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Order Approving Class Action Settlement Was Reversed Because it Was “Worthless” For Most of The Class Members

January 1, 2017 | Topic: Class Actions

The U.S. Court of Appeals for the Ninth Circuit reversed an order approving class action settlement in a suit brought against a debt collection agency under the Fair Debt Collection Practices Act (FDCPA), because there was no evidence that the injunctive relief afforded by the settlement had any value to the class members.  There was also no evidence that the absent class members would derive any benefit from the settlement’s cy pres award.  Koby v. ARS Nat'l Servs., 2017 U.S. App. LEXIS 1317 (9th Cir. Cal. Jan. 25, 2017).  

In Koby, the plaintiffs brought the action against a debt collection agency on the basis that the defendant violated the FDCPA by leaving voicemail messages in which the callers failed to disclose (1) that they worked for the defendant, (2) that the defendant is a debt collector, or (3) that the purpose of the call was to collect a debt.  The plaintiffs brought the action on behalf of everyone in the United States who received a voicemail message from the defendant that failed to include this information.  The class consists of four million people nationwide. 

After a full-day mandatory settlement conference before the magistrate judge, the parties reached a settlement agreement.  In sum, the defendant agreed to make a $35,000 cy pres award to a local San Diego charity because, according to the defendant, the four million class members could collectively recover no more than $35,000, as the defendant’s net worth was $3.5 million.  While the four million class members would receive no monetary compensation under the settlement, they were beneficiaries of a stipulated injunction against the defendant that required them to continue using, for two years, a new voicemail message it had voluntarily adopted in 2011 that complied with the FDCPA.  As a result of the class action settlement, the class members would be barred from pursuing a class action under the FDCPA against the defendant, but they could individually pursue such claims. 

While the district court approved this settlement, the Ninth Circuit found that the settlement should not have been approved because “there is no evidence that the relief afforded by the settlement has any value to the class members, yet to obtain it they had to relinquish their right to seek damages in any other class action.”  Koby, 2017 U.S. App. LEXIS 1317 at *18.  Indeed, the court of appeals described the injunctive relief as “worthless.”  Id

This case serves as a reminder that defendants should always adequately evaluate the value of a settlement for the unnamed members of the class.