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Sharper Image Claims Reimbursing Customers Will Cause Bankruptcy
Daily Business Review
August 16, 2007
Financial experts for retailer Sharper Image are expected to testify today that the company could be pushed into bankruptcy if it is forced to pay up to $900 million to settle a class action lawsuit being pushed by 27 state attorneys general and several plaintiffs attorneys.
At a final fairness hearing today, U.S. District Judge Cecilia Altonaga must weigh Sharper Image's financial health against the demands of various plaintiff groups and attorneys general who want customers compensated for $300 air purifiers they say were ineffective.
An estimated 3 million consumers have purchased the San Francisco-based company's Ionic Breeze purifiers since 1999. The machine, which was supposed to remove dust, pollen and other pollution from household air, did not work and in some cases caused more health problems, such as allergies, according to consumers.
Consumer Reports magazine slammed the device in one of its issues.
A plaintiff group represented by Coral Gables, Fla., attorney Robert Parks and the firm of Lightfoot Franklin & White in Birmingham, Ala., is seeking final approval for a settlement that would provide consumers with $19 coupons on future purchases, plus an "ozone guard" attachment to the machine, subject to availability.
Sharper Image and plaintiffs attorneys for the 3 million customers in one case agreed to the settlement, which also provides for $1.8 million in attorney fees.
"We think we have a strong, viable settlement," Parks said.
But the settlement Sharper Image confidently promoted in a report to shareholders may be derailed.
Miami attorney Michael Tein, who represents an estimated 2 million consumers in a parallel class action lawsuit now stayed in California state court, intervened in the South Florida case in January. He argued in court papers that class members should be fully compensated in cash. He said the coupon settlement would provide plaintiffs with, after shipping and handling, socks, a holiday CD or a trick golf ball.
Tein also accused the company of colluding with Parks to bring a secret settlement in Florida, calling the proposed Florida settlement a "reverse auction."
Parks and Sharper Image attorney David Aronoff of Los Angeles denied in court papers that any collusion existed.
Since Tein's intervention, a host of other parties have also intervened, strongly objecting to the proposed Florida settlement. Filing amicus briefs against the settlement were 27 attorneys general, including those from Florida, Tennessee, Illinois and Washington, D.C. The attorneys general intervened after being notified of the proposed settlement, as is customary with all class action national settlements.
"The attorney general expressed concern about the originally proposed settlement, which led to further negotiations between the parties and ultimately, enhanced consumer restitution," said Sandi Copes, spokeswoman for Florida Attorney General Bill McCollum. "The attorney general's office regularly reviews class action settlements which affect Florida consumers, and we are always interested in making sure consumers' best interests are met, whether through consumer restitution or changes in companies' business practices."
Despite negotiations with attorneys involved in the settlement, the attorneys general still object.
One of their objections is that the settlement does not meet the spirit of the 2005 Class Action Fairness Act. That federal law sought to reduce coupon settlements. Recent studies suggest that only 13 percent of coupons are redeemed in consumer class actions. Also objecting is Public Justice, a Washington, D.C., public interest law firm. Palm Beach Gardens attorney Ted Leopold is handling the case for the group pro bono.
"The fact that the only way in which class members can obtain value from their coupons is by spending more money at Sharper Image raises serious questions about the fairness of this agreement," lead counsel Amy Radon, Public Justice's Goldberg Waters & Kraus fellow, said in a statement.
At the hearing, Parks and Sharper Image attorneys plan to argue that would bankrupt the company. Parks plans to produce a witness at the hearing, James Hitchner of the Financial Valuation Group of Atlanta, who did a financial analysis of the retailer. Hitchner -- who charges $525 an hour as an expert witness -- will testify about his conclusions that the company "is both weak and underperforming" and has a "high probability of bankruptcy within the next 12 months."
The company's stock price has declined from $36.16 at the end of fiscal year 2004 to Tuesday's close of $5.60. The shares trade on the Nasdaq exchange.
"This is a company on the brink," Hitchner wrote in his report on file with the court. Tein said he plans to aggressively dispute the financial claims during cross- examination. Robert Jarvis, a law professor at Nova Southeastern University in Davie, Fla., said he was surprised that the attorneys general banded together to join the case. He said they don't usually intervene in consumer cases "unless people get very sick."
Jarvis surmised the case has become high profile because of the sheer size of the class and the potential dollars involved, mixed in with a prominent company.
Jarvis doubted the class members would wind up getting full refunds and agreed with the company that a $1 billion settlement would drive it out of business. "That's why we invented coupons," he said.
"I tell my students all the time that class action lawsuits are an ineffective way of getting redress," Jarvis said. "The attorneys are the only ones who get paid in cash."
It's unclear whether Altonaga will rule from the bench. If she rejects the settlement, Tein said he will move forward with his suit in California.
