ORDER ON PROPOSED CLASS ACTION SETTLEMENT
Before the Court is Plaintiffs' Motion for Approval ofSettlement and for Class Certification (Docket # 55) assupplemented and amended by Plaintiffs' Motion for Approval ofAmended Settlement Agreement and Notice Plan (Docket # 66) andPlaintiffs' Second Supplemental Memorandum in Support of Approvalof Amended Settlement Agreement and Notice Plan (Docket # 81). Inconnection with this motion, Defendants have filed a Memorandumin Support of Plaintiffs' Motion for Approval of AmendedSettlement Agreement and Notice Plan (Docket # 65). In addition,Counsel for Plaintiffs have filed their Application for Award ofAttorneys' Fees (Docket # 56), along with the Class Counsel'sSupplemental Memorandum in Support of Application for Award ofAttorneys' Fees (Docket # 67) and Class Counsel's SecondSupplemental Memorandum in Support of Application for Award ofAttorneys' Fees (Docket # 83). For the reasons explained below,the Court DENIES the motions seeking approval of the proposedsettlement (Docket #s 55, 66 & 81) and, therefore, finds theapplications for attorneys' fees (Docket #s 56, 67 & 83) areMOOT. I. BACKGROUND
A. The Claims
Plaintiffs filed their initial complaint (Docket # 1) againstDefendants on July 15, 2003. Plaintiff then filed an amendedcomplaint (Docket # 24) on January 7, 2004. This AmendedComplaint asserts claims against more than fifty differentcorporate entities that allegedly underwrote or administeredhealth insurance plans to which Plaintiffs had subscribed(hereinafter collectively referred to as "Defendants" or"CIGNA"). The claims asserted include statutory claims under boththe Employee Retirement Income Security Act ("ERISA"),29 U.S.C. § 1132, and the Racketeer Influenced and Corrupt OrganizationsAct ("RICO"), 18 U.S.C. § 1962, as well as common law claims,such as breach of contract, fraud, fraudulent concealment,negligent misrepresentation, unjust enrichment, accounting andpunitive damages.
Although the Amended Complaint names eight individualPlaintiffs, it asserts that these individual Plaintiffs wish toact as representatives for an entire class of people eligible tobring such claims against CIGNA. They describe that class as:"All subscribers to Healthsource Plans at any time betweenJanuary 1, 1986 and December 31, 1997, who made payments tomedical product or service providers under a percentagecoinsurance plan, where an agreement existed between any of [theDefendants] and the provider to accept a discounted fee and where[the Defendants] did not use that discount in calculating thesubscriber's coinsurance payment as required by the HealthsourcePlans (the "Class")."1 (Am. Compl. ¶ 114.) As described in the Amended Complaint, Defendants allegedlymisled the Class into making coinsurance payments that exceededthe amount actually due under the terms of their CIGNA plans.CIGNA allegedly reaped the benefit of this overpayment andthereby paid out less on the benefit claims filed by Plaintiffs.By way of illustration, Plaintiffs' Amended Complaint offered thefollowing description of what it described as Defendants'"scheme": [A]ssume an inpatient procedure was performed during the Class Period on a [CIGNA] Plan subscriber with a list price of $1,000. The subscriber pays her percentage coinsurance, for example 20% or $200, unaware that [CIGNA] negotiated a secret provider discount whereby the actual allowed cost of the procedure is $600. Since the subscriber has paid $200 out of [the] actual allowed cost of $600, the [CIGNA] Plan now pays only $400 to the provider. As a result of this scheme, the subscriber has paid 33.33% of the actual cost, instead of 20%, and the [CIGNA] Plan has paid only 66.67% of the cost, instead of the 80% called for under the terms of the [CIGNA] Plan. Since the subscriber's correct coinsurance obligation is, in this example, 20% of the actual cost of $600, or $120, [CIGNA] has overcharged the subscriber $80 for the covered service. . . . [A]fter clearly breaching its contractual obligations to the subscriber, [CIGNA] then knowingly sent via U.S. mail a false Explanation of Benefits stating that the allowed cost was $1000, while it concurrently sent a Remittance Advice to the medical provider showing the actual discounted amount for the covered service was $600.(Am. Compl. ¶¶ 79 & 80.) The Amended Complaint further claimedthat the illustration just described had been "replicated . . .in hundreds of thousands or more . . . claims between 1986 and1998." (Am. Compl. ¶ 81.)
B. Discovery Leads to Settlement Negotiations
Between October 2003 and March 2004, the parties engaged indiscovery that included production of approximately 112,000 pagesof documents and CIGNA's claims data as well as depositions ofthree class representatives and two of Defendants' corporaterepresentatives. The Court had previously allowed the parties toproceed simultaneously with discovery on the merits and discoveryrelated to class certification finding that the issues were"significantly intertwined." (Order on Defs.' Obj. to and Request for Amendment(Docket # 17) at 2.) However, the Court had set a deadline ofMarch 5, 2004 for Plaintiffs to file their motion for classcertification.
Apparently, during discovery, Plaintiffs' Counsel determinedthat the harm caused by Defendants' alleged "scheme" was not asdamaging or widespread as they had initially imagined.2Rather, based on analysis of data provided by CIGNA, the expertactuaries hired by Plaintiffs determined that the total damageswere approximately $2.9 million. (See Dec. 6, 2004 Hearing Tr.(Docket # 64) at 11.) Defendants also hired an actuary to performan analysis of the claims data they had produced. Defendants'expert estimated that Plaintiffs' damages were approximately $2.3million. (See id.) In light of this information, counsel forboth sides apparently began discussing the potential of settlingthe case in March 2004 (prior to filing a motion for classcertification). These discussions culminated in a two-daymediation session held on June 23, 2004 and July 7, 2004.
The parties emerged from the mediation with a handwrittenagreement in principle to settle the claims of the class "inexchange for the creation of a settlement fund, funded by thesettling Defendants, in the amount of 3.4 million dollars($3,400,000)." (Pls.' Mot. for Class Cert. and Final SettlementApproval (Docket # 55) Ex. 3 at 3.) Although it was not evidencedin this handwritten agreement, there was apparently negotiationand discussion regarding whether the entire settlement fund wouldbe distributed to the Class or whether distributions from thefund would be limited to the "claims made" with the balance thenreverting to Defendants. (Groff Aff. (Docket # 82) ¶¶ 13 & 15.)In any event, Plaintiffs' counsel believed the $3.4 million fund represented both the principal amount of damages plus someamount of interest owed on those damages and, therefore, they hadessentially "got everything [they] wanted except perhaps moreinterest." (April 28, 2005 Hearing Tr. (Docket # 91) at 10(statement by Mr. Hansel).)
C. The Original Settlement Agreement
Following the successful mediation, the parties drafted adetailed proposed settlement agreement, dated July 23, 2004.(See July 23, 2004 Settlement Agreement (Ex. 2 to Docket # 43)("Settlement Agreement").) The Settlement Agreement contemplatedthat, in addition to payment to class members, the settlementfund would need to cover three other payments: (1) "the approvedcosts and fees of the Settlement Administrator," (2) "theapproved attorney fees and costs of Class Counsel" and (3) "theapproved award to the Class Representatives." (SettlementAgreement ¶ 1.17.) The Settlement Agreement defined the amountremaining after these three deductions as the "Residual Corpus."(Id.)
Under the terms of the Settlement Agreement, the actual amountdistributed to the class would "[i]n no event . . . exceed theamount of the Residual Corpus." (Settlement Agreement ¶ 1.20.)However, this was not the only limitation set on the amountpayable to the class. Rather, the Settlement Agreement alsocapped that maximum payment to each class member at forty dollars($40).3 Apparently, the parties arrived at this maximumpayment by estimating that the Residual Corpus would beapproximately two million dollars ($2,000,000) and then dividingthat amount by 50,000 class members — a CIGNA-supplied estimate.(See, e.g., July 27, 2004 Hearing Transcript (Docket # 50) at 5(representation of Mr. Hansel).) In any event, under the terms of this Agreement, a Class Memberwould be required to return a claim form that included the ClassMember's name, address and social security number in order toreceive any share of the settlement. (See Class Member ClaimForm (Ex. 3 to Docket # 43).) In addition, the Claim Formrequired each Class Member to sign the following statement underthe penalty of perjury: I HAVE NO REASON TO DOUBT THAT I WAS A COVERED SUBSCRIBER OR MEMBER OF A HEALTH PLAN ADMINISTERED AND/OR UNDERWRITTEN BY A HEALTHSOURCE COMPANY AT SOME TIME DURING THE PERIOD BETWEEN JANUARY 1, 1986 AND DECEMBER 31, 1997, AND THAT I ACTUALLY MADE A PERCENTAGE CO-INSURANCE PAYMENT TO A HEALTH CARE PROVIDER UNDER THE TERMS OF A HEALTH PLAN UNDERWRITTEN AND/OR ADMINISTERED BY A HEALTHSOURCE COMPANY.(Id.) In addition to this claim form, the mailed notices alsoincluded an opt-out form that could be returned in lieu of theclaim form.
With respect to attorneys' fees, the Settlement Agreementexplicitly notes that "the Settlement in the total amount ofthree million four hundred thousand dollars ($3,400,000) wasnegotiated at arms length and determined first and independently,before the Parties conducted any negotiations relating to, orreached any agreement regarding attorneys' fees and costs."(Settlement Agreement ¶ 10.8.) Taking this representation at facevalue,4 the parties apparently conducted a later round ofnegotiations that resulted in the Settlement Agreement includingthe following provision: Fee, Costs, and Expenses. Subject to approval or modification by the Court, Class Counsel's reasonable costs of suit and attorneys' fees shall, within fourteen (14) business days after Final Approval, be paid by the Settlement Administrator from the Corpus of the Settlement Trust. Defendant will not oppose a request by Class Counsel for reimbursement of reasonable out of pocket litigation costs up to $250,000, and for an attorneys' fee of thirty percent (30%) of the net settlement fund, after deduction for the total settlement fund of reimbursable litigation costs and the expenses of settlement administration. Plaintiffs will request an attorneys' fee of thirty percent of the total settlement fund of three million four hundred thousand dollars ($3,400,000), and reimbursement of out of pocket litigation costs up to $250,000. Court approval of an attorneys' fee and/or costs in an amount less than stated herein shall not affect any other provisions of the Settlement Agreement, which shall remain fully effective and enforceable.(Settlement Agreement ¶ 10.9.) This type of provision in which adefendant agrees not to oppose an attorney's fee request thatfalls below a negotiated limit is commonly referred to as a"clear sailing" clause. See, e.g., Weinberger v. Great N.Nekoos Corp., 925 F.2d 518, 520 n. 1 (1st Cir. 1991) ("Ingeneral, a clear sailing agreement is one where the party payingthe fee agrees not to contest the amount to be awarded by thefee-setting court so long as the award falls beneath a negotiatedceiling.").
Finally, the Settlement Agreement contained what is commonlyreferred to as a reverter clause. Pursuant to this provision, anyportion of the settlement fund that was not spent or claimed asof "the 61st calendar day following the date of mailing ofthe last Class Member check" would be returned to CIGNA.(Settlement Agreement ¶ 10.10.) Since the Settlement Agreementcontemplated a "claims made" settlement in which payments wereonly made to those Class Members that returned valid claim forms,there existed a potential that substantial unclaimed funds wouldrevert back to CIGNA.
The Settlement Agreement was presented to the Court forpreliminary approval at a hearing on July 27, 2004. Much of thediscussion at the July 27, 2004 hearing focused on ensuring thatnotice to all Class Members was adequate. The parties proposed tohave the Settlement Administrator mail notices to a list of ClassMembers compiled by CIGNA. The Settlement Administrator wouldthen follow up on any returned mail by attempting to get updatedaddresses through the Postal Service or Trans Union, a majorcredit bureau. The Notice Plan also called for reminder postcards to be mailed to all ClassMembers prior to the deadline for filing a claim form. Inaddition to this plan for mailed notices, the Court suggestedthat there be a publication notice. Ultimately, the partiesadopted this suggestion and published a notice of settlement inUSA TODAY on October 7, 2004.
With respect to the substantive terms of the SettlementAgreement, the Court's understanding was that each Class Memberwho filed a claim form would be eligible to receive a payment outof the settlement fund of up to $40. At the July 27, 2004hearing, counsel for both sides represented to the Court that theclass was made up of approximately 50,000 members who were toreceive notification of the settlement via mail, along with aclaim form and an opt-out form. (See July 27, 2004 Hearing Tr.(Docket # 50) at 4-5 (representation of Mr. Hansel), 13(representation of Mr. Armando).) Based on these representationsand the terms of the Agreement, the Court expected that thepayout to the class members would be approximately $2 million($40 per claim x 50,000 claimants).5 Based upon thisanticipated result, the Court issued an order preliminarilyapproving the proposed settlement as well as the form and matterof notice after the July 27, 2004 hearing. (See OrderPreliminarily Approving Settlement (Docket # 47).) D. The First Fairness Hearing
The parties next appeared before the Court on December 6, 2004for a fairness hearing. In preparation for that hearing,Plaintiffs filed their Motion for Approval of Settlement and forClass Certification (Docket # 55) on November 22, 2004. In thatfiling, Plaintiffs' counsel informed the Court for the first timethat there were actually only 39,942 Class Members according tothe records maintained by CIGNA.6 This twenty percentdrop in the number of Class Members, combined with the $40maximum payout, meant that that maximum payout to the Class underthe terms of the Settlement Agreement would be approximately $1.5million (or, more precisely, $1,597,680.00). It also guaranteedthat over four hundred thousand dollars ($400,000) would revertback to CIGNA. Thus, the $3.4 million settlement fund was"illusory" (in the words of Plaintiffs' Counsel) and the actualsettlement fund did not exceed $3 million. (Pls.' Mot. for ClassCertification and Final Settlement Approval at 13.)
At the December 6, 2004 hearing, the Court expressed sincereconcerns about these belated revelations regarding the actualsize of the class and openly doubted whether discovery prior tothe settlement discussions had been sufficient. (See, e.g.,Dec. 6, 2004 Hearing Tr. (Docket # 64) at 15.) In both theirwritten submissions and their oral presentation at the hearing,Plaintiffs' Counsel urged the Court to essentially re-write theSettlement Agreement and increase the maximum amount payable toeach Class Member so that the maximum amount reflected the new information regarding the size of the class.7 Fortheir part, Defendants opposed any increase to the $40 maximumpayout to each class member.
The payout problems caused by the twenty percent drop in actualClass Members was compounded by a very low response rate onreturned claim forms. In fact, mailed notices had beensuccessfully sent to approximately 81.6 percent of the 39,942Class Members. In response to the mailings, 215 Class Member hadreturned opt-out forms.8 As of November 17, 2004, only3,518 Class Member had returned claim forms. By the Court'scalculations, this meant that approximately 28,859 Class Membershad received mailed notices and done nothing.9
In short, if the Court had approved the Settlement Agreement onDecember 6, 2004, the total payout to the Class would havetotaled only $140,720 ($40 x 3,518 Returned Claim Forms). Underthe terms of the Settlement Agreement, it was also contemplatedthat there would also be a payout totaling $40,000 to the eightClass Representatives as well as a disbursement to the SettlementAdministrator totaling $75,000.10 In addition, ClassCounsel had filed an application seeking $1,020,000 in attorneys'fees and reimbursement for $189,062.10 in expenses and costs.11 (See Class Counsel's Applicationfor Award of Attorneys' Fees (Docket # 56) at 1 & 23.)
Even assuming that the Court had given wholesale approval tothese other requested sums, because of the reverter clause, theentity receiving the largest disbursement from the settlementfund would have been CIGNA. In fact, more than $1.9 million wouldhave reverted to CIGNA — making the payout to Defendantssignificantly larger that the combined payout to all otherinterested parties (the Class, the Class Representatives, ClassCounsel and the Settlement Administrator).
Thus, at the time of the First Fairness Hearing the de factosettlement fund had shrunk from the originally contemplated $3.4million to approximately $1.4 million, with less than $200,000actually going to the persons harmed by CIGNA's alleged conduct.The Court's dissatisfaction with this outcome was readilyapparent at the first fairness hearing. Ultimately, the Courtcontinued the hearing while requesting additional informationfrom the parties.
E. The Amendment to the Settlement Agreement
On January 14, 2005, the parties filed an Amendment to theSettlement Agreement (Ex. 1 to Docket # 66) (together with theSettlement Agreement, the "Amended Settlement"). Pursuant to thisAmendment, the parties agreed to raise the maximum amount paidout to each Class Member who filed a Valid Claim Form from $40 to$51.97. The parties arrived at this larger amount by taking theestimated Residual Corpus of $2,075,937.90 and dividing it amongthat actual number of Class Members (39,942). (See Defs.' Mem.in Supp. of Pls. Mot. for Approval of Am. Settlement Agreement (Docket # 65) at 1 n. 1.) In short,this Amendment addressed and resolved the issues regarding theparties' misplaced reliance on CIGNA's initial estimate of 50,000class members. In light of this Amendment, it was nowtheoretically possible that the Class could recover the entireResidual Corpus if each Class Member returned a claim form.
Because of the $11.97 increase in maximum payout to each ClassMember, the parties proposed to have a new round of noticesmailed to any Class Member who had not already returned a validclaim form. Under this revised notice plan, mailed notices wouldalso be re-sent to the 215 Class Members who had elected toopt-out thereby giving them an opportunity to opt back in to theproposed settlement. In addition, the parties agreed to publishan amended notice in USA TODAY. Plaintiffs' Counsel agreed topay any additional costs incurred with these revised notices.
F. The Second Fairness Hearing
The Parties appeared before the Court seeking approval of thisAmended Settlement Agreement on January 24, 2005. At the openingof this hearing, Class Counsel initially indicated that they werebefore the Court seeking final approval of the AmendedSettlement. At the Court's suggestion, the parties agreed toproceed with a request for preliminary approval of the AmendedSettlement Agreement and delay a request for final approval untilthe next fairness hearing, which was set for April 28, 2005.
After this concession, the remainder of the January hearing wasspent discussing possible revisions to the substance of thenotice being provided to the Class. In particular, the Courtsuggested that Class Members should be advised, in plainlanguage, about the ramifications of the reverter clause. Inresponse to the Court's suggestion, the parties ultimately agreedto add the following sentence to the amended notices: "Unclaimedsettlement funds will be retained by CIGNA." (See Jan. 24, 2005Hearing Tr. (Docket # 75) at 29.)
Counsel for both sides, and Defense Counsel in particular, werereluctant to include references to the reverter clause in thenewly revised notice, thinking such information was unnecessary.However, as the Court explained at the hearing, the Courtbelieved that this information may well be relevant to some ClassMembers and thereby encourage the filing of additional claimforms.
Driving the Court's concerns was what the Court considered tobe an unexpectedly low response rate. At the time of the Januaryhearing, the Settlement Administrator had reportedly received atotal of 4,335 valid claim forms. This represented approximately10.8 percent of the class. Even with the larger $51.97 payout oneach Class Member, this return rate on claims forms would haveyielded a total payout to the Class of only $225,289.95 (plus anyadditional amounts paid to the Class Representatives).
G. The Third Fairness Hearing
On April 28, 2005, the parties appeared before the Court athird time seeking final approval of the Amended SettlementAgreement that they presented to the Court in January of thisyear. At this latest hearing, the Court heard presentations fromboth sides in favor of approving the settlement. In addition,Plaintiffs presented the testimony of Professor Edward Sherman, alaw professor and past dean of Tulane Law School, to supporttheir request for final approval.
Per the terms of that Amended Agreement, Plaintiffs' Counselincurred a total of $21,363.39 in unreimbursable costs as aresult of the second round of mail and publication notices.Following this second round of notices, the SettlementAdministrator reported that a total of 7,875 valid claim forms had been returned. (SeeTilghman Aff. (Docket # 84) ¶ 12.) With each of these ClassMembers receiving a check from the settlement fund for $51.97,the total payout to the Class would now total $409,263.75 (plusany additional sums awarded to the Class Representatives). ClassCounsel represents that the 19.7 percent return rate achieved atthis point is "an excellent response rate for a large consumerclass action." (See Pls.' Second Supp. Mem. (Docket # 81) at4.) To support their assessment, they cite the observations ofMr. Tilghman, the Settlement Administrator.12 In twoseparate declarations filed with the Court, Mr. Tilghman hasexplained that, in his experience, "claim return rates are 10% orless in the vast majority of settlements that require filing anotice of claim." (Tilghman Aff. (Docket # 84) ¶ 13 & TilghmanAff. (Ex. L to Docket # 65) ¶ 11.) By this standard, the 19.7percent return rate achieved in this case may well be aboveaverage.
The Court now faces the following question: Is the currentproposed settlement fair, reasonable and adequate? In answeringthis question, the Court fulfills its "judicial duty to protectthe members of a class in class action litigation from lawyersfor the class who may, in derogation of their professional andfiduciary obligations, place their pecuniary self-interest aheadof that of the class." Reynolds v. Beneficial Nat'l Bank,288 F.3d 277, 279 (7th Cir. 2002). It is the burden of the proponentsof the settlement to prove that the proposed settlement is fair, reasonable and adequate. See Wright, Miller & Kane,Federal Practice & Procedure: Civil 3d § 1797.1 (2005).
In the context of the multi-district litigation over compactdisc pricing, another court in this district faced this samequestion. In that case, Judge Hornby explained the applicablestandard and laid out some specific factors to be considered: There is no single test in the First Circuit for determining the fairness, reasonableness and adequacy of a proposed class action settlement. In making this assessment, other circuits generally consider the negotiating process by which the settlement was reached and the substantive fairness of the terms of the settlement compared to the result likely to be reached at trial. Specifically, the appellate courts consider some or all of the following factors: (1) comparison of the proposed settlement with the likely result of litigation; (2) reaction of the class to the settlement; (3) stage of the litigation and the amount of discovery completed; (4) quality of counsel; (5) conduct of the negotiations; and (6) prospects of the case, including risk, complexity, expense and duration.In re Compact Disc Minimum Advertised Price AntitrustLitigation, 216 F.R.D. 197, 206-07 (D. Me. 2003) (internalcitations omitted). Generally, courts have recognized a"presumption of fairness" for settlements that are deemed to bethe result of "arm's-length negotiations" following "meaningful"or "sufficient" discovery. Wal-Mart Stores, Inc. v. Visa U.S.A.,Inc., 396 F.3d 96, 117 (2d Cir. 2005) (quoting the Manual forComplex Litigation, Third § 30.42 (1995)); see also In reCompact Disc MAP Litigation, 216 F.R.D. at 207 ("[T]he case lawtells me that a settlement following sufficient discovery andgenuine arm's-length negotiation is presumed fair.").
A. The Settlement Does Not Fall Within the Presumption ofFairness
The provision of this settlement agreement, along with facts ofthis case, do not allow the Court to apply a presumption offairness to its review of the proposed settlement. Rather, theAmended Settlement Agreement and the process by which thatagreement was reached give rise to an inference that the settlement was not the product ofarm's-length negotiations and sufficient discovery.
Even accepting the representations of the mediator regardingthe two days of mediation, the Court remains troubled that keyprovisions of the Amended Settlement Agreement, which werefinalized by the parties after the mediation session, combine toform an agreement that appears collusive on its face and inpractice. Specifically, the Court remains troubled by thecombination of the reverter clause and the clear sailingprovision. In concert, the Court believes that these twoprovisions give rise to inferences that there was a lack of arm'slength negotiations and a lack of zealous advocacy for the Classby Plaintiffs' counsel.
In fact, Professor Sherman, an expert presented by Plaintiffsin support of the settlement, admitted that reverter clauses aregenerally "suspect" and need to be viewed cautiously since they"undercut? the deterrent effect of class actions"13 andcan "suggest a lack of full diligence in representing the class."(April 28, 2005 Hearing Tr. at 30 & 38 (testimony of Prof.Sherman).) Of course, the presence of clear sailing clausescorrelates generally with reverter clauses. See William D.Henderson, Clear Sailing Agreements: A Special Form of Collusionin Class Action Settlements, 77 TUL. L. REV. 813, 835 (2003)("[I]t is important to recognize that it would be relatively rarefor a plaintiff's attorney to agree to a reverter-fund settlementwithout also having the security of a clear sailing agreement toreduce the uncertainty in his fee award."). However, by including a clear sailing provision, plaintiffs' counsel'sfinancial incentives are "decouple[d] . . . from those of theclass" thereby "increasing the risk that the actual distributionwill be misallocated between attorney's fees and plaintiffs'recovery." International Precious Metals Corp. v. Waters,530 U.S. 1223 (2000) (Mem.) (Justice O'Connor's Statement respectingdenial of writ of certiorari).14 Thus, it stands toreason that the presence of both a reverter clause and a clearsailing clause should be viewed with even greater suspicion andnot be presumed fair to the class. Because of the problemsinherent in a class settlement agreement that includes both areverter clause and a clear sailing clause, the Court believesthat the presence of these two provisions in any settlementagreement should present a presumption of unfairness that mustbe overcome by the proponents of the settlement.15 The current proposed distribution bears out the problemsgenerally associated with reverter clauses and clear sailingprovisions. Based on the most recent estimates provided to theCourt, the total payout to the class will be $409,263.75. Inaddition, if approved by the Court, the Class Representatives mayreceive an additional $40,000. The two payments combined wouldyield a total proposed payout to the class of $449,159.81. Thisamount represents approximately 13 percent of the total $3.4million settlement fund. In contrast, because of the reverterclause and clear sailing provision, both Class Counsel andDefendants stand to receive substantial portions of the original$3.4 million settlement fund. Specifically, Plaintiffs' Counselhas filed a request for $1,020,000 in attorneys' fees and anadditional $211,238.25 in expenses. These requests account forapproximately 36 percent of the $3.4 million settlement fund. Fortheir part, Defendants have filed only a limited objection tothis request that complies with the clear sailing provision ofthe Settlement Agreement and thereby does not object toPlaintiff's counsel receiving approximately 30 percent of thesettlement fund. Assuming the Court were to award Plaintiff'scounsel the fees and expenses requested, $1,644,601.94 wouldstill revert to Defendants under the terms of the AmendedSettlement Agreement.16 Thus, approximately 48 percent ofthe original settlement fund would go back to CIGNA. (Of course,if the Court were to limit the award of attorneys' fees andexpenses, an even larger sum would revert to Defendants pursuantto the terms of the Amended Settlement Agreement.)
Given the parties' estimations that actual damages to the39,932 Class Members totaled between $2.3 million and $2.9million (before interest), the Court simply cannot conclude thatthis proposed division of the $3.4 million settlement fund wasthe product of an arm's-length negotiation. In short, the Courtbelieves that the reverter clause and clear sailing clause raisea presumption of unfairness and the proposed distribution in lightof these provisions does not overcome that presumption.
In addition, the Court notes that there is a basis forquestioning whether the parties have satisfied the "sufficientdiscovery" prerequisite for a presumption of fairness. The mostglaring example of the insufficiency of the discovery prior tosettlement involves the size of the Class. As became apparentafter the first round of mailed notices were sent, neither sidewas even aware of the actual number of Class Members at the timethey negotiated the original Settlement Agreement. Rather,Plaintiffs' Counsel proceeded to finalize a settlement agreementwithout even knowing how many clients they were representing.Despite the apparent lack of discovery on this point, the partiesproceeded to rely on an inaccurate estimate of the size of theClass in order to set a maximum recovery of $40 for each ClassMember. Regardless of the later adjustments made to reflect theactual class size of 39,942, the change necessitated by thispost-negotiation revelation simply highlights a crucial gap inthe discovery undertaken prior to the settlement negotiations. Inshort, despite the number of hours and dollars expended ondiscovery prior to March 2004, the Court concludes that thediscovery completed prior to the negotiation and drafting of theSettlement Agreement does not weigh in favor of applying apresumption of fairness. Rather, because the combination of areverter clause and a clear sailing clause suggests a lack ofarm's-length negotiations that is not overcome by the facts andproposed distribution of the fund, the Court essentially proceedson a presumption of unfairness.
B. The Settlement is Unfair, Unreasonable and Inadequate
Of course, the proponents of the proposed settlement mayovercome a presumption of unfairness by showing that the proposedsettlement is, in fact, fair, reasonable and adequate consideringthe non-exhaustive list of factors laid out above. Below, theCourt discusses each of the relevant factors it has examined and explains its basis forultimately concluding that the proponents of this settlement havenot met their burden of showing that the settlement is fair,reasonable and adequate.
1. Stage of Litigation and Amount of Discovery Completed
This litigation was in a relatively early stage when thesettlement was originally negotiated. Plaintiffs had not yetfiled their class certification motion although the deadline wasfast approaching when the parties began their settlementnegotiations. The Court has already explained one apparent gap inthe discovery completed prior to the Settlement Agreement beingfinalized.17 In short, the stage of the litigation andamount of discovery completed suggest that Plaintiffs' Counselhas not yet completed a full investigation of the allegationslaid out in the Amended Complaint. Nonetheless, the seriousdiscovery conducted prior to the settlement negotiations clearlyled Plaintiffs' Counsel to conclude that the legal and factualobstacles they could encounter during the litigation were largerthan initially anticipated and that the damages from Defendants'alleged conduct were smaller than initially estimated. Whilesettlement negotiations may have been a rational route toconsider under these circumstances, the Court does not believethat either the stage of this litigation or the amount ofdiscovery completed necessarily suggest that the proposedsettlement is fair, reasonable and adequate. 2. Quality of Counsel and Conduct of Negotiations
Because of the early stage of the litigation, this Court hasnot had many opportunities to review and consider the quality ofcounsel in the context of this case. Thus, the Court's review is,for the most part, limited to the context of the motions andhearings surrounding the proposed settlement. Undoubtedly,Plaintiffs' Counsel is made up of a rather large team ofexperienced lawyers. There are eight attorneys hailing from threedifferent firms listed as attorneys of record for Plaintiffs. Atleast some members of this team have previous experience servingas class counsel and have been involved in one or more previouscases pressing similar claims against CIGNA on behalf of smallerclasses of subscribers. These cases, one in South Carolina andone in New Hampshire, both resulted in settlements. In short, theCourt has no reason to doubt that Plaintiffs' Counsel isqualified and has the necessary experience to represent the Classin this matter.
That said, at some point in negotiating the proposedsettlement, it appears Plaintiffs' Counsel lost sight of theirfiduciary duties to the Class while still managing to protecttheir own pecuniary interests. Plaintiffs' Counsel negotiated aclear sailing provision in which Defendants essentially agreedthat Plaintiffs' Counsel are entitled to fees and expensestotaling 30 percent of the entire $3.4 million reversionaryfund.18 With this agreement in hand, Plaintiffs' Counselseems content to rationalize the low claims rate andcorrespondingly low payout to the Class by citing the age-oldadage, "You can lead a horse to water, but you can't make himdrink." (Dec. 6, 2004 Hearing Transcript at 62 (statement by Mr.Hansel).) While there may be some truth to this saying, it does not capture the fiduciary relationshipbetween a lawyer and a group of clients. As fiduciaries to theClass, it is the responsibility of Plaintiffs' counsel to ensurethat the settlement provides real value (or, to extend themetaphor of the just quoted aphorism, `actual drinks') to their39,769 clients. In this case, it appears that Plaintiffs' Counselsecured a $3.4 million pool and also secured (to the extentpossible) approximately a third of that pool for themselves.Nonetheless, they did not obtain the same level of security fortheir clients. This arrangement has satiated Plaintiffs' counsel,but, in this Court's assessment, it has ultimately left the Classparched.
The Court has reviewed the affidavit submitted by the mediator,and also considered counsels' own representations that thenegotiations were hard-fought and contentious. Theserepresentations include Defense counsel's candid statement at thelast hearing that "CIGNA would have been perfectly willing tosettle this case without a reversion but the amount of thesettlement would have reflected still Cigna's assessment of thevalue of this claim and it would not have been 3.4 milliondollars." (April 28, 2005 Hearing Tr. at 80 (statement by Mr.Armando).) Nonetheless, it is far from clear that Plaintiffs'counsel would have settled this case for a fixed fund where themaximum amount that would be paid to the class was less than$450,000.00 (the amount currently slated to be paid to theClass). Moreover, as discussed below, it is not clear that afixed fund in that amount would be a fair, reasonable andadequate settlement. However, this is the de facto result of thecurrent settlement for the Class and Class Representatives. Inthis Court's assessment, this end result does not reflect theproduct of three separate law firms fulfilling their fiduciaryduties to a class of 39,769 clients. 3. Reaction of Class
All Class Members who could be located have received threeseparate mailed notices regarding the proposed settlement: thefirst notice was mailed on or around September — October 2004,the second amended notice was mailed on or around February 2005and a final reminder postcard mailed in March 2005. The Court hasreceived no written objections and no objectors have appeared atany of the hearings. In addition, only 173 valid opt-out formswere received (representing well less that 1 percent of the totalclass). Certainly, a complete lack of objections and a minimalnumber of opt-outs weighs in favor of approving the settlement.
However, in considering the "reaction of the class," the Courtalso considers the relatively small percentage of class members(19.7 percent) who have expressed implicit support for theproposed settlement by returning claim forms as well as the vastmajority that have remained silent and essentially expressed areaction of utter indifference to the settlement. Given that thelarge majority of Class Members fall into this latter category,the Court finds the reaction of the Class is a factor that weighsneither in favor of approving or rejecting the proposedsettlement.
4. Prospects of the Case & Likely Result of Litigation
Although the Court must be careful to not engage in a trial onthe merits,19 many courts faced with proposed classactions settlements do compare the proposed settlement with thelikely result of litigation, which implicitly requires the courtto consider the prospects of the case, including risk,complexity, expense and duration. This particular inquiry focuseson whether the proposed settlement in adequate in light of "the net expectedvalue of continued litigation to the class," to the extent thatit can reasonably quantified. Reynolds, 288 F.3d at 284-85.
In its most recent submission to the Court, Plaintiffs' Counselstates: "It is unlikely that Class Members could have done betterif the case had proceeded to trial. In fact, continuing thislitigation would entail substantial risk that the case might notreach trial stage, and that, if it did the Class might recovernothing." (Pls.' Second Supp. Mem. (Docket # 81) at 4.)Similarly, the mediator reports that "a number of potentialweaknesses in the Plaintiffs' case" were discussed during themediation, including "the age of the claims, statute oflimitations, the difficult[y] of establishing RICO claims and theproof problems of marshaling data from various computer systemsgoing back to the 1980's." (Groff Aff. ¶¶ 11 & 15.) Defendants'own submission goes into even greater detail explaining variousdefenses it would pursue if this litigation were to proceed.(See Defs.' Mem. in Support of Approval of Am. Settlement(Docket # 65) at 4-17.) In the same vein, Defendants have alsodetailed the hurdles Plaintiffs would face in even attempting toobtain class certification in this case.20 (See id.at 18-20.) Undoubtedly, these defenses and obstacles tocertifying the proposed class support "a meaningful riskdiscount," as suggested by Defendants. (Id. at 4.) Nonetheless, a court may not approve a settlement simply basedon a simple finding that "the prospects for the class iflitigation continue[s] [are] uncertain" or even poor. Reynolds,288 F.3d at 284-85; see also In re Compact Disc MAPLitigation, 216 F.R.D. at 221 (refusing to approve a settlementof "dubious value" to the class despite finding that continuedlitigation might well "generate absolutely no benefit for theclass"). Rather, the Court must determine whether the settlementrepresents a reasonable effort to "give? [the class] theexpected value of their claim if it went to trial, net the costsof trial." Mars Steel Corp. v. Continental Illinois Nat'l Bank &Trust Co., 834 F.2d 677, 682 (7th Cir. 1987). In Mars Steel,Judge Posner provides the following illustration of how a courtmight perform such an analysis: Suppose the claim of the class in this matter is worth $750 million, but the probability that the class would prevail if the case were tried is only one percent and if it did prevail it would have to pay a contingent fee of $10 million. Then assuming risk neutrality (meaning indifference between a sum certain and its uncertain equivalent — e.g., between $2 and a 10 percent chance of $20), the class would be better off settling for any amount greater than $7.4 million than taking its chances on a trial. And if the members of the class were risk averse they might consider themselves better off even if the settlement were much smaller.Id. (quoted by Defendants' in their Memorandum in Support ofApproval of Settlement (Docket # 65) at 3). A conservativestarting point for such an analysis in this case is that thePlaintiffs' claims are worth $2.3 million (the estimate ofDefendants' expert).21 Based on the latest estimates ofthe parties, it appears that they propose to settle the claims ofthe class for a total payout of $409,159.81. Assuming riskneutrality, the Class is "better off settling" for this amount if the probability that the Class will prevail to ajudgment of $2.3 million is approximately 17 percent or less.Mars Steel, 834 F.2d at 628. While the proponents of thissettlement have described significant evidentiary and legalhurdles that Plaintiffs may not be able to cross as well aspointing to viable defenses that CIGNA may pursue, they have notshown that the probability of success is less than 17percent.22 Thus, the Court declines Defendants'invitation to declare this settlement fair based on a MarsSteel analysis of its reasonableness.23
Admirably, Defendants' submission in support of settlement alsoattempts to establish the adequacy of the settlement throughquantifying the net expected value of continued litigation to theclass by laying out various recovery scenarios. (See Defs.'Mem. in Supp. of Approval of Settlement at 20-22.) While theCourt has considered this analysis in assessing the settlementhere, the analysis does not support the conclusion that it isreasonable for the Class to settle their claims for a net payoutof $449,159.81.24 Presenting their analysis in terms ofthe net payout to each class member, Defendants' analysis wouldarguably find that per-class-member payouts in the $20-$30 rangeadequately reflected the net expected value of continuedlitigation to the class once a "meaningful risk discount" isfactored in. However, dividing the proposed net payout to the class by the 39,769 Class Members who have not opted out ofthis settlement yields a per class member payout of $11.29. Noproponent of this settlement has shown the Court that this amountadequately reflects the net expected value to the Class if thiscase was litigated.
Thus, despite the parties' attempts to candidly disclose therisks associated with continuing this litigation, the Courtsimply cannot find that the proposed settlement is adequate evenwhen viewed in light of these real litigation risks.
5. Proposed Allocation and Distribution of the SettlementFund25
The Court has already described in great detail how the partiespropose to distribute the Settlement Fund. To summarize, theparties proposed to distribute approximately 13 percent of thefund ($449,159.81) to approximately 19 percent of the Class. Themore than 80 percent of the Class that did not return claim formswill receive nothing. Class Counsel claims it is entitled to 36percent ($1,231,238.25) of the fund to cover its fees andexpenses. What remains after these disbursements and the paymentof the settlement administration expenses amounts to more than 48percent of the fund, which would revert to CIGNA.
This distribution and allocation of the settlement fund isunfair, unreasonable and inadequate on its face. The Court hasspent a great deal of time attempting to understand how aproposed settlement that appeared quite viable when it was firstpresented to the Court could have resulted in distribution thatthis Court simply cannot approve. Stripped to its essence, theCourt believes that three factors combined to create thisuntenable distribution scenario: (1) a claims made settlementpremised on a 100 percent response rate, (2) a reverter clause,and (3) a clear sailing provision. Unfortunately, when this matter first came before the Courtfrom preliminary approval in July 2004, the Court was notindependently aware (nor did any proponent of the settlementbring to the Court's attention) what the parties and theSettlement Administrator already knew — namely, that "claimsmade" settlements regularly yield response rates of 10 percent orless. Having achieved a response rate that is above this average,the amount being distributed to the class is still woefullyinadequate in large part because the maximum payout to each classmember of $51.97 is premised on a 100 percent response rate. Inshort, the parties agreed to cap the payout to each individualclass member based on a 100 percent response rate when they fullyexpected a much lower response rate.
Of course, this cap and the parties' expectations of a lowresponse rate gives the reverter clause real value forDefendants. Likewise, the clear sailing provision, whichguarantees that Defendants will not object to Plaintiffs' Counselessentially seeking 30 percent of the entire settlement fund —regardless of how much is disbursed to the class, gives thissettlement real value for Plaintiffs' Counsel.
The Court does not mean to suggest that each of these features(i.e., claims made settlements, payout caps based on 100 percentresponse rates, reverter clauses, or clear sailing provisions) isper se unacceptable. However, this case provides a tellingexample of how these features can work in concert to produce asettlement that is unfair, inadequate and unreasonable and thatin practice yields comparably little value for the Class.
The Court has fully considered the impact of its decision todeny approval of the settlement at this stage, especially inlight of the fact that Class Members have already receivedrepeated notification of this settlement and arguably some 7,875Class Members are eagerly awaiting the receipt of checks for$51.97. The Court is aware that this denial may seem unfair following in the footsteps of the Court's preliminary approvalgiven to both the original Settlement Agreement and the AmendedSettlement Agreement. However, as the Court has learned in thiscase, the inherent nature of a claims-made reversionary fundsettlement is that the settlement can have the potential toprovide fair and adequate compensation to the Class and yet inpractice yield an actual settlement that is inadequate.
This Court is simply not willing to approve such a settlementand thereby disregard the small amount actually paid to ClassMembers as a collective action problem that cannot be solved inthe context of this litigation. The parties have represented tothe Court that approximately 39,942 known subscribers wereallegedly harmed by Defendants conduct and that the damagesincurred total somewhere between $2.3 million and $2.9 million.This case is not an extraordinarily large consumer class actionwith millions of unknown members. Rather, the settlementadministrator has been able to locate approximately 32,592 ClassMembers (approximately 81.6 percent of the Class). Nonetheless,the parties now ask the Court to approve a settlement that willextinguish the claims of the entire class by paying $51.97 to amere 7,875 Class Members. In the Court's assessment, theproponents of this settlement have failed to show that theproposed distribution of the settlement fund is fair, reasonableand adequate.
Having considered all relevant factors, the Court finds that itcannot approve the proposed settlement in accordance with FederalRule of Civil Procedure 23(e)(1)(C). III. CONCLUSION
For the reasons just explained, the motions seeking approval ofthe proposed settlement (Docket #s 55, 66 & 81) are herebyDENIED. Having determined that the proposed settlement cannot beapproved, Class Counsel's Supplemental Memorandum in Support ofApplication for Award of Attorneys' Fees (Docket # 67) and ClassCounsel's Second Supplemental Memorandum in Support ofApplication for Award of Attorneys' Fees (Docket # 83) are DENIEDas MOOT. Per the Court's Amended Order Granting PreliminaryApproval of Amended Settlement (Docket # 80), the parties shallrevert to their respective positions as of March 4, 2004.
1. Notably, the Class as alleged (and as previously approvedfor purposes of settlement) specifically excludes "(1)subscribers or dependents whose claims have already been resolvedin the Court-approved class action settlements in Lecza v.Healthsource, Inc. et al., Civil Action No. C-95-382-JRM, U.S.District Court, District of New Hampshire or Garvin v. CIGNAHealthsource of South Carolina, Inc., Civil Action No.94-CP-40-3472, South Carolina Court of Common Pleas, RichlandCounty; and (2) those individuals who hold or have held anyexecutive position at Healthsource, and their immediatefamilies." (Am. Compl. ¶ 114.)
2. In their application for attorneys' fees, Class Counselrepresents that when the case began, they believed that this casewas "possibly a $50 million case." (Class Counsel's Second. Supp.Mem. in Support of Application for Award of Attorneys' Fees(Docket # 83) at 2.)
3. The relevant provision of the Settlement Agreement defineseach class member's "Share of the Settlement" as "the lesser of(a) the predetermined amount of forty dollars ($40), whichrepresents that average amount of alleged damaged recoverable bythe Class Members pursuant to this Settlement, or (b) theResidual Corpus divided by the number of Valid Claims FormsTimely Signed and Returned." (Settlement Agreement ¶ 1.20.)
4. The parties have supplied the Court with an affidavit fromthe mediator that also indicates that the parties had informedhim "that they deliberately would not discuss the issue of feesat all until an agreement had been reached independently on asettlement of the litigation." (Groff Aff. ¶ 14.)
5. The Court did express concern that Class Members wouldeither not receive notice of the settlement or not return a claimform and hypothetically noted that, in light of the reverterprovision, Defendants might "get back $300,000." (July 27, 2004Hearing Tr. at 20.) In hindsight, the Court's hypothetical was asignificant underestimation of the amount that would revert toDefendants. (As the Court explains later is this Order, a muchlarger sum would revert to CIGNA if the Court were to approve theproposed settlement in its current form.) However, at thishearing, none of the proponents of the settlement made anyattempt to disclose their actual expectations with respect to theamount that would ultimately revert to CIGNA as a result of theanticipated claims rate. Nonetheless, at later hearings, itbecame clear that both sides had anticipated from the beginningthat more than $300,000 would be returned to CIGNA pursuant tothe terms of the Settlement Agreement.
6. Plaintiffs' counsel represented at the December 6, 2004hearing that it had only learned of the substantial shrinkage inthe number of identifiable Class Members while talking to thesettlement administrator in November 2004. By comparison,Defendants knew of the actual number of Class Members shortlybefore September 15, 2004 (at the very latest). (See Dec. 6,2004 Hearing Tr. at 43 (statement by Mr. Armando).) With thebenefit and clarity of hindsight, it is clear to see thatDefendants should have promptly alerted both Plaintiffs' counseland this Court that Defense counsel's previous representationsregarding the size of the class were incorrect.
7. In fact, Attorney McCutchen essentially agreed with theCourt that the Settlement Agreement with the $40 maximum payoutwas not fair to the 39,942 Class Members and should not beapproved by the Court. (See Dec. 6, 2004 Hearing Transcript(Docket # 64) at 28.)
8. Although this was the opt-out number originally supplied tothe Court, the Proposed Final Judgment and Order of Dismissal(Docket # 88) lists only 173 individuals who have filed timelyand valid opt-out forms.
9. This 28,259 figure amounts to a non-response rate ofapproximately 88 percent of the Class Members who apparentlyreceived the mailed notices. Suffice it to say, the Courtconsidered this non-response rates both surprising andtroubling.
10. (See Aff. of L. Stephens Tilghman, dated Nov. 17, 2004(Ex. 1 to Docket # 55) ¶ 8.)
11. Notably, in spite of the clear sailing clause quotedearlier in this memorandum, Defendants did object to ClassCounsel's Application and asked the Court to limit its award to30 percent "of the settlement fund net of expenses." (Defs.' Memin Opp. to Pls. Counsel's Request for Attorney Fees (Docket # 57)at 4.) The Court understood this to be a limited objection toClass Counsel's request for reimbursement of expenses and costsin addition to attorneys' fees totaling 30 percent of thesettlement fund.
12. Notably, Mr. Tilghman is President of a company that hasadministered over 175 class action settlements, including thesettlement in Garvin v. Healthsource Inc., Civil Action No.94-CP-40-3472, South Carolina Court of Common Pleas, RichlandCounty (a case pressing substantially similar claims to theclaims presented here albeit for a smaller class of subscribers).At the July 27, 2004 Preliminary Approval Hearing, AttorneyHansel represented that both sides had previous experienceworking with Mr. Tilghman. (See July 27, 2004 HearingTranscript at 6.)
13. In its colloquy with Prof. Sherman, the Court specificallyreferenced Judge Posner's discussion of the importance ofdeterrent effect of class actions. See Richard A. Posner,Economic Analysis of Law 626-27 (5th ed. 1998) ("[T]he mostimportant point from an economic standpoint is that the violatorbe confronted with the costs of his violation — this achieves theallocative purpose of the suit — not that he pays them to hisvictims.") Although Professor Sherman went on to explain hisbasis for believing that the proposed settlement achieves thisdeterrent effect, in this Court's assessment, the proposedsettlement falls more closely within the problem that JudgePosner went on to describe in which, "[t]he lawyer for the classwill be tempted to offer to settle with the defendant for a smalljudgment and a large fee, and such an offer will be attractive tothe defendant, provided the sum of the two figures is less thatthe defendant's net expected loss from going to trial." Id. at627.
14. Justice O'Connor also explained that reversionary fundsettlements that allow attorneys' fees to be based upon the totalfund may "potentially undermine the underlying purposes of classactions by providing defendants with a powerful means to enticingclass counsel to settle lawsuits in a manner detrimental to theclass" and, in turn, "could encourage the filing of needlesslawsuits." International Precious Metals Corp.,530 U.S. at 1223. Justice O'Connor's statements in International PreciousMetals were actually made in the context of a request to reviewan actual attorney fee award on a $40 million reversionary fund.In that case, the District Court approved an attorney fee awardof $13,333,333.00 even though only $6,485,362.15 was disbursed tothe Class with the remainder reverting to the defendants. Seeid. In denying review, Justice O'Connor noted that petitioners hadwaived their right to challenge the reasonableness of this awardbecause of a clear sailing agreement in which they agreed not tooppose a fee request for up to one-third of the reversionaryfund. See id. Thus, Justice O'Connor's statement simplyhighlights why the District Court must give particular scrutinyto reversionary fund agreements with clear sailing clauses atthis stage. In short, International Precious Metals appears tostand for the proposition that once a reversionary fundsettlement with a clear sailing provision is approved, it maywell be impossible for other courts to address any apparentunfairness in the misallocation of the total payout betweenattorneys' fees and actual payments to the class.
15. The Court believes that its declaration of a "presumptionof unfairness" in this case is a logical extension of the"presumption of fairness" rule. However, the Court alsorecognizes that a "presumption of unfairness" is not a rule thathas yet been adopted or even proposed in the First Circuit.Nonetheless, as discussed in the previous footnote, it appearsunlikely that any proposed settlement containing these provisionswould be the subject of a properly preserved appeal. In theabsence of any precedent that declares a "presumption ofunfairness" for settlement agreements containing reverter andclear sailing provisions, the Court's declaration of apresumption of unfairness in this case serves as both an honestexplanation of the basis for the Court's concern and a notice tofuture litigants that proposed class settlements with theseprovisions will be subjected to close scrutiny by this Court.
16. The Court has deducted an additional $75,000.00 insettlement administration expenses to arrive at this amount.
17. An additional example that less than complete discoverywas completed prior to the proposed settlement being reached canbe found in Defendants' Memorandum in Support of Approval ofSettlement (Docket # 65). In that submission, Defendants discussthe risks Plaintiffs face in establishing their claims. Thediscussion cites to a subscriber agreement that has not yet beenprovided to Plaintiffs in discovery. (See Defs.' Mem. in Supp.of Approval of Amended Settlement at 5 & n. 3.) Regardless ofwhat this particular document shows regarding Plaintiffs' chanceof success, it is fair to say that Plaintiffs did not have achance to review or consider this document if it was not producedprior to the Settlement Agreement being finalized.
18. As discussed in other sections of this Order, Plaintiffs'Application for Award of Attorneys' Fees actually seeks fees andexpenses that total $1,231,238.25, which equals 36 percent of thetotal settlement fund. Defendants have filed a limited objectionto this request that seeks to limit the Court's award of expensesand fees to 30 percent of the settlement fund. (See Defs.' Memin Opp. to Pls. Counsel's Request for Attorney Fees (Docket # 47)at 4.)
19. See, e.g., In re Compact Disc MAP Litigation,216 F.R.D. at 211 (noting that in assessing a settlement a judgeshould not "prejudge the merits of the case" since the judge maybe called on "to decide the merits if the settlement fails.")
20. Without expressing any opinion on the merits of ayet-unfiled motion for class certification, Defendants do raise avalid question regarding whether a single class can consist ofboth subscribers to plans governed by ERISA and plans that arenot subject to ERISA. To be sure, it is apparently unclear howmany Class Members were subscribers to plans governed by ERISAand how many Class Members were subscribers to non-ERISA plans.Putting aside for a moment this sorting issue, to the extentsome, but not all, Class Members subscribed to plans governed byERISA ("ERISA Plaintiffs"), these ERISA Plaintiffs would belimited to the remedies provided under ERISA and could not pursuestate law claims. See, e.g., Aetna Health Inc. v. Davila,124 S. Ct. 2488, 2495-96 (2004). In contrast, subscribers tonon-ERISA plans may well be able to pursue the other common lawclaims asserted in the Amended Complaint. There is at least abasis for arguing that these two categories of Plaintiffs withtwo different types of claims cannot — when combined into oneclass — satisfy the Rule 23(a)'s requirement of typicality or theRule 23(b)(3)'s requirement of predominance of common questions.
21. Plaintiffs could be entitled to recover reasonableattorneys' fees in addition to this amount pursuant to thefee-shifting provisions in both ERISA, 29 U.S.C. § 1132(g), andRICO, 18 U.S.C. § 1964(c). Thus, for purposes of this analysisthe Court will not deduct a contingency fee from the $2.3 milliondamage estimate. Nonetheless, the Court acknowledges thearguments put forth by Defendants suggesting that Plaintiffsmight have to pay attorneys' fees out of any award theyrecovered. (See Defs.' Mem. in Support of Approval of Am.Settlement (Docket # 65) at 18.) In addition, for purposes of this analysis the Court has notconsidered Plaintiffs' requests for interest, punitive damagesand treble damages, but notes that it is aware that Plaintiffs'Amended Complaint seeks these additional amounts.
22. In fact, Defendants's own evaluation of the settlement andattempt to justify the current settlement as reasonable and fairassumes the chances of a defense verdict at somewhere between 45percent and 60 percent. (See Defs.' Mem. in Support of Approvalof Am. Settlement (Docket # 65) at 22.)
23. In addition, the Court notes that even if the parties wereto certify that the probability of success was less than 17percent, the Court would be reluctant to approve the settlementas fair. As discussed later in this order, the $409,159.81 thatthe Class will recover under the current proposed settlement willbe distributed to less than 20 percent of the Class. Thus,approximately 80 percent of the Class will receive nothing inexchange for their claims being extinguished. Thus, for thislarge majority of the class, the probability of success wouldneed to be zero percent in order to justify finding that thesettlement was fair under a Mars Steel analysis.
24. This amount includes the incentive payments to the ClassRepresentatives.
25. See Wright, Miller & Kane, Federal Practice & Procedure:Civil 3d § 1797.1 & nn. 10 & 11 (2005) (collecting cases in whichthe allocation and distribution contemplated under the settlementwere considered in deciding whether to approve settlement).West Page 811