Pearson v. NBTY, Inc.
2014 U.S. App. LEXIS 21874
| 7th Cir. | 2014Background
- Consumer class actions challenged Rexall (NBTY) advertising for glucosamine supplements as misleading; claims included rebuilding/renewing cartilage and supporting joint structure.
- Six consolidated class actions settled nationwide; district court preliminarily approved a settlement later modified and finally approved with payments totaling roughly $5.63 million (fees, notice/admin, cy pres, claimant payments, named-plaintiff awards) and a 30‑month labeling injunction.
- Settlement included a “clear‑sailing” agreement (defendant would not oppose attorneys’ fees up to $4.5M) and a reversion/kicker clause returning any reduced fees to Rexall rather than to the class.
- Only 30,245 claims were filed (≈0.25% of the class), producing about $865,284 in direct payments to claimants; district court valued the settlement at $20.2M by including prospective claims, notice costs, and the full $4.5M fee cap.
- Objectors (class members) appealed the settlement approval; the Seventh Circuit reviewed issues including fee allocation, valuation methodology, cy pres award, claims process design, injunction value, and the kicker clause.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper valuation for awarding attorneys’ fees (use of $20.2M fund) | Settlement creates a fund whose maximum potential value supports the fee request | Fee should be judged against total settlement value as the parties framed it | Court rejected using inflated potential figure; fees must be compared to actual/realistic benefit to class (fee+class recovery ratio) |
| Reasonableness of awarded attorneys’ fees ($1.93M allowed; $4.5M requested) | Fees reflect work and negotiated agreement; district court should defer to parties’ bargain | Objectors: fee is excessive relative to tiny recovery; counsels’ incentives conflict with class interests | Court found fees excessive (69% of real pot), criticized methodology, suggested presumption fees should not exceed ~33–50% of class recovery in consumer cases |
| Claims process design and low claims rate | Counsel: procedures were standard; prospective option has value even if unexercised | Objectors: onerous documentation, perjury warnings, online-only claim path discouraged filings to benefit defendants and increase fees | Court inferred claims process discouraged filings, reducing class benefit and creating conflict of interest for class counsel |
| Cy pres award to Orthopedic Research & Education Foundation | Parties: leftover funds reasonably cy pres to related charity | Objectors: cy pres improper because feasible alternatives (mailing checks to 4.72M known purchasers) existed | Court held cy pres unjustified here because class compensation could have been feasibly distributed; cy pres therefore invalid as awarded |
| Injunctive relief value (30‑month labeling changes) | Parties: label changes produce significant consumer benefit and economic effect | Objectors: changes are cosmetic, short‑term and of dubious consumer benefit | Court valued injunctive relief at zero (district court discretion affirmed); expert estimate deemed speculative and inadmissible as reliable evidence |
| Reversion/kicker clause returning reduced fees to defendant | Parties: clause was part of negotiated settlement | Objectors: clause defeats objectors’ standing and obstructs courts increasing class share when reducing fees | Court condemned kicker clause as a gimmick, indicated strong presumption against its validity and directed that fee reductions should benefit class |
Key Cases Cited
- Williams v. Rohm & Haas Pension Plan, 658 F.3d 629 (7th Cir. 2011) (appellate review of class settlement approval is limited but meaningful)
- Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277 (7th Cir. 2002) (district judges act as fiduciaries for the class in settlement approval)
- Redman v. RadioShack Corp., 768 F.3d 622 (7th Cir. 2014) (administrative costs should not factor into fee/class allocation; use fee/(fee+class recovery) ratio)
- Boeing Co. v. Van Gemert, 444 U.S. 472 (U.S. 1980) (prospective claims/options can create value where a fund or ascertainable judgment exists)
- Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014) (recognized conflict of interest risk between class counsel and class members in settlement negotiations)
- Creative Montessori Learning Ctrs. v. Ashford Gear LLC, 662 F.3d 913 (7th Cir. 2011) (discussing incentives for class counsel and defendants to structure settlements favorable to lawyers)
- Armstrong v. Bd. of Sch. Dirs. of City of Milwaukee, 616 F.2d 305 (7th Cir. 1980) (judicial role in settlement approval; historical perspective on deference to parties)