Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—6th Cir.: Class action settlement against fitness facility properly approved despite unfairness claims, (May 16, 2016)

By Michael Menzhuber, J.D., LL.M.

The U.S. Court of Appeals in Cincinnati has affirmed a district court’s approval of a settlement agreement in a class action against a fitness facility, despite objections that the settlement agreement unfairly awarded attorneys’ fees and costs of $2.39 million and contained “clear sailing” and “kicker” clauses (Gascho v. Global Fitness Holdings, LLC, May 13, 2016, Stranch, J.)

Joshua Blackman and Robert J. Zik separately challenged the settlement agreement in a consumer class action against Global Fitness Holdings, LLC (GFH) over the sale of gym memberships and imposition of certain fees. The settlement agreement provided a potential benefit of $15.5 million if all of the approximately 606,000 class members filed claims. However, only 55,600 claims were made and the total class payment was $1,593.240. The settlement provided: (1) an award of attorneys’ fees and costs of $2.39 million; (2) that GFH would not oppose the application for attorneys’ fees and costs for that amount or less (“clear-sailing” clause); and (3) if the court awarded less than $2.39 million, that amount would constitute full satisfaction of GFH’s obligation for fees and costs (“kicker” clause).

In overruling the objections and approving the settlement, the district court found that: (1) despite the absence of detailed billing records, the proposed attorneys’ fees and costs were reasonable based on the application of a lodestar calculation and a percentage fee calculation; (2) the “clear sailing” clause was not an issue, in light of the reasonable value of the class settlement; (3) the “kicker” clause was no improper because the parties negotiated a reasonable attorney fee; and (4) the claims-made process was reasonable. The objectors appealed.

Attorney fees. The appellate court determined that the district court was clearly within its discretion to use the lodestar method but noted that it was a “close call” on whether the minimal billing information provided justified the lodestar award. However, the district court also employed the percentage-of-the-fund cross-check to determine the reasonableness of the award.

The district court calculated that the “benefit to the class”, for purposes of calculating the ratio for attorneys’ fees, as the maximum potential benefit. Blackman’s argument that the “benefit to class” was only the amount actually paid to the class. The appellate court found that, rather than adopting a categorical rule which required a calculation using the amount the class actually received, it was within the district court’s discretion to determine the value of the benefit.

The objectors’ argument that the settlement was unfair owing to its lack of individual damages calculation was rejected. It was reasonable for the district court to approve the settlement given the close approximation of the payout to the objectors’ actual damages and the costs involved in individual calculations.

“Clear sailing” and “kicker” clauses. The “clear sailing” and “kicker” clauses, although not unlawful per se, created a heightened duty of scrutiny. The appellate court noted, however, that concern in this case was not warranted because the district court found that relief to the class was “substantial” and that the class counsel’s fee was appropriate.

Dissent. In his dissent, Justice Eric Clay concluded that the district court abused its discretion in approving the settlement because it failed to adequately protect the interests of the class members and unduly enriched class counsel at the expense of their own clients. Specifically, he determined that: (1) counsel did not provide adequate billing records for purposes of the lodestar calculation; (2) the total class benefit, for purposes of the percentage-of-the-fund cross-check, should have been the benefit actually received rather than the midway point valuation plus administration costs and attorneys’ fees; and (3) the “clear sailing” and “kicker” clauses amplified the danger of collusion.

The case is No. 14-3761/3798.

Attorneys: Joshua T. Rose (Hummel Coan Miller Sage & Rose LLC) for Robert J. Zik. Thomas N. McCormick (Vorys, Sater, Seymour and Pease LLP) for Amber Gascho. Richard Gurbst (Squire Patton Boggs) and Virgil Brandon McGrath (Bingham Greenebaum Doll LLP) for Global Fitness Holdings, LLC.

Companies: Global Fitness Holdings, LLC

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