Class Action Defense Review : Antitrust, Employment Discrimination, Securities Fraud and Unfair Competition Lawyer & Attorneys: Cozen O'Conner Law Firm: Philadelphia

How much effort must parties to a class action settlement expend in order to ensure that all class members have notice of the settlement and an opportunity to object? Rule 23(c)(2)(B) requires “reasonable effort,” but when does ensuring individual notice become “unreasonable”?

A recent Third Circuit opinion underscores that compliance with Rule 23(c)(2)(B) is not to be taken lightly. In Larson v. AT&T Mobility, LLC, the Third Circuit reversed a district court’s determination that notice by publication would be sufficient.

The plaintiffs filed suit against cellular phone service providers who included a flat-rate early termination fee (ETF) in their cellular contracts, alleging that the fees were penalties that violated the Federal Communications Act and state consumer protection laws. The plaintiffs then entered into a $17.5 million settlement agreement with Sprint.

After preliminarily approving the settlement, the court held an initial fairness hearing and ruled that the parties’ initial notice plan did not comply with Rule 23(c)(2). The court determined that while it would be unreasonable to require Sprint to compile a full list of class members over the 10-year class period because it would require 6-12 months of work and cost at least $1 million, Sprint’s records showed that Sprint could potentially identify subsets of customers who were members of the class.

The parties subsequently filed an amended notice plan, which asserted that it would be unreasonable to search any of Sprint’s billing records for class members who were charged a flat-rate ETF. This assertion was supported by a declaration from a Sprint executive, who testified that it would take 1-2 months to capture information for a three-month segment of the class period, at a cost of $20,000, and 4-5 months to capture information for an additional two-year segment, at a cost of $80,000. The court agreed and approved the amended notice plan, ruling that it would be “unreasonable to require Sprint to engage in further efforts to identify class members” beyond the 285,000 individuals who initially received notice of the Settlement Agreement.

Agreeing with the objectors that the district court abused its discretion, the Third Circuit reversed and remanded the matter for further proceedings. The panel characterized the district court’s acceptance of the amended notice plan as an “about face,” holding that the court “did not provide any support for its new and very different determination that Sprint did not need to conduct a search of its billing records to provide individual notice to a larger group of class members.”The Third Circuit looked to the Supreme Court’s previous opinion on “reasonable effort” in Eisen v. Carlisle & Jacquelin, a class action involving a prospective class consisting of nearly six million individuals who had engaged in odd-lot stock purchases. In the opinion, the Supreme Court stated that “the names and addresses of 2,250,000 class members [were] easily ascertainable, and there [was] nothing to show that individual notice [could not] be mailed to each.” The Court also stated that notice by publication had “long been recognized as a poor substitute for actual notice.”

Given Sprint’s acknowledgement that a search through billing records could potentially identify millions of class members who were charged a flat-rate ETF, the court determined that while this search “cannot be made with push-button ease,” it is clear it would “bring the effort required within the range of reasonableness.” While the cost of providing notice is an appropriate factor to be taken into account, the panel noted that if only two million people were identified through the additional search, the search would cost only 5 cents per class member identified—43 cents per class member when the cost of sending notice to each was included. Moreover, the court noted that “[e]ven if the costs had been higher . . . that would not automatically mean they were unreasonable.”

The court thus remanded the case for the district court to reassess the amended notice plan “on a more complete record and with a fuller explanation.” In particular, the panel noted “the availability of statistical sampling of Sprint’s billing records” as one way to provide “a better grounded estimate of the number of class members” who could be identified through a search of those records.

The Third Circuit’s view as to the outcome it expects from the district court’s reconciliation was abundantly clear, as is the instruction to be drawn from Larson: circumventing actual notice to absent class members will not be condoned absent a showing that the effort required to provide such notice would be extraordinary.

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A class action brought pursuant to theFair Labor Standards Act (FLSA) requires a proactive class. Unlike Rule 23 class actions, in which class members must affirmatively opt out in order to be excluded from the class, FLSA class actions require that potential class members notify the court of their desire to opt into the action. Just how far can plaintiffs go in soliciting potential class members? A recent case explores the balance between honoring the First Amendment rights of plaintiffs in communicating with a pool of potential class members and ensuring that defendants do not suffer irreparable harm.

In Hathaway v. Shawn Jones Masonry, a Kentucky district court refused to interfere with the rights of a plaintiff to communicate with other potential plaintiffs in a putative FLSA class action. Michael Hathaway sued his former employer, Shawn Jones Masonry (SJM), alleging violations of the FLSA. To encourage other employees to join the class action suit, Hathaway disseminated a letter that “guarantee[d] success,” stating: “PLEASE BE ADVISED THAT YOU ARE ENTITLED TO MONEY WHICH HAS BEEN ILLEGALLY NOT PAID TO YOU BY SHAWN JONES MASONRY . . . A COLLECTIVE ACTION SUIT IS BEING STARTED BY MIKE HATHAWAY AND BEING FILED BY: D. WES SULLENGER, ATTORNEY AT LAW.” Each letter also contained a copy of the attorney Sullenger’s business card. Sullenger denied any knowledge of the letter and agreed that such communication was improper. Sullenger instructed Hathaway to cease disseminating the letter.

SJM argued that the letter Hathaway sent to current employees caused irreparable harm. SJM contended that current employees would believe that SJM was not treating them fairly and would quit, leaving the company short-staffed. SJM asked that the court enjoin Hathaway from soliciting additional plaintiffs to join the action, as the letter violated Kentucky ethics rule prohibiting a lawyer from soliciting professional employment. Alternatively, SJM requested that Hathaway be enjoined from soliciting additional plaintiffs until the court determined whether the action was appropriate for collective class action. Hathaway, however, asserted his First Amendment rights to communicate with potential plaintiffs and potential witnesses.

In upholding Hathaway’s First Amendment rights, the court referenced Gulf Oil Co. v. Bernard, a Supreme Court decision discussing the “heightened susceptibilities of nonparty class members to solicitation amounting to barratry as well as the increased opportunities of the parties and counsel to ‘drum up’ participation in the proceeding.” Gulf Oil granted district courts the broad authority to exercise control over a class action and to enter appropriate orders governing the conduct of parties and counsel. The Supreme Court, however, emphasized the importance of limiting speech as little as possible and “only to the extent consistent with the rights of the parties under the circumstances.”

Here, SJM did not offer any evidence that current employees would quit their jobs and leave the company short-staffed. Hathaway, however, demonstrated that he would be harmed by a delay in contacting “potential witnesses, whose memories will fade over time, and potential plaintiffs[,] whose claims against Defendant are diminished on a daily basis.” The letter was admittedly improper and in potential violation of the Kentucky ethics rule, but Hathaway had already ceased disseminating it, and no specific harm had befallen SJM. In refusing to dampen Hathaway’s rights, the court nevertheless cautioned Hathaway and Sullenger to navigate the ethics rules carefully regarding future contact with prospective clients.

This case demonstrates the importance of First Amendment rights in class action suits and the need for mindfulness in contacting prospective clients. While it might be worthwhile to leave no stone unturned in pursuing potential class members, the specter of being enjoined from soliciting class members altogether represents an effective deterrent for questionable practices. If Sullenger had known about the letter or had not instructed Hathaway to cease dissemination of the letter, the lawsuit might have died a quick death, regardless of the protections of the First Amendment.

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Providing notice to class members in a product liability action is rarely easy, as few manufacturers maintain detailed lists of the customers who purchase their products. A recent ruling in a tobacco class action warns companies who do maintain such information that they cannot assume a court will allow to them keep the information confidential.

In Donovan v. Philip Morris USA, a federal court in Massachusetts required Philip Morris to turn over names from its Adult Tobacco Consumer Database, which Philip Morris contended “contains private, proprietary, competitively sensitive, and highly confidential information on adult tobacco consumers.” According to Philip Morris, the database contains names, ages, and self-reported contact information about adult cigarette smokers “who have indicated a desire to receive promotional offers and materials about cigarettes.” This information, Philip Morris said, “is a matter of enormous interest to and among PM USA’s competitors.”

In an electronic order entered on the case docket, the court rejected these concerns. The court noted that “there is no question that a list of smokers of Marlboro cigarettes with Massachusetts mailing addresses is relevant and necessary to the class action.” The court said that direct mail is the most effective means of notice “[s]hort of placing notice within the cigarette boxes themselves—a feat that Philip Morris has determined to be virtually impossible and cost-prohibitive.” 

The court added, however, that the database itself need not be turned over. Because “[s]ecurity is critical,” Philip Morris need only provide a list of customers in Massachusetts over the age of 50 to the class’ notice consultant, which will be required to sign a confidentiality statement.

Plaintiffs’ use of a notice consultant bound by a confidentiality statement presumably should mitigate much of Philip Morris’ professed concern about security. Nevertheless, as businesses increasingly implement loyalty programs and other measures designed to collect information on and stay in touch with their customers, they should be aware that should their products become the subject of a class action, their databases are a readymade tool for providing notice.

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