Ninth Circuit Nixes "100% Natural" Wesson Oil Class Action Settlement; Finds Collusion On Attorney Fees

Jenna Mowat, Summer Law Clerk

Earlier this month, the Ninth Circuit reversed approval of a consumer class settlement and clarified the standard for scrutinizing settlement agreements, including fee arrangements and the valuation of injunctions. The opinion in Briseño v. Henderson, No. 19-56297, 2021 WL 2197968 (9th Cir. June 1, 2021) summed up the case as “How to Lose a Class Action Settlement in 10 Ways” and is packed with snarky language and references to The Bachelor, Star Wars, and the musical Hamilton.

Plaintiffs sought class certification, alleging that they overpaid for Wesson Oil based on its “100% Natural” label when, in fact, the cooking oil contained ingredients made from genetically modified organisms (GMOs). ConAgra, then-owner of Wesson Oil, agreed to a settlement in which, in addition to paying damages, it would refrain from labeling its oil as “100% Natural.” We previously posted about the Ninth Circuit's class certification decision in Briseno v. ConAgra Foods, Inc., 844 F.3d 1121, 1124 (9th Cir. 2017).

One class member opted out and objected to the settlement, arguing that the attorneys hoarded most of the class’s actual recovery. The court agreed, finding that class counsel would receive “seven times more money than the class members.” The parties represented that their settlement theoretically could be worth over $100 million, but in the end, “ConAgra shelled out less than $8 million, with a mere $1 million of that going to the class.” Of the 15 million class members, “barely more than one-half of one percent of them submitted a claim.” 

The court held that the district court erred by failing to apply the newly revised Rule 23(e)(2), which requires courts to scrutinize attorneys’ fee arrangements for potentially unfair collusion in the distribution of funds between the class and their counsel. The revised Rule 23(e)(2) sets forth specific factors to consider in determining whether a settlement is “fair, reasonable, and adequate.” The revised text provides that a court must balance the “proposed award of attorney’s fees” with the “relief provided for the class” in determining whether the settlement is “adequate” for class members. 

Wesson Oil used its “100% Natural” label when, in fact, the cooking oil contained ingredients made from genetically modified organisms (GMOs).

The district court applied factors set forth in Staton v. Boeing Co., 327 F.3d 938 (9th Cir. 2003), but it “stopped short of conducting a Rule 23(e) inquiry,” merely holding that “there is substantial overlap” between the two. In assessing whether a settlement is “fair, reasonable, and adequate” the Stanton factors consider the strength of the plaintiffs’ case; the risk, expense complexity, and likely duration of further litigation; the risk of maintaining class action status throughout the trial; the amount offered in settlement; the extent of discovery completed and the stage of proceedings; the experience and views of counsel; the presence of a governmental participant; and the reaction of the class members to the proposed settlement. Notably, unlike Rule 23(e)(2), the Stanton factors do not explicitly mandate the consideration of the terms of attorneys’ fees. The revised Rule 23(e)(2) requires that courts go beyond precedent and examine whether the attorneys’ fees arrangement “shortchanges” the class.

In a more recent case, In re Bluetooth Headset Prod. Liab. Litig., the Ninth Circuit held that in reviewing settlements prior to class certification, district courts must look for “subtle signs” to smoke out potential collusion. Three signs identified by the Ninth Circuit are: (1) “when counsel receive[s] a disproportionate distribution of the settlement;” (2) “when the parties negotiate a ‘clear sailing arrangement,’ under which the defendant agrees not to challenge an agreed-upon attorney’s fee;” and (3) when the agreement includes a “kicker” or “reverter” clause that returns unawarded fees to the defendant, rather than the class. 654 F.3d 935, 941 (9th Cir. 2011). Until now, Bluetooth had left an open question: whether the heightened inquiry used in that case applied to post-class certification settlements. The Ninth Circuit here held that it does, because there is nothing in the revised Rule 23(e)’s text to indicate that the requirement only applies to pre-certification settlements. The court noted that Congress required courts to scrutinize attorney’s fees, even if the settlement occurred after certification, for good reason: “[t]he specter of collusion still casts a long shadow over post certification settlements when they involve divvying up funds between class members and class counsel.” Thus, the court held that courts must apply Bluetooth’s heightened scrutiny to post-certification settlements when assessing whether the division of funds between class members and their counsel is fair and “adequate.”

“We can perhaps sum up this case as “How to Lose a Class Action Settlement in 10 Ways.” - Judge K.K. Lee

The court held that the class settlement—one it characterized as “reek[ing] of collusion at the expense of class members”—featured three “red flags” identified in Bluetooth. First, Plaintiffs’ counsel received a disproportionate share of the settlement—almost $7 million—while the class received less than $1 million. Further, the settlement provided for no direct notice to class members, reducing the redemption rate. Second, the parties agreed to a “clear sailing arrangement” in which ConAgra agreed not to challenge the agreed-upon fees for class counsel. This created the possibility that Defendant agreed to pay class counsel excessive fees in exchange for counsel accepting a lower amount for class members. Third, the agreement included a “kicker” or “reverter” clause in which ConAgra, not the class members, would receive a reversion of excess fees if the court reduced the agreed-upon attorney’s fees. 

Because the parties “ran afoul” of all three Bluetooth factors, the court considered the question of whether the parties colluded to prevent any direct challenge to excessive fees. When parties agree to a “kicker,” a Rule 23(h) challenge cannot increase class recovery because the excessive fees go back to defendants. The court recommended that the district court reexamine the settlement to ensure that parties had not colluded at class members’ expense. 

Turning to the issue of the value of the injunction, the panel held that the district court erred by placing even “some value” on the injunction because it was “worthless.” The court reasoned that ConAgra agreed to refrain from using the “100% Natural” label but lacked the power to do so because it had sold the product. The new owner of Wesson Oil was not bound by the injunction and could resume using the “100% Natural” label at any time, thereby depriving the class of any value afforded by the injunction. The court likened ConAgra’s illusory injunction to “George Lucas promising no more mediocre and schlocky Star Wars sequels shortly after selling the franchise to Disney.” 

While the opinion took aim at law students with poor understanding of the Erie doctrine who become lawyers with poor understanding of the Erie doctrine, it ultimately concluded that Erie’s effect on fee-shifting law, even if it had one, was not implicated in this appeal. Rather, the case related to Congress’s rule that all federal district courts must withhold approval of any class settlement if “fair, reasonable, and adequate” findings are absent.

The opinion concluded with an ode to Hamilton: An American Musical, suggesting that collusion has no place in class action settlements. Thus, the court reversed the district court’s approval of the settlement and remanded the case for further proceedings consistent with this opinion.