Have coupon settlements reached their expiration date?

Kate Wallace and Laura Diss Gradel,
BridgeTower Media Newswires

 In 2005, the Class Action Fairness Act created new rules for federal class actions, particularly with respect to “coupon settlements” in which defendants pay aggrieved class members in coupons but pay class counsel in cash.

CAFA was passed primarily to curb perceived abuses of the class action device, including Congress’s concern that, by decoupling the interest of the class and its counsel, coupon settlements may incentivize lawyers to “negotiate settlements under which class members receive nothing but essentially valueless coupons, while the class counsel receive substantial attorney’s fees.”

This article examines Congress’s efforts to regulate coupon settlements, which have taken two primary forms. The first invites judicial scrutiny of coupon settlements, which, because CAFA does not define “coupon,” requires courts first to determine if the proposed settlement is, in fact, a “coupon settlement” subject to CAFA. The second involves a series of specific rules that govern the award of attorneys’ fees in coupon settlements.

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What is a coupon?

CAFA does not define the term “coupon,” which predictably has resulted in courts adopting differing definitions.

The 7th Circuit has taken a broad view of the term “coupon” by rejecting “a proposed distinction between ‘vouchers’ (good for an entire product) and ‘coupons’ (good for price discounts).” In re Southwest Airlines Voucher Litig., 799 F.3d 701, 706 (7th Cir. 2015); Redman v. Radioshack Corp., 768 F.3d 622, 636-37 (7th Cir. 2014) (whether the coupon is a discount off the full price of an item or is equal to or more than the item’s full price is irrelevant).

When determining whether a non-cash award constitutes a coupon, the 7th Circuit considers: whether a class member must do business again with the defendant; the coupon’s value; and whether the coupons are restricted, i.e., they expire quickly, are not transferable, and/or cannot be aggregated. Southwest Airlines, 799 F.3d at 706; see also Berkson v. Gogo LLC, 147 F. Supp. 3d 123, 131 (E.D.N.Y. 2015) (adopting the 7th Circuit’s approach).

In contrast, the 9th Circuit defines “coupons” narrowly: Coupons “require class members to pay their own money before they can take advantage of the coupon.” Hofmann v. Dutch LLC, 317 F.R.D. 566, 575 (S.D. Cal. 2016). Under that definition, a voucher that allows a consumer to purchase an entire item without spending his own money is not considered a “coupon” for CAFA purposes.

For example, under the 9th Circuit’s approach, neither $12 gift cards to a major retailer that could be used on any item nor vouchers for massage services constitute coupons for the purposes of CAFA. In contrast, a $20 e-certificate that does not cover the cost of a single item and has use restrictions constitutes a coupon. Hofmann, 317 F.R.D. at 575; see also Brown v. 22d Dist. Agric. Ass’n., No. 3:15-cv-02578-DHB, 2017 WL 2172239, at *12 (S.D. Cal. May 17, 2017) (discounted admission to county fair a coupon because class members must buy ticket to receive benefit).

In the 1st Circuit, only one court has addressed the question of what constitutes a coupon under CAFA. In Tyler v. Michaels Stores, Inc., 150 F. Supp. 3d 53, 58 (D. Mass. 2015), the District of Massachusetts elected to “chart its own path” and defined a coupon settlement as one in which “class members must transact business with the defendant to obtain the benefit of the settlement.” Id. at 60.

In other words, a coupon settlement exists when something must be redeemed by the class member to access the settlement award. Id.; see also Rougvie v. Ascena Retail Grp. Inc., No. 15-724, 2016 WL 4111320, at *27 (E.D. Pa. July 26, 2016) (same).

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Calculating attorneys’ fees in a coupon settlement

Once a court determines that a settlement involves “coupons,” it must determine the appropriate method for calculating attorneys’ fees.

When reviewing proposed settlements, courts tie the value of a fee award to the value of the class recovery to ensure that class counsel acts in the best interest of the class. In re HP Inkjet Printer Litig., 716 F.3d 1173, 1178 (9th Cir. 2013).

When both class members and their attorneys are paid in cash, this is a fairly straightforward process. The court can assess the relative value of the attorneys’ fees and the class relief by comparing the amount of cash paid to the attorneys with the amount of cash paid to the class.

But when counsel is paid in cash, and the class receives coupons, comparing the value of the fees with the value of the recovery is more difficult. Unlike a cash settlement, coupon settlements involve variables that make their value difficult to appraise, such as redemption rates and restrictions.

For instance, a coupon settlement is likely to provide less value to class members if the coupons are non-transferable, expire quickly or cannot be aggregated. Id. at 1179.

In passing CAFA, Congress intended to eliminate the inequity that arises when class counsel receive attorneys’ fees that are disproportionate to the actual value of the coupon relief obtained for the class.
Class counsel’s cash compensation in a coupon settlement is determined by either the lodestar standard or the percentage-of-recovery method. The lodestar method involves multiplying the number of hours counsel reasonably expended on litigating a claim by a rate that is determined based on counsel’s skill and experience.

Although CAFA permits either method when calculating attorneys’ fees, courts are split as to which method may be or must be used in certain circumstances.

In the 9th Circuit, lodestar fees are prohibited when the settlement awards only coupons to class members. In such instances, attorneys’ fees must be determined based on the value of the coupons redeemed. HP Inkjet, 716 F.3d at 1182-83.

The court retains discretion to award lodestar fees if the settlement is based “in part” on coupon relief. Id. at 1184.

However, in mixed settlements that award both coupon and equitable relief, the court must use the value of the coupons redeemed when determining the value of the coupon part of the settlement, and perform a separate calculation to determine a reasonable lodestar amount to compensate counsel for any non-coupon relief obtained. Id. at 1184-85. Cf. id. at 1187-97 (Berzon, J., dissenting) (taking position that court may award lodestar fees for either coupon or non-coupon relief).

In the 7th Circuit, the lodestar method may be used to calculate attorneys’ fees even when those fees are intended to compensate counsel for coupon relief. Southwest Airlines, 799 F.3d at 707. However, in using the lodestar method, courts should be mindful of the potential for abuse inherent in coupon settlements and should “evaluate critically the claims of success on behalf of the class receiving coupons.” Given that the settlement “actually ma[de] the class whole,” the court determined that the ratio of class relief to attorneys’ fees was of “little force here.”

In the District of Massachusetts, the Tyler court similarly concluded that when a class settlement awards coupons to class members, the court retains discretion to calculate attorneys’ fees either by using a percentage of the redeemed coupons under subsection (a), or employing the lodestar method under subsection (b). Tyler, 150 F. Supp. 3d at 65; see also Rougvie, 2016 WL 4111320 at *27 (same).

However, the Tyler court made clear that it is unlikely to employ the lodestar method absent extraordinary circumstances:

“Given the hostility to disproportionately large fee awards to class counsel evident in the legislative history — at least insofar as fees generated from obtaining coupon settlements were concerned — counsel may reasonably expect that this Court will generally award attorneys’ fees based on a percentage of the actual value of the coupons redeemed by class members, absent the groundbreaking nature of this case.”

— Tyler, 150 F. Supp. 3d at 67.

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Trends and takeaways

In the two years since the Tyler decision, few coupon settlements have been approved under CAFA.

In the 9th Circuit, the paucity of coupon settlements appears to stem from that circuit’s narrow definition of “coupon.” That is, although many cases involve non-cash or mixed settlements, these awards are categorized as non-coupon settlements and thus not subject to CAFA. See, e.g., In re: Easysaver Rewards Litig., No. 09-CV-02094-BAS-WVG, 2016 WL 4191048, at *1 (S.D. Cal. Aug. 9, 2016) ($20 “merchandise credit” for purchase of any item not coupon); In re Groupon Marketing And Sales Practices Litig., Order, No. 3:11-md-02238-DMS-RBB, 6-7 (S.D. Cal. March 23, 2016) (“Groupon credit” to purchase products without any out-of-pocket expense not a coupon).

In the 7th Circuit, where “coupon” is defined broadly, the trend away from coupon settlements likely reflects the increased scrutiny being given to attorneys’ fee awards in class actions settlements.

In the 1st Circuit, and Massachusetts specifically (where the definition of “coupon” covers most non-cash settlements), the small number of coupon settlements likely reflects the Tyler court’s warning that it will not award lodestar fees in a coupon settlement absent “groundbreaking” circumstances. Tyler, 150 F. Supp. 3d at 67. Tyler appears to have provided class counsel with a disincentive to settle for coupon relief.

Ultimately, these cases continue the trend seen in recent years in which courts considering proposed coupon settlements will scrutinize both the settlement terms and fee awards — including lodestar awards — in light of the benefit actually conferred on the class.

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Kate Wallace is a partner in Jones Day’s antitrust and competition practice. Laura Diss Gradel is an associate in the business and tort litigation practice. Both are based in the firm’s Boston office. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.


 

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