In Small v. Target Corp., No. 13-cv-01509 (D. Minn. Oct. 8, 2014), the District Court recently denied preliminary approval of a class action settlement due to concerns regarding the use of a “reverter” provision in the settlement agreement. In Small, the plaintiff filed a putative class action against Target for allegedly sending approximately 500 unsolicited faxes in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227.
The parties agreed to a settlement by which Target would create a settlement fund of approximately $180,000. Class members would receive $375 under the settlement, but only if the class member submitted a claim form (known as a “claims-made” settlement, in contrast to where settlement funds are automatically distributed to all known class members). Any money left over in the settlement fund from unclaimed funds would revert back to Target (commonly known as a “reverter provision” or “reversion clause”).
The plaintiff filed a motion for preliminary approval of the settlement agreement. At the hearing, the District Court expressed concern about the use of the reverter provision and the amount that would likely ultimately be given back to Target, particularly as settlement funds would be distributed only on a claims-made basis. (The District Court noted that claims-made settlements typically have a claims rate of less than 10%.) In response, the District Court permitted Target to submit supplemental briefing regarding the appropriateness of a reverter provision. However, the plaintiff then filed a response, agreeing with the Court’s concern and withdrawing the motion for preliminary approval of the settlement. The District Court stated that due to the plaintiff’s withdrawal, there was no longer a “live Motion upon which to rule.” Despite this, the Court proceeded to opine that even if the plaintiff had not withdrawn the motion, it would likely have denied preliminary approval of the settlement.
While stating that reverter provisions are not per se objectionable, the District Court noted that courts are generally “skeptical of reversion clauses” because they generally create ambiguity as to the true amount of the settlement that a defendant would pay. The Court held that the skepticism regarding reverter provisions was particularly heightened in claims-made settlements, because it could result in significant fees awarded to class counsel (which is generally a percentage of the settlement fund and not the amount actually paid), a low payout by the defendant, and provide limited benefits to class members. For example, while the proposed settlement fund in Small was $180,000, a 10% claims-made rate would mean that Target would only actually pay $18,000 to class members, with the remaining $162,000 would have reverted back to Target (minus class administration and attorneys’ fees). Yet, the settlement would have released the potential claims of all class members, regardless of whether they submitted a claim form.
Concluding that the means of notifying class members would run the risk of very few class member submitting claims (the proposed means of notice, ironically, was via fax), the Court denied the motion for preliminary approval of the settlement.
