Coupon Settlements Remain Acceptable Means to Resolve Class Litigation Even After Passage of CAFA
In a coupon settlement, class members receive coupons or other promises for products or services instead of a cash award. If appropriately structured, settlements remain a realistic, acceptable means to resolve class litigation in the wake of the Class Action Fairness Act of 2005 (CAFA).
CAFA Does not Hinder Coupon Settlements Continuing Role in Resolving Class LitigationDespite their criticism and the passage of CAFA, coupon settlements remain an appropriate method of resolving class actions, especially ones in which individual consumers have minimal damages. Often criticized as a means for plaintiffs' counsel to reap a windfall in fees at the expense of class members, CAFA sought to ensure that coupon settlements are properly reviewed by the courts, and to remove the economic incentive for lawyers to negotiate such settlements at the expense of absent class members. Specifically, Congress included several provisions in CAFA, 28 USC Sections 1332(d), 1453, and 1711, et seq., that regulate coupon settlements. Notably, however, CAFA did not eliminate coupon settlements nor materially restrict their use. As a result, Coupon settlements are still an acceptable means to resolve class litigation if appropriately structured.
Provisions of CAFA Related to Coupon Settlements(1) Hearings and Written Findings: 28 U.S.C. Section 1712(e):
In addition to Federal Rule of Civil Procedure 23(e)(2) requires *courts to hold a hearing to review class action settlements to ensure that they are "fair, reasonable, and adequate," CAFA requires courts to hold a hearing and issue written findings in order to ensure that a coupon settlement is "fair, reasonable, and adequate for class members." 28 U.S.C. Section 1712(e). Despite the identical language in Rule 23(e)(2) and Section 1712(e), several courts have interpreted CAFA as requiring heightened judicial scrutiny of coupon settlements even while employing the factors typically considered by courts under Rule 23(e)(2).
(2). Expert Testimony: 28 U.S.C. Section 1712(d):
CAFA provides that a court "may, in its discretion upon the motion of a party, receive expert testimony from a witness qualified to provide information on the actual value to the class members of the coupons that are redeemed." 28 U.S.C. Section 1712(d). Such testimony may assist the court in determining the fairness of the proposed settlement and the appropriate amount of attorney's fees.
(3). Cy Pres Distribution: 28 U.S.C. 1712(e):
Recognizing a cy pres award may be an appropriate means to supplement a coupon settlement in a particular case, CAFA expressly authorizes a court to "require that a proposed settlement agreement provide for the distribution of a portion of the value of unclaimed coupons to 1 or more charitable or governmental organizations, as agreed to by the parties." 28 U.S.C. Section 1712(e).
Attorneys' Fees: CAFA Section 1712(b), (c)CAFA was enacted by Congress, in part, due to the concern that attorneys were receiving excessive fees with little or no recovery for the class members due to the fact that only a small percentage of coupons are actually redeemed by class members. As a result, CAFA contained provisions to limit attorneys from linking their fee awards to the nominal value of the coupons available to the settlement class. Specifically, attorneys' fees are limited in coupon settlements by CAFA as follows: (1) When coupons provide sole basis of relief "the portion of any attorneys' fee award to class counsel that is attributable to the award of coupons shall be based on the value to class members of the coupons that are redeemed," not the face value of the coupons issued; (2) if the attorneys' fee award is not based on the recovery to the class then the loadstar method must be used which may include a reasonable multiplier; (3) if a proposed settlement provides for coupons and for equitable or injunctive relief, attorneys' fees may be based in part on the value of the coupons redeemed and in part on the lodestar method; and (4) if a proposed settlement includes a cy pres provision, the distribution of any such proceeds "shall not be used to calculate attorneys' fees." 28 U.S.C. Section 1712(e). Notwithstanding, courts may consider the cy pres distribution in deciding the overall reasonableness of an attorneys' fee award, even though they may not be using the cy pres distribution to "calculate" the fee.
Federal Courts Taking Differing Approaches on the Applicable Standard in Approval of Coupon SettlemeIn evaluating coupon-based class action settlements, several federal courts have refused to apply a heightened level of scrutiny noting that CAFA's requirements for evaluating coupon settlements are no higher than the requirements of fairness, reasonableness, and adequacy under Rule 23(e). Some courts have expressly held that the scrutiny under Section 1712(e) of CAFA is the exact same as that of Rule 23(e). Several other federal courts, however, have interpreted CAFA to require a "heightened scrutiny" of coupon settlements. The reasoning. as expressed by one court, in imposing a heightened scrutiny is to achieve Congress's goal of making coupon settlements fairer.