The U.S. Court of Appeals for the Ninth Circuit recently ruled that a class action settlement involving relief in the form of both coupons and injunctive relief violated section 1712 of the federal Class Action Fairness Act.
In so ruling, the Ninth Circuit explained that the lower court erred when it awarded attorney's fees using solely a so-called hourly "lodestar" method of calculating fees without first calculating the actual redemption value of the coupons, as required when any relief is in the form of coupons. The Court also stressed, however, that an award of fees based on attorney time spent on the class action is appropriate for non-coupon relief, such as injunctive relief.
A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/05/15/11-16097.pdf.
Plaintiffs consumers filed three putative class actions in federal court in California alleging that the defendant manufacturer ("Manufacturer") of inkjet printers engaged in unfair business practices relating to its printers and ink cartridges. The three actions were separately and extensively litigated and the parties eventually agreed to a global settlement. The settlement agreement provided for both coupon and injunctive relief.
Specifically, in exchange for the plaintiffs' release of all claims, Manufacturer agreed to among other things provide class members "e-credits" redeemable for printers and printer supplies on the Manufacturer's website, make additional disclosures on its website and elsewhere about its business practices with respect to its printers and ink, and to pay almost $3 million in attorneys' fees. The "e-credits" were non-transferable coupons redeemable only on Manufacturer's website, expired six months after issuance, and could not be combined with other discounts or coupons. The face value of the coupons varied between $2 and $6.
The lower court granted final approval of the settlement, finding that the settlement was fair, reasonable and adequate, and, having calculated the ultimate value to the class at roughly $1.5 million, reduced the proposed award of attorneys' fees. Ruling that the hourly "lodestar" method was applicable under the relevant provision of the Class Action Fairness Act ("CAFA"), the trial court cited reasonableness as the "key consideration" in light of the results achieved, while acknowledging that the coupons were worth significantly less than their face value and that the injunctive relief would confer some benefit on the class members. Certain consumers ("Objectors") objected to the settlement and appealed, opposing the lower court's approval of the settlement and award of attorney's fees.
As you may recall, section 1712 of CAFA governs the calculation of attorney's fees in coupon class action cases, and provides in part that "the portion of any attorney's 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." 28 U.S.C. § 1712(a).
CAFA also provides that if "a portion of the recovery of the coupons is not used to determine the attorney's fee to be paid to class counsel, any attorney's fee shall be based upon the amount of time class counsel reasonably expended working on the action." 28 U.S.C. § 1712(b)(1).
Finally, section 1712 also provides: "If a proposed settlement in a class action provides for an award of coupons to class members and also provides equitable relief, including injunctive relief -- (1) that portion of the attorney's fee to be paid to class counsel that is based upon a portion of the recovery of the coupons shall be calculated in accordance with subsection (a); and (2) that portion of the attorney's fee to be paid to class counsel that is not based upon a portion of the recovery of coupons shall be calculated in accordance with subsection (b)." 28 U.S.C. § 1712(c).
Pointing out that the issue in this case turned on the meaning of the phrase "attributable to the award of the coupons," where the settlement consisted of both coupons and injunctive relief, the Ninth Circuit relied in part on CAFA's legislative history to conclude that the district court should have employed a two-step approach to the award of attorney's fees.
Noting in part that CAFA does not define "attributable to," the Ninth Circuit parsed the language in section 1712 and stressed that each subsection presented a formula to follow depending on whether the relief obtained in a class action consisted of coupons only, or on a combination of coupons and equitable relief, and on whether the fees were based on something other than a "portion of the recovery of the coupons."
Accordingly, the Ninth Circuit reasoned that if a settlement provided only coupon relief, 100 percent of the attorney's fees would be "attributable to" the redemption value of those coupons. Similarly, the Ninth Circuit explained that where attorney's fees are not calculated according to the recovery of the coupons, then the payment must be calculated "based upon the amount of time class counsel reasonably expended working on the action," that is, according to the lodestar method.
In so ruling, the Ninth Circuit criticized the dissent's reasoning as ignoring the language in subsection (a) that "any attorney's fee" awarded for obtaining coupon relief be must be calculated using the redemption value of the coupons, and pointed out that subsection (b)'s language indicates that it applies only where recovery of the coupons is not used to determine attorney's fees. Again citing CAFA's legislative history, the court continued, "[t]he Committee Report does not say that § 1712(b) 'confirms the appropriateness' of awarding lodestar fees in cases based 'solely' on coupon relief. . . . Rather, the legislative history of § 1712(b) confirms the . . . understanding of § 1712(b) – a district court may award lodestar fees under subsection (b)(1) but only where the settlement is based 'in part' on coupon relief."
Finally, turning to subsection (c), the Ninth Circuit noted that in practice this provision requires a two-step calculation and that, accordingly, the lower court should have, first, under subsection (a), determined a reasonable fee based on the actual redemption value of the coupons awarded and, second, under subsection (b), should have determined an amount to compensate class counsel for any non-coupon relief obtained based on the amount of time reasonably expended in the class action. As the Court explained, the final amount awarded under subsection (c) will be the sum of the amounts calculated under subsections (a) and (b).
In reaching this conclusion, the Ninth Circuit pointed out that section "1712(c) confirms that lodestar fees may only be awarded in exchange for obtaining non-coupon relief. Indeed, it can be no other way. If a settlement contains only equitable relief, then it is not a coupon settlement and § 1712 simply does not apply."
With respect to Objectors' argument that the lower court improperly awarded attorney's fees using solely the lodestar method without first calculating the actual redemption value of the coupons, the Ninth Circuit agreed. The Court noted the lower court's supposition that the "ultimate value" of the settlement was $1.5 million, which included both the injunctive and coupon relief but did not reflect the redemption value of the coupons.
The Ninth Circuit thus determined that the award of attorney's fees violated section 1712, because the award was "attributable to the award of coupons" and thus was required to be based on the value of "coupons that are redeemed." Accordingly, the Court reversed and remanded.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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