Inside Counsel Magazine, July 2008

Clipping Coupons

From Inside Counsel Magazine July 2008 Issue

By Melissa Maleske

July 1,2008

When Ford Motor Co. offered a coupon to settle claims related its Explorer, commentators in the media latched onto the story as another example of unfair coupon settlements. Class members claimed that reports of rollovers had negatively impacted the retail value of their vehicles. The deal, which won final approval in April, resolved claims in four consolidated cases. It provided class members with a $500 coupon toward a new Ford Explorer or a $300 coupon to purchase or lease any Ford, Lincoln or Mercury. Meanwhile, class counsel collected fees of $25 million.

Clarence Ditlow, executive director of the consumers’ group Center for Auto Safety, lambasted the settlement in the Sacramento (Calif.) Bee, commenting, “They should pay the lawyers in coupons.”

An Explorer owner told an ABC affiliate in Sacramento, “They get $25 million, all I get is this lousy coupon, which I’m not going to use.”

The complaints touched on issues that were supposed to have been resolved following enactment of the Class Action Fairness Act of 2005 (CAFA), which seeks to end various abuses of the class action system in federal court, including abuse of coupon settlements.

“Attorneys were resorting to coupon settlements as a way to inflate the value of the settlement,” says Ted Frank, director of the American Enterprise Institute’s Legal Center for the Public Interest. “Without that ability there’s no reason to resort to coupon settlements at the federal level. … On the other hand, you still see them being used.”

Although CAFA did not apply to the settlement in Ford’s case, which was filed and remained in state court, the act’s ripple effects have spread throughout the courts, where judges increasingly are paying attention to CAFA’s provisions.

The main objective of CAF A is to prevent plaintiffs from “forum-shopping” in state courts. To that end, it removes state class actions to federal court when the aggregate value of the claims exceeds $5 million, there are at least 100 class members and any member of the class is a citizen of a different state than any defendant.

Its other goal is to ensure settlements are fair, reasonable and adequate to class members. Jason Sultzer, a litigation partner in Wilson Elser Moskowitz Edelman & Dicker, points to a 1995 settlement involving Cheerios, in which class members received a box of cereal while lawyers walked away with $1.75 million. “Those kinds of examples were fairly common before CAFA,” he adds.

Ending Abuse

Preventing such abusive settlements was a major reason CAFA was enacted. Now in federal class actions, a court must hold hearings on a proposed coupon settlement and issue a written opinion approving or rejecting it.

“CAFA doesn’t prohibit anyone from using a coupon settlement as a way to settle a case, but it closes the door a bit,” Sultzer says. “That could hurt a company.”

That’s because for companies that offer goods and services, coupon settlements can have numerous benefits, allowing companies to gain promotional value and customer awareness rather than paying out large cash settlements. They are a good fit for companies that may face financial uncertainties, such as Ford, and for products that garner repeat customers.

New restrictions on coupon settlements don’t just apply to cases removed to federal court under CAFA. Any civil class action filed in federal district court is subject to CAFA requirements, including those on coupon settlements. And the effects of CAFA are spreading so that judges in general are scrutinizing coupon settlements at a higher level than they did just five to 10 years ago, even when CAFA does not apply. For instance, Brian Procel, an associate with Miller Barondess, is currently awaiting final approval of a coupon settlement. Although his case is a state class action to which CAFA does not apply, he still finds that judicial scrutiny of the coupon is heightened.

Frank echoes this view: “At the state level, some judges have paid attention to what’s happened at the federal level and are giving coupon settlements more scrutiny.”

Before a court scrutinizes a coupon, it must determine that the settlement actually is considered a coupon under CAF A. The act provides no clear definition.

For both sides, rejection of a coupon settlement can prevent a desired settlement, Sultzer says. “Both parties, if they want to settle a case, may now want to try to take a settlement outside the context of it being a coupon settlement. They may not want to label it as such so it won’t fall within that strict scrutiny.”

In addition, the definition of a coupon is important because whether a court defines it as such has a great impact on how attorneys’ fees are calculated.

Coupon Classifications

A few cases address the definition of a coupon. In Perez v. Asurion Corp., a 2007 CAFA case, the company agreed to settle claims by providing national class members with phone cards worth $5 or 50 minutes. Some subclass members were to receive vouchers for wireless phones.

The U.S. District Court for the Southern District of Florida considered this a coupon because, it said, “Although the phone cards and vouchers supplied here are not literally ‘coupons ‘-in that they do not require the Class to purchase anything-neither are they cash.”

In the 2008 case Chavez v. Netflix Inc., to which CAF A did not apply, the California state appeals court differentiated between a “pure” coupon settlement and the proposed coupon-worth a month of free Netflix DVD rentals. “[C]lass members are not being offered a discount that requires them to make new purchases,” the judge said. The court deemed this a “variant of the coupon settlement.”

However, in a 2007 case that fell under CAFA, Browning v. Yahoo! Inc., the U.S. District Court for the Northern District of California found a voucher and a coupon to be two different things. The settlement in Browning provided vouchers for a free credit report or two free months of credit monitoring. U.S. Magistrate Judge Howard R. Lloyd addressed settlement objectors who complained about the coupon by noting, “[T]he in-kind relief offered in this case is not a ‘coupon settlement’ because it does not require class members to spend money in order to realize the settlement benefit.”

Still, Lloyd’s analysis of the settlement did not differ much from the analysis of a coupon settlement, and attorneys’ fees were calculated with the same methods used for a coupon settlement. Lloyd did not, however, discuss increased scrutiny of the settlement under CAFA.

Sharp Scrutiny

“The new measures that CAFA puts on these coupon settlements could actually prevent a class action from settling even when both parties want it to settle,” Sultzer says. “The court can say the settlement isn’t fair for whatever reason.”

In Figueroa v. Sharper Image Corp., for example, the U.S. District Court in Miami rejected a settlement proposed by Sharper Image that included a $19 coupon or credit for Sharper Image merchandise. Attorneys general from 35 states and the District of Columbia submitted a brief concluding that the proposed settlement in Figueroa did not “pass muster” under heightened scrutiny of coupon settlements mandated by CAFA.

The court agreed. Federal District Judge Cecilia Altonaga found the settlement was of such negligible value that taking the case to trial would be a worthy risk for plaintiffs. She also cited the state attorneys general, representing class members, who had “objected at every turn” to the settlement.

As to procedural fairness of the settlement, Altonaga also found flaws. She believed Sharper Image had steered the negotiations while class counsel operated from a position of weakness. She cited evidence that the plaintiffs originally had demanded coupons worth $280 and that Sharper Image had broadened its claims so as to resolve separate actions in California and Florida with one settlement.

Altonaga was clear that she had analyzed the settlement under the heightened scrutiny mandated by CAFA. In her order denying approval, she addressed the provisions for coupon settlements under CAFA, allowing that the act’s standards are identical to class action settlement standards provided in the Federal Rules of Civil Procedure. “However,” she added, “because the CAFA requirement … applies only to coupon settlements, and because it is codified to further Congress’ objectives and concerns regarding the fairness vel non of coupon settlements in particular, the undersigned interprets the statutory directive to imply the application of a greater level of scrutiny to the existing criteria than existed pre-CAFA.”

Altonaga’s analysis points to the future of coupon settlements. “I would think that there will be continued scrutiny,” Procel says. “I don’t know that it will continue to increase but it is at a level now that is appropriate for the problem.”