CHICAGO — A group of class action settlement objectors are on the hook for at least $130,000 after a U.S. Seventh Circuit Court of Appeals panel determined they only opposed the deal to "blackmail" to extract a payday of their own.
The underlying lawsuit is a 2011 class action filed in federal court against the drug manufacturer Rexall and retailer Target. The suit alleged Rexall and Target breached consumer protection laws by making false claims about the usefulness of the dietary supplement glucosamine, which Rexall made and Target sold.
After a 2014 settlement, attorney Ted Frank objected, claiming the plaintiffs’ lawyers earned too much on the deal. Frank is litigation director at Hamilton Lincoln Law Institute and the founder of the Center for Class Action Fairness, a nonprofit public interest firm he created in 2009.
Ted Frank
| Center for Class Action Fairness
After the Seventh Circuit sided with Frank, a second settlement deal was ratified in 2016. That was a $9 million agreement, with $5,000 going to each of the five named plaintiffs and as much as $2.5 million going to their attorneys. The millions of potential class members would receive no more than $200 a piece.
Three class members objected to the settlement, then withdrew their objections, under separate settlement deals. Frank, however, challenged those side deals, alleging these objectors were engaging in “objector blackmail,” in which they contested the settlement, not to improve settlement terms, but to pocket a payment in exchange for dropping the objection.
Frank asked U.S. District Judge John Blakey to let him explore whether the three objections were in bad faith. Blakey refused, leading Frank to appeal.
At the Seventh Circuit court, Judge David Hamilton wrote the opinion on Frank’s appeal, issued Aug. 6. Circuit Judges Ilana Rovner and Diane Wood concurred.
Hamilton said the issue is whether Blakey had the power to order the objectors to disgorge - or, repay - their “side payments” in order to increase the cash pool for the remaining class members.
“Falsely flying the class’ colors, these three objectors extracted $130,000 in what economists would call rents from the litigation process simply by showing up and objecting to consummation of the settlement to slow things down until they were paid,” Hamilton wrote. “We hold that settling an objection that asserts the class’ rights in return for a private payment to the objector is inequitable and that disgorgement is the most appropriate remedy.”
The panel determined Blakey “failed to address a critical piece of evidence” in determining the $130,000 paid to the objectors wasn’t intended to be part of the settlement pool. Further, it said that question was only relevant because Blakey “legally erred by requiring some positive statutory violation as a predicate for disgorgement.”
If their arguments were in good faith, Hamilton wrote, the objectors effectively “sold off” a genuine chance to improve every class member’s payment in order to realize an advantage that applied only to them. Since they were “not paid for anything they owned,” he continued, their side deals must be considered part of the equity for the full class. Further, the panel said the record shows the objectors didn’t believe or take seriously their own objections.
Rather than undo the settlement, which would punish the wrong people, or divert the $130,000 to other class members, undesirable because of administrative costs, the panel said the appropriate remedy is putting the objectors’ money in a constructive trust and ordering payment to the Orthopedic Research and Education Foundation, a charity named in the second settlement as recipient of unclaimed funds.
The panel said its ruling shouldn’t deter future good-faith settlement objections, reversed Blakey’s ruling and remanded the case for further proceedings.
According to federal court records, the intervenor plaintiffs were represented in the action by attorneys James Richard Patterson and Todd D. Carpenter, both of San Diego; Arthur J. Howe, of Chicago; and John J. Pentz III, of Sudbury, Mass., among others.
Frank was represented by attorneys Michael F. Bednarz, of Chicago, and Anna St. John, of Washington, D.C. Both are affiliated with the Hamilton Lincoln Law Institute.
Target and Rexall were represented on appeal by attorney Kara McCall, of the firm of Sidley Austin LLP, of Chicago.
The plaintiffs' class has been represented by attorney Stewart M. Weltman, of Chicago, among others.