September 25, 2015 Practice Points

Circuit Split Regarding the "Coupon Settlement Provisions" of the Class Action Fairness Act

By Bryan A. Coleman

In re Southwest Airlines Voucher Litigation, Case No. 13-3264 (7th Cir. Aug. 20, 2015) created a circuit split between the Seventh and Ninth Circuits regarding an interpretation of certain "coupon settlement provisions" of the Class Action Fairness Act (CAFA), 28 U.S.C. § 1712. The provisions at issue related to coupon settlements in which class members were awarded coupons but class counsel was paid in cash.

In August 2010, Southwest Airlines announced that it would not honor in-flight alcoholic drink vouchers issued to passengers that purchased Business Select tickets. Plaintiffs Adam Levitt and Herbert Malone filed a class-action lawsuit against Southwest on behalf of plaintiffs holding drink vouchers that could no longer be redeemed. The complaint set forth claims for breach of contract, unjust enrichment, and violation of state consumer fraud laws.

The unjust enrichment and consumer fraud claims were dismissed as preempted by the federal Airline Deregulation Act, 49 U.S.C. § 41713. The parties agreed to settle the breach of contract claim with the understanding that (1) Southwest would issue replacement drink coupons to each class member that filed a claim form; (2) injunctive relief would preclude similar controversies over expiration dates if Southwest issued new coupons in the future; and (3) the two lead plaintiffs would receive incentive awards of $15,000 each. Additionally, Southwest agreed to pay, without objection, court-awarded attorney fees of up to $3,000,000.

Class members Gregory Markow and Alison Paul (Objectors) challenged the settlement, arguing that the fee award was disproportionate to the class relief. The Objectors also argued that the fee settlement included an improper "clear-sailing" clause (providing that Southwest would not oppose a fee award up to a certain amount) and "kicker" clause (stating that any court-ordered reduction in the attorney fee would benefit Southwest, as opposed to the class) designed to shield the award from challenge. Markow further objected on the ground that, under CAFA, the attorney fee should be based on the value of the coupons redeemed by class members.

The district court approved the settlement, finding that the agreement provided essentially complete relief to the class. The court further determined that CAFA authorized the use of the lodestar method to determine attorney fees, and awarded class counsel a fee of $1,649,118. The Objectors and class counsel appealed.

The Seventh Circuit affirmed. The court noted that in In re HP Inkjet Printer Litig., 716 F.3d 1173, 1183-85 (9th Cir. 2013) the Ninth Circuit determined that 28 U.S.C. § 1712(a) prohibited use of the lodestar method to calculate the attorney fee for class counsel, and that the fee should be calculated based on the value of the new coupons actually redeemed by the class members. The Seventh Circuit declined to follow the Ninth Circuit, instead concluding that the subsections of section 1712 worked together such that

[s]ubsection (a) prohibits basing a percentage-of-recovery fee on the face value of all coupons made available. Subsection (b) says that lodestar is the only permissible alternative to percentage-of-coupons used. And subsection (c) allows, though does not require, a blend of the two methods when a coupon settlement also provides some equitable or cash relief.

Accordingly, the court held that section 1712 permits a district court to use the lodestar method to calculate attorney fees to compensate class counsel for the coupon relief obtained for the class. This interpretation of section 1712 forms the basis of the circuit split with the Ninth Circuit.

Addressing the remaining challenges to the district court's ruling, the Seventh Circuit rejected the argument that the "clear sailing" and "kicker" clauses rendered the settlement agreement unfair to the class. The court specifically recognized the inherent fairness of the agreement because the settlement made the class whole—the class members would receive exactly what they had before, which was an unexpired drink voucher. The court likewise determined that the district judge carefully and appropriately applied the lodestar method in calculating the attorney fee, and that the $1.65 million fee award was not an abuse of discretion.

Objectors argued (for the first time on appeal) that the settlement class should not have been certified because lead class counsel and one of the two class representatives were co-counsel in another class action. The court agreed that there existed at least a potential conflict of interest that should have been disclosed to the court and other interested parties. Consequently, the court modified the district court's ruling and eliminated the $15,000 incentive award to one of the lead plaintiffs and reduced the fee award to counsel by $15,000. The court affirmed the district court in all other respects.

Keywords: products liability, litigation, CAFA, class action, coupon settlement provision, clear sailing, kicker

Bryan A. Coleman is with Maynard, Cooper & Gale, PC, in Birmingham, Alabama.


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