Posts belonging to Category Settlements

Ebook publishers continue to pay a steep price in settling actions alleging that prices were elevated well above what a truly competitive market would have determined. With ebook prices of as much as $12 or $15 – far above the marginal cost plus modest profit that standard economic theory predicts of competitive markets – three publishers have already agreed to substantial settlements: Hachette, $31.7 million; HarperCollins, $19.5 million, and Simon & Schuster, $17.7 million.

Now, Penguin has agreed to the largest such settlement, more than twice that of the Hachette settlement: $75 million to resolve claims brought by state attorneys general, after having earlier settled with the U.S. Department of Justice. Specifically, the settlement provides that Penguin will refund $75 million to consumers through credits to buy Penguin books through online retailers. Penguin’s parent company, Pearson PLC, has anticipated the settlement by way of a $40 million accounting charge, reflecting that the actual cost to Penguin is likely to be considerably less than the $75 million proffered.

In a trio of class action cases consolidated in Pennsylvania’s Eastern District in which the plaintiffs alleged that automatic credit card charges continued beyond the cancellation of a gym membership and that cancellation procedures were excessively onerous, the parties have agreed to terms whereby LA Fitness will provide the class members with combinations of a 45-day LA Fitness pass and a refund for the dues that were automatically charged after memberships were cancelled. See National Class Action Settlement and Release, Vaughn v. L.A. Fitness Int’l, LLC, No. 11-2644 (E.D. Penn. Mar. 13, 2013) (available here). This settlement is expected to influence other consumer class actions in which it is alleged that automatic credit card charges continued beyond the cancellation of a membership, and/or that cancellation procedures are unduly cumbersome.

Specifically excluded from the virtually nationwide settlement are California residents, likely because California has recently enacted among the strictest laws governing the cancellation of automatic monthly payments. Widely known as the “California Gym Cancellation Law,” the Health Studio Services Contract statute (Cal. Civil Code §§ 1812.80-1812.97) would likely have made approval of the Vaughn settlement vulnerable to choice of law doctrines. Also excluded are New Jersey residents, who are class members in a separate class action in which settlement has been reported to be imminent.

The Vaughn complaint, filed in Florida federal court, explained the swiftness with which new members could be signed up, and contrasted that with LA Fitness’ arduous and hard-to-find cancellation procedures: “[W]hile it takes minutes for LA Fitness to sign up a person for a monthly dues membership, it is virtually impossible for a person to cancel the membership and stop paying dues when they want to.” Complaint at ¶ 4, Vaughn v. L.A. Fitness Int’l, LLC, No. 11-0457 (M.D. Fla. Filed Mar. 4, 2011) (available here).

The crux of the allegations in Vaughn and the two other settled actions is that LA Fitness’ representation of a “monthly” contract was deceptive, because as a practical matter new members were obligated to pay dues for a minimum of three months, not merely one month – if they could even effectuate the labyrinthine cancellation procedures. Complaint at ¶¶ 5-7; 19-27. The cancellation procedure was thus designed to “extract dues” and frustrate cancellation, rather than facilitating members’ cancelling a membership they no longer wanted. Complaint at ¶ 7. Exemplifying a growing trend, the plaintiffs made considerable use of online forums in which LA Fitness customers frustrated by their cancellation experiences detailed their attempts to cancel. Complaint at ¶¶ 42-55.

It has been said that history repeats itself, first as tragedy, then as farce. For Bank of America, its acquisition of Countrywide has been a persistent melding of farce and tragedy. Earlier this year, Bank of America agreed to pay $11.6 and $8.5 billion to settle, respectively, with Fannie Mae (over mortgage-backed derivative investments) and the federal government (on behalf of home-loan borrowers). Now, Bank of America and bond insurer MBIA have agreed to a complex set of terms that will settle allegations related to MBIA’s insurance obligations as to the mortgaged-backed securities, a deal which includes payment of $1.6 billion.

Founded in 1973, MBIA’s business model focused on relatively low-risk insurance against municipal bonds defaulting. However, by 2008, MBIA had become at least as prominent in insuring mortgage-backed securities, including those generated by two Bank of America acquisitions, Countrywide (which generated the risky home mortgages) and Merrill Lynch (which created and sold securities backed by the Countrywide mortgages). MBIA found itself faced with having to pay in excess of $3 billion in claims to Merrill Lynch, but without the funds to avoid default. The settlement restructures MBIA’s obligations to Bank of America, and the $1.6 billion in cash will allow MBIA to stay in business.

Announcement of the deal led to a sharp increase in Bank of America’s per-share price, suggesting that analysts had expected the settlement to be even more costly for the bank. For MBIA, the settlement’s timing was at least as important as the amount, as MBIA was believed to have only enough cash to sustain its operations for a matter of weeks at the time of the settlement. The price of MBIA stock increased by 45% on news of the settlement, strongly suggesting that the cash infusion from the settlement didn’t merely benefit MBIA, it saved the company.

The Federal National Mortgage Association, better known as Fannie Mae, and Big Four accounting firm KPMG have agreed to pay $153 million to settle a securities class action that has been litigated over the past eight years. The class members are Fannie Mae shareholders, chiefly large institutional investors and pension plans. The complaint alleges that Fannie Mae, in concert with its auditor, KMPG, violated established accounting principles and published misleading financial reports, which caused Fannie Mae’s stock price to be artificially inflated. The settlement (available here) now awaits a preliminary approval ruling from U.S. District Judge Richard Leon.

No word on why Fannie Mae and other lenders have opted for cheerful nicknames rather than simple, staid acronyms.