A federal judge in Newark has signed off on a $3 million settlement of suits against the maker of anti-aging cream Hydroxatone over allegedly shoddy business practices.
U.S. District Judge Kevin McNulty approved the agreement on Nov. 22 despite a vehement challenge by an objector who maintains the litigation is worth tens of millions more.
A pair of putative class actions were filed in July and August 2011, claiming that Jersey City-based Hydroxatone—which offers free trials on products of the same name—made unauthorized $70 credit card charges, shipped unwanted products and didn’t honor its return policy.
According to court documents, Hydroxatone and co-defendant Atlantic Coast Media Group of Jersey City, its marketing company, engaged the plaintiffs’ lawyers in Sabol v. Hydroxatone during discovery.
Lisa Margolis of Richmond Heights, Ohio—the lead plaintiff in the other suit, Margolis v. Hydroxatone—was invited to join but declined.
She instead set out to distinguish her suit from Sabol through amendments, particularly by highlighting that she signed up for the trial through an automated-call system instead of a live sales representative. Margolis also added two defendants: Hydroxatone principal Thomas Allan Shipley and Marketing Architects, a consultant that facilitated the automated-call system.
In early 2013, Margolis moved to consolidate the suits, alleging collusion in the Sabol settlement talks.
But the motion was denied and the parties reached an agreement approved by the mediator, retired U.S. District Judge Stephen Orlofsky, now a partner at Blank Rome in Princeton.
The deal called for establishment of a $3 million common fund, one-third of which would be allotted for attorney fees.
Claimants who had attempted to obtain a refund may receive a cash award of up to $100, while those who made no such attempt are entitled to more Hydroxatone products.
As of Aug. 15, the end of the claims period, 41,813 had been submitted.
Margolis challenged the settlement, sought Sabol discovery materials and ended up filing the lone substantial objection—claiming that the litigation was worth upward of $300 million.
But McNulty certified the Sabol class and gave final approval to the settlement.
He dispensed with Margolis’ attempt to distinguish a separate class of customers who bought Hydroxatone through the automated-call system rather than speaking with a representative, noting that about half of the 2.6 million Sabol class members used the automated system.
Margolis, therefore, is a member of the Sabol class, he noted.
And Margolis’ $300 million calculation is “manufactured from thin air,” McNulty said.
Sales via the automated system through 2011, the end of the class period, were closer to $80 million, and neither figure reflects damages incurred by the plaintiffs, he said.
There’s no evidence that the defendants have assets that would allow for a greater judgment, the judge added. He noted combined losses of $9.85 million in 2011 and 2012, a 58 percent drop in net worth, a slashing of the work force by nearly two-thirds and $14 million owed to creditors.
“More fundamentally, ‘insolvency’ is not a requirement” and “a settlement is not to be deemed inadequate because it failed to drive the defendant out of business,” McNulty wrote.
He also struck Margolis’ argument that additional insurance benefits were left on the table, noting that just one of Hydroxatone’s three carriers approved coverage for the settlement.
McNulty also found, contrary to Margolis’ claims, that the settlement’s release was not overbroad.
McNulty said other evaluative factors, such as the likely cost of further litigation, all favored approval.
Margolis will appeal, says her lawyer, Patrick Perotti of Dworkin & Bernstein in Painesville, Ohio.
“When you have millions of dollars in insurance coverage that is not being accessed…the settlement cannot be reasonable,” Perotti says.
Andrew Friedman of Cohen Milstein in Washington, D.C., class counsel in Sabol, calls it “a good settlement…in light of the circumstances.”
It was challenging “trying to get compensation for a class that was difficult to certify, from a defendant that was not financially strong,” Friedman says.
Michael Lynch of Kelley Drye in New York, the defendants’ counsel, calls it a “very, very fair settlement.”
He adds, “The court, we think, got this exactly right.”