September 18, 2015 Top Story

Red Bull Class Settlement Flies Despite Dilution of Class Recovery

Court approves a class action settlement with payout cap and ascertainability issues

Onika K. Williams

A federal court granted final approval of a settlement of a class action lawsuit against Red Bull GMBH for false and misleading advertising claims, despite concerns that the agreed payout limit would dilute individual class members’ recovery. The settlement in Careathers v. Red Bull North America illustrates the benefits and pitfalls associated with class settlement caps, particularly those involving popular and inexpensive products where class membership is difficult to verify.

Red Bull Settles False Advertisement Class Action Suit

Two consolidated class action suits filed in the U.S. District Court for the Southern District Court of New York alleged that Red Bull misrepresented the functionality and safety of Red Bull drinks. The plaintiffs asserted claims for breach of express warranty, unjust enrichment, and violations of various state consumer protection statutes. Prior to discovery and class certification, the parties agreed to a capped settlement fund of $13 million for the class. The proposed class included all persons who made at least one purchase of Red Bull products in the United States between January 1, 2002 and October 3, 2014, with each member to receive an estimated $10 cash reimbursement or $15 worth of Red Bull products. No proof of purchase was required to file a claim, and the parties projected 1.3 million claims would be filed. However, approximately 2 million people ultimately filed claims, reducing the recovery for each claimant to $4 or a four-pack of Red Bull.

Despite expressing concerns about dilution of class members’ share after the filing of additional claims, the court approved the settlement. The court also reduced the plaintiffs’ attorney fees from the originally agreed upon amount of $4.75 million to $3.38 million, citing the nuisance value of the claims and lack of discovery. An objector to the settlement, Dave Mager, filed an appeal to the U.S. Court of Appeals for the Second Circuit, which is pending.

Differing Views about Fairness of Settlement 

ABA Section of Litigation leaders disagree on whether the settlement actually benefits and protects Red Bull consumers. “This settlement was more than fair given the nature of the case and the likelihood of success that the plaintiffs had if they were to continue this lawsuit; the court noted that the claims at issue here were marginal,” explains Austin V. Schwing, San Francisco, CA, cochair of the Section of Litigation’s Consumer Law Subcommittee for the Class Action & Derivative Suits Committee. “While some may focus on the relatively small amount that class members may receive because of the perhaps unanticipated press attention the settlement received, we must not lose sight of the fact that they very well may have received nothing had this case proceeded. Courts must have the flexibility to take into account the particular circumstances of the case in assessing whether the settlement is acceptable,” Schwing suggests.

By contrast, other Section leaders point to the disparity between the recovery to the individual members and the attorney fees awarded to the plaintiffs’ counsel as an indication that the settlement did not benefit the class. “One of the main purposes of a class action is to benefit and protect consumers by ensuring the class is adequately compensated for some type of harm. Here, the claimants were awarded $4 each, yet plaintiffs’ counsel were awarded $3.4 million in attorney fees, in a litigation that had not yet reached discovery,” says Caroline E. Oks, Newark, NJ, cochair of the Section’s Young Lawyers Subcommittee for the Class Action & Derivative Suits Committee. “This cost will eventually be passed on to consumers through product price adjustments to compensate for such costs. The focus of this type of litigation is often on a marginal victory for the consumer in an effort to justify an attorney fees award, whereas it should be geared toward a change in defendant’s marketing practices and appropriate compensation to the consumer for actual harm,” adds Oks.

Additionally, some Section leaders emphasize the unfairness of the settlement due to the “ascertainability” issue, or the problem of identifying who is and is not a proper class member. Generally, a class must be ascertainable to be certified under Rule 23. “The Red Bull settlement demonstrates the difficulties in giving consumers a fair settlement when the total number of class members has not been determined. The problem is there was no way to trace who actually was a class member because consumers typically do not keep receipts or other documentation proving purchase of low-cost products, such as Red Bull,” says Kali R. Backer, Denver, CO, chair of the Section’s Class Actions Subcommittee of the Consumer Litigation Committee. “Such a situation . . . demonstrates the need for an ascertainability analysis in evaluating class certification. If the claims process here had required more than filling out a claims form on a website, it is very likely that the settlement award would not have been as diluted,” explains Oks.

Settlement Caps Can Be a Useful Tool

Notwithstanding the potential issues associated with settlement caps, Section leaders agree they can be important tools for both sides in class actions. “Settlement caps on recovery are important because they encourage settlement on both sides. From the plaintiffs’ perspective, a settlement cap may encourage a defendant to settle more expeditiously and with a potentially higher amount. Defendants in turn are assured of a known maximum payout, and may even have the option of reversion of unclaimed funds,” explains Oks.

“The law favors compromise and settlements, as opposed to years of litigation that clogs up our already overwhelmed courts,” says Schwing.

Onika K. Williams is a contributing editor for Litigation News.

Keywords: class action, dilution, settlement cap, ascertainability

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