968 F.3d 827
7th Cir.2020Background
- Plaintiffs filed a class action alleging false claims about dietary supplements; an initial settlement (Pearson I) was vacated by this court.
- Parties negotiated a second settlement (Pearson II): a $7.5 million common fund plus an injunction; the district court approved it over several class-member objections.
- Three objectors (Nunez, Buckley, Sweeney) appealed the denial of their objections and then dismissed their appeals after receiving private side payments totaling $130,000 ($60k, $60k, $10k).
- Class member Theodore Frank moved for disgorgement of those payments to benefit the class; the district court denied the motion, finding no wrongdoing and that payments were not taken from the common fund.
- The Seventh Circuit reversed, holding that class-based objectors who settle appeals for private payments in excess of their class share breach a limited representative duty and that disgorgement (via constructive trust and cy pres if necessary) is an appropriate equitable remedy; the case was remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Equitable authority to disgorge objector side payments | Frank: district court has equitable power to disgorge proceeds of private objector settlements to protect class interests | Objectors: no statutory violation or wrongdoing; court lacked basis to order disgorgement | Reversed: equitable disgorgement is available for class-based objector sellouts |
| Breach of representative/fiduciary duty by objectors | Frank: objectors who appeal on behalf of class assume a fiduciary-like duty and may not sell out class claims for private gain | Objectors: acted in good faith or settled distinct individual claims (esp. Nunez) | Held: objectors assumed representative responsibility; selling appeals for private payments breaches that duty (Young controlling) |
| Source of payments—common fund requirement | Frank: value extracted derived from class litigation regardless of nominal payor; must be returned to class | Objectors: payments came from defendants (not from common fund) so class not harmed | Rejected: who wrote the check is not dispositive; class-derived value was appropriated and disgorgement warranted |
| Appropriate remedy (disgorgement vs rescission) | Frank: disgorgement to class or rescission of settlement | Objectors: rescission or rejection of disgorgement; limit relief | Court: disgorgement via constructive trust; cy pres if direct distribution impractical; rescission is an alternative but not the only or preferred remedy here |
Key Cases Cited
- Young v. Higbee Co., 324 U.S. 204 (1945) (class-based appellants who sell out appeals breach representative duty; profits belong to class)
- Liu v. SEC, 140 S. Ct. 1936 (2020) (discussion of traditional equitable disgorgement remedies and limits)
- Pearson v. NBTY, Inc., 772 F.3d 778 (7th Cir. 2014) (Pearson I) (vacating earlier settlement as inadequate)
- Pearson v. Target Corp., 893 F.3d 980 (7th Cir. 2018) (Pearson II) (recognized problem of objector side deals and allowed inquiry into dismissals)
- Snepp v. United States, 444 U.S. 507 (1980) (constructive trust and disgorgement principles for fiduciary breaches)
- Devlin v. Scardelletti, 536 U.S. 1 (2002) (class members who object and appeal represent interests divergent from class representatives)