopt [the settlement agreement] with a
payout to each claimant of $100 and the attorneys' fees," and it
entered an order and judgment on October 15, 2021, certifying the
proposed class for purposes of a settlement and approving the
proposed settlement.
McDonald timely appealed the approval of the settlement.
II.
The "approval or rejection of a class-action settlement
is entrusted to the district court's informed discretion" and is
accordingly reviewed "for abuse of that discretion -- a
multifaceted standard under which we scrutinize embedded legal
issues de novo and factual findings for clear error." Cohen v.
Brown Univ., 16 F.4th 935, 946 (1st Cir. 2021) (citing Robinson v.
Nat'l Student Clearinghouse, 14 F.4th 56, 59 (1st Cir. 2021)).
McDonald's principal argument below and on appeal rests
on the contention that persons like her who signed up on the NDNC
registry had materially stronger and more valuable claims than
other class members without NDNC claims. Therefore, she reasons,
it was inadequate for these groups to be represented by the same
counsel in determining whether and to what extent their shares of
- 7 - the settlement proceeds should differ. And she contends that this
unfair process led to an inequitable result in which all class
members received equal shares, even though some had more valuable
claims. McDonald also raises a separate argument that the
inclusion of incentive awards for the class representatives
rendered the settlement defective. We discuss these arguments in
turn.
A.
We analyze adequacy of representation through the lens
of Rule 23(e) for the purposes of this appeal, although much, if
not all, of our analysis would apply to Rule 23(a)'s adequate
representation requirement in the context of class certification
for settlement. See Cohen, 16 F.4th at 945 (stating that, because
Rule 23(e)(2)(A) "overlaps with other requirements imposed by
Rule 23, we look to case law glossing the stipulation that 'the
representative parties will fairly and adequately protect the
interests of the class'" in Rule 23(a)(4) (internal citation
omitted)).
Rule 23(e) requires district courts to consider certain
factors in determining whether a proposed settlement is "fair,
reasonable, and adequate." Fed. R. Civ. P. 23(e)(2). These
factors include procedural checks: that "the class representatives
and class counsel have adequately represented the class" and that
"the proposal was negotiated at arm's length." Fed. R. Civ.
- 8 - P. 23(e)(2)(A)–(B). They also include substantive checks: that
"the relief provided for the class is adequate" and that "the
proposal treats class members equitably relative to each other."
Fed. R. Civ. P. 23(e)(2)(C)–(D); see Cohen, 16 F.4th at 943–44
(noting that "[t]he Advisory Committee explained that the first
two factors are 'procedural' in nature," while "the latter two
factors guide 'a "substantive" review'").
We train our attention in the first instance on the
procedural checks because they provide assurance that the
settlement resulted from a process likely to achieve a fair
outcome, thereby providing "an important foundation for
scrutinizing the substance of the proposed settlement." Fed. R.
Civ. P. 23(e)(2)(A)–(B) advisory committee's note to 2018
amendments. In particular, the adequate representation inquiry
"'serves to uncover conflicts of interest between named parties
and the class they seek to represent.' Such conflicts undermine
the indispensable 'structural assurance of fair and adequate
representation for the diverse groups and individuals affected' by
the class-action litigation or settlement." Cohen, 16 F.4th at
945 (quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625,
627 (1997)).
In the class settlement context, conflicts sometimes
arise because there is a common fund -- i.e., an aggregate proposed
settlement amount covering all claims -- that must be allocated
- 9 - among class members. In these zero-sum circumstances, a benefit
to one group of class members (in the form of a larger portion of
the common fund) comes at the detriment of the other class members
(who receive a smaller portion as a result). This presents a
concern that the class representatives or class counsel may "have
sold out some of the class members" by allocating some of their
fair share to other class members. 4 William B. Rubenstein,
Newberg and Rubenstein on Class Actions § 13:56 (6th ed., June
2022 update). Therefore, adequate representation in the
settlement context sometimes requires separate representation for
groups of class members with differing interests.
Not all conflicts require separate representation,
however. "The standard . . . is not 'perfect symmetry of interest'
among the class." Cohen, 16 F.4th at 945 (quoting Matamoros v.
Starbucks Corp., 699 F.3d 129, 138 (1st Cir. 2012)). Rather,
because "[t]he perfect is sometimes the enemy of the good," only
those conflicts that "are fundamental to the suit and . . . go to
the heart of the litigation" breach the adequacy-of-representation
standard. Id. at 945–46 (quoting Matamoros, 699 F.3d at 138).
"Put another way, . . . the intra-class conflict must be so
substantial as to overbalance the common interests of the class
members as a whole." Matamoros, 699 F.3d at 138. On the other
hand, "intra-class conflict is unacceptable when it presents an
- 10 - actual and substantial risk of skewing available relief in favor
of some subset of class members." Cohen, 16 F.4th at 950.
Whether potential differences in claim value give rise
to conflicts requiring separate representation turns on the nature
of the differences between the claims. Class actions in which all
class members have materially common claims are unlikely to require
separate representation. See, e.g., Hanlon v. Chrysler Corp., 150
F.3d 1011, 1021 (9th Cir. 1998). In such cases, any differences
in claim value would likely be subject to objective calculation,
or so obviously miniscule that the transactional costs of debating
them would outweigh any resulting incremental increases in
fairness. Therefore, such differences would be unlikely to
"overbalance the common interests of the class members as a whole"
in obtaining the largest settlement possible without running up
transaction costs. Matamoros, 699 F.3d at 138.
By contrast, if "easily identifiable categories of
claimants," Ortiz v. Fibreboard Corp., 527 U.S. 815, 832 (1999),
have significantly different claims, or if their claims are subject
to significantly different defenses, the lack of separate
representation "presents an actual and substantial risk of skewing
available relief in favor of some subset of class members," Cohen,
16 F.4th at 950. Significant differences in contested claims or
defenses have the potential to cause significant differences in
claim value, which should be reflected in any fair settlement.
- 11 - See, e.g., Principles of the L. of Aggregate Litig. § 3.05 cmt. b
(Am. L. Inst. 2010) ("[A]n agreement that gives the same monetary
remedy to all members of the class, despite significant differences
in the nature of their claims . . ., may not be fair and
reasonable."). Therefore, any such significant differences should
factor into negotiations regarding allocation of the settlement
among groups of class members. And if each group of similarly
situated class members participates in those negotiations through
counsel owing allegiance only to that group, the court has some
structural assurance that a negotiated agreement accounts for any
differences between the claims.
That structural assurance is absent when a single lawyer
represents groups with significantly different claims in the
context of allocating a lump-sum settlement. It is unreasonable
to expect such a lawyer to properly advocate for each such group
because giving one group a larger piece of the pie necessarily
reduces the amount available to a different group. Id. § 2.07
cmt. d ("Structural conflicts also might arise from easily
identifiable differences in the claims to be aggregated, such that
a common lawyer could not reasonably advance the interests of all
claimants."). Such a lawyer would be limited in advancing the
best arguments in favor of one claim relative to another because
of the lawyer's duties to class members holding the latter claim.
Cf. Model Rules of Pro. Conduct r. 1.7(a)(2) (Am. Bar Ass'n 1983)
- 12 - (stating that a conflict of interest exists if "there is a
significant risk that the representation of one or more clients
will be materially limited by the lawyer's responsibilities to
another client"). Therefore, if groups of class members with
significantly different claims do not have separate representation
in determining how the settlement should be split, the court lacks
structural assurance that the settlement treats each group fairly.
See In re Literary Works in Elec. Databases Copyright Litig., 654
F.3d 242, 253 (2d Cir. 2011) ("[H]ow can the value of any subgroup
of claims be properly assessed without independent counsel
pressing its most compelling case?").
For example, in Literary Works, the Second Circuit
considered a settlement of $18 million divided among class members
holding three different categories of claims under the Copyright
Act. Id. at 246. Depending on the status and timing of
registration of the works at issue, the claims were (A) eligible
for statutory damages and attorneys' fees; (B) eligible only for
actual damages and profits of the infringer; or (C) potentially
eligible for actual damages and profits of the infringer (depending
on whether the works were registered). Id. The Second Circuit
held that this breakdown required separately represented
subclasses because "[t]he selling out of one category of claim for
another [was] not improbable." Id. at 252. Accordingly, "[o]nly
the creation of subclasses, and the advocacy of an attorney
- 13 - representing each subclass, [could] ensure that the interests of
that particular subgroup [were] in fact adequately represented."
Id.
Superficially, it might seem that all class members in
this case share a common claim: they all allege that a
telemarketing campaign conducted by HelloFresh violated the TCPA,
47 U.S.C. § 227. The TCPA, however, does not create a single cause
of action. Rather, it authorizes suit and recovery for a variety
of quite different acts.
For example, NDNC claims are based on one prong of the
TCPA and its implementing regulations applying only to telephone
calls made to residential telephone subscribers who are on a
national do-not-call list. 47 U.S.C. § 227(c)(5); 47 C.F.R.
§ 64.1200(c)(2). The elements of such a claim are: (1) a
residential telephone subscriber (2) received more than one
telephonic solicitation (3) by or on behalf of the same entity
(4) during a twelve-month period (5) to a number that the
subscriber registered on the NDNC registry. 47 U.S.C. § 227(c)(5);
47 C.F.R. § 64.1200(c)(2). By contrast, an Auto-Dialer claim
arises under a different section of the TCPA, and only if: (1) at
least one call is made (2) using an automatic telephone dialing
system (3) without consent of the called party and not for
emergency purposes (4) to a number assigned to certain types of
telephone services. 47 U.S.C. § 227(b)(1)(A)(iii).
- 14 - Yet a third type of claim, the IDNC claim, arises if
(1) a residential telephone subscriber (2) receives more than one
call for telemarketing purposes (3) by or on behalf of the same
entity (4) during a twelve-month period (5) within five years of
asking the entity not to call them. 47 U.S.C. § 227(c)(5); 47
C.F.R. § 64.1200(d). While the elements of this claim are similar
albeit not identical to those of the NDNC claim, there is an
"established business relationship" defense to NDNC claims that
does not apply to IDNC claims. 47 C.F.R. § 64.1200(f)(5), (15).
Each of these three types of claims is represented among
the class members, and some class members have multiple types of
claims. In addition, HelloFresh has raised a smattering of
defenses to these claims. Two of its defenses apply to all three
categories of claims: that HelloFresh is not liable because the
calls were made by third-party vendors, and that an arbitration
clause and a class-action waiver in HelloFresh's terms and
conditions preclude class certification. The rest apply to fewer
than all three categories. HelloFresh's argument that the machine
that made the calls was not an "automatic telephone dialing system"
applies only to the Auto-Dialer claims. Its argument that its
calls were not "telephone solicitations" because it had an
"established business relationship" with its former customers, see
47 C.F.R. § 64.1200(f)(5), (15), applies only to the NDNC claims.
Its argument that cell phone users are not "residential telephone
- 15 - subscribers" applies to the NDNC and IDNC claims. Its arguments
that proving the NDNC and IDNC claims requires individualized,
fact-intensive inquiries unsuitable for class certification apply,
respectively, to the NDNC and IDNC claims. Its argument that it
took required steps to ensure compliance with the NDNC and IDNC
rules and that any calls in violation of those rules were in error
applies to the NDNC and IDNC claims, under different regulatory
provisions. See 47 C.F.R. § 64.1200(c)(2)(i), (d).
Moreover, some of those defenses apply differently (or
with different force) even among class members within each category
of claim. For example, as HelloFresh acknowledges, its arbitration
and class-action waiver defense arguably applies more strongly to
class members who signed up for HelloFresh after it added those
provisions to its terms and conditions in February 2017 than to
those who signed up before. As another example, HelloFresh's
contention that cell phone users do not qualify as "residential
telephone subscribers" applies only to class members who received
calls on cell phones -- not those who received calls on landlines.
As a third example, HelloFresh's "established business
relationship" argument does not apply to NDNC class members who
terminated their subscriptions at least eighteen months before
receiving the calls. 47 C.F.R. § 64.1200(f)(5).
Thus, the district court was confronted with a matrix of
claims having different elements and confronting different arrays
- 16 - of defenses. And at least some of these differences are
significant in the sense that they go to "the heart of the
litigation." Cohen, 16 F.4th at 946 (quoting Matamoros, 699 F.3d
at 138). Simply put, some subgroups of the class could easily
lose even as others win.
Of course, sometimes differences in elements or defenses
that appear significant on their face may be rendered insignificant
in the context of a particular set of facts. For example, class
members with an NDNC claim must prove they are on the NDNC list,
while class members with an IDNC claim must prove they are on
HelloFresh's internal do-not-call list. Although these are
different elements, they may not be significant enough to require
separate representation given the lack of any evidence that
HelloFresh failed to honor its obligation to keep an internal list
and the possibility that it would be precluded from gaining any
litigation advantage by failing to do so. As a second example,
HelloFresh's argument that cell phone users are not "residential
telephone subscribers" runs headlong into the FCC's express
statements to the contrary. 18 FCC Rcd. 14014, 14039–40 (2003);
see, e.g., Hodgin v. Parker Waichman LLP, No. 3:14-CV-733, 2015 WL
13022289, at *3 (W.D. Ky. Sept. 30, 2015) ("[T]he FCC has been
clear in interpreting 'residential subscriber' to include cell
phones."). So we do not hold that it would be an abuse of
- 17 - discretion to find that cell phone users and landline users could
be adequately represented by the same representatives and counsel.
On the other hand, some of the differences are, even in
context, too significant to leave the equitable apportionment of
a common fund to a court's discretion uninformed by arm's-length
negotiation between separately represented groups. Most glaring
is the example provided by the Auto-Dialer claim with its unique
element requiring plaintiffs to prove that an "automatic telephone
dialing system" was used. It seems clear that the Auto-Dialer
claims are incompatible with the Supreme Court's opinion in
Facebook, Inc. v. Duguid, 141 S. Ct. 1163 (2021), because the
devices used to make HelloFresh's calls did not "have the capacity
either to store a telephone number using a random or sequential
generator or to produce a telephone number using a random or
sequential number generator," id. at 1167. McDonald argues as
much; HelloFresh concedes that "McDonald's position is consistent
with HelloFresh's"; and plaintiffs' only rejoinder is that perhaps
HelloFresh's contractors did use random or sequential number
generators. But the record is devoid of support for this
speculation, despite plaintiffs' assertion that they have a "clear
view of the strength and weaknesses" of their claims after engaging
"in significant discovery" that produced "over 20,000 pages of
documents." So we think it hardly clear-cut that counsel
- 18 - representing class members with non-Auto Dialer claims would not
argue that those persons should receive more of the $14 million.
Plaintiffs nevertheless contend that Duguid is largely
irrelevant to our inquiry because the parties in this case agreed
on the class settlement before Duguid was decided. Hence,
plaintiffs argue, one could not have relied on Duguid as a basis
for thinking that the Auto-Dialer claims had no settlement value.
But the unanimous result in Duguid was hardly a surprise. The
Supreme Court granted certiorari and held a reasonably
foreshadowing oral argument long before settlement negotiations in
this case commenced. Facebook, Inc. v. Duguid, 141 S. Ct. 193
(2020) (granting certiorari on July 9, 2020); Transcript of Oral
Argument, Facebook, Inc. v. Duguid, 141 S. Ct. 1163 (2021) (No. 19-
511) (oral argument held on December 8, 2020). In addition, the
timeline of events suggests that the actual decision in Duguid had
very little, if any, impact on HelloFresh's valuation of the
claims. Before Duguid was decided, HelloFresh was willing to pay
$14 million to settle a basket of claims containing many Auto-
Dialer claims. After Duguid was decided, the court's initial
refusal to approve the settlement without a further concession by
HelloFresh gave the company a chance to walk away from the deal or
renegotiate a lower sum. Yet it was still willing to pay
$14 million to settle the same basket of claims. That suggests
- 19 - that HelloFresh's valuation of the Auto-Dialer claims was roughly
constant before and after the Duguid decision came down.
Other significant differences among class members result
from the way the class is defined. As HelloFresh points out, there
is no viable NDNC claim for individuals with whom HelloFresh had
an "established business relationship" at the time of the calls
-- i.e., individuals who made a "purchase or transaction" with
HelloFresh in the eighteen months preceding the calls and did not
ask HelloFresh not to call them. 47 C.F.R. § 64.1200(f)(5), (15).
This is especially pertinent in the context of this case, which
centers on HelloFresh's campaign to "win back" former subscribers.
It seems obvious that the NDNC claims of class members who received
HelloFresh's calls within eighteen months after terminating their
subscriptions (if those claims exist at all) are significantly
weaker than the NDNC claims of those who terminated their
subscriptions at least eighteen months before receiving the calls.
But the class is defined to include both of these groups, and the
settlement treats them no differently.
Similarly, the TCPA requires that an individual must
have received "more than one telephone call within any 12-month
period" to bring an IDNC claim. 47 U.S.C. § 227(c)(5). But the
IDNC group comprises individuals who received "one or more calls,"
and the settlement does not distinguish between those who received
- 20 - only one call and those who received multiple calls, despite the
clear difference in claim value.
These significant differences between the claims of the
various class members land this case quite far from Cohen, which
involved a settlement regarding the gender ratios of Brown
University's athletes. In Cohen, we rejected objectors' arguments
that an intra-class conflict between women's sports teams -- some
of which had been demoted from varsity to club status, and others
of which had retained varsity status -- required separate
representation. 16 F.4th at 950. Unlike here, the class members
possessed the same claim with the same elements (the ratio of
women's varsity athletes as compared to men's athletes was low
enough to violate Title IX). And, unlike here, compromising the
remedy that could result from successful litigation (a requirement
that Brown adjust the ratio of women's to men's varsity athletes)
posed no significant potential for conflict. The most significant
potential conflict among class members concerned which teams Brown
might elevate or demote -- a decision which no class members could
claim to be able to dictate, and which was not within the purview
of the settlement. Id. ("Under the Joint Agreement, every varsity
team, regardless of gender, played at Brown's pleasure . . . .").
So, for that reason, we found that "[t]he record simply does not
suggest any reason to believe that the class representatives'
negotiations were apt to be skewed in favor of reinstating certain
- 21 - teams by jettisoning others." Id. By contrast, here the class
members possess claims having significantly different elements and
facing significantly different defenses. And each group has a
legal basis for demanding more of the lump sum -- an issue squarely
posed by the proposed settlement -- because each group has a claim
for monetary damages (at least in theory) against HelloFresh.
At oral argument, counsel for HelloFresh contended that
because the groups of class members "overlapped," their interests
were more or less the same. Imagine, for example, that every class
member with an Auto-Dialer claim also had an NDNC claim. In that
scenario, the alleged worthlessness of the Auto-Dialer claims in
light of Duguid would not be a good reason to depart from the
common per-person payment of $100 called for by the proposed
settlement. So we asked counsel to submit letters pointing us to
this overlap. Letters were filed, but none supported the claim of
any relevant overlap. They purportedly showed that eight of the
nine named plaintiffs had all three types of claims. But they
provided no evidence that this ratio extended to the rest of the
class. HelloFresh also pointed out that less than 10% of class
members with an NDNC claim had landlines, suggesting that over 90%
of those class members used cell phones and also have an Auto-
Dialer claim. But this is the wrong type of overlap; the relevant
inquiry is how many class members with an (allegedly worthless)
- 22 - Auto-Dialer claim also have an (allegedly more valuable) NDNC
claim, not the other way around.
HelloFresh and plaintiffs finally contend that because
each of the three types of claims faces significant obstacles,
their values are roughly equal. That is, they argue that the
defenses HelloFresh raised to the NDNC and IDNC claims are on par
with the Duguid defense to the Auto-Dialer claims. But we do not
think HelloFresh's other defenses are as definitive as the Duguid
defense, which essentially extinguishes the value of the Auto-
Dialer claims. Plus, HelloFresh's continued willingness to pay
$14 million to settle the entire bundle of claims runs counter to
the notion that they are all as weak as the Auto-Dialer claims
appear to be on the record as it now stands.
In any event, plaintiffs' and HelloFresh's attempts to
convince us that the significantly different claims nevertheless
have the same value largely miss the point. In theory, in the
absence of arm's-length negotiations by separately counseled
representatives, a district court could try on its own to value
each category of the significantly different claims as discounted
by the risks posed by the significantly different defenses
applicable to each claim. This is what plaintiffs and HelloFresh
ask us to do. But we do not think that Rule 23 is intended to
work in this manner -- at least beyond requiring the district court
to determine whether it is clear-cut that the differences would
- 23 - likely have no material effect on settlement value. As described
above, Rule 23(e) imposes procedural requirements, including that
the settlement was the product of "arm's length" negotiation by
individuals "adequately represent[ing] the class," Fed. R. Civ.
P. 23(e)(2)(A)–(B), that are designed to provide "structural
assurance of fair and adequate representation" before the
settlement reaches the court for approval. Cohen, 16 F.4th at 945
(quoting Amchem, 521 U.S. at 627). And this "structural assurance"
includes negotiations among counsel for each group of class members
with materially differing interests as to how the proposed
settlement amount should be divided among those groups -- including
negotiations regarding the impact of significant differences on
the relative values of the claims. Said differently, ensuring
that claims marked by significantly different elements or defenses
receive appropriate relative weight in a class settlement should
be done in the first instance through negotiations between
counseled representatives of the different groups of class
members, not by the district court, unless the appropriate relative
weight is clear-cut. See Literary Works, 654 F.3d at 253 ("We
know that Category C claims are worth less than the registered
claims, but not by how much. Nor can we know this, in the absence
of independent representation."). This procedural safeguard
"serve[s] to inhibit appraisals of the chancellor's foot kind
-- class certifications dependent upon the court's gestalt
- 24 - judgment or overarching impression of the settlement's fairness."
Amchem, 521 U.S. at 621.
To summarize, we find that the class as certified
consists of class members with claims having significantly
different elements and facing some very different defenses.
Furthermore, we cannot say that the relative values of all of those
different claims are sufficiently clear-cut so as to enable a court
to approve a proposed apportionment of a common fund among the
claimants in the absence of any informed arm's-length negotiation.
Given these findings, the district court lacked the requisite basis
for certifying the settlement class and approving the allocation
of the $14 million among class members as fair, reasonable, and
adequate.1
None of this is to say that a settlement like the
proposed settlement cannot be approved. Arms-length negotiators
might assess the differences in claim value as too insignificant
to warrant the delay, expenses, and risk of foregoing a global
settlement. Such a conclusion put forward collectively by counsel
for each distinct group would provide a structural assurance of
adequacy and fairness that is now missing. And the district court
1 We do not address in this opinion a subject not raised by the parties -- the extent to which a class or classes may be certified for litigation rather than settlement. Nor do we opine on the precise number of subclasses that would need to be represented in concluding a lump-sum settlement of the present multi-claim class.
- 25 - would have a significantly more developed record upon which it can
exercise its discretion under Rule 23(e).
B.
McDonald also challenges the incentive awards the
settlement provides for the named plaintiffs. The district court
approved awards between $2,000 and $10,000 apiece for the named
plaintiffs. McDonald argues that the Supreme Court banned such
payments in two 19th-century decisions and that, in this case, the
incentive awards make the named plaintiffs inadequate
representatives of the class. Neither contention is availing.
Because this issue will undoubtedly arise in the course of any
attempt to negotiate a new settlement on remand, we address it
now.
1.
We begin by considering whether the Supreme Court has
already rejected incentive awards for named plaintiffs in Rule 23
class actions. It has not.
The Supreme Court did hold, well before the advent of
Rule 23, that a court cannot allow a "creditor, suing on behalf of
himself and other creditors" to recover "personal services and
private expenses" out of a common fund. Internal Imp. Fund Trs.
v. Greenough, 105 U.S. 527, 537 (1881); see also Cent. R.R. &
Banking Co. v. Pettus, 113 U.S. 116, 122 (1885). McDonald argues
that we should apply these late-19th-century cases regarding
- 26 - creditor lawsuits over mismanagement of a fund to modern-day class
actions under Rule 23, thereby categorically prohibiting incentive
awards for class representatives.
McDonald faces an uphill battle. Courts have blessed
incentive payments for named plaintiffs in class actions for nearly
a half century, despite Greenough and Pettus. See 5 Rubenstein,
supra, at §§ 17:2, 17:4 (describing the history of modern incentive
awards and explaining that Greenough "seems distant in both time
and fact"). Two of our sister circuits have distinguished
Greenough and declined to categorically prohibit incentive
payments. Melito v. Experian Mktg. Sols., Inc., 923 F.3d 85, 96
(2d Cir. 2019); In re Cont'l Ill. Sec. Litig., 962 F.2d 566, 571–
72 (7th Cir. 1992).
The Eleventh Circuit (in somewhat of an about-face) did
recently bite on the Greenough argument. Johnson v. NPAS Sols.,
LLC, 975 F.3d 1244, 1257 (11th Cir. 2020); but see Muransky v.
Godiva Chocolatier, Inc., 922 F.3d 1175, 1196 (11th Cir. 2019),
reh'g granted by, vacated by, 939 F.3d 1279 (11th Cir. 2019)
(rejecting the same argument). It stated that class-action
incentive awards were "roughly analogous" to the payments for
personal services in Greenough. Johnson, 975 F.3d at 1257.
We do not think the situations sufficiently analogous.
In Greenough, a creditor's lawsuit against trustees in charge of
managing a common fund, the Supreme Court's concern was that "[i]t
- 27 - would present too great a temptation to parties to intermeddle in
the management of valuable property or funds in which they have
only the interest of creditors, and that perhaps only to a small
amount, if they could calculate upon the allowance of a salary for
their time and of having all their private expenses paid."
Greenough, 105 U.S. at 538. Said differently, the Court was
concerned that such awards would induce creditors to interfere
with the management of funds that had already been entrusted to
trustees charged with fiduciary duties to act in the best interests
of the creditors.
That is a different rationale than the one McDonald
attributes to Greenough: "ensuring that named plaintiffs will
actually represent the interests of the class in whose name they
sue." Greenough was concerned with a creditor's relationship vis-
à-vis the trustees, not the other creditors. Moreover, Rule 23(e)
ensures that incentive payments will not result in unfair
settlements by requiring that any settlement be "fair, reasonable,
and adequate," taking into account whether "the class
representatives . . . have adequately represented the class" and
whether "the proposal treats class members equitably relative to
each other." Fed. R. Civ. P. 23(e)(2); see Johnson, 975 F.3d at
1266–67 (Martin, J., dissenting). And courts routinely enforce
this requirement with regard to incentive payments specifically.
See, e.g., Continental Illinois, 962 F.2d at 571–72 (upholding
- 28 - denial of $10,000 award to named plaintiff); Schneider v. Chipotle
Mexican Grill, Inc., 336 F.R.D. 588, 602–03 (N.D. Cal. 2020)
(denying request for incentive awards under circumstances of
case); In re Puerto Rican Cabotage Antitrust Litig., 815 F. Supp.
2d 448, 469 (D.P.R. 2011) (reducing incentive award from amount
requested to reflect named plaintiffs' actual participation).
In addition, whereas in Greenough the Court wished to
prevent "intermeddl[ing]" with fund management, Rule 23 is
designed to encourage claimants with small claims to vindicate
their rights and hold unlawful behavior to account. See Smilow v.
Sw. Bell Mobile Sys., Inc., 323 F.3d 32, 41 (1st Cir. 2003) ("The
core purpose of Rule 23(b)(3) is to vindicate the claims of
consumers and other groups of people whose individual claims would
be too small to warrant litigation."); Bais Yaakov of Spring Valley
v. ACT, Inc., 798 F.3d 46, 49 (1st Cir. 2015) (noting that, through
class actions, "Congress has chosen to empower citizens as private
attorneys general to pursue claims for well-defined statutory
damages"). But Rule 23 class actions still require named
plaintiffs to bear the brunt of litigation (document collection,
depositions, trial testimony, etc.), which is a burden that could
guarantee a net loss for the named plaintiffs unless somehow fairly
shifted to those whose interests they advance. See Continental
Illinois, 962 F.2d at 571. In this important respect, incentive
payments remove an impediment to bringing meritorious class
- 29 - actions and fit snugly into the requirement of Rule 23(e)(2)(D)
that the settlement "treats class members equitably relative to
each other."
Accordingly, we choose to follow the collective wisdom
of courts over the past several decades that have permitted these
sorts of incentive payments, rather than create a categorical rule
that refuses to consider the facts of each case.
2.
McDonald also claims that the presence of incentive
payments in this case created a conflict of interest that rendered
the named plaintiffs inadequate representatives of the class. This
contention is unavailing. McDonald presents little, if any, case-
specific analysis for concluding that the form or substance of the
incentive payments called for by the proposed settlement prevented
the named plaintiffs from adequately representing the class.
Instead, her argument relies primarily on a presumption that
incentive awards inherently cause class representatives to sell
out the class. For all the reasons already described, we reject
McDonald's contention that incentive payments are categorically
improper. And we otherwise see no basis in the record to conclude
that the district court abused its discretion in entertaining the
approval of incentive payments in this case.
We also note that McDonald's argument might be said to
apply similarly to attorneys' fees, yet McDonald does not suggest
- 30 - that the payment of a fee to class counsel out of the settlement
proceeds raises a conflict that categorically bars such payments.
In either instance, a categorical prohibition on payments to those
who make a class recovery possible would likely work to the
disadvantage of those who might have otherwise benefited by a class
recovery.
III.
For the foregoing reasons, we vacate the district
court's approval of the proposed settlement and remand for further
proceedings consistent with this opinion. Costs are taxed in favor
of the appellant Sarah McDonald and against appellees, jointly and
severally.
- 31 -