Clipping Coupons
From Inside Counsel Magazine | July 2008 Issue
By Melissa Maleske
July l, 2008
When Ford Motor Co. offered a coupon to settle claims related its Explorer, commentators in the media
latched onto the story as another example of unfair coupon settlements. Class members claimed that
reports of rollovers had negatively impacted the retail value of their vehicles. The deal, which won final
approval in April, resolved claims in four consolidated cases. It provided class members with a $500
coupon toward a new Ford Explorer or a $300 coupon to purchase or lease any Ford, Lincoln or Mercury.
Meanwhile, class counsel collected fees of $25 million.
Clarence Ditlow, executive director of the consumers' group Center for Auto Safety, lambasted the
settlement in the Sacramento (Calif.) Bee, commenting, "They should pay the lawyers in coupons."
An Explorer owner told an ABC affiliate in Sacramento, "They get $25 million, all I get is this lousy
coupon, which I'm not going to use."
The complaints touched on issues that were supposed to have been resolved following enactment of the
Class Action Fairness Act of2005 (CAFA), which seeks to end various abuses of the class action system in
federal court, including abuse of coupon settlements.
"Attorneys were resorting to coupon settlements as a way to inflate the value of the settlement," says
Ted Frank, director of the American Enterprise Institute's Legal Center for the Public Interest. "Without
that ability there's no reason to resort to coupon settlements at the federal level. ... On the other hand,
you still see them being used."
Although CAFA did not apply to the settlement in Ford's case, which was filed and remained in state
court, the act's ripple effects have spread throughout the courts, where judges increasingly are paying
attention to CAF A's provisions.
The main objective of CAF A is to prevent plaintiffs from "forum-shopping" in state courts. To that end, it
removes state class actions to federal court when the aggregate value of the claims exceeds $5 million,
there are at least 1OO class members and any member of the class is a citizen of a different state than
any defendant.
Its other goal is to ensure settlements are fair, reasonable and adequate to class members. Jason
Sultzer, a litigation partner in Wilson Elser Moskowitz Edelman & Dicker, points to a i 995 settlement
involving Cheerios, in which class members received a box of cereal while lawyers walked away with $ 1
.75 milion. "Those kinds of examples were fairly common before CAFA," he adds.
Ending Abuse
Preventing such abusive settlements was a major reason CAF A was enacted. Now in federal class
actions, a court must hold hearings on a proposed coupon settlement and issue a written opinion
approving or rejecting it.
"CAF A doesn't prohibit anyone from using a coupon settlement as à way to settle a case, but it closes
the door a bit," Sultzer says. "That could hurt a company."
That's because for companies that offer goods and services, coupon settlements can have numerous
benefits, allowing companies to gain promotional value and customer awareness rather than paying out
large cash settlements. They are a good fit for companies that may face financial uncertainties, such as
Ford, and for products that garner repeat customers.
New restrictions on coupon settlements don't just apply to cases removed to federal court under CAFA.
Any civil class action filed in federal district court is subject to CAFA requirements, including those on
coupon settlements. And the effects of CAF A are spreading so that judges in general are scrutinizing
coupon settlements at a higher level than they did just five to 10 years ago, even when CAFA does not
apply. For instance, Brian Procel, an associate with Miler Barondess, is currently awaiting final approval
of a coupon settlement. Although his case is a state class action to which CAFA does not apply, he still
finds that judicial scrutiny of the coupon is heightened.
Frank echoes this view: "At the state level, some judges have paid attention to what's happened at the
federal level and are giving coupon settlements more scrutiny."
Before a court scrutinizes a coupon, it must determine that the settlement actually is considered a
coupon under CAF A. The act provides no clear definition.
For both sides, rejection of a coupon settlement can prevent a desired settlement, Sultzer says. "Both
parties, if they want to settle a case, may now want to try to take a settlement outside the context of it
being a coupon settlement. They may not want to label it as such so it won't fall within that strict
scrutiny. "
In addition, the definition of a coupon is important because whether a court defines it as such has a
great impact on how attorneys' fees are calculated.
Coupon Classifications
A few cases address the definition of a coupon. In Perez v. Asurion Corp., a 2007 CAFA case, the
company agreed to settle claims by providing national class members with phone cards worth $5 or 50
minutes. Some subclass members were to receive vouchers for wireless phones.
The U.S. District Court for the Southern District of Florida considered this a coupon because, it said,
"Although the phone cards and vouchers supplied here are not literally 'coupons'-in that they do not
require the Class to purchase anything-neither are they cash."
In the 2008 case Chavez v. Netfix Inc., to which CAFA did not apply, the California state appeals court
differentiated between a "pure" coupon settlement and the proposed coupon-worth a month of free
Netflx DVD rentals. "(Class members are not being offered a discount that requires them to make new
purchases," the judge said. The court deemed this a "variant of the coupon settlement."
However, in a 2007 case that fell under CAFA, Browning v. Yahoo! Inc., the U.S. District Court for the
Northern District of California found a voucher and a coupon to be two different things. The settlement
in Browning provided vouchers for a free credit report or two free months of credit monitoring. U.S.
Magistrate Judge Howard R. Lloyd addressed settlement objectors who complained about the coupon
by noting, "(The in-kind relief offered in this case is not a 'coupon settlement' because it does not
require class members to spend money in order to realize the settlement benefit."
Still, Lloyd's analysis of the settlement did not differ much from the analysis of a coupon settlement, and
attorneys' fees were calculated with the same methods used for a coupon settlement. Lloyd did not,
however, discuss increased scrutiny of the settlement under CAFA.
Sharp Scrutiny
"The new measures that CAF A puts on these coupon settlements could actually prevent a class action
from settling even when both parties want it to settle," Sultzer says. "The court can say the settlement
isn't fair for whatever reason."
In Figueroa v. Sharper Image Corp., for example, the U.S. District Court in Miami rejected a settlement
proposed by Sharper Image that included a $ 1 9 coupon or credit for Sharper Image merchandise.
Attorneys general from 35 states and the District of Columbia submitted a brief concluding that the
proposed settlement in Figueroa did not "pass muster" under heightened scrutiny of coupon
settlements mandated by CAFA.
The court agreed. Federal District Judge Cecilia Altonaga found the settlement was of such negligible
value that taking the case to trial would be a worthy risk for plaintiffs. She also cited the state attorneys
general, representing class members, who had "objected at every turn" to the settlement.
As to procedural fairness of the settlement, Altonaga also found flaws. She believed Sharper Image had
steered the negotiations while class counsel operated from a position of weakness. She cited evidence
that the plaintiffs originally had demanded coupons worth $280 and that Sharper Image had broadened
its claims so as to resolve separate actions in California and Florida with one settlement.
Altonaga was clear that she had analyzed the settlement under the heightened scrutiny mandated by
CAF A. In her order denying approval, she addressed the provisions for coupon settlements under CAFA,
allowing that the act's standards are identical to class action settlement standards provided in the
Federal Rules of Civil Procedure. "However," she added, "because the CAF A requirement... applies only
to coupon settlements, and because it is codified to further Congress' objectives and concerns regarding
the fairness vel non of coupon settlements in particular, the undersigned interprets the statutory
directive to imply the application of a greater level of scrutiny to the existing criteria than existed preCAF A."
Altonaga's analysis points to the future of coupon settlements. "I would think that there will be
continued scrutiny," Procel says. "I don't know that it will continue to increase but it is at a level now
that is appropriate for the problem."