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Pearson v. NBTY, Inc.

United States District Court, N.D. Illinois, Eastern Division

September 23, 2019

NICK PEARSON, et al., Plaintiffs,
NBTY, INC., et al., Defendants.


          John Robert Blakey, United States District Judge

         This case is before the Court on Objector Theodore Frank’s motion seeking disgorgement of side payments Defendants made to other objectors to settle their appeals. For the reasons explained below, the Court denies Frank’s motion [381], [383].

         A. Background & Procedural History

         This case, filed in November of 2011, began as a putative class action on behalf of consumers who purchased glucosamine, a dietary supplement touted to improve joint health. The named Plaintiff, Nick Pearson, alleged, on behalf of the class, that Defendants, Target Corporation, NBTY, Inc., and Rexall Sundown, Inc., violated consumer protection laws by making false claims about the efficacy of the supplement. On April 15, 2013, Pearson, along with Plaintiffs in five other cases, executed a global, nationwide settlement agreement. That initial settlement established a constructive common fund of $14.2 million, only $2 million of which was guaranteed to go to class members. The settlement also secured an additional $6.5 million to pay notice and administrative costs, attorney’s fees, and litigation expenses. Judge Zagel, to whom this case was then assigned, approved the settlement in January 2014, over the objections of several class members, including Theodore Frank, but with certain modifications. As approved, the settlement required Defendants to pay, in addition to money paid on the class members’ claims: $1.5 million in notice and administration costs; $30, 000 in incentive awards to the six named Plaintiffs; $1.13 million to the Orthopedic Research and Education Foundation; and $1.93 million in attorneys’ fees and expenses (a significant reduction from what counsel had requested). See [143], [144].

         The objectors, including Frank, appealed, and the Seventh Circuit reversed, determining that, although Judge Zagel had improved the settlement with his modifications, he had not gone far enough. [198]. The Seventh Circuit determined that the value to the class was not, as Judge Zagel thought, $20.2 million (the potential payout on claims), but $865, 284–the total compensation actually paid to the class members on the 30, 245 claims they ultimately filed. Id. at pp. 4–5. Thus, the attorneys’ fees represented not 9.6 percent of the aggregate value, as Judge Zagel believed, “but an outlandish 69 percent.” [198] at p. 6. The Seventh Circuit also took issue with several other provisions of the settlement, including a reversion or “kicker” clause providing that, if the court were to shave the proposed fee award, the savings would revert to Defendants and not go to class members. Id. at p. 16. Ultimately, the Seventh Circuit concluded that this settlement reflected “a selfish deal between class counsel and the defendant” that “disserve[d] the class.” Id. at p. 18.

         On remand, the parties reached a new settlement, this time with the assistance of a neutral third-party mediator. The new settlement, in direct response to concerns raised by the Seventh Circuit, established a $7.5 million settlement fund to pay class member claims, attorneys’ fees and expenses, and incentive awards. On top of that, the settlement required Defendants to pay an additional $1.5 million for notice and administration costs. The parties eliminated any “kicker” clauses from their agreement; they also simplified the claims process, upping the potential compensation and eliminating any proof of purchase requirement (in fact, while the first settlement yielded 30, 245 claims, the second yielded 145, 329). Additionally, the injunction component of the parties’ settlement was made permanent.

         Despite these improvements, several class members, including Frank, Steven Buckley, Randy Nunez, and Patrick Sweeney, filed objections. None of the objectors challenged the reasonableness of the settlement. Rather Nunez objected because his attorney, who had been named interim class counsel in another case pending in California, was not involved in the negotiations that led to the new settlement. Buckley similarly raised no challenge to the terms of the settlement but objected to class counsel’s fee petition, arguing that counsel should get no more than $1.5 million. Frank similarly raised no challenge to the terms of the settlement but challenged the proposed fee award and argued that any fees awarded to his attorney should come from class counsel’s award and not from the settlement fund. Sweeney asserted a canned objection and did not even bother to cut and paste his pleadings to state the correct case information.

         Judge Zagel approved the settlement, over these objections, awarded $25, 000 in incentive awards to five class representatives ($5, 000 to each), and awarded class counsel 33% of the net settlement fund. Additionally, Judge Zagel awarded Frank’s counsel attorney’s fees in the amount of $180, 000, to be paid from the gross settlement fund. Judge Zagel granted preliminary approval on February 1, 2016 [238] and final approval on August 25, 2016. See [288]. The motion for distribution filed on February 2, 2017 shows that the approved class recovery amount was $3, 963, 335.32. See [344].

         Nunez, Buckley, Sweeney, and Frank filed separate notices of appeal. See [289], [293], [298], and [308].[1] The Seventh Circuit consolidated the appeals and set a single briefing schedule. But before briefing began, Nunez, Buckley, and Sweeney voluntarily dismissed their appeals. The day the Seventh Circuit dismissed those appeals, Frank voluntarily dismissed his appeal, which entered separately that same day. Thereafter, Plaintiffs and Defendants asked Judge Zagel to dismiss the case with prejudice, and he did, on November 18, 2016 [333].

         Frank subsequently moved to intervene, seeking to disgorge any side payments made to the three objectors, Nunez, Buckley, and Sweeney. Because Judge Zagel had by then dismissed the case with prejudice, this Court, having received the case on reassignment, denied the motion on jurisdictional grounds [340].

         Frank appealed, and the Seventh Circuit reversed. In doing so, the Court noted that Frank had potentially identified a case of “objector blackmail”–the phenomenon where an absent class member objects to a settlement with no intention of improving the settlement for the class, but with the sole purpose of garnering a side payment in exchange for voluntarily dismissing the appeal. In such cases, “a potential benefit for the class–a better settlement–is leveraged for a purely personal gain–a side bargain.” Pearson v. Target Corp., 893 F.3d 980, 982-83 (7th Cir. 2018). The Seventh Circuit determined that the circumstances –“three objectors voluntarily dismissed their appeals before appellate briefing began”–were such that this Court should have allowed Frank formally to raise his suspicion that the settling objectors acted in bad faith.

         On remand, consistent with the Seventh Circuit’s directives, this Court provided Frank with the opportunity to pursue his theory. The parties conducted discovery, filed motions, and argued the matter, but the record failed to confirm suspicions of blackmail or other wrongdoing. As such, the evidence does not warrant disgorgement, and this Court denies Frank’s motion [381], [383].

         B. Discussion

         For the Court to order disgorgement, Frank would have to demonstrate that the objector/appellants violated some rule or statute or did something unlawful, that the settlement payments amounted to ill-gotten gains. See Porter v. WarnerHolding Co., 328 U.S. 395, 397–99 (1946) (recognizing the appropriateness of invoking the court’s equitable powers to enjoin illegal acts and practices); Fed. Trade Comm’n v. Credit Bureau Ctr., LLC, No. 18-2847, 2019 WL 3940917, at *27 (7th Cir. Aug. 21, 2019) (“primary purpose of disgorgement orders is to deter violations of the laws by depriving violators of their ill-gotten gains”); Kokesh v. S.E.C., 137 S.Ct. 1635, 1640 (2017) (“disgorgement is a form of ‘[r]estitution measured by the defendant’s wrongful gain’”) (quoting Restatement (Third) of Restitution and Unjust Enrichment § 51, Comment a, p. 204) (2010)). Without more, the dismissal of an appeal does not necessarily indicate objector blackmail. Litigants routinely dismiss matters for reasons other than blackmail (as Frank knows, having himself dismissed his appeal). And litigants settle disputes every day for reasons having nothing ...

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