One common misconception of class actions is that they provide a method for consumers to band together and fight back against the faceless and heartless corporations that have wronged them. The reality of class actions is far different. While corporations may well be faceless and heartless, and sometimes they do wrong consumers, a class action is not consumers’ collective response. Rather, a class action is the product of an enterprising plaintiffs’ attorney’s imagination. If that attorney can sign up a single injured plaintiff (known as a “named plaintiff”) that can adequately represent the class, he can rope hundreds or thousands or even millions of other people into the lawsuit without their consent. Indeed, these “absent class members” have never met and will never meet either the attorney or his client.
While the law generally allows this, it imposes safeguards necessary to protect the rights of those absent class members who are roped in. When plaintiffs and their attorneys propose to bring a class action lawsuit on behalf of unpresented persons, they assume certain responsibilities—what the law calls “fiduciary duties.” Among those duties, they have to make sure any settlements they enter into serve the class members’ interests and not merely their own self interest. They must also “ensure that the class is afforded the opportunity to represent its own best interests.” To do this the class attorneys have to be “actually desirous” of notifying class members of any pending settlements. In practice that means sending the class members a letter or an email informing them of the proposed settlement and giving them the opportunity to register an objection with the court if they don’t like the proposed settlement or class counsel’s request for attorneys’ fees.
Sometimes, settling parties don’t notice the class or let them object
Any practitioner with a modicum of class action experience would know these basics. That is why I am so disturbed by what happened last week in the case of Buckeye Tree Lodge and Sequoia Village Inn, LLC v. Expedia, Inc., No. 16-cv-04721 (N.D. Cal.) in federal district court in San Francisco. This case involves allegations that Expedia had violated the trademark rights of numerous independent hotel and motel establishments by running advertising implying that consumers could book reservations for those hotels on Expedia even though Expedia had no relationship with those hotels. After a potential customer entered prospective travel dates on Expedia’s website for an unaffiliated hotel, Expedia would represent that there are all bookings are “sold out”, leading the potential customer to think that that particular hotel had no vacancies during the time period, rather than the truth that Expedia simply had no booking relationship with the hotel. These unaffiliated hotels constitute the class members in this case. Their trademark claims seem far from frivolous to me.
In response to the lawsuit, Expedia changed its business to prevent non-affiliated hotels from being advertised with unavailability messages. But the fact that the lawsuit catalyzed certain changes did not entitle class counsel to the attorneys’ fees that they hoped to obtain from the suit. To extract those fees, class counsel needed to reach a separate settlement with Expedia and have that settlement approved by the presiding court. They did so, negotiating a settlement in which Expedia would pay the class attorneys $2.1 million, the four named plaintiffs $12,500 each, and the rest of the class members nothing. The class members would waive their right to sue Expedia for additional injunctive relief. Meanwhile, the class would get nothing beyond Expedia’s promise to use its “best efforts” to do more of what it is already doing. That is the supposed class benefit; modest would be a generous description.
But instead of asking for the court to send notice to the class members and giving them the opportunity to comment on a proposed settlement that is going to bind them, the class attorneys asked for the court skip that step entirely and simply approve the settlement. And, shockingly, the court did exactly that! Taking this shortcut violated the rights of class members under federal class action law and deprived them of due process they are entitled to under the United States Constitution. (It also violated a separate federal law by failing to notify state officials entitled to notice of the settlement).
Cutting out class notice might make the settlement unenforceable
As a result, under the law, the settlement is likely a void nullity. Class members could walk into another court tomorrow and Expedia could not enforce the release that it has bargained for in this settlement. But unless a class member steps forward to move to vacate the settlement approval or to disgorge class counsel’s fee, class counsel will walk away with $2.1 million, leaving absent class members with $0, a worthless injunction, and no opportunity to register their displeasure. Class counsel’s conduct constitutes an ethical breach of the highest order. It reifies the worst aspects of the class action system—that the entire process is of the attorneys, by the attorneys, and for the attorneys.
We at the Center for Class Action Fairness remain committed to fight for a class action system that serves consumers and shareholders, rather than just attorneys. We would welcome any inquiries from those who may be affected by the abuses in this or other cases.