On May 15 a Ninth Circuit panel reversed the district court’s approval of a class action settlement, holding that attorney’s fees awarded in connection with a coupon for the class members must be tied to actual redemption of the coupons rather than the time the attorneys spent working toward the coupon settlement. (In re HP Inkjet Printer Litigation, No. 11-16097 (9th Cir. May 15, 2013) opinion available here.)
The decision (1) forecloses the use of a reasonable-hours-times-reasonable-rate method of calculating fees for the coupon part of a settlement and (2) prevents the award of fees as a portion of the coupon value until the value of actually-redeemed coupons is known. While this opinion only serves as governing precedent in Ninth Circuit federal courts, it may inform state court decisions on the subject of coupon settlements in class action cases.
The objectors are members of a class of people who bought printers from the Defendant between 2001 and 2010. In 2010 the parties agreed to a global settlement, with the Defendant (1) providing class members with $5 million in “e-credits” for the Defendant’s products, (2) making additional disclosures to customers, (3) paying class notice and settlement administration costs, and (4) paying up to $2.9 million in attorneys’ fees and expenses. The e-credits (which the Court deemed “a euphemism for coupons”) would be awarded in $2-$6 amounts, and would expire, would not be transferable, would only be accepted at the Defendant’s online store, and could not be used with other discounts or coupons. These are all variables that complicate the estimation of the actual value of the settlement to the class.
The district court approved the settlement, but estimated that the actual value of the whole settlement (coupons plus injunctive relief) to the class was approximately $1.5 million, so reduced the lodestar amount for the attorney’s fees to $1.5 million, with costs of nearly $600,000. The lodestar method of calculating damages requires multiplying the number of hours reasonably worked by a reasonable hourly rate.
With respect to the Class Action Fairness Act (“CAFA”), the Ninth Circuit majority and dissent “agree[d] that CAFA is poorly drafted,” and both opinions delved at a granular level into the meaning of CAFA’s text.
Section 1712(a)-(c) of CAFA governs the calculation of attorneys’ fees in class action settlements that involve a coupon component (the text of CAFA is available here). Under section 1712(a), when a settlement provides for coupons, “any attorney’s fee . . . that is attributable to the award of coupons shall be based on the value to class members of the coupons that are redeemed.” The majority noted that, with CAFA, Congress specifically “intended to put an end to the ‘inequities’ that arise when class counsel receive attorneys’ fees that are grossly disproportionate to the actual value of the coupon relief obtained for the class.”
The Ninth Circuit majority explained that the district court must calculate (1) the part of the fees based on the coupon using actual redemption value and (2) the part of the fees for injunctive relief using the lodestar method of estimating payment based on the time plaintiff attorneys reasonably spent working on the case. The majority then reversed the district court, finding that it had failed to calculate the redemption value of the coupons, instead only using the lodestar method for coupon and injunctive relief.
The majority also noted that allowing for redemption of coupons before final approval of the settlement (and the attorneys’ fees) would have alleviated part of the problem, because the redemption value of coupons actually used would be known. The Court did not address whether business modeling estimations of the actual coupon use would be sufficient to establish the actual dollar value of the coupons to the class.
Judge Berzon dissented, arguing that CAFA allows use of the lodestar method for the entire settlement, rather than only for the part resulting in non-coupon relief. Judge Berzon explained that, under her reading of CAFA, section “1712(a) regulates how a percentage-of-recovery fee should be calculated, if that method is used to award attorney’s fees for a coupon settlement; it does not dictate whether a percentage-of-recovery method must be used.” Judge Berzon wrote that section 1712(b), in turn, states that the lodestar method is to be used if attorneys’ fees are not determined as “a portion of the recovery of the coupons.” Finally, the dissent said that 1712(c) allowed for a blend of the percentage and lodestar approaches. Judge Berzon further reasoned that plaintiffs’ counsel could not be expected to separate billing for their work on the coupon part of the settlement from their work on the injunctive relief. Additionally, district judges safeguard against the possibility of excessive fees based on hours for settlements with low value to the plaintiff class by reviewing the overall reasonableness of the fees and choosing which fee calculation method to apply, as appropriate.