Opinion
ORDER DENYING PLAINTIFFS' MOTION FOR CLASS CERTIFICATION AND PRELIMINARY APPROVAL OF SETTLEMENT
SAMUEL CONTI, District Judge.
I. INTRODUCTION
On February 3, 2011, the Court denied the Motion for Preliminary Approval of Settlement and Conditional Class Certification that was filed by Plaintiffs Tina Walter ("Walter"), Christopher Bayless ("Bayless"), and Eric Schumacher ("Schumacher") (collectively, "Named Plaintiffs" or "Plaintiffs") and joined by Defendants Hughes Communications, Inc. and Hughes Network Systems, LLC (collectively, "Hughes"). ECF Nos. 60 ("Motion"), 69 ("Feb. 3, 2011 Order"). Plaintiffs have since renoticed their motion and Plaintiffs and Hughes have filed additional briefs in support of it. ECF Nos. 72 ("Pls.' Supp. Br."), 73 ("Defs.' Joinder"). The Court has reviewed the documents submitted, and for the following reasons, it DENIES the Motion.
II. BACKGROUND
A. Factual Background
Hughes is a satellite broadband Internet technology and service provider ("ISP") that sells Internet access via satellite to consumers in rural areas where Internet service is not available through digital subscriber lines ("DSL") or cable. ECF No. 44 ("SAC") ¶ 2. Hughes advertises a variety of service plans which offer different download and upload speeds at different prices:
For example, HughesNet offers the following "Home" plans: The Home Plan, for a monthly fee of $59.99, is advertised with download speeds at 1.0 Mbps; the Pro Plan, for a monthly fee of $69.99, is advertised with download speeds at 1.2 Mbps; the ProPlus Plan, for a monthly fee of $79.99, is advertised with download speeds at 1.6 Mbps; the Elite Plan, for a monthly fee of $119.99, is advertised with download speeds at 2.0 Mbps; the ElitePlus Plan, for a monthly fee of $189.99, is advertised with download speeds at 3.0 Mbps; and the ElitePlus Plan, for a monthly fee of $349.99, is advertised with download speeds at 5.0 Mbps.
Id. ¶ 27. Regardless of the plan selected, Hughes requires a two-year commitment from its subscribers; those who cancel their service are obligated to pay an early termination fee ("ETF"). Id . ¶ 52. Until September 1, 2008, Hughes charged a $300 ETF; subscriptions activated after September 1, 2008 were subject to a $400 ETF. Id . ¶ 28.
Hughes also maintains what it calls a "Fair Access Policy" ("FAP"). Under the FAP, Hughes caps the amount of data its subscribers may download in a day. Id . ¶ 46. Hughes advertises that "[a] small percentage of subscribers who exceed this limit will experience a temporary reduction of speed." Id . This reduction in download speed continues for approximately twenty-four hours, and serves to discourage subscribers from bandwidth-intensive Internet activity. Id . ¶ 47.
In this action, Plantiffs claim to be current and former subscribers and allege that Hughes falsely advertised Internet service speeds; oversold and/or capped the speed of its Internet service; failed to properly disclose its policy of limiting the amount of data users can upload or download; and imposed a $400 early cancellation fee that was "unconscionable and unenforceable under California law." See id. ¶¶ 2, 26-55.
Plaintiff Bayless claims that as a Hughes subscriber, he frequently experienced slow Internet service and had difficulty connecting to the Internet numerous times. Id . ¶ 60. Bayless alleges that even after upgrading to Hughes's ElitePlus Internet service, his Internet speed was "approximately half" of the advertised speed. Id . ¶ 61. Bayless claims that when he cancelled his subscription in November 2008, he paid a $300 early termination fee. Id . ¶ 62.
Plaintiff Schumacher claims that he upgraded his Hughes Internet subscription to the Pro plan due to Hughes's advertising of a maximum speed of "up to 1.2 Mbps" and "typical speeds about 700 Kbps to 800 Kbps during peak times." Id . ¶ 66. Schumacher alleges that the average speed of his Internet service during both peak and non-peak times was "651 Kbps, approximately half of the advertised speed." Id . ¶ 68. Schumacher then upgraded to Hughes's Small Office plan, which he claims also did not perform at advertised speeds. Id . ¶¶ 69-71. Schumacher terminated his subscription in or around January 2009. Id . ¶ 71.
Walter subscribed to Hughes's Home plan. Walter alleges that she experienced "significantly slow, and at times non-existent, upload and download speeds, " which she attributes to both "the speed of the service" and "because the FAP was implemented more stringently than the disclosures to her had represented." Id . ¶ 73.
Plaintiffs initially sought to represent a class of "all citizens of the State of California who are or were subscribers to HughesNet's satellite broadband and Internet equipment services during the four years preceding the filing of the complaint" and a subclass of "all citizens of the State of California who are consumers under Civil Code section 1761(d) and are or were subscribers of HughesNet's satellite broadband and internet equipment services during the three years preceding the filing of the complaint." Id . ¶¶ 13-14. In the Third Amended Complaint filed with the Motion, Plaintiffs seek to expand this class to all Hughes subscribers throughout the United States. ECF No. 63 ("TAC").
B. Procedural Background
Walter and Bayless filed their initial complaint on May 15, 2009. ECF No. 1 ("Initial Compl."). Schumacher filed a complaint against Hughes with similar claims in California state court on June 9, 2009; this action was subsequently removed to federal court and consolidated with the earlier-filed action. ECF No. 17. The parties stipulated to multiple extensions of Hughes's deadline to respond to the complaint. ECF Nos. 5, 13. On September 3, 2009, Plaintiffs amended their complaint. See ECF No. 18 ("FAC"). On October 5, 2009, Hughes moved to dismiss the FAC. ECF No. 20. On January 26, 2010, the Court granted in part and denied in part Hughes's motion to dismiss, dismissing two claims with prejudice and two claims without prejudice, and granting Plaintiffs leave to amend their complaint. ECF No. 40. On February 26, 2010, Plaintiffs filed their Second Amended Complaint. See SAC. On March 18, 2010, Hughes filed a second motion to dismiss. ECF No. 45. Shortly thereafter, the parties began mediation and Hughes withdrew its motion to dismiss. ECF No. 55. On January 7, 2011, after several additional continuances, Plaintiffs filed an unopposed motion for preliminary approval of a class action settlement. ECF No 60.
Plaintiffs concurrently filed their Third Amended Complaint. In it, Plaintiffs bring four causes of action: (1) violation of California's Consumer Legal Remedies Act ("CLRA"), Cal. Civ. Code §§ 1750, et seq., as well as "similar applicable consumer protection law of other states", TAC ¶¶ 73-84; (2) violation of California's Unfair Competition Law ("UCL"), Cal. Civ. Code § 17200, as well as "similar applicable unfair competition law of other states"; TAC ¶¶ 85-98; (3) negligent misrepresentation, id. ¶¶ 99-109; and (4) intentional misrepresentation and omission, id. ¶¶ 110-119. Whereas in the first three complaints, Plaintiffs sought to represent a class of Hughes's California customers, Plaintiffs now seek to represent "[a]ll residents of the United States of America who are or were subscribers to Hughes' satellite broadband and internet equipment services during the four years preceding the filing of the original complaint" and a subclass of "[a]ll residents of the United States of America who are consumers under Civil Code section 1761(d) and are or were subscribers of Hughes' satellite broadband and internet equipment services during the three years preceding the original filing of the complaint." Id . ¶¶ 13-14.
The Court denied the Motion, finding that the papers submitted failed to provide basic information about the proposed class. See Feb. 3, 2011 Order. The Court granted the parties leave to renew their motion and advised the parties include to information such as estimates of the size of the class, the total gross amount to be recovered, and the cost of administration and notice. Id . The Court also ordered briefing and evidence supporting "Plaintiffs' threadbare assertion that the requirements of Federal Rules 23(a) and (b)(3) are satisfied, " and ordered additional briefing on the proposed form of notice to the class. Id.
The parties have since renewed their motion for preliminary approval of the settlement. The terms of the settlement have not changed, but the parties have revised the notice documents in response to the Court's February 3, 2011 Order. See Rosenberg Supp. Decl. Ex. 1 ("Settlement"), id. Ex. A ("Claim Form"); Ezrin Decl. Exs. D ("Long Form"), E ("Postcard"), F ("Summary Notice"). Plaintiffs also submit firm resumes of Plaintiffs' three counsel, Bramson, Plutzik, Mahler & Birkhaeuser LLP ("Bramson Plutzik"), Audet & Partners LLP ("Audet"), and Pogust, Braslow & Millrood, LLC ("Pogust") as evidence that they are adequate class counsel. Ezrin Decl. Exs. A, B, C.
Jennifer Rosenberg ("Rosenberg"), counsel for Plaintiffs filed a1 declaration in support of the Motion, ECF No. 61, which she later corrected in a supplemental declaration, ECF No. 66. Joshua C. Ezrin ("Ezrin"), counsel for Plaintiffs, filed a declaration in support of the Settlement, which Plaintiffs attached to their Supplemental Brief.
C. The Proposed Settlement
1. Class Structure
Under the settlement, the class that would be certified and subject to the settlement's release of liability is defined as:
All persons and entities residing in the United States of America who, during any time between May 15, 2005 and the Preliminary Approval Date, were subscribers to any of the Hughes' Consumer Service Plans.
Excluded from this definition are Hughes Communications, Inc. and Hughes Network Systems, LLC, and their respective subsidiaries, affiliates, dealers, employees, directors, and the legal representatives, heirs, successors and assigns of the individuals and entities previously referenced in this sentence, and any government entities.
Settlement § 1.27.
2. Injunctive Relief
Under the proposed settlement, Hughes would alter its practice of charging a $400 flat ETF and instead pro-rate its ETF such that it would vary between $85 and $400 depending on the number of months left on the subscriber's 24-month contract. Pls.' Supp. Br. at 6. Hughes would be required to maintain this rate schedule for at least "18 months after the effectiveness of the new schedule, " and not return to a flat ETF for a period of three years. Id . Plaintiffs provide a chart which they claim shows that the "estimated minimum value of the changes to the ETF policy is approximately $4,472,662." Id. at 7.
Hughes would alter its FAP to provide subscribers with what it calls "FAP Tokens." Id . These "tokens" would allow subscribers to reset their download allowances once per month if they reached their maximum download allowance under the FAP for that month. Id . Plaintiffs estimate the value of this portion of the injunctive relief at $10,099,388. Id. at 8.
Hughes would also alter its advertising such that "[w]hen advertising upload or download speeds measured in MBPS or KBPS for its consumer plans, Hughes will include a disclosure in reasonable proximity to the advertised speeds that states that advertised upload and download speeds are not guaranteed and may be slower than the maximum advertised speeds, particularly during peak times." Id. at 7. The parties do not attempt to estimate the value of this relief to the class.
Plaintiffs estimate that the injunctive relief contemplated under the settlement will confer a total benefit of roughly $14 million on the class.
3. Economic Relief
Under the proposed settlement, former subscribers who paid an ETF prior to December 6, 2010 would receive a $40 cash payment, and former subscribers who did not pay an ETF would receive a $5 cash payment. Settlement § 2.6. Current subscribers as of the date of preliminary approval would receive no cash compensation.
Receipt of the cash payment would be conditioned on each class member's submission of a valid and timely claim form in which he or she affirm the above facts, as well as the fact that he or she returned "all equipment leased from or provided by Hughes" within ninety days of cancelling his or her Hughes service. Id .; see Claim Form. Plaintiffs estimate that approximately 73, 837 of the class members paid an ETF during the class period and would therefore be potentially eligible for the $40 cash payment. Pls.' Supp. Br. at 9. Plaintiffs estimate that approximately 465, 706 former subscribers did not pay an ETF and would therefore be eligible for the $5 cash payment. Id . Plaintiffs multiply the size of the cash payments by the number of class members eligible to receive them to calculate "the total amount of cash compensation available to the Class under the Settlement" at approximately $5,282,010. Id.
4. Fee Awards
Hughes agrees to pay Plaintiffs' counsel up to $980,000 in attorney fees and expenses once the settlement becomes final, subject to Court approval. Settlement § 2.9. This fee amount is in addition to the relief Hughes will provide to the settlement class - it would not be paid out of a common fund. Id . The parties also intend to seek a cash payment of $5,000 to compensate each of the three Named Plaintiffs. Id . § 2.11.
5. Notice
The parties propose providing notice of the settlement to the class via a Postcard sent via direct mail, a Long Form sent via e-mail, and a Summary Notice published in USA Today. Id . § 3.2. The parties agree that a "professional claims administrator" will administer the claims resolution process, issuing class notice and claim forms, determining and issuing settlement payments, and responding to class member inquiries. Id . §§ 2.7, 3.2. Hughes would pay all costs of notice. Id . § 2.9.
The Postcard would be sent via First Class U.S. Mail to each class member for whom Hughes has a valid mailing address. Pls.' Supp. Br. at 10. Plaintiffs allege that "because installation of Hughes equipment requires a physical address, Hughes customer account records necessarily include a mailing address for 100% of the approximately 1.1 million class members, " id. at 10, and that Hughes has already determined that two percent of these addresses are no longer valid "e.g., based on a returned mailing." Mathur Decl. ¶ 3. Hughes admits that in addition to this two percent, "a certain percentage" of class members "will have moved their residences since providing an address to Hughes." Id . Hughes does not attempt to estimate this "certain percentage, " but they propose updating their address list using the National Change of Address System ("NCOA"). Pls.' Supp. Br. at 10. The parties do not attempt to determine a "reach calculation" - that is, an estimate of the number of class members to receive notice - for notice via the Postcard.
Alok Mathur ("Mathur"), director of business processes for Hughes, filed a declaration in support of the settlement, which Plaintiffs attached to their Supplemental Brief.
The Postcard states: "you may be entitled to cash or non-cash benefits." See Postcard. It provides no information on the size of the cash awards available under the settlement. It also states that "any legal claim you may have against Hughes related to this lawsuit will be settled" if the class member does not exclude him or herself and if the Court approves the settlement. Id . It directs the recipient to a yet-unidentified Web site to read the Long Form and access the Claim Form. Id.
The Long Form would be sent via e-mail and would also be available on the settlement Web site. Hughes claims to have e-mail addresses for approximately 79 percent of the class members, but concedes that only approximately 40 percent of these addresses are still valid. Marthur Decl. ¶ 4. As such, by Hughes's estimates, Hughes only has valid and current e-mail addresses for 31 percent of the class.
The Summary Notice would be published as a one-eighth-page advertisement in USA Today on two consecutive days. Pls.' Supp. Br. at 11. It is a simple text-only advertisement, and it provides basic information about the proposed settlement.
The parties estimate that the cost of the above-mentioned forms of notice will be $365,300; the parties estimate the administration costs for administering the settlement to "range from approximately $69,000 to $84,000, " depending on how many claims are submitted. Id.
6. Releases of Liability
Under the settlement, all of the class members who do not affirmatively opt out of the class by providing the claims administrator with timely notice of intention to opt out would be subject to the following release of liability:
[The class members] [s]hall release and forever discharge, and shall be forever barred from instituting, maintaining or prosecuting against any or all of the Released Persons, any and all claims, liens, demands, actions, causes of action, obligations, damages or liabilities of any nature whatsoever, whether legal, equitable or otherwise, arising from or relating to the subject matter of this Litigation, including, without limitation, the charging of ETFs, the HughesNet Fair Access Policy, the actual or advertised download, upload or other internet speeds, any advertising or other public statement relating to the foregoing and/or any other matter alleged in the Complaint (collectively, the "Claims"), insofar as such Claims were asserted or could have been asserted in this Litigation or in any other lawsuit or arbitration proceeding in any venue or forum on or before the date of the Final Order Date, or based on Hughes implementation of this Settlement Agreement in accordance with its terms.
Settlement § 4.1. The class would also waive any claims not known at the time of the release under California Civil Code § 1542. Id.
III. LEGAL STANDARD
No class action may be settled without court approval. Fed.R.Civ.P. 23(e). When the parties to a putative class action reach a settlement agreement prior to class certification, "courts must peruse the proposed compromise to ratify both the propriety of the certification and the fairness of the settlement." Staton v. Boeing Co. , 327 F.3d 938, 952 (9th Cir. 2003). First, the Court must assess whether a class exists. Id . (citing Amchem Prods. Inc. v. Windsor , 521 U.S. 591, 620 (1997)). Second, the court must determine whether the proposed settlement "is fundamentally fair, adequate, and reasonable." Hanlon v. Chrysler Corp. , 150 F.3d 1011, 1026 (9th Cir. 1998).
IV. DISCUSSION
A. Class Certification
Federal Rule of Civil Procedure 23(a) provides four requirements for class certification: (1) numerosity ("the class is so numerous that joinder of all members is impracticable"); (2) commonality ("there are questions of law or fact common to the class"); (3) typicality ("the claims or defenses of the representative parties are typical of the claims or defenses of the class"); and (4) adequacy of representation ("the representative parties will fairly and adequately protect the interests of the class"). Fed.R.Civ.P. 23(a)(1)-(4). In addition, the court must also find that the requirements of Rule 23(b)(1), (b)(2), or (b)(3) are satisfied. Wal-Mart Stores, Inc. v. Dukes, __ U.S. __ , 2011 WL 2437013, at *5 (2011). Rule 23(b)(3) requires a finding by the court "that questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3). Courts refer to the requirements of Rule 23(b)(3) as its "predominance" and "superiority" requirements. Amchem Prods., Inc. v. Windsor , 521 U.S. 591, 615 (1997).
More than a pleading standard, Rule 23 requires the party seeking class certification to "affirmatively demonstrate... compliance with the rule - that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc." Wal-Mart , 2011 WL 2437013, at *10 (emphasis in original). This requires a "rigorous analysis" which frequently "will entail some overlap with the merits of the plaintiff's underlying claim." Id.
Plaintiffs no longer seek certification of a class and a subclass - they seek certification of a single class of "[a]ll persons and entities residing in the United States of America who, during any time between May 15, 2005 and the Preliminary Approval Date, were subscribers to any of the Hughes' Consumer Service Plans." Settlement § 1.27.
1. Numerosity
Rule 23(a)(1) provides that a class action may be maintained only if "the class is so numerous that joinder of all parties is impracticable." Fed.R.Civ.P. 23(a)(1). However, "impracticable" does not mean impossible; it refers only to the difficulty or inconvenience of joining all members of the class. Harris v. Palm Springs Alpine Estates, Inc. , 329 F.2d 909, 913-14 (9th Cir. 1964).
Plaintiffs allege that the class consists of approximately 1.1 million individuals. Pls.' Supp. Br. at 12. In support of this estimate, they attach the declaration of Michael J. Bass ("Bass"), a senior systems analyst for Hughes. Bass declares that he reviewed Hughes's subscription data and alleges that it shows that there were 200, 875 Hughes subscribers in May 2005, and that 885, 719 new subscribers have joined in the intervening period. Id . ¶ 3. Bass declares that because approximately 539, 543 of this total class are no longer Hughes customers, Hughes has roughly 549, 051 current subscribers. Id . Bass also states that as of December 31, 2010, a total of 73, 837 former subscribers were charged ETFs, and he estimates that the "vast majority" of these subscribers were charged prior to December 6, 2010. Id . ¶ 6.
ECF No. 72-1.
In light of the above, the Court finds the numerosity requirement to be satisfied.
2. Commonality
Rule 23(a)(2) requires that there be "questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). Wal-Mart, decided after the parties filed their papers in support of settlement, represents a significant restatement of the commonality requirement. "Commonality requires the plaintiff to demonstrate that the class members have suffered the same injury.'" Wal-Mart , 2011 WL 2437013, at *9 (quoting Gen. Tel. Co. of the Southwest v. Falcon , 457 U.S. 147, 157 (1982)). The class members' "claims must depend on a common contention, " and that common contention must be "of such a nature that it is capable of classwide resolution - which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke." Id.
Plaintiffs offer a list of nine "common questions" as proof that the commonality requirement is satisfied:
(a) Whether Hughes was unjustly enriched by unfairly charging flat rate early termination fees without taking into consideration its actual damages. (See Third Amended Complaint (TAC at ¶ 17(h));
(b) Whether Hughes was unjustly enriched in selling Plaintiffs and the Settlement Class defective broadband and satellite service (TAC at ¶ 17(i));
(c) Whether Hughes falsely advertised to Settlement Class members by marketing and advertising its services as reliable, consistent high speed broadband satellite service (TAC at ¶ 17(a));
(d) Whether Hughes, through false advertising and otherwise, misrepresented to Settlement Class members the maximum upload and download speeds of its various Hughes service plans (TAC at ¶ 17(b));
(e) Whether Hughes, through false advertising and otherwise, misrepresented to Settlement Class members the volume of data that can be downloaded continuously through its Hughes service plans (TAC at ¶ 17(c));
(f) Whether Hughes, through false advertising and otherwise, misrepresented to Settlement Class members the maximum upload and download capability of its Hughes satellite and broadband service subscriber equipment and hardware (TAC at ¶ 17(d));
(g) Whether Hughes oversold its bandwidth, thereby adversely affecting Settlement Class members' satellite broadband service;
(h) Whether Hughes fraudulently induced Settlement Class members to upgrade their service and incur additional fees by misrepresenting the benefits of upgrading in terms of speed, accessibility, functionality and connectivity of its Hughes broadband satellite services (TAC at ¶ 17(g)); and
(i) Whether Hughes unfairly imposed early termination fees upon Settlement Class members (TAC at ¶ 17(h)).
Pls.' Supp. Br. at 13.
Plaintiffs do not attempt to explain how these questions are common to any of the four claims pleaded in their TAC. This failure is troubling, given Plaintiffs' eleventh-hour attempt to certify a nationwide class. Plaintiffs bring four state-law causes of action and no federal causes of action. Plaintiffs do not argue that California law would apply to the claims of class members outside of California; nor do they attempt to argue that a cause of action would be supported by the law of other states. Whereas Plaintiffs' first cause of action was formerly violation of California's Consumer Legal Remedies Act, now Plaintiffs claim violation of "[t]he Consumer Legal Remedies Act and similar applicable consumer protection law of other states." TAC ¶ 74 (emphasis added). Because Plaintiffs have not even identified the law to be applied in this action, the Court cannot find that there are questions of law or fact common to the class. Accordingly, the Court finds the commonality requirement to be unsatisfied.
3. Typicality
Rule 23(a)(3) requires that the representative parties' claims be "typical of the claims... of the class." Fed.R.Civ.P. 23(a)(3). "Under the rule's permissive standards, representative claims are typical' if they are reasonably co-extensive with those of absent class members; they need not be substantially identical." Hanlon , 150 F.3d at 1020. Rule 23 "does not require the named plaintiffs to be identically situated with all other class members. It is enough if their situations share a common issue of law or fact and are sufficiently parallel to insure a vigorous and full presentation of all claims for relief." Cal. Rural Legal Assist., Inc. v. Legal Servs. Corp. , 917 F.2d 1171, 1175 (9th Cir. 1990). In practice, "[t]he commonality and typicality requirements of Rule 23(a) tend to merge." Falcon , 457 U.S. at 157 n.13.
Plaintiffs argue that the named Plaintiffs "have precisely the same claims as the Settlement Class, " and allege that each Plaintiff "truly represents a sector of the claims being addressed by the settlement." Pls.' Supp. Br. at 14. Walter claims to have "experienced numerous service disruptions due to reaching her download threshold;" Bayless "terminated his service due to dissatisfaction with speed and service and paid an ETF;" and Schumacher "terminated his service but did not pay an ETF." Id. at 14-15.
As with the commonality requirement, the Court finds the typicality requirement unsatisfied. It is true that the injuries claimed by the three named Plaintiffs mirror the injuries alleged to have been experienced by the class as a whole - they are caused by Hughes's allegedly unfair or illegal FAP and ETF and misleading advertising of Internet speed. But while Plaintiffs draw parallels between the alleged injuries to named Plaintiffs and the class as a whole, they fail to draw parallels between named Plaintiffs' legal claims and the legal claims of the class as a whole. Named Plaintiffs are California residents, and it appears that California law would apply to their claims. Plaintiffs do not argue that California law would apply to the claims of non-California resident class members. As such, the Court finds this requirement unsatisfied.
4. Adequacy of Representation
Rule 23(a)(4) requires a showing that "the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4). This factor requires: (1) that Plaintiffs are represented by qualified and competent counsel and (2) that the proposed representative Plaintiffs do not have conflicts of interest with the proposed class. Hanlon , 150 F.3d at 1020, 603 F.3d at 614.
Plaintiffs allege that "Plaintiffs and putative class members are represented by extremely qualified counsel with extensive collective experience prosecuting complex consumer class actions cases of this nature." Pls.' Supp. Br. at 16. The Court has reviewed the curriculum vitae submitted and sees no issue with the qualification and experience of Plaintiffs' counsel. However, the Court finds that Plaintiffs' counsel's work on this Motion speaks volumes, and the Court is not convinced by this work that Plaintiffs' counsel would adequately represent the class.
As to the second requirement, Plaintiffs state that their claims are co-extensive with the settlement because
(1) Plaintiffs and each Settlement Class Member have been injured in the same manner by Hughes by being forced to comply with an unlawful ETF policy and for entering into their respective service contracts on the basis of false information regarding the speeds of service obtainable under each respective internet service plan, (2) Plaintiffs and each Settlement Class Member have an identical interest in establishing Hughes' liability for imposing an unlawful ETF and falsely advertising the speeds of service available under each respective internet service plan, (3) Plaintiffs assert the same legal claims and theories as would all other Settlement Class Members under the factual and legal theories enumerated above, and (4) Plaintiffs seek the identical relief that would be sought by all members of the Settlement Class.
Pls.' Supp. Br. at 16.
Plaintiffs' argument is flawed. Plaintiffs' contention that the named Plaintiffs "assert the same legal claims and theories as would all Settlement Class Members" is not true given that class members outside California would likely bring claims under the laws of their states. It is possible that the remedies provided under the laws of the fifty states are so similar as to render the Named Plaintiffs adequate class representatives, but Plaintiffs have not argued this in their papers.
5. Predominance and Superiority
Rule 23(b)(3) requires the court to find that "the questions of law or fact common to class members predominate over any questions affecting only individual members." Fed.R.Civ.P. 23(b)(3). While evaluation of Rule 23's predominance requirement on a settlement motion does not require an analysis of potential trial management problems, "other specifications of the Rule - those designed to protect absentees by blocking unwarranted or overbroad class definitions - demand undiluted, even heightened, attention in the settlement context." Amchem, 521 U.S. at 20. The terms of a proposed settlement are "relevant to a class certification." Id . Rule 23(b)(3) also requires that the class action be "superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3). The factors relevant to assessing superiority include:
(A) the class members' interests in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already begun by or against class members; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and (D) the likely difficulties in managing a class action.
Plaintiffs identify eight legal questions which they claim predominate, such as "Whether HughesNet's conduct violates the unfair competition law, such as California Business and Professions Code § 17200 et seq. and similar laws of other states." Pls.' Supp. Br. at 19. As the Court noted above, Plaintiffs have not satisfied the commonality requirement, and because they have not identified a single common question of law or fact, the Court cannot find that common questions predominate.
Plaintiffs state that the superiority requirement is satisfied because "this case involves multiple claims for relatively small sums, " making class treatment superior to "alternative methods." Pls.' Supp. Br. at 20. While it is true that the settlement contemplates awards of $5 and $40 to class members who return a claim form, the named Plaintiffs seek $5,000, a considerably higher amount. If this $5,000 figure represents a potential recovery at trial, then the class's claims may be large enough to justify individual actions.
For these reasons, the Court finds that Plaintiffs have failed to satisfy Rule 23's requirements. The Court notes that all of the flaws it has identified are curable through amended pleadings or alteration of the terms of the settlement, and so it grants parties leave to file an amended motion for settlement. In the interest of judicial economy, it also evaluates the fairness of the settlement and the adequacy of the proposed notice.
B. Fairness of the Settlement
The Ninth Circuit has warned that "there are real dangers in the negotiation of class action settlements of compromising the interests of class members, " because "[i]ncentives inherent in class-action settlements" can "result in a decree in which the rights of [class members, including the named plaintiffs] may not [be] given due regard by the negotiating parties." Staton , 327 F.3d at 959 (internal quotation marks omitted). These incentives stem from the fact that "[t]he class members are not at the table; class counsel and counsel for the defendants are." Id . This can "influence the result of the negotiations without any explicit expression or secret cabals, " and is why "district court review of class action settlements includes not only consideration of whether there was actual fraud, overreaching or collusion but, as well, substantive consideration of whether the terms of the decree are fair, reasonable and adequate to all concerned.'" Id. at 950 (citing Officers for Justice v. Civ. Serv. Comm'n of San Francisco , 688 F.2d 615, 625 (9th Cir. 1982)). Due in part to these dangers of "collusion between class counsel and the defendant, " the Ninth Circuit has adopted the rule of other circuits that "settlement approval that takes place prior to formal class certification requires a higher standard of fairness, " leading to "a more probing inquiry than may normally be required under Rule 23(e)." Hanlon , 150 F.3d at 1026.
Not all proposed class action settlements require the same level of court scrutiny - if the class had the opportunity to participate in settlement negotiations, the Court need not assume the role of class advocate. Similarly, a settlement that is structured such that the interests of the class are tied to the interests of the named plaintiffs, their counsel, or the defendant demands less scrutiny. For example, a settlement that ties the size of the class counsel's attorney fee award to the number of claim forms submitted or the amount disbursed to the class gives class counsel motivation to ensure that notice to the class is as effective as possible. Similarly, because a defendant benefits from the largest possible release of liability, a settlement in which only class members who submit a claim form release their claims against a defendant aligns the interests of the defendant and the class members.
No such alignments are present here: all parties present during negotiation of the settlement stand to benefit regardless of whether the class members receive a benefit. The three Named Plaintiffs would receive up to $5,000 in incentive payments, subject to Court approval, regardless of the size of the award to the class. The settlement contemplates $980,000 in attorneys' fees paid to Plaintiffs' counsel; this proposed award is not tied to the total amount recovered by the class. And Hughes would receive a considerable benefit - a release of every related claim that could be brought by its 1.1 million subscriber base - even if no claim forms were submitted and no funds were distributed to the class. As such, the parties have designed a settlement containing no structural protections of the interests of the class as a whole.
Hence, the parties force the Court into the role of class advocate.
1. Substantive Issues
Under the settlement, around 40 percent of the class - former subscribers who did not pay an ETF - would be eligible to receive a $5 cash payment. Around seven percent of the class - former subscribers who did pay an ETF - would be eligible to receive the $40 cash payment. The remaining class members - Hughes's current subscriber base - would receive no benefit except the proposed injunctive relief. Obviously, Hughes's former subscribers would derive no benefit from the proposed injunctive relief.
In exchange for this relief, every class member who does not affirmatively opt out of the settlement would be subject to the settlement's release of liability:
[Class members] [s]hall release and forever discharge, and shall be forever barred from instituting, maintaining or prosecuting against any or all of the Released Persons, any and all claims, liens, demands, actions, causes of action, obligations, damages or liabilities of any nature whatsoever, whether legal, equitable or otherwise, arising from or relating to the subject matter of this Litigation, including, without limitation, the charging of ETFs, the HughesNet Fair Access Policy, the actual or advertised download, upload or other internet speeds, any advertising or other public statement relating to the foregoing and/or any other matter alleged in the Complaint (collectively, the "Claims"), insofar as such Claims were asserted or could have been asserted in this Litigation or in any other lawsuit or arbitration proceeding in any venue or forum on or before the date of the Final Order Date, or based on Hughes implementation of this Settlement Agreement in accordance with its terms.
Settlement § 4.1. The Long Form summarizes this release as one freeing Hughes and affiliated persons "from all claims of liability that were asserted or that could have been asserted in the lawsuit, or in other legal proceedings or forums, arising from or relating to the subject matter of the lawsuit." Long Form at 5. The Postcard summarizes this release as one of "claims related to the matters alleged in the lawsuit that you may have against Hughes and others." See Postcard.
This release is obtusely written. Notice of the terms of the settlement must be provided to the class "in plain, easily understood language." Fed. R. Civ. P 23(c)(2)(B). If one accepts the accuracy of the Long Form's summary of the release, all claims relating to Hughes's charging of ETFs, its FAP, its advertising, and the speed of its service would be released. This is a particularly broad release, and while it does not render the settlement unfair, its breadth should be considered in evaluating the fairness of the settlement.
The amount to be paid to the class is, of course, an important factor in determining the fairness of a settlement. The Court instructed the parties to estimate the "total gross amount to be recovered by the class, supported by appropriate evidence." Feb. 3, 2011 Order. Instead of doing this, Plaintiffs provide "the total amount of cash compensation available to the Class under the Settlement, " (emphasis added) which they estimate to be approximately $5,282,010. This represents the total amount Hughes would pay if every single class member who was eligible to receive a cash benefit received notice of the settlement and submitted a timely and valid claim form.
Plaintiffs' offer of the total compensation available in lieu of total compensation paid is disingenuous. Plaintiffs' counsel claim to be "extremely qualified counsel with extensive experience prosecuting complex consumer class actions cases of this nature." Pls.' Supp. Br. at 16. As such, they certainly should have the means to estimate class participation in a settlement such as this one. They are no doubt aware that average claims submission rates in similar class actions are typically ten percent or less. See, e.g., In re Compact Disc Minimum Advertised Price Antitrust Litig. , 370 F.Supp.2d 320, 321 (D. Me. 2005) (two percent submission rate); Buchet v. ITT Consumer Fin. Corp. , 845 F.Supp. 684, 695 (D. Minn. 1994), as amended 858 F.Supp. 944 (rejecting settlement where similar settlement had only a three percent redemption rate); Strong v. Bellsouth Telecomm., Inc. , 173 F.R.D. 167, 169 (W.D. La. 1997) (4.3 percent claims rate); Burch v. United Cable TV of Baltimore Ltd. P'ship, 732 A.2d 88 7 (Md. 1999) (9.7 percent response rate to claims process); Union Life Fid. Ins. Co. v. McCurdy, 781 So.2d 1 86, 188 (Ala. 2000) (observing that only 113 of 104, 000 class members submitted claims, for a rate of 0.1 percent). Assuming a rather generous ten percent response rate, the Court estimates that roughly $500,000 will be paid to the class. This amount is dwarfed by Plaintiffs' counsel's anticipated motion for $980,000 in attorney's fees.
Plaintiffs also provide unrealistic estimates of the value of the injunctive relief available under the settlement. Plaintiffs claim that Hughes's revised FAP and its pro-rated early termination fee confer a benefit of $14 million upon the class. Having reviewed the declarations submitted in support of this figure, the Court is extremely skeptical of the accuracy of this estimate. Setting aside its accuracy, however, Plaintiffs fail to state that this injunctive relief provides no benefit to the roughly half of the class who are no longer Hughes subscribers. Also, part of the benefit of the injunctive relief would be conferred upon future Hughes subscribers, and these individuals are not part of the settlement class and would not be bound by the release of liability.
Despite serious concerns with the confusing wording of the release and considerable skepticism as to Plaintiffs' estimate of the settlement's value to the class, the Court does not find the substantive terms of the settlement to be inherently unfair at this time. The Court finds the question of substantive fairness to be more appropriate for objecting class members to raise if and when this settlement reaches the final approval stage.
2. Procedural Issues
While Rule 23(e)(5) gives class members the opportunity to object to the substance of the settlement at the final fairness hearing, this often occurs too late in the proceedings to address procedural issues, such as flaws in the claims submission process. As such, the Court reviews the design of the claims process closely.
Under the settlement, class members can receive $5 if they returned their Hughes equipment and $40 if they also paid an ETF during the stated period. Many hurdles stand between a class member and the receipt of such a payment, however, and such additional steps tend to lower class participation. See Tiffany Allen, "Anticipating Claims Filing Rates in Class Action Settlements" (Nov. 2008) ("A settlement that requires claimants simply to sign a form will likely have a higher claims-filing rate than one requiring claimants to provide narrative responses to First, the class member must receive notice of the settlement. Class members will not be sent claim forms. Assuming a class member receives the Postcard, he or she must comb through the small type on the Postcard to find the Web site he or she must access for more information about the settlement. The class member would then have to use a computer to access the settlement Web site, follow the links on the settlement Web site to locate the Claim Form, download the Claim Form, print out the Claim Form, fill out the Claim Form with the required personal information, and mail the Claim Form to the claims administrator during the claims period. The class members would bear the cost of the forty-four cent postage stamp required to submit the Claim Form.
The design of the Claim Form presents problems of its own. It states that to receive a cash payment of $40, the claimant must affirm that during the period, the claimant (1) subscribed to a Hughes satellite broadband consumer Internet service plan; (2) was no longer a Hughes subscriber as of the preliminary approval date; (3) paid an ETF between May 15, 2005 and December 5, 2010; and (4) returned "all equipment leased from or provided by Hughes within ninety (90) days" of termination of the subscription. To receive a cash payment of $5, the claimant must affirm that the claimant (1) was a Hughes subscriber, (2) was no longer a Hughes subscriber as of the date by which Hughes must complete notice; (3) did not pay an early termination fee, or paid an ETF on or after December 6, 2010, and (4) returned all equipment leased from or provided by Hughes within ninety days of termination. The claimant must provide his or her name, address, "email address(es) used in corresponding with Hughes, " and his or her "current email address, " and sign and date the claim form under penalty of perjury. The claimant must mail this form to the settlement administrator before the stated deadline.
The Claim Form suffers from several problems. First, it includes a limitation that is not provided in the Long Form or the Summary Notice - namely, the requirement that the claimant returned all equipment "leased from or provided by Hughes" within ninety days of termination. Second, this limitation is so vague as to likely discourage some class members from filing a claim - while it may be clear to class members what constitutes "equipment leased" from Hughes, it is less clear what is required by the provision mandating the return of equipment "provided by" Hughes. Third, the Claim Form is unnecessarily complex. It is two pages long, it contains unnecessary language, and it is confusingly arranged. Like a poorly drafted verdict form, it invites user error. Finally, the Claim Form creates an infinite feedback loop; it reflexively cites to the Class Notice and Settlement Agreement "for eligibility and claims rules, " while the Class Notice refers class members to the Claim Form for additional eligibility requirements.
It would be rational for a class member to invest the time and effort to perform the above steps and scrutinize the claim form if the economic incentive for so doing was great enough. But the vast majority of class members who would receive any cash payment under the settlement would receive a mere $5. Many class members will likely find that given the size of the cash benefit and the amount of time required to submit a claim, it simply is not worth the time and effort to submit a claim.
There are many ways the parties could improve the claim submission procedure, such as by allowing class members to make claims using an online form or by mailing settlement checks to each class member who, according to Hughes's records, satisfies the requirements for such a claim. For unknown reasons, the parties have opted for an unnecessarily taxing claims procedure over these alternatives. The Court finds that in light of the small cash benefits contemplated, the proposed claim procedure is unreasonable.
C. Adequacy of Proposed Notice
Notice to the class must provide:
the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice must concisely and clearly state in plain, easily understood language: the nature of the action; the definition of the class certified; the class claims, issues, or defenses; that a class member may enter an appearance through counsel if the member so desires; that the court will exclude from the class any member who requests exclusion, stating when and how members may elect to be excluded; and the binding effect of a class judgment on class members under Rule 23(c)(3).
The Federal Judicial Center's "Judges' Class Action Notice and Claims Process Checklist and Plain Language Guide" ("FJC Class Action Checklist"), available through the FJC Web site, provides guidance for judges and counsel in determining whether a notice plan is adequate. Among other things, this guide instructs parties and reviewing courts to ask, "Will the notices come to the attention of the class?" and "Are the notices informative and easy to understand?" Id.
The Postcard, which would be sent via U.S. mail, is postcard-sized. It provides the case name and is titled, "NOTICE OF PROPOSED CLASS ACTION SETTLEMENT." It does not state the size of the awards to class members; it merely informs its recipient that the settlement, if approved, "may entitle you to cash or non-cash benefits." It directs class members to read the Long Form, found online, for a description of "all eligibility requirements to receive a cash benefit." Other than the deadlines for submitting claim forms and exclusion from the settlement, it provides no other pertinent information to the class. It does not include information about how to object to the settlement, nor does it state that Plaintiffs' counsel seeks a $980,000 award of attorneys' fees. It is written in small type and aside from a provision in capital letters stating, "YOUR LEGAL RIGHTS MIGHT BE AFFECTED BY THIS SETTLEMENT. PLEASE READ THIS NOTICE CAREFULLY, " it is devoid of text treatment or graphic elements to command class members' attention. Direct mail companies have developed a number of innovative techniques to ensure their mailings stand out. The Postcard uses none of these techniques.
The Long Form, which would be e-mailed to the class members for whom Hughes has a valid e-mail address and posted on the settlement Web site, is a seven-page document. See Long Form. It does not command the attention of the class. It appears to be a court document, complete with a case caption. While it accurately reflects most of the terms of the Settlement Agreement, it does not state every requirement for receiving a cash payment, but rather directs class members to the "conditions described on the Claim Form." Id . § 4(a).
The Summary Notice would be published as a one-eighth-page advertisement in USA Today on two consecutive days. This document contains much of the information contained in the Long Form, including the size of the cash benefits available, and directs readers to visit the settlement Web site for more information. However, like the Long Form, it is merely a collection of small-print text, and does not appear designed to command the attention of USA Today's readers.
In sum, the Court is not convinced that the proposed notice plan would provide the class with "the best notice practicable under the circumstances" as Rule 23 requires. It appears as though very little effort was expended by the parties to ensure the largest possible number of class members received notice.
In light of the above, the Court DENIES Plaintiffs' Motion. The Court finds that Plaintiffs have failed to establish that Rule 23's class certification requirements of commonality, typicality, predominance, and adequacy of representation are satisfied for a nationwide class of Hughes's current and former subscribers. The Court finds the claims procedure contemplated in the settlement to be unreasonable given the small size of the cash payments available to class members. Finally, the Court finds that Plaintiffs have failed to establish that the proposed notice plan would provide the class with the best notice practicable under the circumstances.
The Court recognizes that a fair settlement is considerably preferable to all parties than protracted litigation. While the proposed settlement is unfair, it is not beyond salvage through amendment. Furthermore, the Court is convinced that a fair settlement could be reached without increasing the cost or burden on Hughes - the parties value this settlement at roughly $20 million, which should be enough to effect a fair settlement. As such, the Court has labored to provide the parties with guidance should they decide to file an amended motion for preliminary approval. The parties must establish that a nationwide class exists and that the Named Plaintiffs are proper representatives of that class. The parties must provide a claims procedure that is simple and easy enough to encourage, rather than inhibit, participation by class members despite the small size of the cash awards. The parties must clearly and explicitly communicate the scope of the release of liability to the class members. The parties must design the best notice plan practicable under the circumstances, and provide the Court with a realistic reach calculation for the plan. Furthermore, if the parties alter the settlement such that the interests of either Plaintiffs' counsel or Hughes is aligned with the interests of the class, the Court will apply considerably less scrutiny in reviewing it. The Court puts the parties on notice that if the Court does ultimately preliminarily approve the settlement, it may delay ruling on an attorneys' fees motion until after all settlement proceeds have been disbursed to the class in order to determine the fairness of the amount sought in attorneys' fees in light of the total benefit conferred on the class.
V. CONCLUSION
For the foregoing reasons, the Court DENIES the Motion for Preliminary Approval of Settlement filed by Plaintiffs Tina Walter, Christopher Bayless, and Eric Schumacher. The parties are granted leave to file an amended motion. A status conference is set for Friday, August 26, 2011, at 10:00 a.m., in Courtroom 1, 450 Golden Gate Avenue, San Francisco, California. The parties shall meet and confer and file a joint case management statement no less than seven (7) days before the status conference.
IT IS SO ORDERED.