The U.S. Court of Appeals for the Seventh Circuit recently reversed an order approving class settlement for alleged violation of the federal Fair and Accurate Credit Transactions Act (“FACTA”), 15 U.S.C. § 1681c(g), involving the printing of credit card expiration dates on consumers’ purchase receipts.
Among other things, the Seventh Circuit held that the central consideration in determining the reasonableness of attorneys’ fees in a proposed settlement is what class counsel achieved for the members of the class, rather than how much effort class counsel invested in the litigation.
A copy of the opinion is available at: Link to Opinion
This appeal is a consolidation of two class action filed under the under FACTA, 15 U.S.C. § 1681c(g), involving consumers who paid for products using credit or debit cards, and received electronically printed receipts that contained the card’s expiration date.
As you may recall, the FACTA provides that “no person that accepts credit cards or debt cards for the transaction of business shall print [electronically, as distinct from by handwriting or by an imprint or copy of the card] more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.” 15 U.S.C. §§ 1681c(g)(1), (2). Statutory damages of between $100 and $1,000 may be awarded for a willful violation of the FACTA. See 15 U.S.C. § 1681n(a)(1)(A). A consumer harmed by the violation of the statute can obtain actual damages without proving willfulness. See 15 U.S.C. § 1681o.
In the first case (“Case A”), the district court dismissed the suit with prejudice before certifying a class, and therefore there were no issues in that case concerning class action procedure.
In contrast, the second case (“Case B”) was centrally about class action procedure. Before any substantive motions had been decided, the named plaintiffs agreed to a “coupon” settlement. Each class member who responded positively to the notice of the proposed settlement would receive a $10 coupon that could be used at any of the defendant’s retail stores. The class member could use it to buy an item costing $10 or less (but he would receive no change if the item cost less than $10), or as part payment for an item costing more. The class member could stack up to three coupons and thus obtain a $30 item, or a $30 credit against a more expensive item.
Of the approximately 16 million potential class members, 5 million were given notice, and 83,000 submitted claims for the coupons in response. This figure amounts to a little more than one half of one percent of the entire class, assuming the entire class consisted of 16 million different consumers.
The agreed-upon settlement consisted of attorney fees of approximately $1 million, plus $830,000 worth of coupons at face value, and $2.2 million in administrative costs (including the cost of notice), for a total of about $4.1 million. Class counsel argued that the attorneys’ amounted to approximately 25% of the total settlement and was therefore reasonable.
The district court approved the settlement, but various class members objected to the approval.
On appeal, the Seventh Circuit flatly rejected the terms of the proposed settlement, holding that the value of the award to class members – the $10 coupons – was significantly overshadowed by the attorneys’ fees to class counsel.
First, the Seventh Circuit found that the district court erred in its calculation of the value of the award to class members.
By including the roughly $2.2 million in administrative costs in calculating the division of spoils between class counsel and class members, the Court held, the district court reduced the value received from the settlement by the members of the class. The Seventh Circuit acknowledged that administrative costs are part of settlement and benefit all parties, but explained that the district court should not have treated every penny of administrative expenses as cash in the pockets of class members. In so doing, the district court eliminated the incentive of class counsel to economize on that expense and created an incentive to increase administrative expenses to make class counsel’s proposed fee appear smaller in relation to the total settlement.
Second, Seventh Circuit held that the district court miscalculated the reasonableness of the attorneys’ fees.
As the Seventh Circuit explained, the ratio that is relevant to assessing the reasonableness of the attorneys’ fee is the ratio of: (1) the fee to (2) the fee plus what the class members received. In Case B, the class members received at most $830,000, which translated into a ratio of attorneys’ fees to the sum of those fees plus the face value of the coupons of 1 to 1.83. That equated to a contingent fee of 55%. The Seventh Circuit further explained that the ratio might be even higher because the $10 coupons were worth less than their face value since no change would be given, the coupons expired in six months, and many class members would simply not use them.
Third, Seventh Circuit held that the district court erred by basing the fee award on the amount of time that class counsel reportedly spent on the case, and increasing that amount by 25% to reflect the risk of litigation.
The Seventh Circuit explained that reasonableness of a fee cannot be assessed in isolation from what it buys. For instance, the Court noted, suppose class counsel worked hard and efficiently but only 1,000 claims had been filed in response to the notice of the proposed settlement, such that the total value of the class was only $10,000. $1 million in attorneys’ fees under this example would not be appropriate even though a poor response to a notice is one of the risks involved in a class action.
Instead, the Seventh Circuit held that the central consideration in determining the reasonableness of attorneys’ fees in a proposed settlement is what class counsel achieved for the members of the class, rather than how much effort class counsel invested in the litigation.
In so ruling, the Seventh Circuit then turned to the coupon provisions of the Class Action Fairness Act, which states:
(a) Contingent Fees in Coupon Settlements. If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney’s fee awarded to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.
(b) Other Attorney’s Fee Awards in Coupon Settlements.
(1) In general. If a proposed settlement in a class action provides for a recovery of coupons to class members, and 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 award shall be based upon the amount of time class counsel reasonably expended working on the action.
See 28 U.S.C. §§ 1712(a) and (b)(1).
As explained by the Seventh Circuit, the statute is poorly drafted because a literal reading of “value to class members of the coupons that are redeemed” would prevent class counsel from being paid in full until the settlement had been fully implemented. If a settlement cannot be wound up until the redemption period expired, district courts would be pressured to approve shorter redemption periods and thus reducing the value of the coupons.
According to the Seventh Circuit, there is no need for such a rigid rule. In some cases, the optimal solution may be part payment to class members and class counsel up front, with final payment when the settlement is wound up. However, the Court held, the district court erred by attempting to determine the ultimate value of the settlement before the redemption period ended without even an estimate by a qualified expert of what the ultimate value would likely be.
The Seventh Circuit also noted another problem with coupon settlements under CAFA -- i.e., although subsection (a) is mandatory, and under it the attorneys’ fee in a coupon settlement must be based on the coupons’ redemption value, but subsection (b)(1) provides an alternative method of determining attorneys’ fees based on the lodestar method of calculating fee awards, i.e., the amount of time class counsel reasonably expended working on the action.
Relying on In re HP Inkjet Printer Litigation, 716 F.3d 1173 (9th Cir. 2013), which held that subsection (a) must be used where the settlement provides coupons and no cash benefits to class members, the Seventh Circuit found that the district court failed to recognize the amendment to CAFA with respect to coupon settlements.
Fourth, the Seventh Circuit questioned the inclusion of a “clear-sailing clause” in the proposed settlement.
A clear sailing clause is where the defendant agrees not to contest class counsel’s request for attorneys’ fees. Because defendant’s interest is to reduce the overall cost of the settlement, the defendant will not agree to a clear-sailing clause without compensation – namely a reduction in the part of the settlement that goes to the class members, as that is the only reduction class counsel are likely to consider. Thus, the Seventh Circuit concluded that such clauses must be subject to intense scrutiny because of the danger of collusion in class actions between class counsel and the defendant, all to the detriment of the class members.
Fifth, the Seventh Circuit also pointed to a procedural defect in requesting attorneys’ fees in this case.
As you may recall, Rule 23(h) of the civil rules requires that a claim for attorneys’ fees in a class action be made by motion and notice served on all parties. See Fed. R. Civ. P. 23(h). In the present case, class counsel did not file the attorneys’ fee motion until after the deadline for objections to the settlement had expired. As the Seventh Circuit explained, the objectors knew that class counsel were likely to ask for $1 million in attorneys’ fees, but they were handicapped in objection because the details of class counsel’s hours and expenses were submitted later, with the fee motion, and therefore they did not have the information they needed to justify their objection.
Sixth, the Seventh Circuit noted a final concern relating to the lead named plaintiff.
The lead named plaintiff was employed by a law firm for which the principal class counsel once worked. The Seventh Circuit explained that there should be a genuine arm’s-length relationship between class counsel and the named plaintiffs, and reminded the class action bar of the importance of insisting that the named plaintiffs be genuine fiduciaries to the class, uninfluenced by any family ties or friendships.
Finally, the Seventh Circuit turned to Case A, which pivots on the meaning of “willfully” in the FACTA.
In Case B, the willfulness issues was straightforward because the company had been found in an earlier lawsuit to have left the expiration date on receipts in violation of a parallel state statute. See Ferron v. RadioShack Corp, 886 N.E.2d 286 (Ohio App. 2008). The Seventh Circuit therefore determined that the company had to know that there was a risk of error because the identical risk had materialized previously, and its failure to take any precautions against it was indicative of willful violation.
In contrast, the company in Case A did not willfully violate the FACTA because there was no previous violation to alert the company of a risk of error. Therefore, the Seventh Circuit concluded that any violation by the company would not have been willful.
Accordingly, the Seventh Circuit reversed the judgment approving the settlement in Case B and remanded the case for further proceedings, and affirmed the judgment in favor the defendant in Case A.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mwbllp.com
Admitted to practice law in Illinois
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