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

May 1, 2007

THE EDUCATION STATION DAY CARE CENTER INC., PLAINTIFF-RESPONDENT,
v.
YELLOW BOOK USA, INC., DEFENDANT-RESPONDENT.
THE EDUCATION STATION DAY CARE CENTER INC., PLAINTIFF-APPELLANT,
v.
YELLOW BOOK USA, INC., DEFENDANT-RESPONDENT.



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

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

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 ...


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