Ali v. Franklin Wireless Corp. ( 2024 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 MOHAMMED USMAN ALI, Case No.: 21-cv-00687-AJB-MSB Individually and on Behalf of All Others 12 ORDER DENYING WITHOUT Similarly Situated, PREJUDICE LEAD PLAINTIFF’S 13 MOTION FOR PRELIMINARY Plaintiffs, 14 APPROVAL OF CLASS ACTION SETTLEMENT 15 vs. 16 (Doc. No. 63) FRANKLIN WIRELESS CORP., OC 17 KIM, and DAVID BROWN, 18 Defendants. 19 20 Before the Court is Gergely Csaba’s (“Lead Plaintiff”) motion for preliminary 21 approval of class action settlement. (Doc. No. 63.) Franklin Wireless Corp., OC Kim, and 22 David Brown (“Defendants”) filed a notice of joinder in Lead Plaintiff’s motion. (Doc. No. 23 66.) For the reasons set forth below, the Court DENIES the motion WITHOUT 24 PREJUDICE to a renewed filing addressing the deficiencies identified herein. 25 I. BACKGROUND 26 On April 16, 2021, Mohammed Usman Ali filed a Class Action Complaint against 27 Defendants for violations of the Securities Exchange Act of 1934 (the “Exchange Act”). 28 (Doc. No. 1.) On September 15, 2021, the Court appointed Gergely Csaba as Lead Plaintiff 1 and Pomerantz LLP (“Pomerantz”) as Lead Counsel pursuant to section 21D(a)(3)(B) of 2 the Exchange Act. (Doc. No. 15.) 3 The operative pleading in this case is the Amended Complaint (“FAC”). (Doc. No. 4 26.) The FAC details that Franklin is a provider of wireless solutions, including mobile 5 hotspots, routers and modems, and markets and sells its products directly to wireless 6 operators, as well as indirectly through partners and distributors. (Id. at 5.) According to 7 the FAC, Defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 8 10b-5 promulgated thereunder by misleading the market to believe that the Company had 9 no knowledge that its mobile hotspot devices were manufactured with defective lithium-ion 10 batteries. (Id.) The FAC alleges that during the class period, Franklin knew, but did not 11 disclose that the hotspot devices were manufactured with defective lithium-ion batteries 12 that posed a serious safety hazard because the batteries could overheat and cause severe 13 burns and, in some cases, catch fire. (Id. at 5, 11–18.) Defendants filed an Answer (Doc. 14 No. 27), and discovery thereafter commenced with the parties exchanging documents on a 15 rolling basis. 16 On January 3, 2023, the Court granted Plaintiff’s motion for class certification and 17 certified the following Class: 18 All persons and entities other than defendants who purchased or otherwise 19 acquired Franklin Wireless Corporation (“Franklin” or the “Company”) common stock between September 17, 2020 and April 8, 2021 (the “Class 20 Period”), inclusive. Excluded from the Class are any parties who are or have 21 been Defendants in this litigation, the present and former officers and directors of Franklin and any subsidiary thereof, members of their immediate 22 families and their legal representatives, heirs, successors or assigns and any 23 entity in which any current or former Defendant has or had a controlling interest. 24 25 (Doc. No. 50.) 26 On May 1, 2023, the parties attended mediation with Jed D. Melnick, Esq., an 27 experienced mediator. Prior to the mediation, the parties submitted comprehensive 28 mediation statements setting forth the strengths and weaknesses of their case. The 1 mediation resulted in the parties’ agreement to settle the action. The parties memorialized 2 their agreement in a memorandum of understanding (“Memorandum”), which they fully 3 executed on May 3, 2023. The Memorandum sets forth, among other things, the parties’ 4 agreement to settle and release all claims that were asserted or could have been asserted in 5 the action in exchange for a payment by or on behalf of Defendants of $2,400,000 for the 6 benefit of the Class. The instant motion for preliminary approval of class action settlement 7 follows. (Doc. No. 63.) 8 II. TERMS OF THE PROPOSED SETTLEMENT 9 Lead Plaintiff, on behalf of himself and the Class, and Defendants Franklin Wireless 10 Corp., OC Kim, and David Brown (collectively “Defendants”) have executed a 11 “Stipulation and Agreement of Settlement” (“Settlement Agreement”). (Doc. No. 63-2.) 12 The primary terms of the Settlement Agreement are as follows. 13 A. Settlement Amount 14 The parties agreed to settle the instant class action for $2,400,000 (“Settlement 15 Amount”) to be paid by Defendant in exchange for the release of claims. The Settlement 16 Amount plus any interest earned thereon will be used to pay: (a) any Taxes; (b) any Notice 17 and Administration Costs; (c) any Litigation Expenses awarded by the Court; and (d) any 18 attorneys’ fees awarded by the Court. The remaining balance (“Net Settlement Fund”) will 19 be distributed to authorized claimants. 20 B. Settlement Notice and Administration 21 The proposed Notice contains detailed information about this action, including what 22 the lawsuit is about, why there is a settlement, who is included in the settlement, the 23 settlement benefits, how to receive payment, how to object to or be excluded from the 24 settlement, lawyer representation, and the final approval hearing. (Doc. No. 63-4.) The 25 Notice also contains information of the proposed “Plan of Allocation” and the calculations 26 to be used to determine a claimant’s recognized loss per share of Frankin stock. (Id. at 21– 27 30.) 28 // 1 The parties selected Epiq as “Claims Administrator” to administer the settlement. 2 (Doc. No. 63-2 at 6.) Franklin will provide Epiq the names and addresses of the holders of 3 Franklin Securities during the Class Period. Epiq will mail the Notice to class members. In 4 addition, Epiq will publish a summarized version of the Notice (“Summary Notice”) on a 5 national business newswire and maintain a website containing a copy of the Notice, 6 Summary Notice, Claim Form and Release Form, and Settlement Agreement. 7 According to the parties’ Settlement Agreement, “Counsel may pay from the 8 Settlement Fund, without further approval from Defendants or further order of the Court, 9 all Notice and Administration Costs actually incurred and paid or payable up to $250,000.” 10 (Doc. No. 63-2 at 17.) 11 C. Attorneys’ Fees, Costs, and Class Representative Award 12 The class Notice states that Lead Counsel will seek an award for attorneys’ fees “in 13 an amount not to exceed 33.33% of the Settlement Fund plus interest” and litigation 14 expenses “in an amount not to exceed $300,000.” (Doc. No. 63-4 at 5.) 15 D. Releases 16 In exchange for Defendants’ $2,400,000 payment, class members who do not opt 17 out of the Class release the following claims against Defendants. 18 [A]ny and all claims, demands, rights, causes of action and liabilities, of every nature and description whatsoever, whether based in law or equity, arising 19 under federal, state, local, statutory or common law, or any other law, rule or 20 regulation, including both known and Unknown Claims, that have been or could have been asserted in any forum by the members of the Class, or the 21 successors or assigns of any of them, in any capacity, arising out of, based 22 upon or related in any way to the purchase, acquisition, sale, or ownership of Franklin Securities during the Class Period. 23 24 (Doc. No. 63-2 at 10–11.) 25 They do not include any claims relating to the enforcement of the Settlement 26 Agreement; any claims of any person or entity who or which submits a request for 27 exclusion that is accepted by the Court; and any claims that already have been brought 28 derivatively related to Franklin Securities during the Class Period. (Id. at 11.) 1 III. LEGAL STANDARD 2 The Ninth Circuit has a strong policy that favors settlements in class actions. Class 3 Plaintiffs v. City of Seattle, 955 F.2d 1268, 1276 (9th Cir. 1992). A class action, however, 4 may not be settled without approval of the court. Hanlon v. Chrysler Corp., 150 F.3d 1011, 5 1025-26 (9th Cir. 1998) (citing Fed. R. Civ. P. 23(e)). The primary concern is the protection 6 of class members, including the named plaintiffs, whose rights may not have been given 7 due regard by the negotiating parties. Officers for Justice v. Civil Serv. Comm’n of City & 8 Cty. of San Francisco, 688 F.2d 615, 624 (9th Cir. 1982). 9 Court approval of a settlement involves a two-step process—preliminary approval, 10 followed by final approval of the settlement. See In re M.L. Stern Overtime Litig., 11 No. 07-CV-0118-BTM (JMA), 2009 WL 995864, at *3 (S.D. Cal. Apr. 13, 2009). The 12 court need not review the settlement in detail at this juncture. See id. Preliminary approval 13 and notice of the settlement terms to the proposed class are appropriate where the 14 settlement (1) appears to be the product of serious, informed, non-collusive negotiations, 15 (2) has no obvious deficiencies, (3) does not improperly grant preferential treatment to 16 class representatives or segments of the class, and (3) falls with the range of possible 17 approval. See Eddings v. Health Net, Inc., No. CV 10-1744-JST RZX, 2013 WL 169895, 18 at *2 (C.D. Cal. Jan. 16, 2013). At the same time, however, “a district court may not simply 19 rubber stamp stipulated settlements.” Kakani v. Oracle Corp., No. C 06-06493 WHA, 2007 20 WL 1793774, at *1 (N.D. Cal. June 19, 2007). 21 IV. DISCUSSION 22 Upon review of the proposed settlement and Lead Plaintiff’s motion, the Court finds 23 there are several deficiencies and insufficiently explained terms which prevent it from 24 evaluating the fairness, adequacy, and reasonableness of the proposed settlement. 25 A. Indeterminate Net Settlement Fund 26 To begin, neither the Settlement Agreement nor Lead Plaintiff’s motion contain 27 enough information for the Court to determine the Net Settlement Fund—the actual amount 28 the Class stands to recover from the settlement. According to the Settlement Agreement, 1 the Net Settlement Fund will be what remains of the $2.4 million gross settlement after any 2 attorneys’ fees, litigation expenses, notice and administration costs, and taxes are paid. 3 (Doc. No. 63-2 at 9.) The filings indicate Lead Plaintiff will be requesting attorneys’ fees 4 “in an amount not to exceed 33.33% of the Settlement Fund plus interest”; litigation 5 expenses “in an amount not to exceed $300,000”; and notice and administration costs “up 6 to $250,000.” (Doc. Nos. 63-2 at 17; 63-4 at 4.) There is no indication of the projected 7 amount of taxes to be paid. 8 Settlement Amount $2,400,000 9 Maximum Attorneys’ Fees (33.33% of Settlement Amount) ($799,920) 10 Maximum Litigation Expenses ($300,000) Maximum Notice and Administration Costs ($250,000) 11 Taxes (?) 12 $1,050,080 13 Net Settlement Fund minus taxes 14 From the numbers and percentages provided, the Net Settlement Amount is 15 indeterminate and unlikely to yield $1 million. And while the Court recognizes that the 16 litigation and administration costs are estimates, the amounts nevertheless appear excessive 17 compared to those in other settlements of similar securities cases. See, e.g., In re Aqua 18 Metals, Inc. Sec. Litig., No. 17-CV-07142-HSG, 2022 WL 612804, at *4 (N.D. Cal. Mar. 19 2, 2022) (approving $7 million settlement and $95,634.04 litigation expenses.); Fleming v. 20 Impax Lab’ys Inc., No. 16-CV-06557-HSG, 2022 WL 2789496, at *7 (N.D. Cal. July 15, 21 2022) (approving $133 million settlement and $176,501.78 litigation expenses). 22 In addition, Lead Plaintiff’s filings do not specify the number of individuals in the 23 Class or any estimated low-end, average, or high-end payments to be made to them. Nor is 24 there an explanation as to why such numbers cannot be determined. Without more, the 25 Court cannot ascertain whether “the relief provided for the class is adequate.” Fed. R. Civ. 26 P. 23(e)(2)(C). 27 B. Unequal Treatment of Class Members 28 Next, the proposed settlement appears to treat class members unequally. For 1 example, while the Plan of Allocation provides that the Net Settlement Fund will be 2 distributed to claimants on a pro rata basis based on the relative size of their recognized 3 claims, if a claimant’s distribution amount is less than $10, it will not be included in the 4 calculation and that claimant will not receive a distribution. (Doc. No. 63-4 at 26–27.) Lead 5 Plaintiff’s filings do not explain why this disqualification is fair or reasonable. Cf. Fleming, 6 No. 16-CV-06557-HSG, 2022 WL 2789496, at *2 (approving a settlement agreement that 7 provided: “If any claimant's Distribution Amount calculates out to be less than $10.00, the 8 claimant’s Distribution Amount will be increased to $10.00.”). 9 The proposed settlement also contains certain limitations on what will be deemed an 10 eligible purchase or acquisition of Franklin shares for purposes of distribution. (Doc. No. 11 63-4 at 27.) For instance, unless certain criteria are met, the “receipt or grant by gift, 12 inheritance or operation of law of Franklin Securities during the Class Period shall not be 13 deemed a purchase or acquisition of Franklin securities for the calculation of an Authorized 14 Claimant’s Recognized Loss.” (Id.) Also ineligible is the “receipt of Franklin securities 15 during the Class Period in exchange for securities of any other corporation or entity.” (Id.) 16 As previously described, the class definition includes all persons and entities “who 17 purchased or otherwise acquired Franklin Wireless Corporation.” (Doc. No. 50.) The 18 additional criteria would therefore disqualify certain class members from obtaining relief, 19 while at the same time, bind them to the settlement and release of claims. Because Lead 20 Plaintiff provides no explanation for limiting relief to certain class members, the Court is 21 unable to evaluate whether such difference in treatment is fair or reasonable. See Fed. R. 22 Civ. P. 23(e)(2)(D) (requiring the court to consider whether “the proposal treats class 23 members equitably relative to each other.”). 24 C. Redistribution of Remaining Funds 25 Lead Plaintiff also has not adequately explained the process for redistribution of 26 remaining funds. According to the proposal, if funds remain after initial distribution, the 27 Claims Administrator will conduct a re-distribution “if Class Counsel, in consultation with 28 the Claims Administrator, determines that it is cost-effective to do so.” (Doc. No. 63-4 at 1 29.) There is no indication what happens to the remaining balance if redistribution is 2 determined not to be cost-effective. The Court therefore finds the proposed settlement 3 additionally deficient in this regard. Cf. Fleming, No. 16-CV-06557-HSG, 2022 WL 4 2789496, at *2 (approving a settlement that provided a cy pres designation for any 5 remaining funds to Investor Protection Trust); In re Aqua Metals, Inc., No. 17-CV-07142- 6 HSG, 2022 WL 612804, at *2 (approving cy pres designation to Loyola University School 7 of Law’s Institute for Investor Protection). 8 D. Overbroad Release 9 Lastly, the proposed settlement’s release provision is overbroad. While Lead 10 Plaintiff’s motion states that the release covers “all claims that were asserted or could have 11 been asserted in the Action,” (Doc. No. 63 at 10), the language in the Settlement Agreement 12 is far more sweeping. The scope of the release covers any and all claims that have been or 13 could have been asserted in any forum by the class members arising out of, or based upon 14 or related in any way to, the purchase, acquisition, sale, or ownership of Franklin Securities 15 during the Class Period. (Doc. No. 63-2 at 10–11.) It is not limited to only those claims 16 that arise out of the factual allegations in the operative complaint. 17 Ninth Circuit case law indicates that release provisions are enforceable “only where 18 the released claim is ‘based on the identical factual predicate as that underlying the claims 19 in the settled class action.’” Hesse v. Sprint Corp., 598 F.3d 581, 590 (9th Cir. 2010) 20 (quoting Williams v. Boeing Co., 517 F.3d 1120, 1133 (9th Cir.2008)). As such, “[d]istrict 21 courts in this Circuit have declined to approve settlement agreements where such 22 agreements would release claims based on different facts than those alleged in the litigation 23 at issue.” Chavez v. PVH Corp., No. 13-CV-01797-LHK, 2015 WL 581382, at *5 (N.D. 24 Cal. Feb. 11, 2015) (collecting cases). 25 Because the proposed release indiscriminately covers any and all claims arising out 26 of the class members’ ownership of Franklin shares during the Class Period—without 27 regard to whether such claim arises out of, or bears any relation to, the allegations in the 28 operative complaint—it does not merit approval. Lead Plaintiff has not provided any | |}argument or case law to the contrary. 2 36 3s 3 Based on the foregoing deficiencies, the Court declines to grant the proposed 4 || Settlement Agreement. 5 || V. CONCLUSION 6 Accordingly, the Court DENIES Lead Plaintiff's motion for preliminary approval of 7 action settlement. (Doc. No. 63.) The denial is WITHOUT PREJUDICE to the 8 || filing of renewed motion addressing the deficiencies identified in this Order. The renewed 9 || motion must be filed no later than February 26, 2024 and contain information and case law 10 || authority establishing that the proposed settlement is within the range of possible approval. 11 IT IS SO ORDERED. 12 Dated: January 24, 2024 © ¢ 13 Hon, Anthony J.Battaglia 14 United States District Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28