The U.S. Court of Appeals for the Ninth Circuit held that the trial court erred in awarding $8.7 million in attorneys' fees in a class action settlement because it did not treat $20 credits issued as part of the settlement as "coupons" under the Class Action Fairness Act ("CAFA").
In so ruling, the Court held that, because the trial court included the full face value of the coupons in its calculation of the fee award, the "error require[d] recalculation of the fee award."
Accordingly, the Ninth Circuit vacated the trial court's attorneys' fee award.
A copy of the opinion is available at: Link to Opinion
The defendant company ("Company") operates online businesses that sell flowers, chocolates, fruit baskets, and other similar items.
The plaintiff and seven other class representatives (collectively, "Plaintiffs") purchased items from a Company business, and were then presented with a pop-up advertisement for $15 off another item from the same website.
Clicking the pop-up enrolled Plaintiffs in the Company's membership rewards program, and transmitted the Plaintiffs' payment information to a separate defendant company (collectively, with Company, "Defendants"), which proceeded to charge Plaintiffs a $1.95 activation fee and recurring $14.95 monthly membership fee.
Plaintiffs did not consent to joining the rewards program or having their data transferred to another entity. Plaintiffs also never received the promised coupons, gift codes, or any other savings benefits.
Plaintiffs filed a putative class action in the Southern trial of California alleging violations of various state laws arising from Defendants' operation of their membership rewards program.
After two years of litigation, the parties agreed to settle. The proposed settlement provided class members with two forms of relief – monetary reimbursement of membership fees upon submission of a claim, and a $20 credit which did not require the submission of a claim that could be used to purchase items on Defendants' websites.
The settlement established a $12.5 million fund from which Defendants would pay up to $8.7 million in attorneys' fees, $80,000 in enhancement awards to the Plaintiffs, and $200,000 in litigation costs. The approximately $3.5 million remaining would be available to fund the settlement's administration costs and to reimburse class members for their membership fees "on a pro rata basis up to the full amount owed."
After the refunds were issued, any remaining funds were to be distributed as a cy pres award to several universities.
The trial court preliminarily approved the settlement, and the parties informed the court that the class contained approximately 1.3 million consumers.
Class members were notified of the settlement and given a 135-day period to request a refund, during which only about 3,000 class members did so. Their submitted claims requested a total of $225,000 in cash refunds, leaving approximately $3 million of the settlement's cash fund to be distributed to the cy pres beneficiaries.
Separately, class counsel moved for $8.7 million in fees and $200,000 in costs.
The trial court subsequently held a final settlement approval hearing at which a class member ("Objector") objected to the settlement. He argued that the attorneys' fee award did not comply with CAFA's requirements for settlements awarding coupons and that the cy pres award was improper.
The trial court rejected the objections and issued a final order approving both the settlement and class counsel's accompanying fee request. The Objector appealed and the Ninth Circuit vacated and remanded in light of their decision in In re Online DVD-Rental Antitrust Litigation (In re Online DVD), 779 F.3d 934 (9th Cir. 2015).
On remand, the trial court determined that, under In re Online DVD, the credits should not be construed as coupons, and that it was therefore unnecessary to apply CAFA's requirements for coupon settlements. Using $38 million as the total value of the settlement, the court then approved the $8.7 million attorneys' fee award based on both percentage-of-recovery and lodestar calculations.
The Objector again appealed challenging the attorneys' fee and cy pres awards.
On appeal, the Ninth Circuit held that the Objector's "challenge to the attorney's fees award succeeds because the trial court failed to treat the $20 credits as coupon under CAFA, but we reject the cy pres arguments."
In so ruling, the Court first noted that "CAFA imposes restrictions on attorney's fee awards for class action settlements that provide class members relief in the form of coupons," as it requires trial courts to consider the value of only those coupons "that were actually redeemed" when calculating the total relief awarded to a class.
However, CAFA provides no definition of "coupon," so courts have been left to define the term on their own.
The Ninth Circuit explained that in In re Online DVD, it outlined three factors to guide the inquiry: "(1) whether class members have 'to hand over more of their own money before they can take advantage of' a credit, (2) whether the credit is valid only 'for select products or services,' and (3) how much flexibility the credit provides, including whether it expires or is freely transferrable."
The Ninth Circuit then noted that the trial court relied on an additional factor not present in In re Online DVD, and found that the credits should not be construed as coupons in part because it concluded that the settlement was "stronger than" the settlement in In re Online DVD in terms of how closely the relief matched class members' alleged injury.
The Ninth Circuit disagreed with this reasoning, noting that "the trial court's inclusion of this factor conflated the coupon analysis with whether the settlement was fair and reasonable."
Moreover, "[r]egardless of the substance of the underlying claim or injury, CAFA prevents settling parties from valuing coupons at face value without accounting for their redemption rate. Accordingly, the trial court erred by incorporating an improper factor into its analysis of whether the credit was a coupon under CAFA."
Applying the correct legal standard, the Ninth Circuit held that the "only logical conclusion" was that the credits were coupons under CAFA. Thus, because the trial court included the full face value of the coupons in its calculation of the fee award, the "error require[d] recalculation of the fee award."
As the Court explained, "[w]hen a fee award in a coupon settlement is calculated using the percentage-of-recovery method, CAFA requires that any calculation of the size of the settlement fund . . . be determined using the redemption rate of the coupons." Because it did not have the redemption information, the Ninth Circuit would not approve the trial court's percentage-of-recovery evaluation.
The settling parties argued that the award could still be upheld based on the trial court's lodestar calculation.
However, the Ninth Circuit determined that "the trial court . . . went astray when it reverse-engineered the lodestar multiplier using a value of the settlement that included the full face value of all the $20 coupons."
The Ninth Circuit therefore held that "the attorney's fee award must be vacated," and "the award should be recalculated in a manner that treats the $20 credits as coupons under CAFA."
The Court next addressed the Objector's argument that cy pres should not be used to distribute the remaining settlement funds.
The Ninth Circuit disagreed, and held that "it was not an abuse of discretion for the trial court to approve the use of cy pres . . . or to approve these particular recipients."
Ralph T. Wutscher
Maurice Wutscher LLP
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