1998-01 Mercedes FSS Engine Damage

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Attorney fees of $4.9 million OK’d

Shannon P. Duffy
The Legal Intelligencer

A federal judge has approved a settlement worth more than $32 million in a class action products liability suit against Mercedes Benz brought by owners of cars manufactured from 1998 to 2001 who said they were never warned that use of non-synthetic motor oils would cause premature engine wear.

Under the settlement, 351,439 class members will each receive a voucher worth $35 toward a scheduled service which includes an oil change, and Mercedes-Benz USA has agreed to modify its warranty to cover the costs of repairing any damage caused by the problem.

Although both sides were urging U.S. District Judge Franklin S. VanAntwerpen to approve the settlement, they disagreed sharply over how much it was worth and how much the plaintiffs’ attorneys should be paid. The plaintiffs’ team — attorneys Kenneth A. Jacobsen, Francis J. Farina and Peter A. Lennon — argued that the extended warranty made the settlement worth more than $100 million. They asked for fees of about $7 million. But the defense attorneys — Keith D. Heinhold of Philadelphia-based Marshall, Dennehey, Warner, Coleman & Goggin, along with Lewis H. Goldfarb and Terri S. Reiskin of Washington, D.C.-based Hogan & Hartson — argued that the warranty extension was worth no more than $4.6 million. The defense lawyers also argued that the plaintiffs’ team had billed at excessive hourly rates — ranging from $400 to $450 — and had exaggerated their hours. They suggested a fee award in the range of $950,000 to $1.5 million.

Now Judge Van Antwerpen has decided that the total value of the settlement is about $32.6 million and that the plaintiffs’ lawyers are entitled to a fee award of 15 percent, or about $4.9 million. In a 97-page opinion in O’Keefe v. Mercedes-Benz USA, the judge first tackled a complex jurisdictional issue and then focused on whether the settlement is fair and reasonable.

In the suit, plaintiffs alleged that Mercedes-Benz vehicles were equipped with a defective "Flexible Service System" — a system designed to monitor a car’s driving condition and notify drivers when the vehicle requires an oil change. The alleged problem with the FSS occurs when the driver uses conventional oil instead of synthetic oil. Typically the FSS recommends oil changes somewhere between 10,000 and 20,000 miles with a 12,000-mile average depending on each vehicle’s operation and driving conditions, but conventional oil will allegedly cause engine damage when used for FSS recommended drain intervals. In March 2001, Mercedes-Benz sent all vehicle owners a letter that strongly recommended switching over to pure synthetic oils for all FSS-equipped vehicles to prevent excessive oil consumption and oil sludging.

VanAntwerpen found that the settlement satisfies all of the requirements of Rule 23 of the Federal Rules of Civil Procedure. Individual damages issues were not a problem, VanAntwerpen found, because the settlement effectively solved them since class members will be refunded for repairs caused by the problem and the added warranty will insulate class members from future repair costs. VanAntwerpen found the settlement also "removes the manageability issues that would complicate this litigation."

Turning to the fairness of the settlement, VanAntwerpen applied the so-called Girsh factors — named after the 1975 decision by the 3rd U.S. Circuit Court of Appeals in Girsh v. Jepson.

Nearly all of the factors weighed in favor of approving the settlement, VanAntwerpen found, and the others were simply not relevant. "If this case had gone to trial, it would have been long, expensive and risky for both parties. Trial preparations would have required additional extensive discovery and depositions. Certification of the class for trial would have been challenged … which would have resulted in a round of expensive and timely interlocutory appeals," VanAntwerpen wrote.
"Even if the case then reached trial, plaintiffs may not have prevailed at trial; or defendant may have faced substantial punitive or treble damages. In either event, the losing party would have appealed and added additional delay and expense to both sides," VanAntwerpen wrote. only about 140 of the 667,000 class members opted out, a figure VanAntwerpen described as a "tiny fraction of the class."

VanAntwerpen also found that that the $35 voucher did not present any of the problems that spelled disaster for the proposed settlement of a suit brought by owners of GM trucks.

"The $35 voucher at issue here avoids all of the defects exhibited in the GM voucher," VanAntwerpen wrote. "First, the extended coverage program repairs the product’s defects. Second, the voucher does not force unanticipated dealings between the parties. No class member will be forced to purchase a new vehicle and enter into a new long term contractual relationship," VanAntwerpen wrote. "Third, all class members can use the vouchers. All vehicles need an oil change eventually and all vehicle owners anticipate oil changes. All class members will be given a voucher and they can all use the voucher," VanAntwerpen wrote. As a result, VanAntwerpen said, the $35 voucher was an "appropriate part" of the settlement, and, unlike the GM coupon, could not be criticized as a "marketing tool" for Mercedes Benz.

"The best feature of the voucher that weighs in favor of approving the settlement, is that the voucher does not stand alone. The extended coverage program ensures that the vehicles are repaired and that class members do not suffer a financial loss," VanAntwerpen wrote. "Unlike In re GM Trucks where the voucher constituted the sole form of relief, the $35 voucher is the minor component of the O’Keefe settlement," VanAntwerpen wrote.

Under the settlement, Mercedes Benz promised not to appeal any fee award of $7.5 million or less, but reserved the right to dispute any request by the plaintiffs. When the plaintiffs’ team asked for $7 million, the defense strenuously objected. The key dispute in the battle over the fee award centered on the value of the settlement because federal courts decide fees in class action settlements on the basis of a percentage of the fund.

Both sides agreed that the $35 vouchers were worth about $12.3 million. VanAntwerpen concurred, saying it was a matter of "simple multiplication." But the lawyers argued over the valuation of the extended coverage program. VanAntwerpen found that the first estimate offered by Mercedes Benz was wrong since it was calculated by the probable cost to Mercedes of making the offer.

"We believe that the benefit to the class [is] most accurately measured by making an estimation of the extended coverage program’s market price," VanAntwerpen wrote.

Although such a figure is "difficult to estimate" since the product is "not on the market," VanAntwerpen found that "economists, actuaries, investors and businesspeople must estimate and value risk in all types of market transactions."

As a result, he said, a warranty "is simply the ex ante market price of insuring against a foreseeable risk. Any other measure except the market price would over or underestimate the benefit to the class." VanAntwerpen decided that the best estimate was a $20 million figure offered by a defense expert in a report that used a plaintiffs’ expert’s calculations as its starting point. Adding the values of the vouchers and the warranty, VanAntwerpen concluded that the settlement’s total value was about $32 million.

In deciding the percentage to award, VanAntwerpen found that one of the key factors was that the case had settled quickly. "This case went from filing to settlement in a relatively short time for a complex class action. This factor weighs in favor of a smaller percentage for the class counsel," VanAntwerpen wrote. "By adjusting the fee downward when resolution occurs early, we help ensure that the class counsel adequately represents the best interest of the class. … If the percentage remained the same for any settlement whether it was reached in one week, one year or one decade, class counsel would have an incentive to settle early and reap quick rewards," VanAntwerpen wrote. By awarding a smaller percentage in shorter cases and a larger percentage in more developed cases, VanAntwerpen said, courts "can ensure that class counsel is rewarded for a more thorough crusade and punished for only a cursory inquiry before settlement."

VanAntwerpen decided that 15 percent of the fund was an appropriate fee award because the case was not as complex as a securities case in which fee awards are more likely to be one-third of the fund. "As a starting point, we would have awarded a twenty percent fee in an average non-securities and non-antitrust suit. We believe that the short duration and the simplicity of this case require a lower percentage," VanAntwerpen wrote. "We believe that 15 percent takes into account the simplicity and speed of this litigation."

The District Court’s approval of the settlement is reported at:: O’Keefe v. Mercedes-Benz USA, 214 F.R.D. 266 E.D.Pa. 2003.