Ninth Circuit Limits Fee Awards to Class Counsel in Coupon Settlement Context

Background
As the Ninth Circuit recognized in its opinion, Congress passed CAFA precisely to address a number of observed abuses in the class action context relating to coupon settlements, with the imbalance between class counsel cash awards and class member coupon awards among the most criticized. CAFA’s legislative history demonstrates that 28 U.S.C. § 1712 was expressly aimed at putting an “end to the ‘inequities’ that arise when class counsel receive attorney fees that are grossly disproportionate to the actual value of the coupon relief obtained for the class.” In re HP Inkjet Printer Litigation, No. 11-16097, 2013 U.S. App. LEXIS 9744, at *17, 2013 WL 1986396 (9th Cir. May 15, 2013) (citing S. Rep. 109–14, at 29-32).

As a response to this perceived imbalance, Section 1712(a)–(c) requires that fees attributable to coupon settlements be based on the value of the coupons actually redeemed, while fees attributable to other benefits or equitable relief (i.e., injunctive relief) must be based on the amount of time class counsel reasonably expended working on the action.

Notwithstanding the mandate of § 1712(a)–(c), the amount of class counsel’s attorney fees awarded in class action coupon settlements has been often justified by the statutory fee-shifting or common fund calculation methods and sometimes by both.  See, e.g., In re HP Laser Printer Litig., No. SACV 07-0667, 2011 U.S. Dist. LEXIS 98759, at *15 (C.D. Cal. Aug. 31, 2011).  Courts considered the “lodestar method” appropriate in class actions brought under fee-shifting statutes where the relief sought and obtained was primarily injunctive and thus difficult to value. In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 941 (9th Cir. 2011). To apply the method, the number of hours class counsel reasonably expended on the litigation is multiplied by a reasonable hourly rate for the region and experience of the lawyer. Id. Where a settlement results in a common fund for the benefit of the entire class, the benefit to the class is relatively easy to quantify and courts typically award class counsel a percentage of the common fund. Id. at 942. Either or both of these methods have been used by class counsel to obtain the courts’ approval of attorney fees in class action settlements involving coupons.

The Ninth Circuit’s In re HP Inkjet Printer Litigation Opinion
The Ninth Circuit’s opinion in In re HP Inkjet Printer Litigation changed that practice by adhering to the language in CAFA. The plaintiffs in the case filed three nationwide putative class actions against Hewlett-Packard Co. (HP), in the United States District Court for the Northern District of California between June 2005 and January 2007. In re HP Inkjet Printer Litig., No. 11-16097, 2013 U.S. App. LEXIS 9744, at *3, *4 n.1 (9th Cir. May 15, 2013). In August 2010, after “aggressively litigating” for more than five years, the parties reached a global settlement. Id. The settlement came after the plaintiffs suffered dismissal of several claims and were denied nationwide class certification in one of the actions. Id. at *5. The parties agreed on a settlement in which eligible class members would receive up to $5 million in “e-credits” redeemable on HP’s website. Id.  at *6. In addition, HP agreed to publicize its business practices on its website, user manuals and software interfaces. Id. The parties agreed that class counsel would receive up to $2,900,000 in attorney fees and expenses. Id.

On October 1, 2010, the district court consolidated the three putative class actions for settlement, granted preliminary settlement approval, conditionally certified a nationwide settlement class, and directed the parties to provide settlement notice. Id. at *6–7. On January 28, 2011, the district court held a fairness hearing and concluded that the settlement was fair, despite the arguments of the objectors. Id. at *7.On March 29, 2011, the district court granted final approval and certified a nationwide settlement class. Id.

The court issued a separate ruling on class counsels’ fees. Id. at *8. Class counsel submitted a bill for over $7 million, but agreed to accept HP’s offer of $2.3 million in fees and approximately $600,000 in costs. Id. The court held that the lodestar method was applicable under § 1712(b)(1) of CAFA and that the key consideration in determining the appropriate fees was “reasonableness in light of the results actually achieved.” Id. at *8. The court looked at both the perceived value of the e-credits and the estimated value of the injunctive relief to class members and reduced the award of attorney fees to $1.5 million and maintained costs at $596,990.70. Id. at *9. Thus, the district court calculated the fees as “attributable to” the perceived or estimated value of the coupon relief, without first calculating the coupons’ redemption value. Id. at *4.

Two of the objectors to the settlement appealed to the Ninth Circuit Court of Appeals. Id. at *9. They argued that such a settlement violated Federal Rule of Civil Procedure 23(e)(2) and Section 3 of CAFA. Id. at *3. They also appealed the attorney fee award, claiming it did not abide by the calculation method used for class action cases containing a coupon component under CAFA, and specifically § 1712(a)–(c). Id.

The Ninth Circuit analyzed the text of CAFA in detail, noting that it was clear: Fees “attributable to” any coupon portion of the settlement must be calculated after the coupons have been redeemed by the class in order to determine the coupons’ value. Id. at *28. Where the settlement provides for non-coupon relief, either instead of coupon relief or in addition to it, the portion of the fees attributable to the non-coupon relief shall be based upon the amount of time class counsel reasonably expended working on the action, i.e., the lodestar method. Id. Consequently, if the parties have agreed to a “mixed” settlement of coupon and non-coupon relief, “the district court must perform two separate calculations to fully compensate class counsel.” Id. at *32–33.

Because the district court had made a rough estimate of the ultimate value of the settlement when it approved class counsels’ attorney fees and failed to make two separate calculations, the Ninth Circuit held that the district court abused its discretion and reversed and remanded the case to the district court for further proceedings consistent with its opinion. Id. at *40–41.

Significance of the Decision
A district court may not award attorney fees to class counsel that are attributable to an award of coupons without first considering the redemption value of the coupons under § 1712. The district court may, however, award fees calculated by the lodestar method under CAFA to compensate class counsel for any non-coupon relief they obtain for the class. As a result, the process of negotiating, determining, and obtaining final approval of class counsel’s attorney fees in a class action coupon settlement will change significantly from class action counsels’ practices before the In re HP Inkjet Printer Litigation opinion.

This means that for class action cases that have settled for coupon awards but were not finally approved before May 15, 2013, the application for class counsel’s attorney fees cannot be made at the final approval stage, unless the application is made solely for the value attributable to any non-coupon relief. With respect to the attorney fees attributable to the coupons, class counsel will have to wait until the redemption value of the coupons can be determined.  In most cases, that will occur after the coupons have expired, which may be more than a year past the final approval hearing date. This is because most defendants will not agree to issue coupons to class members without receiving the court’s final approval of the terms of the settlement. Otherwise, the defendant will incur the cost of issuing the coupons to class members and risk having the court deny final approval, resulting in additional costs to the defendant.  For instance, if the court were to deny final approval, the defendant would either have to issue additional coupons or cash to class members or decide to not honor the coupons already issued and incur costs to its reputation, public image, and relationship with class members, who are in many instances the defendant’s customers, clients and employees.

Going forward, class counsel will presumably be less likely to agree to a coupon settlement for the class unless settlement occurs early in the class action. This is because the redemption rate of coupons in most class actions is notably low and often amounts to only a fraction of the estimated face value of the coupons. When settlement occurs later in the action, class counsel will have incurred significant amounts of time and expense litigating and will run the risk that the number of coupons actually redeemed will not compensate them for the hours reasonably expended working on the action. At the same time, in order to obtain the court’s approval of any settlement, the parties must show that a minimum amount of investigation and discovery has occurred to satisfy the court that any settlement is fair and reasonable to the class. What practitioners may experience as a result are class counsel who refuse to settle for awards other than cash or cash equivalents in order to protect their perceived value of the litigation. The plaintiff’s counsel may also attempt to avoid the effects of a “coupon” award by structuring the settlement benefit in the form of “in-kind” settlement awards, such as free services or gift cards. Most likely, future litigation will ensue on the issue of whether these arguments successfully avoid the coupon requisites of CAFA and the In re HP Inkjet Printer Litigation opinion.

Keywords: litigation, class action, derivative suits, fee awards, class counsel, coupon settlement