Ninth Circuit Raises Fee Award Hurdle in Coupon Class Action Settlements

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TAKEAWAYS

  • Ninth Circuit decision prohibits use of lodestar-only methodology to calculate a fee award for class action settlements involving coupons.
  • The decision contemplates coupon class action settlements where coupons are redeemed before final approval, but also addresses more conventional settlements where final approval comes first.
  • Decision approves use of expert testimony to determine value of coupons included in as part of a class action settlement, likely leading to a rise in expert testimony in fee motions.

The Ninth Circuit Court of Appeals recently issued a significant opinion that will materially impact class action settlements that provide coupon relief and in particular how the realized value of those coupons limits class counsel’s fee awards.

In Whirlpool Corp., et al. v. Chambers, et al., Case No. 8:11-cv-01733-FMO-JCG, eight plaintiffs filed a putative class action lawsuit in a California federal court against defendants—three well-known dishwasher machine manufacturers—asserting breach of warranty and other state law claims. The complaint alleged certain of defendants’ dishwashers suffered from a design defect that caused electronic control boards to overheat and malfunction. While the initial complaint sought certification of a nationwide class of dishwasher purchasers, the final iteration of plaintiffs’ complaint dropped the nationwide class and replaced it with 11 state classes.

Before the district court ruled on any substantive motions, the parties reached a settlement premised on a nationwide class. The settlement provided both class and non-class members monetary relief if they had already experienced an overheating incident. The settlement also provided coupons to customers for the purchase of a new dishwasher.

The district court granted preliminary settlement approval and class certification, and direct mail notice was sent to over 3.5 million class members. Of the 133,040 claims that were filed, approximately 96 percent were for coupons. The parties substantially disagreed on how many of these coupons would be redeemed, as illustrated by the competing valuations of the settlement: defendants estimated the settlement value to be as low as $4.2 million, while plaintiffs put the high end at $116.7 million. Because the parties could not agree on the amount of legal fees to be paid by defendants under the settlement, they agreed that the district court should decide the amount.

The district court granted the bulk of plaintiffs’ fee request, awarding $14.8 million based on a settlement value in the range of $55.7 million to $116.7 million, figures that took into consideration the coupon portion of the settlement. The district court arrived at this award by using lodestar methodology (reasonable number of hours billed times a reasonable hourly rate) of $8,818,449.23, to which a 1.68 multiplier was applied due to several factors, including the “impressive results” obtained by class counsel.

Defendants appealed the district court’s decision to award $14.8 million in attorneys’ fees. The Ninth Circuit Panel made the following significant holdings:

  • The Class Action Fairness Act (CAFA) preempts any corresponding state law and applies to any class action in federal court, including those based on diversity jurisdiction.
  • The Rules Enabling Act does not preclude CAFA preemption of state laws on attorneys’ fee awards.
  • A choice-of-law provision in a class action settlement agreement cannot invoke a state rule permitting a lodestar-only attorneys’ fee award calculation. CAFA supplants any such state rule.
  • A lodestar methodology can only be used in a “mixed” settlement involving coupon and non-coupon relief if the lodestar calculation does not consider the coupon portion of the settlement or takes into account the coupon redemption value (i.e., the value of coupons actually redeemed).
  • In light of these holdings, the Panel vacated the $14.8 million district court fee award because it was based solely on a lodestar-only valuation that improperly considered class counsel’s work performed for the coupon portion of the settlement. On remand, the Panel instructed the district court to determine an appropriate fee award by ascertaining the (a) redemption value of the coupons, and (b) the value of the non-coupon portion of the settlement.

The Panel’s holdings will likely have a significant and far-reaching effect on class litigants’ willingness to use coupons in future class action settlements. Class counsel’s hopes for windfall fee awards may also discourage some new class action filings in the Ninth Circuit. A few immediate observations can be made:

  • The opinion reaffirms that CAFA’s “mixed” settlement provision (28 U.S.C. § 1712(c)) applies to settlements involving coupon relief and monetary relief, even though the statute references settlements involving coupon relief and equitable relief. Under the Panel’s broad interpretation of the “mixed” settlement provision, it is hard to imagine a class action settlement involving coupons that is not For example, it is generally the case that defendants will pay class administration fees incurred in executing the terms of a class action settlement. Defendants’ payment of these fees is a form of monetary relief for the class obtained by class counsel. It appears then that the panel’s decision means district courts can never apply lodestar-only methodology to calculate a fee award for class action settlements involving coupons.
  • The opinion explains that CAFA contemplates coupon settlements where the coupons are redeemed before final settlement approval. But even if such settlements could be achieved through “bifurcated or staggered” fee award proceedings, the Panel’s interpretation of CAFA does not address an important pragmatic consideration: whether class action defendants are ever willing to make settlement payments before they know if the settlement is finally approved.
  • The Panel also approves of the use of expert testimony to determine the portion of the settlement value stemming from coupon relief. This guidance may lead to a rise in expert testimony in class action settlement fee award proceedings.

Plaintiffs’ class counsel in consumer cases are less likely to receive windfall fee awards under this new decision. Time will tell, but we may continue to see more class action forum shopping at the state court level using narrower and smaller classes.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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