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A Tale of Two Settlements: The Virtue of Being Adversarial in Class Action Lawsuits

I really only want to talk about one settlement—the settlement in Rougvie v. Ascena Retail Group, No. 15-cv-724 (E.D. Pa.). Ascena is the corporate owner of the Justice brand clothing franchise, which caters to pre-adolescent girls in 900 stores throughout the country. If you’ve ever walked past what you thought was a Care Bears shrine in your local mall, that was probably a Justice store. 

Last year Carol Rougvie and a handful of other individuals brought suit alleging that Justice had engaged in a pattern of fake 40% sales, i.e., they allegedly advertised items as being “40% off” that were never sold at the full retail price. Whether this complaint states a cognizable legal theory of false advertising or consumer fraud is a matter open for debate. Some courts have concluded that there is no fraud because the purchaser knew exactly what he was purchasing at the price that was stated. This case didn’t decide the question because the parties decided to settle on behalf of over 20 million Justice shoppers across the country.

How they settled is the interesting part. The parties proposed to distribute an assortment of coupons and cash awards to class members, with amounts depending upon various factors like whether the class member came forward to make an affirmative claim and whether the class member has kept her receipts or gave her contact information to Justice at the point of sale. Representing two objecting class members, CEI’s focused on the fact that the class attorneys had negotiated for themselves a fee award of $14.1 million, essentially just as much as the true value that they were providing to their client class members.

But again, this was a tale of two settlements. The settling parties represented to the court that their settlement was worth at least $50.8 million, even suggesting a number of times that the court should ascribe a value of over $400 million to it. It took some deft sleight of hand to arrive at those numbers. To get to $50.8 million, they had to count money that was “made available” to class members, but ultimately would be returned to the defendant after it wasn’t claimed. They also had to count $8 to $12 million that was earmarked to pay the third party class action administration company. To get to $400 million, they had to count the face value of all the coupons that the defendant agreed to email to class members who made no claim. The actuarial reality is that only 1-3% of those coupons will be redeemed.

Last week, Judge Kearney of the U.S. District Court of the Eastern District of Pennsylvania issued a thoughtful 80-page opinion, by and large agreeing with CEI’s view of the settlement. In accordance with the Class Action Fairness Act, he concluded that he could not count the coupons that would be distributed as part of the settlement value to justify the fee award. Counsel was only entitled to $5.3 million at present, and would have to wait until the coupon expiration next year before determining whether they are entitled to anything more. The Court recognized the importance of not exalting fictions, speculations and hypotheticals over cold hard facts. It also understood well the bedrock importance of aligning the interest of class counsel and their clients. While the Court awarded $9 million in the settlement, class counsel will only receive any portion of the unawarded $9 million if they demonstrate that class members redeem the burdensome coupons. We expect that few will, and in that event, the $9 million will instead augment class members’ recovery.  

These propositions may seem self-evident, but too often in the context of a class action settlement, it is too easy for settling parties to slip an “unopposed” motion by an overburdened district court judge. Reinjecting adversarialness into an otherwise done deal is what objectors do best. The system worked as it was supposed to…this time.