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Education Station Day Care Center Inc. v. Yellow Book USA


May 1, 2007


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, L-13657-04.

Per curiam.


Argued: March 27, 2007

Before Judges Coburn, Axelrad and R.B. Coleman.

These consolidated appeals arise out of a court approved settlement of a certified class action for false advertising against defendant, Yellow Book USA, Inc. One group of objectors challenges the fairness of the settlement and the other group of objectors challenges the sufficiency of notice. Plaintiff, Education Station Day Care Centers, Inc. (Education Station), challenges the methodology and quantum of the counsel fee approved by the court. We affirm as to the objectors' appeals. As to plaintiff's appeal, we affirm in part and exercise original jurisdiction and modify in part.

In November 2004, Education Station, an advertiser in Yellow Page directories, filed this class action litigation, alleging that Yellow Book made false representations in its advertisements and sales presentations concerning the usage of its telephone directories during the period from May 2002 through July 2004. Plaintiff alleged that as a result of Yellow Book's claims of superior usage, class members paid more than they should have for their Yellow Book advertisements, and sought damages under the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -106, and similar statutes in all other states nationwide, and also pled companion common law claims. At the time plaintiff commenced this lawsuit, several other putative class actions were pending against Yellow Book in other jurisdictions.

In January and February 2005, the parties participated in mediated settlement discussions, with the Hon. Geoffrey Gaulkin, P.J.A.D. (Ret.) presiding, and after four days a settlement was reached. The proposed settlement provided relief for a class of 529,087 Yellow Book customers, consisting of 391,525 current customers and 137,562 former customers. Current customers were eligible for a fully transferable credit voucher for future advertising purchases, with a fourteen-month expiration period, valued between $48 to $720, depending on the amount of advertising purchased by the customer during the class period. Former customers were eligible for the same credit vouchers as current customers toward future Yellow Book advertising, or had the option of receiving a lower cash payment of between $22 to $265, depending on the amount of advertising purchased by the customer during the class period. Yellow Book also agreed to pay all administrative costs, including costs associated with notice to the settlement class. The parties estimated the total potential value of the proposed settlement, excluding administrative costs and counsel fees and costs at between $65,709,220 and $71,900,000, depending on whether credit or cash options were chosen.

Following an agreement on the substantive terms of the settlement, the parties, with the assistance of the mediator, negotiated attorneys' fees to be paid to plaintiff's counsel. The agreement was that Yellow Book would pay attorneys' fees separate and apart from any relief provided to the class so that the fees would not decrease the value of the settlement to the class members. On April 28, 2005, the parties executed a Settlement Agreement pending the court's approval as required by Rule 4:32-2(e). As part of the Settlement Agreement, Representative Plaintiffs' Counsel agreed to "apply to the Court for an award of attorneys' fees and litigation expenses not to exceed $5,000,000" and Yellow Book "agreed to pay, subject to Court approval, the sum of $5,000,000 to Representative Plaintiffs' Counsel for their attorneys' fees and expenses in connection with the Action and the Litigation." Paragraph IX(A).

On May l3, 2005, the trial court entered a preliminary approval order incorporating the terms of the agreement and scheduling the final approval hearing. The court specifically found the requirements under Rule 4:32 were provisionally met and the manner of notice described in the agreement was valid and sufficient. As of the fairness hearing on August 26, 2005, in excess of ninety-six percent of the class members had been contacted. According to plaintiff's counsel, with four weeks remaining in the claims period, about 81,000 people (15% of the class) had filed claims. Thirteen members filed objections. Counsel for Yellow Book represented that 65,000 current customers had made claims for their advertising credits totaling over $11.2 million. Counsel recounted that the parties "painstakingly negotiated" the settlement over the four days of mediation, which resulted in "major compromises on both sides."

Plaintiff's counsel touted the benefit that each class member received from the settlement without the risk and delay of trial, explaining that its economist predicted that if plaintiffs were successful at trial, their maximum possible damages would be that class members paid eleven percent more for their advertising as a result of Yellow Book's misleading campaign. The settlement agreement, however, provided each class member with a range of fifty to seventy to eighty percent of that amount, which was a tremendous result considering the average nine to twelve percent recovery of maximum possible damages in a typical class action settlement. Plaintiff's counsel also explained the rationale for negotiating the cash option solely for former customers was that such customers could have gone out of business, moved out of state or, for whatever reason, did not want to advertise in Yellow Book and would have no need for a credit voucher. Credit vouchers, however, were a viable option for current customers in view of Yellow Book's seventy percent customer retention rate.

Appellant John Pentz and counsel for an objector who did not appeal presented their views. Pentz primarily argued that the class should have only included the class members who relied upon the misleading advertising campaign. He also argued the court should not apply a multiplier in determining attorneys' fees and the excess funds between the court-awarded fee and the agreed-upon maximum should be distributed to the class. Furthermore, Pentz suggested that, due to the inherent linkage between the parties' settlement for the class award and the attorneys' fees, the court should require the parties in a class action to resettle the class award after settling the amount of attorneys' fees. The court reviewed submissions by objectors who were unable to appear, including appellants Ford and Young.

The court certified the class under Rule 4:32-1(a) and (b), and approved the terms of the settlement as "fair and reasonable [and] adequate under the totality of the circumstances" pursuant to Rule 4:32-2. The court recited the factors it took into consideration, including: (1) the inclusiveness of the meaningful class members within the time period; (2) the risk of trial; (3) the substantial recovery provided by the settlement considering the maximum possible recovery provided by the economist; (4) the flexible redemption period for class members to exercise their vouchers once received; (5) the ability for class members to opt out; and (6) the increased value of the voucher as opposed to a current cash payment, particularly in view of the likelihood the current customers would exercise that voucher for future advertising.

On October 24, 2005, after reviewing the parties' arguments and itemized fees submitted by class counsel, the court issued a written decision regarding plaintiff's attorneys' fees and expenses. The court recited the history of the case and the terms of the parties' proposed settlement and noted the representation of Yellow Book's counsel at the fairness hearing that "the attorneys' fees and expenses were negotiated not with a finite amount, but with a cap or maximum of $5,000,000 to be paid by Yellow Book," the provision in the proposed Settlement Order and Judgment for the maximum amount of attorneys' fees, and the objectors' position that such award was not justified. The court, citing Varacallo v. Mass. Mut. Life Ins. Co., 226 F.R.D. 207, 248 (D.N.J. 2005), explained that its obligation as part of a fairness determination in a class action settlement was to thoroughly analyze a fee application and assess a reasonable fee and expenses within its discretion in accordance with the appropriate methodology. It further recited the two primary methods for calculating attorneys' fees, the lodestar method, noting this method is more typically applied in statutory fee-shifting cases, and the percentage of recovery method. The court concluded that the lodestar amount, i.e., the legal fees as billed for the six law firms totaling $1,060,266, was an appropriate attorneys' fee award, plus costs and disbursements of $33,909.87, as opposed to the $5 million requested. On October 24, 2005, the court entered a Settlement Order and Judgment confirming the Settlement Agreement and approving payment of $1,094,175.87 to Representative Plaintiffs' Counsel as attorneys' fees and expenses to be paid by Yellow Book as provided in the Settlement Agreement. These appeals ensued.

In appeal No. A-1834-05T1, objectors, Hanzen Stierberger Downard Melenbrink & Schroeder, Tri-County Abstract Inc., Connie Pentz Realty Co., and John J. Pentz, Jr. ("Pentz" objectors) assert the following arguments: (1) the court abused its discretion in approving the settlement because it discriminates unfairly between similarly situated class members; (2) attorneys' fees may not exceed one-and-one half times class counsel's reasonable lodestar; and (3) the difference between the $5 million fund set aside for payment of attorneys' fees and the amount actually awarded should be treated as class funds.

In appeal No. A-1653-05T1, objectors Randal Ford and Lillian Young argue that since individuals who signed Yellow Book contracts on behalf of companies that were plaintiffs in the class action were not included as class members and did not receive individual notice of the proposed settlement, the judgment approving the settlement should be reversed.

In appeal No. A-1693-05T1, plaintiff Education Station asserts the following arguments: (1) the trial court should only have reviewed the record and class counsel's fee request for taint or conflict, and if there was none, approved the $5 million fee; (2) the Appellate Division should exercise original jurisdiction and set the fee; and (3) even if analyzed under the majority view in awarding common fund class action counsel fees, the $5 million fee was fair and reasonable.

We first address the objectors' challenges to the overall settlement and then address the counsel fee award. The Pentz objectors argue that the settlement agreement discriminates between similarly situated class members, in that former customers may elect a cash payment and current customers can only use a credit voucher for future advertising. They contend such distinction arbitrarily prefers one group of plaintiffs over another, which is inimical to the very principle of class advocacy. They suggest we disapprove the settlement as structured by the parties, citing Parker v. Time Warner Entm't Co., L.P., 239 F.R.D. 318 (E.D.N.Y. 2007), as persuasive authority for the proposition that treating current and former customers is de facto unfair differential treatment of similarly situated class members. The Pentz objectors propose that the settlement should be amended to remove the disparity by providing the current customers with the cash option, and that such amendment would have little effect on Yellow Book's ultimate payout because the current customers who are satisfied with Yellow Book would choose the higher-valued vouchers.

We are not persuaded by these arguments. A trial court's task in reviewing a class action settlement is to determine whether it is fair, reasonable, and adequate to the class as a whole. R. 4:32-2(e)(1)(A); Chattin v. Cape May Greene, Inc., 216 N.J. Super. 618, 627 (App. Div. l987). The trial court's role is to approve or reject the proposed settlement in its entirety, not to revise or amend particular provisions. See City of Paterson v. Paterson Gen. Hospital, 104 N.J. Super. 472 (App. Div.), aff'd, 53 N.J. 421 (1969). "[T]he court's function [is] to determine the reasonableness of the agreement, not to renegotiate the terms of the settlement." Tabaac v. Atlantic City, 174 N.J. Super. 519, 524 (Law Div. l980). The issue is the reasonableness of the settlement as written, "not whether one could conceive of a better settlement." In re Cendant Sec. Litig., l09 F. Supp. 2d. 235, 255 (D.N.J. 2000).

On appeal, the trial court's decision to approve a proposed class settlement is reviewed for abuse of discretion. Chattin, 216 N.J. Super. at 628; In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 527 (3d Cir. 2004)(standard of review is abuse of discretion, and approval of class settlement must be affirmed absent clearly erroneous finding of fact or misinterpretation or misapplication of law). Deference to the trial court's approval of a complex class action settlement is particularly appropriate given courts' endorsement of the policy of encouraging the settlement of litigation. See 4 Alba Conte & Herbert Newberg, Newberg on Class Actions § 11.41 (4th ed. 2002); In re General Motors Corp. Pick-Up Truck Prod. Liab. Litig., 55 F.3d 768, 784 (3d Cir. l995) ("[t]he law favors settlement, particularly in class action and other complex cases where substantial judicial resources can be conserved by avoiding formal litigation); Cotton v. Hinton, 559 F.2d 1326, 1331 (5th Cir. l977) ("[p]articularly in class action suits, there is an overriding public interest in favor of settlement").

The Pentz objectors point to no abuse of discretion that would justify overturning the settlement. They merely challenge a single feature, contending that current customers like themselves are provided with less valuable benefits because they are not offered the cash option available to former customers and, thus, that portion of the settlement is unfair and should be reformed. Their reliance on Parker is misplaced. Parker involved a class action suit regarding Time Warner's disclosure and sale of its cable subscribers' personal identification information in violation of state and federal privacy laws. The proposed settlement provided benefits to class members who could be identified from a sales database. Under the settlement, current subscribers ("Category I") received credit for free movies or other service and former subscribers who were still living in Time Warner's service area ("Category II") received a credit for a month of free service with no installation fee. Parker, 239 F.R.D. at 326. Employing the "range of reasonableness standard," the court found these in-kind, non-cash credits to be substantially fair and adequate means of compensation for the class claims at issue. The court, however, declined to approve the settlement agreement for two other reasons, one being the disparate and unfair treatment of "Category III" members, former subscribers who no longer lived in the cable company's service area, who were only given the right, within 120 days, to transfer either benefit available to a current or former subscriber to a person living in the area serviced by Time Warner.*fn1 The court found that merely providing this group of customers, which represented a significant number of members, with a credit that they did not even have the option of using themselves, was not a sufficient benefit of the settlement. Of significant concern was that the parties failed to offer any difference between the three categories of claimants that would justify providing the former subscribers who had moved out of the area with only the "mere right to transfer their benefit to someone else." Id. at 340.

Entirely consistent with the case law, and recognized by the court in Parker, a class settlement can offer different benefits to differently situated class members, so long as it offers fair and adequate compensation to the class as a whole. There was more than adequate explanation given in the present case as to why the settlement provided two separate awards to the class, and the parties explained the rationale in detail for compromising different award options due to distinguishing needs of current and former customers, making the cash option available only to the latter. Moreover, the Pentz objectors' assertion that providing settlement credits to current customers is inadequate because they are no more likely to purchase future advertising in Yellow Book than former customers is belied by the undisputed fact in the record of Yellow Book's seventy-percent customer retention rate. As such, the settlement credit may even be better than a cash rebate for this vast majority of current customers who have an ongoing, recurring business relationship with Yellow Book. The trial court was satisfied there was ample evidence in the record of distributional fairness, equal treatment among class members, and an overall fair, reasonable and adequate settlement to the class, and we discern no basis to second-guess that decision.

The Ford and Young objectors argue that individuals such as themselves who signed Yellow Book contracts on behalf of companies that were plaintiffs in the class action should have been included as class members and given notice because they are co-obligors on the contract, thereby incurring joint liability. This argument is without sufficient merit to warrant discussion. R. 2:11-3(e)(1)(E). These individuals signed contracts as authorized representatives of companies, not on their own behalf. They arranged for the payment of advertising to Yellow Book from their respective companies and did not draw from their own accounts in making the payment. They are not class members and, as such, were never entitled to notice of the proposed settlement.

We turn now to the counsel fee award. Plaintiff contends the parties agreed that Yellow Book would pay $5 million in attorneys' fees to plaintiff's counsel separate from the relief to the class members, and the trial court's sole function was to ascertain that the counsel fee settlement was reached as a result of arms-length negotiations, with the assistance of a highly-respected mediator, following an agreement on the substantive terms of the class settlement, and was free of taint or collusion. According to plaintiff, consistent with our courts' deference to parties' agreements absent taint or conflict, if the court was satisfied there were no such impediments, it should have approved the $5 million fee.

We have no doubt as to the integrity of the mediation process but disagree that the court's scope of review should have been as narrow as suggested by plaintiff. "[A] thorough judicial review of fee applications is required in all class action settlements." In re General Motors Corp., supra, 55 F.3d at 819. It is apparent from the comments of Yellow Book's counsel at the fairness hearing and the language of the proposed Settlement Agreement that attorneys' fees and expenses were negotiated with the knowledge that Yellow Book could be required to pay up to $5 million, depending upon what the court determined was a reasonable fee under acceptable standards for fee approvals. For example, in addition to the aforementioned provision in the Settlement Agreement referencing the "not to exceed $5,000,000" language and "court approval" of the amount, the agreement contains several provisions acknowledging the court will determine whether the attorneys' fees and expenses requested by Representative Plaintiffs' counsel are "reasonable." The Agreement also contemplates the court may award less than the $5 million requested, providing in ¶ IX(B) that installments of "$2,500,000 will be paid, or in the event the Court awards some lesser amount, half of that less amount will be paid . . . "(emphasis added) and in ¶ X(F) that "no order of the Court awarding Representative Plaintiffs' Counsel attorneys' fees and expense in an amount less than the amount agreed to in ¶ IX(A) . . . shall constitute grounds for cancellation or termination of the Settlement Agreement."

The court explained that of the two primary methods for calculating attorneys' fees, the percentage of recovery method and the lodestar method, the lodestar method is more typically applied in statutory fee-shifting cases, and that the alternate method may be used to cross-check the reasonableness of the fee. The court then analyzed the itemized breakdown of attorneys' fees, totaling $1,060,266, from each of the six law firms comprising Plaintiffs' Representative counsel whose hourly rates descended from the highest at $550 per hour for retired Supreme Court Justice Gary S. Stein. The court found the hourly rates were "current, prevailing hourly market rates considering [plaintiff's] skill and proficiency" exhibited in its submissions and oral arguments and the rates, including former Justice Stein's, were "not disproportionate considering the vastness, preparedness and expertise necessary for this type of Settlement." The court elaborated:

The litigation itself required considerable resources in order to argue and prepare the issues involved for early resolution. It is unquestioned that this matter required preparation for litigation as well as for Settlement. Without that preparation, defense counsel would not have considered such a Settlement offer. Further, the Court observed the skill of competent counsel during the Fairness Hearing and also recognizes that the papers submitted are commensurate with the skill represented.

The court further noted that the "miniscule amount of objections filed [thirteen] compared to the amount of Class members [529,000] is an additional, persuasive basis to determine that the fees as billed are fair and reasonable." The court concluded that the amount of actual time billed was "fundamentally unchallenged by any meritorious objection" and there was nothing before the court that "substantiate[d] any reduction of time billed on a belief of fabrication, exaggeration or claim of unnecessary hours billed." Thus, citing Rendine v. Pantzer, 141 N.J. 292, 337 (1995), the court found the hourly rates and the amount of hours billed were "realistic, fair, reasonable and unchallenged by any meritorious defense." The court then approved a counsel fee award in the amount of the lodestar plus actual costs, totaling $1,094,175.87, stating it was a fair and reasonable fee for the class action settlement.

Contrary to plaintiff's argument on appeal, the Rendine lodestar analysis was the appropriate method for calculating counsel fees in this fee-shifting CFA action. See In re General Motors Corp., supra, 55 F.3d at 821 ("Courts generally regard the lodestar method, which uses the number of hours reasonably expended as its starting point, as the appropriate method in statutory fee shifting cases."). Under specific statutory enactments, courts are authorized to award a "reasonable" attorneys' fee to the prevailing party. R. 4:42-9(a)(8); Rendine, supra, 141 N.J. at 322. See also R.M. v. Supreme Court of New Jersey, ___ N.J. ___, ___ (2007) (slip op. at 9). The CFA expressly provides that a prevailing plaintiff is entitled to reasonable attorneys' fees, filing fees, and costs. N.J.S.A. 56:8-19; Wanetick v. Gateway Mitsubishi, 163 N.J. 484, 490 (2000). The first step in calculating a fee award under a fee-shifting statute is to determine the "lodestar," which is arrived at by multiplying the number of hours reasonably expended by a reasonable hourly rate. Rendine, supra, l4l N.J. at 334-35. The determination of the lodestar amount is the "most significant element in the award of a reasonable fee" because it requires the trial court to "evaluate carefully and critically the aggregate hours and specific hourly rates advanced by counsel for the prevailing party to support the fee application." Id. at 335. Here, the court found both the hours expended and the hourly rates reasonable. No challenges were made on appeal to those findings.

The Court also instructed in Rendine, that after determining the appropriate lodestar amount, the trial court should "consider whether to increase that fee to reflect the risk of nonpayment in all cases in which the attorney's compensation entirely or substantially is contingent on a successful outcome." Id. at 337. As the Court recognized, "[b]oth as a matter of economic reality and simple fairness . . . a counsel fee awarded under a fee-shifting statute cannot be 'reasonable' unless the lodestar, calculated as if the attorney's compensation were guaranteed irrespective of result, is adjusted to reflect the actual risk that the attorney will not receive payment if the suit does not succeed." Id. at 338. The Court also held that an additional enhancement may be justified in certain circumstances based on the likelihood of success, "[w]hen the result achieved in such a case is significant and of broad public interest . . . ." Id. at 341 (quoting Pennsylvania v. Delaware Citizens' Council for Clean Air, 483 U.S. 711, 751, 107 S.Ct. 3078, 97 L.Ed. 2d 585 (1987)). Ordinarily, contingency enhancements in fee-shifting cases should range between five and fifty-percent of the lodestar fee; "with the enhancement in typical contingency cases ranging between twenty and thirty-five percent of the lodestar." Id. at 343. The Court instructed, however, that such enhancements should never exceed one-hundred percent of the lodestar, and enhancements of that magnitude will be appropriate only in a rare and exceptional case. Ibid.

Although the court applied the Rendine methodology in calculating plaintiff's counsel fee, the court ceased its analysis after calculating the lodestar amount, did not award any enhancement, and provided no explanation as to why it did not give what Rendine describes as the ordinary enhancement in a fee-shifting case. We are satisfied the record is sufficiently complete to permit us to perform the second step of the Rendine analysis in the exercise of our original jurisdiction. R. 2:10-5. We affirm the lodestar counsel fee determination but conclude that plaintiff's counsel is entitled to an enhancement to the lodestar billed fees. This class action was taken on a contingent fee basis, with substantial risks to plaintiff's counsel. Moreover, based on plaintiff's economist's assessment of maximum possible damages recoverable if successful at trial, plaintiff's counsel achieved an excellent result for the class members without the risk, delay and additional expenses of a trial. Plaintiff's counsel also deserves an enhancement for resolving the matter expeditiously through mediation rather than increasing the lodestar through protracted litigation, and for not seeking a fee against the class, which could have been based on a percentage of recovery. We therefore conclude that plaintiff's counsel is entitled to an enhancement of thirty-five percent of the lodestar ($371,093) to be added to the counsel fee award entered by the trial court.

We reject the Pentz objectors' argument that the difference between the requested $5 million and the approved counsel fee should be added to the class award. This argument ignores the purpose of negotiating attorneys' fees only after the terms of the substantive settlement are reached, i.e., avoiding the subject of fees from improperly influencing the settlement. Indeed, the class settlement amount and the attorneys' fees are two separate and distinct funds. The settlement was negotiated prior to the fee agreement, and it is not the court's role to renegotiate the terms of the settlement. See Tabaac, supra, 174 N.J. Super. at 524.

Appeal Nos. A-1834-05T1 and A-1653-05T1 are affirmed. We remand Appeal No. A-1693-05T1 for entry of an appropriate order consistent with this opinion.

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