In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 05-1450, 05-1596, 05-2914, 05-3022
SYNFUEL TECHNOLOGIES, INC.,
Plaintiff-Appellee,
v.
DHL EXPRESS (USA), INC.,
Defendant-Appellee,
APPEALS OF:
KEARNEY D. HUTSLER, P.C.,
et al., JOEL M. SHAPIRO, and
W. ANDREW HOFFMAN, et al.,
Objectors-Appellants,
and
CROSS-APPEAL OF:
KOREIN TILLERY,
Cross-Appellant.
____________
Appeals from the United States District Court
for the Southern District of Illinois.
No. 3:02-CV-00324—David R. Herndon, Judge.
____________
ARGUED NOVEMBER 28, 2005—DECIDED SEPTEMBER 11, 2006
____________
Before KANNE, ROVNER, and WOOD, Circuit Judges.
WOOD, Circuit Judge. Airborne Express, Inc. (now known
as DHL Express (USA), Inc., but referred to as “Airborne”
2 Nos. 05-1450, 05-1596, 05-2914, 05-3022
throughout this opinion) is in the business of delivering
packages. In 2002, Synfuel Technologies, Inc., filed this
lawsuit on behalf of itself and other Airborne customers
claiming that the shipper’s practice of charging customers
a five pound default rate if they failed to identify the weight
of their package violated federal common law. After the
district court denied Airborne’s motion to dismiss, the
company decided to come to the table. A settlement worked
out by the parties proposed to compensate class members
with up to four pre-paid Airborne shipping envelopes or $30
in cash and to require Airborne to make changes to its
billing practices. Several class members filed objections to
the settlement, maintaining, among other things, that the
compensation provided to class members was nominal.
Nevertheless, after a hearing, the district court approved
the settlement and awarded class counsel over $600,000 in
attorneys’ fees.
Several objectors filed appeals. All the objectors argue
that the district court lacked jurisdiction over this suit.
Objectors Kearney D. Hutsler, P.C., and Thompson, Hutsler
& Carson (the “Hutsler objectors”) additionally contend that
the settlement is unfair to the class members. Objector Joel
Shapiro argues that the settlement notice approved by the
district court was insufficient. Objectors W. Andrew
Hoffman of the Hoffman Legal Group, Pritchard, McCall &
Jones, LLC, Professional Asset Strategies, Inc., Asset
Strategies, Inc., and N. Albert Bacharach, Jr. (the “Hoffman
objectors”) argue that the district court wrongly denied their
motion to intervene. Finally, class counsel Korein Tillery
appeals the district court’s attorneys’ fees award, contend-
ing that it was too low.
We conclude that subject matter jurisdiction exists,
although based on diversity jurisdiction, not federal com-
mon law. On the merits, we vacate the district court’s
approval of the settlement agreement because the court did
not adequately evaluate whether the settlement is fair to
Nos. 05-1450, 05-1596, 05-2914, 05-3022 3
class members. We do not reach the other issues raised by
the objectors and class counsel.
I
Prior to this lawsuit, if a customer shipping a Letter
Express package (an envelope intended to carry eight
ounces or less at a special fixed rate) with Airborne failed
either to indicate the actual weight of the package on the
airbill or to write the number “1” in the weight section, she
was charged a default rate equivalent to the cost of sending
a five pound shipment. The actual cost of these shipments
varied depending on the customer’s particular arrangement
with Airborne, but the record indicates that the default
charge was typically about $5 higher than the regular
Letter Express rate.
In April 2002, Synfuel filed a complaint against Airborne,
asserting that the company’s practice of charging a default
rate constitutes a “penalty” and that “[f]ederal common law
prohibits the imposition of a penalty, as opposed to liqui-
dated damages, under any contract.” Although Synfuel filed
the initial suit only on its own behalf, an amended com-
plaint added class allegations and sought to certify a class
made up of “All Airborne Express, Inc. customers who have
been assessed Letter Express charges based on a five pound
default rate within the last ten years.” Airborne moved to
dismiss the suit, contending that application of a default
rate was not a penalty but rather “an alternative contrac-
tual rate that determines how the sender will be charged for
shipment.” In support of this argument, Airborne attached
a copy of one of its airbill forms, which states on its face: “If
you fail to record the weight of the shipment on the airbill
at the time of tender, we may, at our discretion, apply
either a default rate or an additional service charge.”
In October 2002, the district court denied Airborne’s
motion to dismiss, reasoning that “the default weight
4 Nos. 05-1450, 05-1596, 05-2914, 05-3022
provision resembles a penalty provision, rather than a
liquidated damages provision or an alternative contract.”
The parties then entered into settlement discussions,
eventually reaching an agreement in October 2003. The
proposed settlement defines a settlement class of Airborne
customers who were charged the default rate between April
11, 1992, and November 30, 2003. It allows each class
member to submit a proof of claim form and supporting
documentation and receive pre-paid Letter Express pack-
ages, worth approximately $13 each, according to the
following schedule:
1-3 default charges = 1 package
4-7 default charges = 2 packages
8-12 default charges = 3 packages
12+ default charges = 4 packages
Alternatively, a class member may opt to receive a cash
payment instead of the pre-paid packages:
1 default charge = $2.50
2 default charges = $5.00
3 default charges = $7.50
4-6 default charges = $2.00 per charge
>6 default charges = $1.50 per charge up to a maxi-
mum of $30.
A class member who submits a proof of claim form without
providing supporting documentation is entitled to a single
pre-paid Letter Express package.
In addition to compensating class members directly, the
settlement requires Airborne to “implement new . . .
training/enforcement measures intended to substantially
increase the likelihood that packages are properly identified
as Letter Express packages and that customers will include
Nos. 05-1450, 05-1596, 05-2914, 05-3022 5
the necessary information in airbills,” and it requires
Airborne drivers to fill in missing package weights on
airbills. The agreement does not, however, altogether
prohibit Airborne from charging the default rate. Finally,
the settlement calls for Airborne to pay class counsel Korein
Tillery $4.95 million in attorneys’ fees and up to $45,000 in
costs, and for class counsel to petition the court for an
incentive award of $10,000 to be paid to Synfuel.
The district court conditionally certified the settlement
class, approved a notice to be mailed to over 240,000
potential class members and printed in several national-
circulation publications, and scheduled a fairness hearing
for April 2004. By the date of the hearing, approximately
7,000 individuals (a paltry three percent) had filed proofs of
claim and eight objections had been filed.
After hearing oral argument by the parties and objectors
at the fairness hearing, the district court approved the
settlement in a January 2005 order. The court rejected the
complaint raised by the Hutsler objectors that the settle-
ment provided insufficient compensation to class members,
stating that it was “generous in light of the fact that
Plaintiff’s case is subject to a number of strong defenses.”
The district court also rejected the argument raised by
objector Shapiro that the notice provided to class members
was inadequate because several publications incorrectly
stated that claims were due by June 23, 2004, as opposed to
the deadline called for in the agreement of 60 days
after final approval of the settlement. The Hutsler objectors
and Shapiro filed timely appeals of the district court’s
approval of the settlement.
After a separate hearing, the court awarded class counsel
Korein Tillery $600,250 in fees, significantly less than the
settlement agreement contemplated. In response to this
order, the Hoffman objectors, who had not previously
appealed the district court’s approval of the settlement
6 Nos. 05-1450, 05-1596, 05-2914, 05-3022
almost a year earlier, filed a motion to intervene to
“preclud[e] reversion of the $4.4 million fee reduction to
[Airborne].” The district court denied this motion because,
among other reasons, it was untimely and class counsel had
already filed a motion seeking “the exact same relief.”
II
A
Although the issue of subject matter jurisdiction was
not addressed below, it should have been; only after several
supplemental filings have we finally been able to assure
ourselves that the district court’s jurisdiction was proper.
Before the district court, class counsel maintained that
jurisdiction was proper under 28 U.S.C. § 1331 because its
claim arose under “federal common law.” This is obviously
wrong. Later, the possibility of diversity jurisdiction under
28 U.S.C. § 1332 emerged; we discuss that below.
The Supreme Court has stressed that, when it comes
to jurisdiction, the “cases in which judicial creation of a
special federal rule would be justified . . . are . . . few and
restricted,” Atherton v. FDIC, 519 U.S. 213, 218 (1997)
(quoting O’Melveny & Myers v. FDIC, 512 U.S. 79, 87
(1994)), and are limited to those involving “uniquely federal
interests.” Boyle v. United Technologies Corp., 487 U.S. 500,
504 (1988). See also Empire Healthchoice Assur., Inc. v.
McVeigh, 126 S.Ct. 2121, 2131-32 (2006) (noting that even
where federal law controls, the prudent course is often to
adopt state law as the federal rule of decision, rather than
to create federal common law). Class counsel’s argument for
the applicability of federal common law in this case relies
almost exclusively on decisions from other circuits holding
that “federal common law applies to loss of or damage to
goods by interstate common carriers by air.” Read-Rite
Corp. v. Burlington Air Express, Ltd., 186 F.3d 1190, 1195
(9th Cir. 1999); Sam L. Majors Jewelers v. ABX, Inc., 117
Nos. 05-1450, 05-1596, 05-2914, 05-3022 7
F.3d 922, 929 (5th Cir. 1997) (holding that “a federal cause
of action continues to survive for freight claims against air
carriers”).
These cases trace federal common law authority in this
specialized area to Congress’s 1887 enactment of the
Carmack Amendment to the Interstate Commerce Act, a
statute that “specified that federal law [ ] controlled liability
for goods lost or damaged during interstate shipments.”
Sam L. Majors Jewelers, 117 F.3d at 926. While “the other
major interstate commerce acts [eventually] included a
provision that imposed liability on carriers for loss or injury
to goods transported and provided for private civil actions
to recover[,] [t]he Federal Aviation Act . . . failed to include
such a provision.” Id. at 927. To fill this gap, some federal
courts have concluded that “civil actions against air carriers
for lost or damaged goods arose under federal [common]
law.” Id. at 927-28. We need not decide whether we agree
with this interstitial application of federal common law,
however, because the cases cited are not relevant to plain-
tiffs’ claim in this case. Synfuel and the other class mem-
bers did not sue Airborne for lost or damaged goods. Their
claim was about illegal billing practices. Nor does the class’s
argument find support in the Fourth Circuit’s conclusion
that late payment penalties charged by a common carrier
are subject to federal common law rules about liquidated
damages. See Humboldt Express, Inc. v. The Wise Co., 190
F.3d 624, 637 (4th Cir. 1999). The Humboldt court derived
its rule from federal statutory provisions and regulations
governing such penalties. In contrast, class counsel has
not pointed to any comparable sources of law from which a
court might derive a federal common law rule governing
Airborne’s response to incomplete airbills.
Presumably aware of the jurisdictional flaw in the case,
class counsel sought and received permission from this
court to add diversity jurisdiction allegations to the com-
plaint as permitted by 28 U.S.C. § 1653. In these allega-
8 Nos. 05-1450, 05-1596, 05-2914, 05-3022
tions, counsel stated that at the time Synfuel filed its
complaint it was an Illinois limited liability company with
its principal place of business in Illinois (it has since
incorporated, hence its current designation as “Synfuel
Technologies, Inc.”). Airborne was, on the other hand, a
Delaware corporation with its principal place of business in
the State of Washington. We could not determine based on
these pleadings whether the parties were completely
diverse, however, because unfortunately the amended
complaint failed to provide us with the citizenship of each
of Synfuel’s members. See Wise v. Wachovia Securities,
LLC, 450 F.3d 265, 267 (7th Cir. 2006) (“The citizenship for
diversity purposes of a limited liability company . . . is the
citizenship of each of its members.”). In a supplemental
filing, class counsel now informs us that, at the time
Synfuel originally filed this action, it was a Minnesota
limited liability corporation with two members who were
citizens of Illinois and Minnesota respectively. Based on
this representation, we are finally in a position to con-
clude that the parties are completely diverse. (There is
no excuse for the earlier ambiguity, we add; the rules
concerning the plaintiff’s duty to support subject matter
jurisdiction in the federal court are too well established
to require citation.)
The amended complaint also stated that 28 U.S.C.
§ 1332’s amount in controversy requirement was met by the
value of injunctive relief demanded, including “the cost of
altering [ ] Airborne’s method of doing business” to reduce
the incidence of default charges, a cost plaintiffs estimate at
approximately $30 million over four years. In determining
the amount in controversy, “[t]he court cannot just add up
the damages sought by each member of the class”; rather,
“[a]t least one named plaintiff must satisfy the jurisdic-
tional minimum.” In re Brand Name Prescription Drugs
Antitrust Litig., 123 F.3d 599, 607 (7th Cir. 1997) (citing
Snyder v. Harris, 394 U.S. 332 (1969), and Zahn v. Int’l
Nos. 05-1450, 05-1596, 05-2914, 05-3022 9
Paper Co., 414 U.S. 291 (1973)). As the Supreme Court
recently clarified, however, where “at least one named
plaintiff in the action satisfies the amount-in-controversy
requirement, § 1367 does authorize supplemental jurisdic-
tion over the claims of other plaintiffs in the same Article
III case or controversy, even if those claims are for less than
the jurisdictional amount.” Exxon Mobil Corp. v. Allapattah
Servs., Inc., 125 S.Ct. 2611, 2615 (2005). Furthermore, this
court has been willing to look at the amount from either
party’s perspective; thus, “the cost to the defendant of
complying with an injunction counts toward the jurisdic-
tional minimum.” Rubel v. Pfizer Inc., 361 F.3d 1016, 1017
(7th Cir. 2004). The relevant test, however, “is the cost to
each defendant of an injunction running in favor of one
plaintiff; otherwise the nonaggregation rule would be
violated.” Brand Name Prescription Drugs, 123 F.3d at 610.
The key jurisdictional issue in this case, then, is whether
Airborne could alter the default weight billing practice for
an individual customer—in which case the value of the
injunction to each individual class member is quantifiable
and presumably quite small—or if it could comply with
the proposed injunction only by undertaking a systemic
change of its weighing and billing procedures, a change that
would cost the same whether it was made for just
one customer or every customer served by the company.
When confronted with this question at oral argument, both
Synfuel and Airborne agreed that the changes sought in the
complaint could be instituted only on a systemic basis,
because each package shipped by Airborne moves through
an integrated delivery system. Based on this representa-
tion, we conclude that plaintiffs’ complaint also meets the
amount in controversy requirement and that we have
diversity jurisdiction over this case.
Because the case was settled, we do not need to concern
ourselves with the theory of substantive law on which
plaintiffs were, or could have been, relying. Pleadings do
10 Nos. 05-1450, 05-1596, 05-2914, 05-3022
not need to spell out legal theories in any event, and we can
imagine state-law claims for consumer fraud and deceptive
practices that conceivably could apply here. (The implica-
tions of the change in applicable law for class certification
are another matter, which is not before us at this time. The
district court, however, is free to revisit this issue on
remand. See FED. R. CIV. P. 23(c)(1)(C); In re
Bridgestone/Firestone, Inc., 288 F.3d 1012, 1018 (7th Cir.
2002) (rejecting on the facts there presented a nation-
wide class action where “claims must be adjudicated under
the law of so many jurisdictions,” because “a single nation-
wide class is not manageable”).) The important point at this
stage of the proceedings is that the parties decided to settle
the case rather than to test its legal sufficiency in court.
B
We turn now to the most substantial challenge raised
by the objectors on the merits, which is the Hutsler ob-
jectors’ claim that the district court erred in approving the
settlement agreement as fair to class members.
A district court may approve a settlement only if it is
“fair, reasonable, and adequate.” FED. R. CIV. P. 23(e)(1)(C).
Although our review of a district court’s approval of a class
action settlement is limited to whether there was an abuse
of discretion, Isby v. Bayh, 75 F.3d 1191, 1196 (7th Cir.
1996), we insist that district courts “exercise the highest
degree of vigilance in scrutinizing proposed settlements of
class actions.” Reynolds v. Beneficial Nat’l Bank, 288 F.3d
277, 279 (7th Cir. 2002). In the past, we have gone so far as
to characterize the court’s role as akin “to the high duty of
care that the law requires of fiduciaries.” Id. at 280.
The Hutsler objectors complain particularly about the
settlement’s “capped regressive scale” of compensation,
contending that the payment structure is disadvan-
tageous to class members who were charged the default rate
Nos. 05-1450, 05-1596, 05-2914, 05-3022 11
by Airborne numerous times. They also argue that provid-
ing class members with pre-paid Letter Express packages
is analogous to providing them with coupons, a method of
compensation that has been widely criticized. See, e.g.,
Christopher R. Leslie, “The Need To Study Coupon Settle-
ments in Class Action Litigation,” 18 GEO. J. LEGAL ETHICS
1395, 1396-97 (2005) (identifying three problems with
coupon settlements: (1) it is doubtful that they “provide
meaningful compensation to most class members”; (2) they
often “fail to disgorge ill-gotten gains from the defendant”;
and (3) they may force class members “to do future business
with the defendant”); Geoffrey P. Miller & Lori S. Singer,
“Nonpecuniary Class Action Settlements,” 60 LAW &
CONTEMP. PROBS. 97, 108 (1997) (noting that for many
consumers “the right to receive a discount [or coupon] will
be worthless”).
In order to evaluate the fairness of a settlement, a district
court must consider “the strength of plaintiffs’ case com-
pared to the amount of defendants’ settlement offer, an
assessment of the likely complexity, length and expense
of the litigation, an evaluation of the amount of opposition
to settlement among affected parties, the opinion of compe-
tent counsel, and the stage of the proceedings and the
amount of discovery completed at the time of settlement.”
Isby, 75 F.3d at 1199. The “most important factor relevant
to the fairness of a class action settlement” is the first one
listed: “the strength of plaintiff’s case on the merits bal-
anced against the amount offered in the settlement.” In re
General Motors Corp. Engine Interchange Litig., 594 F.2d
1106, 1132 (7th Cir. 1979) (citing the MANUAL FOR COMPLEX
LITIGATION § 1.46 at 56 (4th ed. 1977)). In conducting this
analysis, the district court should begin by “quantify[ing]
the net expected value of continued litigation to the class.”
Reynolds, 288 F.3d at 284-85. To do so, the court should
“estimat[e] the range of possible outcomes and ascrib[e] a
probability to each point on the range.” Id. at 285. Although
12 Nos. 05-1450, 05-1596, 05-2914, 05-3022
we have recognized that “[a] high degree of precision cannot
be expected in valuing a litigation,” the court should
nevertheless “insist[ ] that the parties present evidence that
would enable [ ] possible outcomes to be estimated,” so that
the court can at least come up with a “ballpark valuation.”
Id. at 285.
In assessing the strength of the plaintiffs’ case, the
district court accepted class counsel’s contention, largely
unsupported by any evidence or analysis, that the regres-
sive payment schedule and $30 cap appropriately re-
flected the impact of the statute of limitations and the
voluntary payment doctrine on the class’s claims against
Airborne. This latter doctrine, “a corollary to the mistake of
law doctrine[,] . . . holds that a person who voluntarily pays
another with full knowledge of the facts will not be entitled
to restitution.” Randazzo v. Harris Bank Palatine, N.A., 262
F.3d 663, 667 (7th Cir. 2001). The court reasoned that
“[g]iven that a member is more likely to have ‘full knowl-
edge of the facts’ after each successive default charge,
counsel for the class and [Airborne] have appropriately
incorporated a capped regressive scale to reflect the proba-
bility of a member’s recovery.”
While we do not dispute that the statute of limitations
and the voluntary payment doctrine may have some
relevance to certain class members’ claims against Air-
borne, we cannot glean from the district court’s opinion how
it determined that this particular payment schedule and
level of compensation is fair. In considering the fairness of
the settlement, the court did not attempt to quantify the
value of plaintiffs’ case or even the overall value of the
settlement offer to class members. Nor did it estimate how
many class members’ claims would be barred by the statute
of limitations or the voluntary payment doctrine. In fact,
the only effort to value the litigation that appears in the
record is the Hutsler objectors’ estimate that Airborne
overcharged class members by $75 million during the
Nos. 05-1450, 05-1596, 05-2914, 05-3022 13
relevant period, a figure the district court dismissed as
irrelevant to its evaluation of the fairness of the settlement.
Our confidence in the fairness of the settlement is further
undermined by the agreement’s bias toward compensating
class members with pre-paid Letter Express envelopes
instead of cash. Pre-paid envelopes, like coupons, are a form
of in-kind compensation. “[C]ompensation in kind is worth
less than cash of the same nominal value,” since, as is
typical with coupons, some percentage of the pre-paid
envelopes claimed by class members will never be used and,
as a result, will not constitute a cost to Airborne. In re
Mexico Money Transfer Litig., 267 F.3d 743, 748 (7th Cir.
2001). Further, as the Hutsler objectors point out, although
an individual pre-paid envelope is significantly more
valuable to a class member than the equivalent amount of
cash offered by the settlement, compensation in envelopes
“require[s] the claimant to return to the Defendant to do
business with him,” something at least some class members
likely would prefer not to do. And although this case is not
covered by the Class Action Fairness Act (CAFA) of 2005,
we note that in that statute Congress required heightened
judicial scrutiny of coupon-based settlements based on its
concern that in many cases “counsel are awarded large fees,
while leaving class members with coupons or other awards
of little or no value.” Pub. L. 109-2, § 2(a)(3)(A), 119 Stat. 4,
4. We recognize that the pre-paid envelopes are not identi-
cal to coupons, since they represent an entire product, not
just a discount on a proposed purchase. Nonetheless, they
are a form of in-kind compensation that shares some
characteristics of coupons, including forced future business
with the defendant and, especially for heavier users, the
likelihood that the full amount of Airborne’s gains will not
be disgorged.
Finally, we are not persuaded by Synfuel’s contention
that the operational changes required by the settlement
“will result in over $30 million in savings that will flow
14 Nos. 05-1450, 05-1596, 05-2914, 05-3022
directly into the pockets of Class members.” These changes
will benefit only those class members who continue to
purchase services from Airborne. The value of these
operational changes must also be discounted to account
for the fact that at least some, if not most, class members
will not fail to record the weight of their packages in the
future. It is future customers who are not plaintiffs in this
suit who will reap most of the benefit from these changes.
The class complaint specifically sought “[a] sum of
money that represents the difference between the illegal
penalties imposed on the Plaintiff and the Class and the
amount that should have been imposed.” The fairness of the
settlement must be evaluated primarily based on how it
compensates class members for these past injuries.
Since we conclude that the district court abused its
discretion by approving the settlement without adequately
evaluating its fairness, we need not reach the other argu-
ments raised by the objectors, nor the cross-appellants’
appeal of the court’s attorneys’ fees award.
Nos. 05-1450, 05-1596, 05-2914, 05-3022 15
III
We therefore VACATE the district court’s approval of the
settlement agreement and REMAND for further proceed-
ings consistent with this opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-11-06