February 14, 2017

On January 25, 2017, the Ninth Circuit Court of Appeals partially reversed and remanded a settlement against ARS National Services, Inc. (“ARS”), a debt collection agency, in the case Koby v. ARS National Services Inc., et al., Case No.13-56964 (Jan. 25, 2017) (“Koby”).  In a precedential decision authored by Judge Paul J. Watford, a three-judge panel of the Ninth Circuit Court of Appeals ruled that a magistrate judge abused her discretion in approving a class action settlement that awarded four million class members only “worthless injunctive relief.”

In Koby, three named plaintiffs brought a collective and class action against ARS under the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692 et seq.  Plaintiffs’ complaint alleged that ARS violated the FDCPA by leaving voicemail messages in which the callers failed to disclose: (1) that they worked for ARS; (2) that ARS was a debt collector; or (3) that the purpose of the call was to collect a debt.  The putative nationwide class was comprised of all recipients of such voicemail messages.

Plaintiffs sought damages under the FDCPA, which, in a class action, permits the named plaintiffs to recover their actual damages and an additional $1,000 each.  The FDCPA permits class members to recover aggregate damages of no more than $500,000, or one percent of the defendant’s net worth, whichever is less.  ARS represented to the court that its net worth was only $3.5 million, which meant that the four million class members could collectively recover no more than $35,000.

The parties entered into a settlement that provided $1,000 to each of the three named plaintiffs despite their stipulation that they suffered no actual damage.  Because distribution of $35,000 to four million class members was practically impossible, ARS agreed to injunctive relief and a cy pres award.  The injunctive relief consisted of ARS’s promise to continue to use an FDCPA-compliant voicemail message that it had previously adopted for another two years.  The cy pres award consisted of a $35,000 donation to a San Diego charity.  The release precluded the four million class members from seeking actual damages from ARS as part of a class action, but would have allowed them to pursue individual relief.  ARS also agreed to pay class counsel $67,500 in attorneys’ fees.

Magistrate Judge Karen S. Crawford of the Southern District of California approved the settlement.  One class member, the named plaintiff in a parallel Florida class action against ARS, objected because class members would be barred from pursuing damages claims as part of any other class action but would receive nothing of value in return.  Judge Crawford overruled the objection and approved the settlement.

The objector appealed and the Ninth Circuit agreed that Judge Crawford abused her discretion in approving the settlement because there was no evidence presented that the class members would actually benefit from the injunctive relief:

“As the proponents of the settlement, ARS and the named plaintiffs bore the burden of demonstrating that class members would benefit from the settlement’s injunctive relief, which required them to show that class members were likely to face future collection efforts by ARS. See In re Dry Max Pampers Litigation, 724 F.3d 713, 719 (6th Cir. 2013). They fell far short of carrying that burden. ARS and the named plaintiffs made no showing that members of the class continued to receive calls from ARS as part of ongoing efforts to collect debts that were by then two to five years old, a proposition doubtful enough that empirical data of some sort would be necessary to substantiate it. Nor did they show that class members were likely to become targets of ARS’s collection efforts in the future. That would happen only if a class member failed to pay another debt, the debt got referred to a collection agency, and ARS turned out to be that agency. While some of the four million class members might find themselves in that predicament during the two-year span of the injunction, nothing in the record indicates that most class members would. In other words, ARS and the named plaintiffs provided no evidence to suggest that many, if any, members of the proposed class would derive a benefit from obtaining the injunctive relief afforded by the settlement.”

In summary, the Ninth Circuit ruled that the injunctive relief stipulated to as part of the settlement was “worthless” to the class because it would only benefit consumers contacted by ARS in the future, not the class members who had been called in the past.  The Court also noted the deal had an “escape” clause that allowed ARS to dissolve the injunction any time there was a change in the law and effectively “wriggle out” of the purported relief.

The Koby decision is in line with our general observation that courts are becoming more critical of class action settlements and are increasingly demanding evidence to justify settlement terms.