[BreachExchange] Does Class Settlement Of Bank Claims In Home Depot Data Breach Litigation Pass The “Superiority” Test?

[Audrey McNeil]

http://www.jdsupra.com/legalnews/does-class-settlement-of-bank-claims-in-
26724/

Counsel for a class of card-issuing banks filed a settlement agreement on
March 8 proposing a class settlement to resolve claims arising from the
2014 theft of payment card data from Home Depot point-of-sale terminals.
The contemplated $27.25 million class settlement follows in the wake of
over $140 million already paid by Home Depot to settle issuer bank claims
through card association settlement processes.  The revelation that Home
Depot was able to use private means to settle the vast majority of the bank
claims outside of the class action raises significant questions about
whether the proposed settlement class satisfies the requirement under Rule
23(b)(3) that a class action provide a superior means to resolve class
members’ claims.

The proposed settlement provides for a non-reversionary fund of $25 million
to pay claims of card-issuing banks that have not previously given releases
to Home Depot for losses arising from the data breach.  Each of those banks
will receive $2.00 for every card it issued that was on the list of
compromised cards. This presumably compensates the banks for card
reissuance costs.  Those banks can also submit documentation substantiating
claims for fraud losses, and receive pro-rata distributions equal to as
much as 60% of their documented losses, depending on the number and value
of claims submitted.  Those amounts are payable out of the primary $25
million settlement fund.

Additionally, the settlement would provide for payment of up to an
additional $2.25 million to banks that had previously settled with Home
Depot based on allegedly misleading disclosures.  Those banks can submit
claims against that separate $2.25 million fund to receive $2.00 per each
compromised card issued by those banks.

Class counsel will seek a fee award, to be paid in addition to the $27.25
million settlement fund, in the amount of $18,000,000.  That fee request
equals 66% of the new settlement proceeds to paid to the class.  As
justification for its fee request, class counsel argues in the brief in
support of its motion for preliminary settlement approval that the
reasonableness of the fee should be measured against not only the value of
the new settlement fund, but also based on $14.5 million in payments
previously made to the class members who were given misleading disclosures
and will collect up to $2.25 million in additional payments in this
settlement.  When that additional sum is taken into account, the $18
million fee request represents less than 30% of the amounts recovered by
members of the settlement class.  Home Depot has reserved the right to
challenge class counsel’s fee request.

This settlement raises serious questions about whether the proposed
settlement class meets the requirement of Rule 23(b)(3) that a class action
provides a superior means of resolving class members’ claims.  As noted
above, the declaration of lead class counsel discloses that Home Depot has
already paid in excess of $140 million to payment card issuing banks in
connection with the data breach. Those amounts were paid through claims
settlement and dispute resolution processes administered by the card brand
organizations – Visa, MasterCard, American Express and Discover.  As a
result, the $27.25 million that is recoverable by the class under this
settlement represents just 16% of the total amounts paid to card issuing
banks.  Or, put another way, the card association claims resolution
processes provided a vehicle to resolve 84% of issuer bank claims, without
having to resort to litigation or pay class counsel fees.

Other than the $2.25 million that is available to banks that had previously
settled with Home Depot, there is no indication that class members would
have been able to obtain greater recoveries outside of the class action.
To the extent that class counsel created value for their clients, they are
entitled to be rewarded.  At a counsel fee of 2/3 of the class recovery,
the cost of clawing in that last 14% on behalf of card issuing banks seems
awfully steep.  But even if the class counsel fee award is less than $18
million, there is a serious question whether any of the expenses associated
with class litigation – including fees of both sets of counsel and other
attendant costs – are an efficient use of resources.  The existence of a
robust, adequate and efficient non-judicial claims resolution process, as
there appears to be in the payment card industry, strongly suggests that
resort to expensive and burdensome class litigation may not provide a
superior means to resolve fraud loss claims asserted on behalf of card
issuing banks.
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