Member Article

It is not uncommon in class actions for parties to reach a settlement that provides non-monetary relief to the plaintiffs and a payment of attorneys’ fees to class counsel. In August, however, a California federal court denied preliminary approval of such a settlement. The court questioned the propriety and reasonableness of a proposed cy pres award - one in which funds would be awarded to a third party because distributing funds to the class would not be feasible - and, more importantly, questioned the amount of plaintiff attorneys’ fees agreed to by the parties - an amount the parties had to justify in part based on the perceived value of injunctive relief.

This recent holding will likely impact both the motivation of plaintiffs’ attorneys to bring class actions seeking only injunctive relief and the way in which class action litigators craft settlements. In the context of privacy and data breach law, where small or non-cash settlements accompanied by sizeable attorneys’ fees awards are common, this holding could be of particular importance.

The plaintiffs in Fraley v. Facebook sued in 2011 alleging that Facebook’s Sponsored Stories advertising service violated their privacy rights under California law. The Sponsored Stories program operates as follows: Facebook users “like” a particular product or company online by clicking the iconic “thumbs up” symbol, their profile image appears as an endorsement on Facebook pages, and the company benefitting from the endorsement pays Facebook a small fee. Although news reports indicate that Facebook makes $1 million each day with its Sponsored Stories program, users whose likenesses are used by Facebook are not compensated for their “endorsements.” The plaintiffs in Fraley alleged that this practice violated California Civil Code § 3344 (related to the unauthorized use of another’s likeness) and California Business and Professions Code § 17200 (related to unfair competition).

The plaintiffs reached a settlement with Facebook and, in June 2012, filed a motion for preliminary approval. Under the agreement, Facebook was required to make a $10 million cy pres payment to organizations involved in Internet privacy issues, make agreed-upon changes to its Statement of Rights and Responsibilities that govern the use of Facebook, and provide users with more control over how their names and likenesses are used by Facebook in its Sponsored Stories program. The settlement also allowed plaintiffs’ lawyers to request attorneys’ fees in an amount up to $10 million without objection from Facebook.

On August 17, 2012, the Fraley court declined preliminary approval of the settlement, suggesting that additional briefing regarding the propriety of the settlement, or else a re-negotiated settlement, was needed. The court expressed several concerns with the proposed agreement, not the least of which was the “clear sailing” fee provision which permitted plaintiffs’ counsel to request up to $10 million in fees without objection from Facebook. The plaintiffs argued that $10 million was a reasonable fee in light of both the cy pres amount and the injunctive relief to which Facebook was agreeing (the plaintiffs estimated that Facebook would make about $103 million using its members’ names and likenesses in Sponsored Stories over the next two years, an amount that would likely be reduced by the agreed-upon injunctive relief).

The court balked at this reasoning. First, the court questioned whether it was appropriate for plaintiffs to estimate the monetary value of the injunctive relief based on Facebook’s potential earnings from the Sponsored Stories service or whether the estimate should instead be based on the value of plaintiffs’ right to control the use of their likenesses. “Plaintiffs have presented no reason in logic or law that supports calculating the value of the injunctive relief in such a manner.” Second, the court questioned whether injunctive relief can be assigned an economic value at all for purposes of determining reasonable attorneys’ fees in a settlement agreement. “To the extent any renewed motion for preliminary approval contemplates a fee award based in part on an asserted economic value of injunctive relief, plaintiffs should include any authority addressing whether injunctive relief may be assigned such a value, and how it should be calculated.”

This holding is important for class action litigators, and it is not the only one of its kind. The Texas Court of Appeals, for example, recently rejected a class action settlement in Rocker v. Centex, a shareholder merger case in which plaintiffs’ attorneys had been awarded more than $1 million in attorneys’ fees after reaching a non-cash settlement with defendants. Although plaintiffs’ counsel will have an opportunity on remand to provide more evidence regarding the monetary value of the settlement, the court indicated that Texas law - specifically Texas Civil Practice and Remedies Code § 26.003(b) - may preclude attorneys’ fees payable in cash when only non-cash relief is obtained for the class, regardless of whether the relief can be assigned a monetary value.

These decisions could have a profound impact on future class action litigation. They could make class action plaintiffs’ litigation a less attractive business model, or they could make it more difficult for all class action litigators to craft settlements that will survive court scrutiny. In privacy and data breach litigation - where relief is often sought on a class basis and attorneys pick up sizeable fee awards in connection with small or no-cash settlements - these decisions could be of particular significance.

For more information, please visit the Securities Class Action Defense and Shareholder Litigationpage of the Haynes and Boone, LLP website, or contact one of the attorneys below.