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The Elephant in the Room: Contingency Fees and the Future Of Coupon Settlements After In re HP Inkjet Printer Litigation

Monday, July 15, 2013

By Michael Mallow and Livia Kiser, Loeb & Loeb LLP

In class action litigation, attorneys' fee awards are the bane of defendants' existence, the salt in the open wound. Defendants have to pay for their own counsel, and then, if they elect to resolve a case via settlement, they are on the hook not only for the costs of settlement, but plaintiffs' fees as well!1

The way to avoid this result is to eschew class settlements. Indeed, many companies openly espouse a “never settle” philosophy, and for good reason. The reputational hit to a company-turned-defendant is often substantial, especially in consumer cases. Many consumers believe that a settlement reflects a tacit admission of wrongdoing by the company or an acknowledgement that a product is, in fact, somehow defective. Companies rightly factor these intangible costs into their analyses when making strategic litigation decisions. When a company obtains a dismissal of a class lawsuit or defeats class certification, it feels like what it is: a victory, a degree of vindication.2

But here is the reality: even when a class lawsuit is weak on the merits, a defendant can have legitimate reasons for wanting to make it go away. The negative media attention that often accompanies these types of claims, the cost of discovery (frequently exorbitant, always one-sided), the allocation of resources—both human and financial—to defend a case, the ongoing distraction of litigation that likely will take years to resolve, the potential of making “bad law” that could impact the business now and in the future—these and other factors sometimes will cause a company to seek resolution through the certainty of settlement even though the company sincerely believes it has not done anything wrong and ultimately would prevail on the merits.3

For their part, plaintiffs' attorneys have their own motivations to come to the settlement table. For one thing, their compensation is contingent on results: If they lose on the merits, they do not obtain any compensation for the work they did prosecuting the case. A settlement, if approved, brings with it a guarantee of at least some compensation. In addition, plaintiffs' attorneys recognize that they sometimes can negotiate a “better” result for consumers via settlement, particularly when (in the interest of resolution) a company agrees to change behavior going forward. Where the risks (as quantified by the parties) overlap, a deal can be done.

The Use of Coupons in Settlements

Coupons have long been a component of class settlements. Defendants like them not only because they reinforce brand loyalty via potential future product use, but also because coupons can provide substantially more value at lesser cost than a small cash payment. Plaintiffs' attorneys like them largely for the same reasons—a coupon for $5 off sounds like a better deal than a check in the mail for 50 cents. Because value to the class—the “benefit conferred”—is what drives a court's determination of a reasonable plaintiffs' attorneys' fee, plaintiffs' attorneys have every interest in trying to maximize the benefit conferred to the settlement class. In addition, because settlement agreements typically contain a “clear sailing” provision (i.e., a clause in a settlement agreement indicating the highest amount of attorneys' fees that plaintiffs' counsel can request to which the defendant will not object), the parties' interests in promoting the settlement's value to the court usually are substantially aligned.

Coupon settlements, however, have been extensively criticized.4 The provisions in the Class Action Fairness Act of 2005 (CAFA) regulating coupon settlements are based on congressional findings that include, “Class members often receive little or no benefit from class actions, and are sometimes harmed, such as where … counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value.”5 Accordingly, by its terms, CAFA limits attorneys' fees in coupon settlements. Although the term “coupon” is not defined in the statute, a coupon settlement is typically understood as one in which defendants pay settlement class members in coupons or vouchers that are redeemable by making additional, qualifying purchases of defendants' products.6 When coupons provide the sole basis for relief to the class, CAFA requires the attorneys' fee award to “be based on the value to class members of the coupons that are redeemed.”7 If the settlement includes both coupons and other relief (such as injunctive or equitable relief), attorneys' fees may be based in part on the value of the coupons redeemed and in part on a calculation of a reasonable fee based upon the “lodestar method.”8 CAFA also authorizes a court to augment the lodestar by a reasonable multiplier where appropriate.9

Notwithstanding the legitimate concerns motivating Congress's findings, not all coupons are valueless, and not all coupon settlements are inappropriate, a reality CAFA seems to tacitly acknowledge.10 For example, coupons that are valid for an extended period, are transferable and/or stackable, or are sufficiently large enough to purchase an entire product or service, provide meaningful value to settlement class members, as courts have recognized.11 On the other hand, where there are legal or factual infirmities that would undermine class certification or the merits, courts have been willing to approve coupon settlements where the benefit conferred is arguably minimal on the theory that something is better than nothing.12

A district court evaluates a proposed class settlement through the lens of a fiduciary in protecting and representing the interests of the settlement class.13 Post-CAFA, some courts evaluating coupon-based class action settlements have interpreted CAFA to require a “heightened scrutiny” of coupon settlements.14 On the other hand, other courts have concluded that the CAFA requirements for evaluating coupon settlements simply track the traditional Rule 23(e) requirements of fairness, reasonable and accuracy.15

The devil in the details of a coupon-based settlement subject to CAFA, of course, is trying to determine the value attributable to the coupons prior to final approval. Plaintiffs' counsel sometimes use expert testimony to try to establish the “redemption value” of the coupons in order to provide courts with evidence to support their requested fee award. In addition, the settlement agreement nearly always allows settlement class members to “claim in” prior to final approval (i.e., file a claim for benefits) so the number of settlement class members requesting coupons in advance of final approval will be known to the court. Historically, courts have considered these and other factors when determining the “value” of settlements that contain a coupon component for purposes of determining a reasonable attorneys' fee.16

Ninth Circuit Requires Coupon Redemption
Before Determining Benefit Conferred

In a recent decision, the Ninth Circuit interpreted CAFA in a manner that could significantly limit the use of coupons in settlements. In re HP Inkjet Printer Litigation is a consolidated proceeding that resolved pursuant to a nationwide class settlement providing coupons and injunctive relief to the settlement class members.17

In connection with final approval of the settlement, the district court approved a $1.5 million attorneys' fee award (and nearly $600,000 in costs). Certain objectors appealed the order granting final approval of the settlement and the attorneys' fee award. The Ninth Circuit agreed with the objectors and vacated, reversed and remanded the order awarding the fee.18 The court held that the portion of the attorneys' fees attributable to the coupon component must be based on the actual redemption value of the coupons (rather than with reference to the “ultimate value” of the settlement) in order to comply with CAFA.19

District Court: Attorneys' Fee Can Be Determined
Based Upon ‘Ultimate Value’ of Settlement

In re HP Inkjet Litigation consolidated three separate consumer class actions alleging that HP engaged in unfair business practices relating to its inkjet printers' use of ink cartridges.20 In August 2012, more than five years after the first action was filed and after extensive motion practice and discovery, the parties agreed to a class settlement that included: (1) up to $5 million in “e-credits” (ranging in value from $2 to $6) redeemable by eligible settlement class members for printers and printer supplies on HP's website; (2) injunctive relief requiring HP to make certain disclosures regarding the inkjet printers and cartridges; (3) up to $950,000 for class notice and settlement administration costs and (4) up to $2.9 million in attorneys' fees and expenses.21

After the district court granted preliminary approval of the settlement and directed notice be provided to settlement class members, it held a fairness hearing to determine whether to grant final approval to the settlement. Five objectors formally objected to the settlement, including specifically to class counsel's requested fee award. The district court overruled the objections and entered an order granting final approval of the settlement. In addition, in a separate ruling that was not released for publication, the district court substantially reduced the requested attorneys' fee from $2.3 million to $1.5 million.22

In calculating the attorneys' fee award, the district court held that the “lodestar method” (i.e., calculating a fee award by multiplying hours the attorneys reasonably spent by a reasonable hourly rate) was applicable based upon Section 1712(b)(1) of CAFA, and that the results actually achieved are the key consideration for determining the reasonableness of the attorneys' fee.23 In this case, the parties had structured the settlement so that the claim period expired prior to the fairness hearing, so the district court knew how many claims had been submitted requesting the “e-credits” (122,410 claims out of a settlement class of more than 13,000,000 people).24 Acknowledging that the e-credits were coupons worth significantly less than their face value, but also recognizing the injunctive relief did confer some benefit on class members, the court estimated the ultimate value of the settlement to be $1.5 million. Concluding that it could not properly award fees in an amount greater than the value of the settlement itself, the court ordered HP to pay a reduced lodestar amount of $1.5 million and $596,990.70 in costs.25

Ninth Circuit: Redeemed Value
of Coupons Drives Reasonable Attorneys' Fees

On appeal, the Ninth Circuit reviewed the lower court's attorneys' fee award and concluded that the district court had misinterpreted Section 1712 of CAFA, the provision pertaining to attorneys' fees.26 At the outset, the court had no difficulty finding that the e-credits operated as coupons for purposes of CAFA, and further observed that they likely would provide little value to class members because they were low value, non-transferable, expired within a short time after their issuance, and could not be aggregated.27

The court then interpreted Section 1712 of CAFA. Under subsection 1712(a), if a district court awards any attorneys' fees “attributable to” the award of coupons in the settlement, then (according to the Ninth Circuit) CAFA requires the court to calculate the fee award by using the actual redemption value of the coupons.28 In cases in which the settlement includes non-coupon relief, subsection 1712(b)(1) applies, and a district court must calculate that portion of the payment not attributable to the coupon relief “based on the amount of time class counsel reasonably expended working on the action”—i.e., using the lodestar method adjusting upwards or downwards depending on the settlement value relative to the lodestar. Subsection 1712(b)(2) allows a court, in its discretion, to apply an appropriate multiplier to any lodestar amount it awards under subsection (b)(1) for obtaining non-coupon relief.29

Finally, in cases involving “mixed” settlements (i.e., a combination of coupon and other relief), subsection 1712(c) applies and a district court must adopt a hybrid approach when determining the attorneys' fee award:

The practical effect of §1712(c) is that the district court must perform two separate calculations to fully compensate class counsel. First, under subsection (a), the court must determine a reasonable contingency fee based on the actual redemption value of the coupons awarded. Second, under subsection (b), the court must determine a reasonable lodestar amount to compensate class counsel for any non-coupon relief obtained. This lodestar amount can be further adjusted upwards or downwards using an appropriate multiplier. … In the end, the total amount of fees awarded under subsection (c) will be the sum of the amounts calculated under subsections (a) and (b).30

Applying this rule to the situation before it, the Ninth Circuit agreed with the objectors that the district court erred because its value determination was based upon an overall settlement value for both the injunctive and coupon relief that was tied to class counsel's lodestar. Here, because the coupons could not be redeemed until after the settlement became final, the Ninth Circuit determined the actual relief obtained by the settlement class attributable to the e-credits was not ascertainable, so class counsel would not be permitted to seek compensation for the value of the coupon relief obtained for the class.31

Judge Berzon dissented, arguing that the district court's fee award did not violate Section 1712 because it did not award a contingency fee calculated as a percentage of the purported value of the total class recovery, but rather awarded a lodestar fee, calculated on the basis of hours worked and rates charged, and carefully limited that fee award by a fair estimate of the amount of the benefit received by the class.32

Shoulda, Coulda, Woulda
Although the Ninth Circuit's interpretation of Section 1712 is not without support in the statutory text, it fails to take into account key practical and legal considerations. Class counsel can no longer obtain “credit” towards their fee for a coupon component unless coupons are actually redeemed prior to final approval, but defendants will not want to issue relief to a proposed settlement class before a settlement is in all respects final, and justifiably so. Indeed, the case itself proves the wisdom of that rule, because objectors were ultimately able to forestall final approval of the settlement. Had HP allowed settlement class members to redeem coupons prior to the settlement becoming final, it would have provided consideration to the settlement class without actually securing a resolution of the dispute.

Moreover, the Ninth Circuit interpreted the statute in a way that removes considerable discretion from the trial court, even though CAFA acknowledges the trial court is in the best position to evaluate a class settlement to determine whether it is fair, reasonable and adequate.33 Subsection 1712(e) of CAFA authorizes a trial court to approve a coupon settlement provided that it (1) holds a hearing and (2) issues a written opinion finding the settlement to be fair, reasonable and adequate for class members. In re HP Inkjet Printer Litigation limits a district court's discretion to make its own independent determination of a coupon's “value,” foreclosing other reasonable means of assessment that could otherwise be employed.

Finally, the overall result is somewhat in tension with the long-standing judicial attitude favoring class action settlements. Even if the Ninth Circuit determined that the district court failed to apply the appropriate standard, it could still have remanded the case without foreclosing the assignment of any value to the coupons. In addition, the Ninth Circuit could have defined what does (and does not) qualify as a “coupon,” and could have excluded from its definition such things as (1) vouchers for free products or services that do not require an additional investment by the settlement class member; (2) rebates that are paid from a “common fund,” with any balance remaining in the fund reverting to a cy pres distribution; or (3) transferable certificates of sufficient value that they could be traded and/or sold. These and other, similar alternatives address the concerns raised by the Ninth Circuit regarding perceived abuses in the use of coupons in class actions while remaining true to other, competing policies such as favoring settlement and keeping discretion in the trial court where it belongs.

Michael Mallow is a partner in the Los Angeles office of Loeb & Loeb, where he heads the firm's Consumer Protection Defense Department. He can be reached at mmallow@loeb.com.

Livia Kiser, a Chicago-based partner at Loeb & Loeb, is a member of the Consumer Protection Defense Department and co-chairs Loeb's Health and Wellness Marketing Compliance Task Force. She can be reached at lkiser@loeb.com.

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