Slayton v. Citibank

Filed 3/12/07 Slayton v. Citibank CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

A class action complaint alleged that a bank sold confidential credit cardholder information to third party vendors. The class representatives and bank reached a settlement, and the trial court approved the settlement over the objections of a consumer organization and a small number of individual class members. The objectors primary contention is that the settlement is unfair because it commits the entire monetary recovery of $5 million (less costs of class notice) to educational and charitable organizations, without providing any direct compensation to class members. We conclude that the trial court did not abuse its discretion in approving as fair and adequate the settlement agreement given the impracticability of direct compensation to a potential class of several million people.

facts

In July 1999, plaintiffs Thomas E. Slayton, Jr. and Karen West filed this action on their individual behalf, and on behalf of a class of similarly situated persons. In the operative complaint, plaintiffs allege that defendant Citibank (South Dakota), N.A. (Citibank) sold private information about its California credit cardholders to third party financial institutions, telemarketers, and mass marketers. Plaintiffs assert causes of action for invasion of privacy, unjust enrichment, and statutory violations. The class of persons was ultimately defined to include any person who, between July 2, 1995 and July 1, 2001, held a Citibank credit card with a California mailing address and whose personal financial information was disclosed to and/or shared with third parties without his or her prior informed consent.

The case was extensively litigated for years before reaching settlement. Motion practice included demurrers, motions to strike portions of the pleadings, and challenges to class certification. The parties engaged in extended discovery efforts and disputes that included requests for admission, multiple sets of interrogatories, depositions, several motions to compel responses, and a contested protective order for trade secrets.

Settlement discussions began in late 2002, shortly after the court certified a class on plaintiffs claims. Notice to the certified class was deferred during settlement discussions. The outline of a settlement was reached in February 2003, but it took two years of extensive arms-length negotiations before the parties agreed on specific terms necessary to finalize the agreement. The trial court lent its assistance to the parties on multiple occasions during settlement negotiations until a final resolution was reached at a settlement conference in March 2005.

The settlement agreement provides for a monetary payment of $5 million, minus the cost of providing notice to the class, to be distributed to not-for-profit entities established for education or other charitable purposes.[1] Half the charitable fund recipients are to be designated by plaintiffs, and the other half by Citibank, with the court resolving any disputes over recipients. Plaintiffs counsel declares that every intended recipient of the charitable fund either is California based or will use its share of the funds to benefit Californians. Counsel also states that several of the intended recipients will use their awards to promote consumer privacy concerns in California. Citibank declares that it has made substantial efforts to direct the charitable fund to educational purposes related to privacy issues in California.

In addition to a monetary award, the settlement also obligates Citibank to post its privacy promise, explaining its information sharing policy on its Internet website for two years. Citibank also agreed to pay plaintiffs attorney fees, in an amount assessed by the court, up to a maximum of $2 million. All class members agreed to release Citibank and associated entities from liability arising from acts asserted in the lawsuit, although Citibank denies any wrongdoing.

In May 2005, the trial court granted preliminary approval of the settlement and ordered notice to the class. (Cal. Rules of Court, rule 3.769.) In September and October 2005, Citibank mailed notice to 3.7 million current California cardholders, and published notice in four California newspapers. The majority of the mailed notices were sent with periodic billing statements. Only 370 cardholders elected to opt out of the settlement. Nine objections to the settlement were filed, representing 22 individuals and one organization.

In December 2005, a group of objectors filed a motion in advance of the hearing on final approval of the settlement. The objectors moved for access to all of Citibanks discovery responses and asked the court to lift the protective order safeguarding asserted trade secrets. The court held a hearing in January 2006, and denied the motion.

The final approval and fairness hearing on the settlement was held on February 2, 2006. The trial court considered the parties submissions and heard from all objectors or their counsel who appeared and wished to be heard. The court addressed concerns raised by the objectors, and concluded that the settlement was fair, reasonable and adequate. The court overruled the objections, approved the settlement and awarded attorney fees of $2 million. Judgment was entered on February 16, 2006, and 12 objectors appealed. Appellants are Steven Wethy (A113891); Stan Schuldiner (A113892); Laurel Marinelli (A113893); and a group composed of the Consumer Federation of California, Linda Ackerman, Sharon Arkin, Robert Aronin, Mari Frank, James Hayes, Ed Hoffman, Mark Reback, and Verner Soler (collectively, CFC) (A113894). We granted respondents motion to consolidate the appeals.

discussion

A. General principles

The settlement of a class action requires court approval to prevent fraud, collusion, or unfairness to the class. (Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1800.) The court must determine the settlement is fair, adequate, and reasonable. (Id. at p. 1801.) The trial court is vested with a broad discretion in making this determination. [Citation.] In exercising its discretion, that court should consider relevant factors, which may include, but are not limited to the strength of the plaintiffs case, the risk, expense, complexity and duration of further litigation as a class action, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of class members to the proposed settlement. At the same time, the trial court should give due regard . . . to what is otherwise a private consensual agreement between the parties.  (In re Microsoft I-V Cases (2006) 135 Cal.App.4th 706, 723.)  [A] presumption of fairness exists where: (1) the settlement is reached through arms-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.  (7-Eleven Owners for Fair Franchising v. Southland Corp. (2000) 85 Cal.App.4th 1135, 1146.) As a reviewing court, our task is limited to a review of the trial courts settlement approval for a clear abuse of discretion. (Id. at p. 1145.)

B. The trial court did not abuse its discretion in finding that the settlement was
fair

A presumption of fairness operated here. The settlement was reached after years of arms-length negotiations assisted by the court and extensive discovery was conducted; class counsel was highly experienced in bank privacy class action litigation and the percentage of objectors was infinitesimally small. (7-Eleven Owners for Fair Franchising v. Southland Corp., supra, at p. 1146.) Of the almost 3.7 million Citibank cardholders notified of the settlement, 370 chose to opt out of the class action and only 22 objected to the settlement.

The court explored a number of additional factors in confirming the fairness of the settlement. The court observed that plaintiffs case would likely be the first to define some of the claimed constitutional and other based privacy rights that were being sued upon. As a case of first impression, its resolution in the courts would consume a protracted period of time with attendant high costs of litigation. The case also presented difficulties in proof. The class encompassed California cardholders from 1995 to 2001, yet a Citibank director declared that the company does not maintain records that indicate which credit card customers information was shared with third party vendors prior to January 1999. The records from 1999 to 2001, while identifying the customer whose information was shared, do not contain historical addresses to confirm that the customer was a California resident at the time of the disclosure. The case also presented complexities in quantifying damages. As the trial court observed, it would be difficult for a class member to know whether a telemarketer contacted him or her through information received from Citibank as opposed to another source, and difficult to measure damages from receiving commercial solicitations. The trial court did not abuse its discretion in finding that the risk, expense, complexity and duration of further litigation as a class action supported settlement. (In re Microsoft I-V Cases, supra, 135 Cal.App.4th at p. 723.)

C. Fluid recovery

Appellants CFC, Schuldiner, and Wethy contend that the settlement is unfair because the entire monetary recovery is dedicated to charities. According to CFC, a class action settlement must allow plaintiffs an opportunity to collect direct monetary compensation. CFC is mistaken. It has long been recognized that the distribution of damages poses special problems in consumer class actions, where each individuals recovery may be too small to make traditional methods of proof and distribution worthwhile. (State of California v. Levi Strauss & Co. (1986) 41 Cal.3d 460, 471-472.) In response to these problems, the courts have turned to the equitable doctrine of cy prs. This doctrine originated in the law of charitable trusts. Where compliance with the literal terms of a charitable trust became impossible, the funds would be put to the next best use, in accord with the dominant charitable purposes of the donor. [Citation.] In the class action context, the cy prs doctrine is generally denominated fluid recovery. [2] (Id. at p. 472.) Without fluid recovery, defendants may be permitted to retain ill gotten gains simply because their conduct harmed large numbers of people in small amounts instead of small numbers of people in large amounts. (Ibid.)

The propriety of fluid recovery in a particular case depends upon its usefulness in fulfilling the purposes of the underlying cause of action. (State of California v. Levi Strauss & Co., supra, 41 Cal.3d at p. 472.) There are multiple methods of fluid recovery, which may include claimant fund sharing or price rollbacks designed to provide direct monetary relief to class members. (See id. at pp. 472-479.) Contrary to CFCs claim, however, there is no requirement that a class action settlement provide direct monetary compensation to class members. (In re Vitamin Cases (2003) 107 Cal.App.4th 820, 831-833.) This District Court of Appeal affirmed a class action settlement where the entire monetary fund was distributed to charitable, governmental, and nonprofit organizations. (Id. at pp. 824, 833.) The court soundly rejected objectors contention that they must be given an opportunity to claim a portion of the fund before it can be disbursed to nonprofit organizations. (Id. at p. 831.)

CFC is also mistaken in asserting that Code of Civil Procedure section 384 (section 384) requires direct compensation to class members. Section 384, subdivision (b) provides that the court shall determine the total amount that will be payable to all class members, and shall direct any unpaid residue to qualified nonprofit organizations. Section 384 does not require that every class action settlement allot amounts payable to class members; it simply establishes procedures for those settlements that do award individual payments yet contain no provision for unclaimed amounts. (In re Microsoft I-V Cases, supra, 135 Cal.App.4th at pp. 717-722; In re Vitamin Cases, supra, 107 Cal.App.4th at p. 826-829.) Section 384 is wholly inapplicable where, as here, the settlement does not provide for any direct compensation of class members and hence does not require a distribution of unpaid residue.  (In Re Microsoft I-V Cases, supra, at p. 718; accord In re Vitamin Cases, supra, at p. 827.) We reject CFCs argument that In Re Microsoft I-V Cases and In re Vitamin Cases were wrongly decided.

CFC and other appellants are correct, however, in arguing that a class action settlement must benefit the class and fulfill the purposes of the underlying cause of action. (State of California v. Levi Strauss & Co., supra, 41 Cal.3d at p. 472; Blue Chip Stamps v. Superior Court (1976) 18 Cal.3d 381, 385-386.) Direct monetary compensation to class members is often the surest way to effectuate these goals, but it is not the only way. Where the distribution and administration costs of individual claims exceed the recovery, payment to charitable organizations may be a fair alternative. (In re Vitamin Cases, supra, at pp. 829-830.) The trial court was presented with such a situation here, and noted that an individual payment to every class member would cost more to mail out or otherwise distribute than [it] is worth.

While the exact number of class members was never determined, it is undisputed that the class numbered in the millions. In 2001, a company manager estimated that there were about 6.1 million Californians who were cardholders in the previous two years. Information about approximately 45 percent of current cardholders is shared with third party vendors. Assuming the same rate of information sharing throughout the six-year period that is the subject of litigation, the class is in the range of three million people. Notice of the class action settlement was mailed to almost 3.7 million cardholders, representing current cardholders with recent account activity warranting the mailing of a billing statement. The cost of preparing, printing, and mailing notices to this number of cardholders was $556,887. The remaining settlement fund was about $4.4 million. If this amount were divided among 3 million class members, each member would be entitled to less than $1.50. The actual payment would be less, as additional transactional costs would be incurred in distributing the settlement fund.

Appellant Schuldiner argues that direct compensation was available by the simple expediency of mathematically dividing the settlement fund among the number of current cardholders and crediting their accounts in the appropriate amount. While expedient, that method of distribution would exclude class members who no longer have an account with Citibank. Moreover, the assertion that a class members interest is better served by a minimal monetary credit than a material contribution to charitable works is debatable. The parties to the settlement agreement resolved that debate in favor of charitable works, and it is not the function of the courts to investigate and weigh alternative means of fund distribution. [A] trial court is not required to initiate an investigation to determine other possible cy prs distributions when it conducts a reasonable assessment of a cy prs distribution proposed in a settlement agreement. (In Re Microsoft I-V Cases, supra, 135 Cal.App.4th at p. 725.) The relevant inquiry is whether that agreement, as proposed, was not a product of fraud or collusion and was, on the whole, fair. (Id. at p. 724, italics in original.) If a proposed distribution is useful in fulfilling the purposes of the underlying cause of action, it may be approved despite an objectors assertion that another type of distribution might be better. (Ibid.)

Appellants CFC, Schuldiner, and Wethy contend that broad-based charitable contributions do not fulfill the purposes of the underlying cause of action. Appellants question the correlation between the injured class and the class to be benefited by the distribution of damages. The trial court addressed this concern, and found that the injured class was composed of a wide cross-section of Californians with possibly every demographic, sociological, political and other characteristic. Accordingly, a settlement distribution to a wide range of charities that gives benefit and good things in a general sense is an appropriate distribution here because of the nature of all the different people that we have. The court acted well within its discretion in reaching that conclusion.

The settlement, aside from indirectly benefiting class members by supporting charitable works, satisfied another important goal of any class action: deterrence or disgorgement. (In Re Microsoft I-V Cases, supra, 135 Cal.App.4th at p. 727.) The settlement obligated Citibank to spend $7 million to address allegations that it violated its customers privacy by sharing customer information with third party vendors. Such an expenditure encourages financial institutions to act with the utmost caution to avoid unauthorized disclosures, and to educate their customers about company privacy policies so that customers understand the conditions under which information may legally be shared. The settlement here went beyond creating a financial incentive for customer education, and took the additional step of including a provision requiring Citibank to post on the Internet its Privacy Promise, which explains company policy on customer information sharing. This feature of the settlement benefited class members by providing easy access to information useful to privacy protection, and deters Citibank from deviating from its publicly-announced policy.

Appellants argue that no deterrent effect is achieved by compelling a monetary payment to charities because Citibank usually makes charitable donations, and will simply reduce the amount it would otherwise donate by the settlement amount. As the trial court noted, however, it is speculative to assume that Citibank would have donated millions of dollars to the organizations benefited by the settlement agreement. Also, the settlement agreement creates a legally enforceable obligation distinct from the voluntary contributions Citibank has made in the past, and may make in the future. Citibank also promises in the settlement agreement that the settlement money was not obtained from money that would otherwise have been allocated to charitable causes. Appellant Schuldiner dismisses Citibanks promise as meaningless because [t]here is no way Citibank could be held to violate this certification. Our California Supreme Court has shown less cynicism. While acknowledging the courts limited ability to enforce a partys promise not to reduce other sources of funding for recipients of settlement money, the court also found no reason to assume that the [party] would act in bad faith. (State of California v. Levi Strauss & Co., supra, 41 Cal.3d at p. 475, fn. 10.) We are likewise unwilling to assume that Citibank will act in bad faith.

D. Collateral claims: discovery and notice costs

Finally, we address several collateral arguments raised by appellants. Appellants CFC, Schuldiner, and Wethy complain that they were wrongly denied discovery. A class action objectors discovery request is a matter addressed to the discretion of the trial court, and will not be overturned on appeal absent a clear abuse of discretion. (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 241.) The trial court found that the case was fully discovered to the appropriate level, making further discovery unnecessary. The court also denied objectors request to view Citibanks discovery responses upon noting that the basic facts were already known, and the case turned on the legal significance of Citibanks actions.

Appellants dispute the trial courts findings, and insist that access to Citibank documents and discovery responses would have aided their decision whether to opt out of the class by revealing the exact identity of cardholders whose information was sold by Citibank. But there are no company documents with the information objectors sought. The class encompasses California cardholders from 1995 to 2001, whose customer information was shared with third party vendors. No records exist that indicate which credit card customers information was shared with third party vendors prior to January 1999. Records from 1999 to 2001 do exist from which the identity of cardholders subject to information sharing could be ascertained but there is no existing list. A Citibank director declared that [t]he effort to identify from the relevant databases the names, addresses and accounts numbers of all individuals whose information was shared with third party vendors for marketing purposes since January 1999 and for whom we currently have a California billing address would require significant computer programming. It would take approximately one to three months, and cost approximately $60,000 to $100,000 to complete that effort. In short, the documents objectors sought in discovery do not exist, and it would take a costly effort to compile even a partial list of class members sought by objectors.

The cost of class notice is the focus of appellant Marinellis concern, and she raises two main issues on the subject. First, appellant Marinelli asserts that costs were unduly inflated by mailing notice to some Citibank customers instead of including all notices in billing statements. Most notices were mailed to customers with their billing statements. Specifically, 2,342,004 mailed notices were included with September 2005 billing statements that were mailed beginning on September 12, 2005. However, a company officer explained that, [d]ue to a printing problem, notices were not included in statements mailed prior to September 12, 2005. Citibank hired a direct mail vendor to mail separate notices to those 1,158,512 customers, and to an additional group of 180,141 customers who had elected to view their statements on the Internet or, for other specified reasons, had not been sent notice with the monthly billing statement.

Appellant Marinelli complains that the nature of the printing problem is not established, and argues that any problem with mailing notice in the September 2005 billing statements could have been cured by mailing notice in the next months statement and postponing the settlement approval hearing, rather than undertaking expensive direct mailing. The trial court found no basis for finding that Citibank acted unreasonably in providing direct mail notices to those customers for whom billing statement notice was mistakenly omitted. The settlement agreement, and order for providing notice to the settlement class, did not limit the means of providing mailed notice or otherwise preclude direct mailing.

Appellant Schuldiner argues that the settlement agreement should have imposed limitations on direct mailing to avoid a wasteful notice expense. There is merit to the argument but we cannot say that the trial court abused its discretion in approving a settlement without specific limitations on the means of providing mailed notice to designated class members. The notice provision, while lacking specific guidelines, was subject to an implied reasonableness requirement and the record does not show that Citibank acted unreasonably. The costs incurred were not extravagant. The cost of providing mailed notice was $556,886.62. While that is a significant amount of money, it averages to only 15 cents per individual notified. We find no abuse of discretion in the trial courts conclusion that the cost of notice was reasonable.

Appellant Marinellis second grievance with the cost of notice rests on an alleged discrepancy in Citibanks accounting. Citibank reported that the total cost of preparing, printing, and mailing all notices was $556,886.62. Appellant notes that the rate of postage for first class mail was 37 cents in 2005, and calculates the cost of postage for direct mailing notice to 1,158,512 customers as $428,649.44. Appellant Marinelli argues that the $128,237.18 cost difference between the total cost of mailed notice and the cost of postage is not identified.

The immediate answer is that appellant misstates the difference between the direct mail postage expenditure and the total cost of notice. Appellant calculated the postage costs for mailing notice to the 1,158,512 customers who received a billing statement without a notice insert. Appellant overlooks the postage costs for mailing notice to the additional 180,141 individuals who received no statement. A total of 1,338,653 customers received direct mail notice, incurring postage expenses of $495,301.61, according to appellants methodology. Assuming appellant has applied the correct postal rate, the difference between the total cost of direct mail notice and the postage cost of the notice is thus $61,585.01, less than the amount posited by appellant.

Appellant is also mistaken in asserting that the cost difference is not identified in Citibanks accounting. The cost is identified, just not at the level of accounting precision demanded by appellant. Citibank provided an aggregate sum for the cost of mailed notice rather than itemizing each element of costs. We cannot say that the trial court abused its discretion in permitting proof of costs without itemization of printing, postage, and assembly costs for each group of mailings. The provided accounting is sufficient to assess the reasonableness of the costs and, contrary to appellants suggestion, does not indicate any unauthorized expenditures. Apart from postage costs, other legitimate expenses incurred in preparing, printing, and mailing notices could easily account for the amount not itemized, which is only $61,585.01 under appellant Marinellis methodology. Appellant denies this fact, and notes that it cost only $17,223.96 when Citibank prepared and printed a class notice that was ordered, but not sent, earlier in the case. The record does not show what efforts were expended during the aborted notice preparation but it is reasonable to conclude that more substantial efforts were required when notice was actually mailed to almost 3.7 million customers.

Appellant Marinellis final argument concerns attorney fees. Appellant maintains that class counsels fee award should be reversed because counsel did not defend the class recovery from an improper charge of notice costs. The claim fails because there was no improper charge of notice costs, as just discussed. Appellant Marinelli has also moved for sanctions against respondents on appeal, upon claims that respondents Citibank and plaintiffs included irrelevant documents in their joint appendix and that plaintiffs failed to cite to the record for some factual assertions in their brief. (Cal. Rules of Court, rules 8.124(b)(2), 8.204(a)(1)(C), 8.276(e)(1)(C).) We deny the motion for sanctions.

disposition

The judgment is affirmed.

_________________________

Sepulveda, J.

We concur:

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Ruvolo, P. J.

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Rivera, J.

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Analysis and review provided by Spring Valley Property line attorney.

[1] Notice and administration costs totaled $587,763.48, leaving about $4.4 million for distribution.

[2] Cy Prs derives from the Norman French cy prs comme possible, literally, as near as possible.  (In re Microsoft I-V Cases, supra, at p. 716, fn. 8.)