The Ninth Circuit Court of Appeals rejected a class action settlement as “worthless” for absent class members in a recent federal Fair Debt Collection Practices Act case. The decision represents another addition to the growing list of FDCPA and other consumer-related class action settlements facing tough scrutiny where absent class members receive minimal or no monetary relief in proportion to their release of future claims, while class representatives and their counsel receive handsome rewards.

A copy of the opinion in Koby v. ARS National Services, Inc. is available at: Link to Opinion.

The case arose from a voicemail message seeking to collect a debt. Koby and the other named plaintiffs filed suit in a California federal court alleging the message violated the FDCPA because it failed to state the caller worked for the defendant, that the defendant was a debt collector, and the purpose of the call. Each named plaintiff sought only $1,000, the maximum statutory damages allowed for individuals under the FDCPA. The defendant ARS tried to dismiss the lawsuit, but its motion was denied.

Following its loss, in 2011 ARS voluntarily altered its scripted voicemail message to state the caller worked for ARS, that ARS was a debt collector, and the call was made to collect a debt. It then turned to settlement negotiations.

The Troubled Settlement

The negotiations led to an agreement in January 2013 that would certify a nationwide class of persons who received a voicemail message similar to the one at issue here.

Under the settlement, the class representatives would each receive $1,000 and the class counsel would be paid $67,500. ARS would also pay the maximum award permitted against it in a class action – one percent of its net worth, being $35,000. But because it would be impossible to divide the $35,000 among four million class members, the settlement called for the money to go to a San Diego veterans’ charity.

Instead of monetary relief, the class members were to receive an injunction against ARS. The injunction required ARS to use the same revised voicemail script it adopted in 2011 when leaving a voicemail message to collect a debt from a class member.

Class members would give up their right to sue ARS in a class action, but could sue ARS individually. The class would be certified under Federal Rule of Civil Procedure 23(b)(2), which provides for injunctive relief.

An Objector Appears

Trouble began to surface for the Koby settlement when Bernadette Helmuth entered the picture. While the Koby case was moving along in the California federal court, Helmuth was suing ARS in her own FDCPA class action in Florida on the same voicemail message that got ARS into hot water in California.

But Helmuth sought different relief for her class than that proposed by Koby in the California settlement. Instead of a nationwide class, Helmuth proposed a class of only Florida residents and even whittled down that number to a few hundred class members by including only those Florida residents who received the ARS voicemail about a debt owed to a particular creditor.

The problem for Helmuth was that the settlement proposed in the Koby case, if approved by the California federal magistrate, would bar her from moving forward with her Florida federal class action.

Helmuth filed an objection to the Koby settlement, but the objection was overruled. Helmuth appealed to the Ninth Circuit.

A ‘Worthless’ Settlement

The Ninth Circuit ultimately found the settlement “is worthless to most members of the class because it merely dictates the disclosures ARS must make in future voicemail messages for a period of two years.” Class members would waive their right to seek damages in future class actions, and this right “has some value.” In exchange, the absent class members received nothing of value.

Requiring ARS to leave a modified voicemail message would certainly benefit persons who had not yet been contacted by ARS using the faulty message, but the Court did not believe there was any appreciable benefit to the class members. Class members had already received the violating message and the Court found nothing to indicate they will receive another collection voicemail from ARS. This “obvious mismatch between the injunctive relief provided and the definition of the proposed class” doomed the settlement, wrote the Court.

Adding additional fuel to its reasoning, the Court criticized the $35,000 cy pres award to the San Diego veterans’ charity as providing no benefit to absent class members because it lacked any connection to the class or the issues. No evidence was presented that the class members were largely located in San Diego or were veterans. Nor did the parties offer any proof that the charity engaged in work designed to protect persons from unfair debt collection practices. Not even “this aspect of the settlement provided any material benefit to the class members.”

The Rule 23(b)(2) Issue

Federal Rule of Civil Procedure 23 provides different paths to class certification. Many FDCPA class actions are certified under Rule 23(b)(3), which requires notice to each absent class member (that is, a person not expressly identified in the pleadings as a class representative) of the proposed settlement and the right to opt out of the settlement. Here, the parties chose Rule 23(b)(2), which does not require notice to absent class members and does not afford them the ability to opt out. Although raised by Helmuth, the Ninth Circuit decided not to reach the issue because the settlement failed for the other reasons.

But there is a significant body of decisional law that would agree with Helmuth. The FDCPA does not provide for injunctive relief in civil actions and courts have routinely rejected class actions proposing certification on this basis.

Tying the Class Settlement Award to the Release

Last year, the Second Circuit Court of Appeals rejected an FDCPA settlement along similar lines. It found that absent class members were receiving no value for giving up their rights to sue a debt collector. The proposed settlement in Gallego v. Northland Group Inc. would have paid 16.5 cents to each class member in exchange for a full release of “all claims” against the debt collector.

Koby and Gallego do not prohibit releases from absent class members, but demonstrate courts will scrutinize class settlements for consideration that adequately supports the claims being released. Limiting the release to certain types of claims, adjusting the cy pres amount and recipient or ending collection efforts against the absent class members may have saved the settlements in both cases.