After being hit with a class action, one question consumer products companies often face is: should we modify our business practices in response to the suit? Sometimes it makes sense. Changing the challenged practice can, in some cases, help defeat class certification and may help limit liability. Others would argue that changing business practices in response to a lawsuit is an admission of culpability that could negatively impact how the judge and jury will view the case.
A recent decision provides an additional reason consumer products companies will want to carefully evaluate whether to change business practices after being sued in a class action.
In Henderson v. J.M. Smucker Co., CV 10-4524-GHK VBKX, 2013 WL 3146774 (C.D. Cal. June 19, 2013), the plaintiff sued claiming that the defendant’s labels included misleading “health and wellness” claims on products that actually contained unhealthy amounts of high fructose corn syrup and trans fat. The court dismissed the case because the plaintiff had filed for bankruptcy and the trustee had settled her individual claim. But the plaintiff’s lawyers still moved for attorney’s fees under a “catalyst theory,” seeking more than $3 million on the ground that the defendant had changed its business practices in response to the suit (by removing the high fructose corn syrup and changing certain labels). After concluding that the plaintiff’s lawyers could seek fees notwithstanding the bankruptcy, the court explained California’s broad rule allowing attorneys’ fees even though the plaintiff had not prevailed on the merits:
“Under [California’s] broad, pragmatic view of what constitutes a successful party within the meaning of section 1021.5, a plaintiff need not obtain a judgment in its favor to be a successful party. Rather, a plaintiff is a successful party whenever it obtains the relief sought in its lawsuit, regardless of whether that relief is obtained through a voluntary change in the defendant’s conduct, through a settlement, or otherwise.” Plaintiff is a “successful party” under this pragmatic approach if “(1) the lawsuit was a catalyst motivating the defendants to provide the primary relief sought; (2) that the lawsuit had merit and achieved its catalytic effect by threat of victory, not by dint of nuisance and threat of expense … and, (3) that the plaintiffs reasonably attempted to settle the litigation prior to filing the lawsuit.”
Henderson, 2013 WL 3146774, at *4. Although the court requested more information regarding whether $3 million in fees was reasonable, it granted the request, subject to receiving additional information about billing records. The case is unique for many reasons, including because of the bankruptcy issues. But the case also provides a cautionary tale. Even after winning, a defendant could end up defending a motion for catalyst fees based on an intervening decision to modify business practices. The decision highlights the need to coordinate litigation and business strategy, while carefully considering the implications of changing business practices in response to litigation.