Counsel Fees Can Be Based on Overall Value of Settlement, Not Just Amounts in a Settlement Fund

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In Patel v Groupon Inc., 2013 ONSC 6679, Justice Belobaba heard a consent motion to certify a class action against Groupon Inc. (“Groupon”) as well as motions to approve the settlement and class counsel fees. The class action was easily certified and the settlement agreement approved - which included establishing a settlement fund of $535,000.  Class counsel then sought fees totalling almost half the value of the settlement fund, to be paid out of the settlement fund.  Due to the somewhat unique circumstances of this case, which included consideration of both the monetary and non-monetary value of the settlement, Justice Belobaba approved this arrangement.

Groupon is a company that sells “deal vouchers” that can be used at local establishments for goods or services.  A consumer pays a set purchase price, and receives a voucher that has a higher face value and is therefore a “deal”. The plaintiffs alleged that Groupon had engaged in ‘unfair practices’ by selling deal vouchers with illegal expiration dates, and by illegally requiring customers to use the entire value of the deal voucher in one transaction or lose the remaining balance. After the commencement of the class action Groupon changed the terms of service of the deal vouchers to clarify that the amount that the consumer had paid, the purchase value, would not expire.  However, in the plaintiffs’ view, the changes did not make it clear on the face of the vouchers that the expiry date only referred to the promotional value, i.e. the difference between the face value of the voucher and the purchase price paid by the customer, and Groupon did not take any steps to refund expired vouchers.

The settlement agreement provided that class members could continue to redeem “expired” vouchers at the purchase price or, if that was not possible, they could be compensated from the settlement fund that was to be established in the amount of $535,000. Class Counsel’s fees were also to be paid out of the settlement fund.  As such, these fees were “subjected to strict scrutiny”. Justice Belobaba stated that normally, he would not have approved $235,000 in legal fees.  If the total value of the settlement was $535,000 then the counsel fees on a contingency basis would be approximately 44%.  However, Justice Belobaba was persuaded that the total value of the settlement also included millions of dollars in unredeemed vouchers.

Justice Belobaba accepted class counsel’s submissions that there was a significant benefit achieved by the freeing up of unredeemed vouchers that consumers believed had expired and that could now be redeemed.  However, he appears to have been concerned that class counsel’s estimate of the value of the expired vouchers at $7 million was an over estimation.  Using the most conservative measure, Justice Belobaba found that the overall value of the settlement, including both monetary and non-monetary benefits, was at least $2.285 million.  (This was based on ¼ of the $7 million estimate, plus the settlement fund.)  Therefore, if class counsel had agreed to be compensated at a 20 percent contingency fee basis, they would have been entitled to $457,000 in legal fees. Viewed through this lens, Justice Belobaba found that “the quantum is fair and reasonable given the fact that the overall recovery for class members (monetary and non-monetary) is demonstrably in the millions of dollars”.

Justice Belobaba’s calculations were based on a conservative value of the non-monetary portion of the settlement and, what he appears to have identified as a conservative contingency fee rate of 20%, as opposed to the number of hours docketed which he noted was a generally unsatisfactory metric.  No explanation was provided as to where these measures came from nor do the reasons include what the actual number of docketed hours were.  Had less conservative measures been used, such as a more typical contingency rate of 1/3, the fees requested would appear to be significantly less than one would expect, given the value of the settlement.  This would not detract from the fairness and reasonableness of the fees and in fact might add to them and it may very well be that Justice Belobaba had this concern in mind when he applied what he termed a “conservative measure”. In future motions to approve class counsel fees, parties would be wise to consider what evidence can and should be placed before the Court in particular to assist in quantifying any non-monetary value of a settlement and what evidence or law there may be as to the actual, standard or appropriate contingency fee.