Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.D. Cal: Approval denied to eBay deceptive practices settlement, (Aug 29, 2013)

By Tobias J. Gillett, J.D., LL.M.

The federal district court in San Francisco has declined to approve a proposed settlement of California Unfair Competition Law (UCL) and False Advertising Law (FAL) claims concerning eBay’s alleged misrepresentation of its “Featured Plus!” listings (Custom LED, LLC v. eBay, Inc., August 27, 2013, Tigar, J.).

On January 23, 2012, Custom LED, LLC filed suit against eBay, alleging that a statement in eBay’s fee schedule for its Featured Plus! Listings: “Featured Plus!: Your item appears in the Featured Items section at the top of the search results list page” constituted a false promise to display those listings at the top of any search list, when in fact those listings only appeared when (1) the search was conducted on eBay Motors, (2) the search was limited to eBay Motors listings, and (3) the search results were sorted by Best Match. Custom LED asserted claims for unfair competition in violation of the UCL; violations of the FAL; fraud and deceit; unjust enrichment; and declaratory judgment. The district court granted eBay’s motion to dismiss with prejudice as to Custom LED’s claims to fraud and deceit, unjust enrichment, and declaratory judgment, but denied it as to the UCL and FAL claims.

In later mediation, the parties reached a settlement, under which eBay agreed to pay $4,750,000 to settle the claims. $3,355,000 would be distributed to the class (the Net Settlement Fund); $7,500 would go to Custom LED as an “enhancement award”; 25 percent of the gross fund, plus costs and expenses, would go to attorneys’ fees; and approximately $300,000 would go to administration costs. One third of the Net Settlement Fund would be allocated to the time period from January 23, 2008, to September 28, 2009, and two thirds would be allocated to the period from September 29, 2009, to February 4, 2013. The counsel for Custom LED estimated that the “average net recovery” would be $4.71 for the first period and $46 for the second period, but did not explain how the net recovery was calculated. The parties also did not identify the total fees paid in each period or the estimated number of individuals who would fit the class definition.

By default, class members with active eBay accounts would receive their funds as account credits, with the credits reduced by any outstanding amounts due to eBay, although they could elect to receive a check by providing timely notice to the claims administrator. Members with closed accounts would receive checks from eBay. Any remaining funds in the Net Settlement Fund would go to the National Cyber-Forensics and Training Alliance and the National Consumer Law Center. Any class members that did not opt out would release all “known or unknown” claims “arising out of or relating in any way to Featured Plus!”

Class certification. The court granted certification of the class for settlement purposes. The settlement satisfied Federal Rule of Civil Procedure 23(a)’s numerosity requirement because the number of account holders in the class “appear[ed] to be very large, such that joinder of all class members would be impracticable.” The class met the commonality requirement because the claims arose out of common questions concerning “various web pages that describe the User Agreement, the Featured Plus! fees, the functionality of Featured Plus!, and the operation of the search feature, among other things.” The typicality requirement was satisfied because the “class members were injured by the same course of conduct, namely eBay’s search algorithm which uniformly failed to display the Featured Plus! listings as advertised.” Finally, representation was adequate because nothing in the record indicated that Custom LED or its counsel had any conflicts of interest in the case or that its interests were insufficient to ensure vigorous representation.

In addition, the class satisfied Rule 23(b)(3) because the “class action would achieve the resolution of the putative class members’ claims at a lower cost and would reduce the likelihood of inconsistent determinations.” Moreover, common questions would predominate “because the operation of Featured Plus! was the same with respect to each class member.”

Fairness of the settlement. However, the court denied the parties’ motion for approval of the settlement. The court did find that the settlement was likely not collusive because the parties reached it after private mediation. Moreover, the parties were sufficiently informed about Custom LED’s claims because they had the benefit of developing the facts and issues prior to the settlement and had taken into account the time and costs associated with litigation, as well as “the difficulties and risks inherent in the trial.”

However, the court found the scope of the release was overbroad in that it released any claim “arising out of or relating in any way to Featured Plus!,” without regard to whether those claims were based on the allegations in the complaint.

Moreover, court found the proposed notice to be deficient. The notice stated that class members would “release all claims they have against eBay related to the allegations in the lawsuit,” but the scope of the actual release was much broader, as previously discussed. It also did not inform class members that only those receiving payments by account credit would have their awards be subject to reductions based on any amounts owed to eBay. In addition, the notice did not provide a range of potential recover class members could receive. Finally, the notice had to contain sufficient information concerning how to receive payment, opt out of the settlement, or object to the settlement. A link to a notice website was insufficient.

In addition, the court noted that the parties did not explain how distribution of the funds through account credits was fair to the class, or consistent with their description of the settlement as a “cash settlement.” Moreover, they did not explain why it would be fair to reduce the credits by amounts owed to eBay that were unrelated to the Featured Plus! fees.

The court also could not find that the parties’ cy pres award to the National Cyber-Forensics and Training Alliance and the National Consumer Law Center complied with the Ninth Circuit’s standards for such awards, because the parties did not establish that those organizations had “a nexus to the putative class members and their claims.”

Moreover, the court was not convinced that the proposed method for distributing funds to the class members would not unfairly benefit the members whose claims arose in the second time period rather than the first time period. The claims and eBay’s defenses for each time period “appear[ed] to be substantially similar,” and the parties provided only a “bare summary” of the claims and defenses, without an analysis of the relevant evidence sufficient “to justify bifurcating the distribution of the Net Settlement Fund such that claims in the second period [would] receive twice the payout as claims in the first period. “

Further, the court found that the parties had not “established that class members who receive checks would not receive special treatment vis-à-vis class members who receive account credits,” because credits were subject to deductions based on any amounts owed to eBay, while checks were not.

Finally, the court concluded that the parties had not provided any “information as to the class members’ potential range of recovery,” or “any data as to the number of claimants (as opposed to User IDs) in each period or the total amount of Featured Plus! fees paid in each period.” Therefore, the court could not “evaluate the adequacy and fairness of the proposed settlement.”

The case is No. 12-cv00350-JST.

Attorneys: Keith R. Verges (Figari & Davenport, LLP) for Custom LED, LLC. Benjamin F. Chapman (Cooley Godward Kronish LLP) for eBay, Inc.

Companies: eBay, Inc.; Custom LED, LLC

Cases: StateUnfairTradePractices CaliforniaNews