Appeals Court Rejects NBTY Class-Action Settlement

The 7th Circuit said a federal judge used the wrong calculation in determining the reasonableness of the fees awarded to class counsel.

CHICAGO—An appeals court rejected a nearly USD $6 million agreement that resolved a number of lawsuits filed against NBTY Inc. and its subsidiary Rexall Sundown Inc. The court questioned the reasonableness of attorneys’ fees in the judgment.

The consolidated class-action settlement covered a class of approximately 12 million people and resolved complaints that Rexall misrepresented the benefits of glucosamine pills. It included an injunction against Rexall that prohibited the company from making certain advertising or marketing claims for 30 months.

In approving an award of $1.93 million in fees to class counsel, U.S. District Judge James Zagel in Illinois calculated the amount of attorneys’ fees reflected 9.6 percent of the total potential value to class members of $20.2 million.

The judge’s calculation was erroneous, and it should have reflected the ratio of the attorneys’ fees to the fees plus what the class members received, the panel of three appeals judges held in the 18-page opinion. Members of the class only received $865,284, meaning “attorneys’ fees represented not 9.6 percent of the aggregate value but an outlandish 69 percent," Circuit Judge Richard Posner wrote on behalf of the U.S. Court of Appeals for the Seventh Circuit.

The attorneys’ fees awarded reflect an hourly fee of $538, implying “few if any associates or paralegals had actually been used on the case, even though most of the legal work was routine pretrial preparation," Posner stated. “This is a further indication (if any were needed) that class counsel sought and were awarded excessive compensation."

The approved settlement required Rexall to distribute $5.63 million. The settlement funds comprised $1.93 million in fees to class counsel, $179,676 in attorney expenses, $1.5 million in notice and administration costs, $1.13 million to the Orthopedic Research and Education Foundation, $30,000 to the six named plaintiffs, and $865,284 to the 30,245 class members who submitted claims.

Under the settlement, class members who saved receipts from 2005 through 2013 could obtain $5 per bottle for up to 10 bottles ($50), and class members without proof of purchase could claim a check of up to $12 ($3 for up to four bottles), according to the Center for Class Action Fairness, which objected to the settlement and filed an appeal.

When only a small percentage of class members file claims—in the case under review, only one-quarter of 1 percent did so—the 7th Circuit suggested a presumption “that attorneys’ fees awarded to class counsel should not exceed a third or at most a half of the total amount of money going to class members and their counsel."

Based on the above calculation, the attorney’s fees should have been between $436,642 and $865,284, the appeals court said. 

“The settlement, a selfish deal between class counsel and the defendant, disserves the class," Posner said. “Class counsel shed crocodile tears over Rexall’s misrepresentations, describing them as ‘demonstrably false,’ ‘consumer fraud,’ ‘false representations,’ and so on, and pointed out that most of the consumers of Rexall’s glucosamine pills are elderly, bought the product in containers the labels of which recite the misrepresentations—and number some 12 million. Yet, only one-fourth of one percent of these fraud victims will receive even modest compensation, and for a limited period, the labels will be changed, in trivial respects unlikely to influence or inform consumers. And for conferring these meager benefits class counsel should receive almost $2 million?"

NBTY declined comment on the appeals decision.

Plaintiffs accused NBTY, Rexall and Target of violating consumer protection laws in several states by making false claims concerning the efficacy of glucosamine. Claims that were subject to the lawsuits included “help rebuild cartilage," “support renewal of cartilage," help “maintain the structural integrity of joints," “lubricate joints," and “support mobility and flexibility."

Eight months after plaintiffs filed a lawsuit in federal district court in Illinois, plaintiffs’ lawyers in all six cases negotiated a settlement with NBTY and Rexall. Under the settlement that had received preliminary approval, the attorneys would have received fees of up to $4.5 million, and any amount that the judge deemed excessive would have been returned to Rexall rather than to class members, according to the appeals decision. Had that agreement been approved, the attorneys would have been paid an average hourly fee of $1,254, Posner noted.  

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