Prospective injunctive relief and class settlements.

AuthorSheley, Erin L.
PositionII. Courts Have No Expertise in Evaluating Regulatory-Style Injunctive Remedies D. Pearson v. NBTY through Conclusion, with footnotes, p. 800-832
  1. Pearson v. NBTY

    If the Hot Fuel settlements exemplify over-regulation through litigation, the injunctive remedies proposed by the settlement in Pearson v. NBTY, Inc. exemplify mindless underregulation. (122) Both dangers arise when plaintiffs' counsel attempts to justify fees without having provided any benefit to class members or consumers.

    Pearson involved several class actions over glucosamine supplements made by NBTY's subsidiary Rexall Sundown, Inc. The supplements had labels containing allegedly scientifically unsupported claims that the products "'help rebuild cartilage,' 'support renewal of cartilage,' help 'maintain the structural integrity of joints,' 'lubricate joints,' and 'support[] mobility and flexibility,"' among others. (123) The district court approved a settlement that would pay about $8.5 million to class members due to a claims process that failed to compensate over ninety nine percent of the class. (124) Class counsel attempted to justify a $4.5 million fee request based in large part on Rexall's agreement to make certain changes to its labeling for a period of thirty months (minus the six months allowed for Rexall to make the changes and begin shipping the new packages); the district court agreed with the objector that the injunctive relief was of unproven benefit and approved the settlement while reducing the fee award to $1.93 million. (125)

    The objector appealed the settlement approval, while the class counsel cross-appealed the fee reduction. (126) Class counsel's cross-appeal argued that the labeling changes were a class benefit. In rejecting class counsel's argument and reversing the settlement approval, the Seventh Circuit provided a blistering account of the lack of value in the labeling changes touted as class "benefits":

    [I]t's superfluous--or even adverse to consumers. Given the emphasis that class counsel place on the fraudulent character of Rexall's claims, Rexall might have an incentive even without an injunction to change them. The injunction actually gives it protection by allowing it, with a judicial imprimatur (because it's part of a settlement approved by the district court), to preserve the substance of the claims by making... purely cosmetic changes in wording, which Rexall in effect is seeking judicial approval of. (127) The Court went on to call the proposed labeling changes "substantively empty," pointing out the lack of meaningful difference between original language, such as "support[s] renewal of cartilage," and its replacement "contains a key building block of cartilage." (128) In other words, the defendants would lose nothing in terms of advertising content through this remedy even if it did not have a limitation of twenty-four months.

    In an amicus brief filed in opposition to a similarly empty settlement of glucosamine labeling claims against Walgreens Drug and other retail defendants, the consumer watchdog Truth in Advertising, Inc. (TIA) emphasized how meaningless labeling changes exacerbate, rather than abate, the victimization of consumers: "[Defendants can use any term--except for the six that were blacklisted in the agreement--that suggests] glucosamine supplements can improve joint health and/or build cartilage." (129) As TIA put it, the settlement "gives the companies the green light to continue marketing their supplements just as they had before this lawsuit was filed and this agreement was reached." (130) Notwithstanding TIA's objection, to say nothing of the Seventh Circuit's decision in Pearson, the district court approved the settlement.

    It is important to understand that, with the settlement approved by the Pearson district courts, the parties achieved, with no meaningful adversarial process, what even the Food and Drug Administration (FDA) cannot: the preclusion of future claims by class members against Rexall for any representations made in the new labels. Some scholars have argued that manufacturers' adherence to FDA labeling requirements should have the power to create a preemptive safe harbor against tort litigation. Richard Epstein points to the "comprehensive control that the FDA exercises in issuing warnings about the dangerous side effects and counter-indications for the use of any drug" and asserts that "[t]he FDA, for all its flaws, does have one advantage over a system of tort liability: It makes its judgments on the overall effects of drug use, not on the particulars of individual cases where the question of proper warning is compromised in a number of ways." (131) In holding that FDA regulations lack such preemptive effect, the Supreme Court has relied on the theory that the FDA has "limited resources" to monitor the 11,000 drugs on the market and that "state [tort] law offers an additional, and important, layer of consumer protection that complements FDA regulation." (132) If the FDA regulatory process cannot preempt collateral litigation, what sense does it make to allow the parties to a single, non-adversarial settlement--who have every incentive to negotiate the least meaningful labeling changes they can get away with--to do so? (133)

    We will consider the question of preemption in greater detail in the next Part, but for the present we note that Pearson exemplifies the judicial illegitimacy described by William Fletcher and referenced in Part II above. The district court exercised "remedial discretion" in a context far from one in which "political bodies that should ordinarily exercise such discretion are seriously and chronically in default." (134) Indeed the FDA was industriously occupying the space in which plaintiffs' attorneys and the district court illegitimately intervened. In reality, the injunctive provision of this settlement operates to harm consumers by creating an unsupported mirage of government approval to justify higher fees for the attorneys.

  2. American Express Merchant Litigation

    As badly as the Pearson litigation usurped regulatory authority, the situation worsens in cases where political bodies are not only regulating actively in the relevant area, but are already regulating the specific defendants the class action targeted. Case in point is the antitrust class action litigation brought on behalf of merchant classes against credit card companies for the "anti-steering" terms in their contracts. (135) These nondiscrimination provisions (NDPs), which were ubiquitous across the credit card industry, prohibited merchants from either offering customers incentives such as discounts or levying surcharges for the use of one particular credit card over another. The NDPs are anti-competitive in that they "create an environment in which there is nothing to offset credit card networks' incentive... to charge merchants inflated prices for their services. (136)

    As a result of these provisions, the Antitrust Division of the Department of Justice, together with the attorneys general of seventeen states, brought enforcement actions against Visa, MasterCard, and American Express ("Amex") for violations of section 1 of the Sherman Act. (137) Visa and MasterCard entered into consent decrees with the government while Amex litigated the action to judgment in a bench trial, which Amex lost. (138) In deciding against Amex the court held that the government had proved by a preponderance of the evidence that the defendants' NDPs violated the federal antitrust laws. (139) Accordingly, the court issued an injunction requiring that Amex "not adopt, maintain, or enforce any Rule, or enter into or enforce any agreement, that directly or indirectly prohibits, prevents, or restrains" a merchant from offering a customer incentives or discounts in exchange for using "a particular Brand or Type of General Purpose or brand of debit card" different from the card initially proffered. (140) The injunction restricted the company's anti-steering attempts far more broadly than the settlement negotiated in the class action. (141) That agreement provided that the NDPs "shall continue to prohibit discrimination against the use of American Express-Branded Cards, except as expressly set forth in this Class Settlement Agreement." (142) The most significant change the settlement made from the prior status quo was to require that Amex allow a merchant to impose a surcharge on all credit card transactions without imposing any on debit cards. (143)

    The court's findings in the enforcement action reveal the lack of value in the class settlement from the perspective of the merchants. As part of its analysis, the court found that general purpose credit cards and debit cards belong to separate antitrust markets. (144) For antitrust purposes, a product market exists if a hypothetical profit-maximizing monopolist that is the only seller of the product included in the proposed market could impose a small but significant and non-transitory price increase (SSNIP) without losing so many sales to other products that its price became unprofitable. (145)

    After considering both expert price sensitivity analysis and the evidence of competitive realities produced at trial, the court concluded:

    [T]here is no indication that merchants--the 'relevant consumer' for defining the relevant product market in this case--historically have been or would be inclined to switch to debit network services (i.e., drop acceptance of credit cards) in response to rising prices in the GPCC card network services market, or that such substitution, if it did occur, would be sufficient to temper an exercise of market power therein. (146) This finding undercuts the class counsel's theory of why the credit card surcharges they negotiated should be valuable to merchants. According to class counsel:

    [M]erchants will be free to impose a separate charge to account for the costs of credit card acceptance, thus offering consumers a powerful and direct economic incentive to use debit cards--the cost of which is regulated by the Federal Reserve and far cheaper than credit card...

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