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From Banking and Finance Law Daily, January 26, 2017

Settlement giving absent class members nothing for something wasn’t fair

By Richard A. Roth, J.D.

A settlement of a Fair Debt Collection Practices Act class action was not fair, reasonable, and adequate when it gave class members nothing of value but deprived them of the ability to participate in future class actions over the same conduct, the U.S. Court of Appeals for the Ninth Circuit has decided. While the three named class representatives each received $1,000—the maximum available statutory damages—the settlement gave four million other class members only the benefit of a worthless injunction, while preventing them from being members of any future class and from opting out of the settlement. Approving such a settlement was an abuse of discretion, the court said (Koby v. ARS National Services, Inc., Jan. 25, 2017, Watford, P.).

The class action claimed that debt collector ARS National Services had violated the FDCPA when its employees left voicemails that omitted required information—that they worked for ARS, that ARS was a debt collector, and that the call was an attempt to collect a debt. The proposed class included everyone in the United States who had received such an email, approximately four million consumers.

Settlement terms. ARS and the class representatives reached a settlement under which they would ask for the certification of a nationwide settlement-only class. The named class representatives would receive $1,000 each. The rest of the class members would receive no payment because ARS’s net worth was so small that the maximum award to the class would be $35,000—too little to be divided among four million people. Instead, $35,000 would be donated to a local charity.

No notice of any kind was to be sent to any of the four million class members, and none of them would be permitted to opt out of the class. Additionally, the class members would lose the right to participate in any future class actions that complained about the voicemails, although they could file individual suits.

The only benefit the absent class members would receive from the settlement was an injunction requiring ARS to use a revised voicemail that complied with the FDCPA. The injunction was to last for two years, and the company already had adopted the revised script.

A consumer who was the named representative in a separate class action addressing the same voicemails objected to the settlement, arguing that the lack of benefit to the class made the agreement unfair and unreasonable. The magistrate judge who was handling the case disagreed and approved the settlement.

Erroneous approval. The settlement should not have been approved because it was not fair, reasonable, and adequate, according to the appellate court. When a settlement is negotiated before a class is certified, the increased risk of collusion or conflicts of interest requires the court to look closely to be sure that settlement is fair. This settlement was not fair 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.”

The injunction was worthless to most of the class members, the court said. There was “an obvious mismatch” between the individuals who might benefit from the injunction and those who were included in the class—the injunction might help those whom ARS would contact in the future, but the class was defined only as those who had been contacted in the past. Even class members who might receive voicemails in the future received no real benefit, the court added, because the injunction merely required ARS to continue using a legal voicemail it already had chosen to use.

The cy pres award that would result in a $35,000 donation to a San Diego veterans’ organization did not convince the court that the settlement was acceptable. There was no evidence that any of the class members would benefit from the donation, no connection between the veterans’ organization and the purposes of the FDCPA, and no relationship between a San Diego charity and a nationwide class of four million consumers.

Since the settlement gave the absent class members nothing of value, those class members could not be expected to give up anything of value, the court continued. However, the right to participate in a different class action had value—the objector’s suit proposed a much smaller class that, she claimed, could allow members to receive as much as $100 each.

“The fact that class members were required to give up anything at all in exchange for worthless injunctive relief precluded approval of the settlement as fair, reasonable, and adequate,” the court concluded.

Magistrate’s jurisdiction. Before considering whether the settlement should have been approved, the appellate court had to analyze whether the magistrate judge had the jurisdiction to make such a decision. Generally, a magistrate judge has the authority to conduct all of the proceedings in a suit and enter a final judgment if the parties agree, and they had agreed in this case. However, was the agreement of the four million absent class members necessary?

The three named class members could consent to the magistrate judge’s jurisdiction and bind the absent class members, the court decided. The relevant statute, 28 U.S.C. §636(c), apparently did not intend that absent class members were to be treated as parties, and the class action process allowed named class members to conduct the suit on behalf of absent class members.

Constitutional concerns remained, though. The National Association of Consumer Advocates, in a friend of the court brief, argued that magistrate judges could have jurisdiction under Article III only if all of the absent class members agreed. The appellate court was willing to accept that named class representatives could agree to a magistrate judge’s jurisdiction because their interests and those of the absent members would be the same and the named representatives could be expected to protect those interests adequately.

There might be a due process issue, the court conceded. However, that would apply only to whether the settlement could be enforced against the absent class members, not whether the magistrate judge could enter the judgment. Enforcement concerns were irrelevant because the approval of the settlement was being reversed, the court added.

The case is No. 13-56964.

Attorneys: Philip D. Stern (Stern Thompson) for Michael P. Koby, Michael Simmons, and Jonathan Supler. Sean P. Flynn (Gordon &Rees Scully Mansukhani) for ARS National Services, Inc. Jonathan Taylor (Gupta Beck PLLC) for Bernadette M. Helmuth. Brian Wolfman, Institute for Public Representation, Georgetown University Law Center and Ira Rheingold, National Association of Consumer Advocates, for amicus curiae National Association of Consumer Advocates.

Companies: ARS National Services, Inc.; National Association of Consumer Advocates

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