## Facts

- Consumers sued NBTY, Inc., Rexall Sundown, and Target alleging glucosamine supplements were marketed with misleading joint-health claims, violating state consumer-protection laws.
- Multiple related federal class actions were coordinated into a single proposed nationwide settlement presented for approval in the Northern District of Illinois.
- The settlement provided claims-made cash payments of $3 per bottle (up to four without proof) or $5 per bottle (up to ten with proof), and included a roughly 30-month injunction requiring revisions to certain labeling language.
- As approved, Rexall’s payments totaled about $5.63 million, including approximately $865,284 paid to 30,245 claimants.
- The settlement also funded about $1.93 million in attorneys’ fees plus expenses, about $1.5 million in notice/administration costs, and about $1.13 million in cy pres to an orthopedic foundation.
- Objectors appealed, arguing the settlement’s value to the class was overstated and that fees and non-class allocations were disproportionate to the class’s actual recovery.

## Issues

1. Whether the settlement was “fair, reasonable, and adequate” under Federal Rule of Civil Procedure 23(e) given the disparity between class recovery and attorneys’ fees, administration costs, and cy pres.
2. Whether the district court improperly valued the settlement by crediting speculative or weakly supported components such as injunctive relief and cy pres.
3. Whether the district court fulfilled its fiduciary duty to absent class members by meaningfully scrutinizing the settlement’s structure and the fee request.

## Decision

- The Seventh Circuit reversed the approval of the class settlement and the award of attorneys’ fees and remanded.
- The court held the settlement was not fair, reasonable, and adequate because the class received only a small fraction of the settlement outlay while counsel fees and other non-class components were substantial.
- The court rejected valuation methods that relied on the settlement’s theoretical maximum or on uncertain estimates of injunctive relief value rather than on the class’s likely actual recovery.

## Legal Principles

- In assessing a class settlement under Rule 23(e), the district court acts as a fiduciary for absent class members and must conduct independent, skeptical review of settlement value and allocation.
- Attorneys’ fees in class actions must be reasonable in relation to the actual benefit obtained for the class, not to a nominal fund size or other inflated measures.
- Settlement valuation should reflect realistic claims rates and redemption, not assumptions that most class members will participate or that non-monetary relief has large cash-equivalent worth.
- Cy pres distributions require careful justification and generally should not substitute for direct compensation when distribution to class members is feasible.
- High notice and administration costs that do not directly compensate class members are relevant when comparing the class’s recovery to attorneys’ fees and assessing overall fairness.

## Conclusion

The Seventh Circuit required class settlements to be evaluated by what class members are likely to receive in practice and held that a claims-made structure with modest payouts cannot support substantial attorneys’ fees and large cy pres and administrative allocations without rigorous justification under Rule 23(e).


Pearson v. NBTY, Inc., 772 F.3d 778 (7th Cir. 2014)