Extreme Couponing: Reforming the Method of Calculating Attorneys' Fees in Class Action Coupon Settlements

• Author: Neil Connolly
• Position: J.D. Candidate, The University of Iowa College of Law, 2017; B.S. Bradley University, 2014
• Pages: 1335-1359

Extreme Couponing: Reforming the Method of Calculating Attorneys’ Fees in Class Action Coupon Settlements Neil Connolly * ABSTRACT: The class action device is an important tool for injured consumers. It allows hundreds of consumers to aggregate their injuries and enables them to litigate their claims. However, the system is vulnerable to abuse. One form of alleged abuse is the class action coupon settlement. In many coupon settlements, the members of the class receive valueless coupons, while the class’s attorney is paid millions. Congress sought to eliminate this practice by enacting section 1712 of the Class Actions Fairness Act (“CAFA”), which attempts to regulate how attorneys’ fees are calculated in a coupon settlement. Unfortunately, section 1712 was poorly drafted, which has led to opposing interpretations from the Seventh and Ninth Circuits. This Note argues that the Seventh Circuit correctly interpreted the current version of section 1712 of CAFA, but that Congress should rewrite section 1712 in accordance with the Ninth Circuit’s interpretation, to better protect future class members in coupon settlements. I. INTRODUCTION ........................................................................... 1336 II. CLASS ACTIONS AND COUPON SETTLEMENTS: HISTORY, BENEFITS, DISADVANTAGES, AND FAILED REFORM ...................... 1337 A. H ISTORY OF C LASS A CTIONS AND C OUPON S ETTLEMENTS ........ 1337 B. T HE N EED FOR C LASS A CTIONS .............................................. 1339 1. The Aggregation Principle ......................................... 1339 2. Private Enforcement of the Law Through Class Actions.......................................................................... 1340 C. C OUPON S ETTLEMENTS : C OMPENSATION , A BUSE , AND A TTEMPTED R EFORM ................................................................................ 1342 1. Lawyer’s Cash Compensation: Percentage-of-Recovery vs. the Lodestar Standard ........................................... 1343 * J.D. Candidate, The University of Iowa College of Law, 2017; B.S. Bradley University, 2014. I would like to thank the Iowa Law Review editorial board for all of their work on this Note, and my girlfriend, Kim, my friends, and family for their continued support. 1336 IOWA LAW REVIEW [Vol. 102:1335 i. The Lodestar Standard ............................................ 1343 ii. Percentage-of-Recovery Method ................................ 1344 2. Reasoning Behind the Class Actions Fairness Act of 2005 ............................................................................. 1345 3. The Failed Congressional Solution: 28 U.S.C. § 1712........................................................................... 1346 III. ANALYZING THE OPPOSING INTERPRETATIONS OF SECTION 1712 ........................................................................................... 1348 A. T HE N INTH C IRCUIT A PPROACH : IN RE HP I NKJET P RINTER L ITIGATION .......................................................................... 1348 B. T HE S EVENTH C IRCUIT A PPROACH : IN RE S OUTHWEST A IRLINES V OUCHER L ITIGATION ........................................................... 1351 C. T HE I NTERPRETATION THAT B ETTER P ROTECTS THE M EMBERS OF THE C LASS ........................................................................ 1353 1. The Canon Against Surplusage ................................ 1354 2. The Legislative History Debate ................................ 1354 3. Better Protection of the Class ................................... 1355 IV. REWRITING SECTION 1712 TO BETTER PROTECT THE CLASS ..... 1355 A. T HE N EW AND I MPROVED : 28 U.S.C. § 1712 C OUPON S ETTLEMENTS ....................................................................... 1355 1. New Subsection Titles ............................................... 1356 2. Alignment of Interests: Class and Class Counsel .... 1356 3. Coupon Restrictions.................................................. 1358 4. Eliminating the Mixed Settlement Subsection ....... 1359 V. CONCLUSION .............................................................................. 1359 I. INTRODUCTION On August 20, 2015, in In re Southwest Airlines Voucher Litigation , the Seventh Circuit created a clear circuit split when the court decided that the lodestar method can be used to ascertain attorneys’ fees in a coupon settlement under the Class Action Fairness Act of 2005 (“CAFA”). 1 This holding is contrary to the Ninth Circuit’s approach in In re HP Inkjet Printer Litigation , which held that the lodestar standard was prohibited in class action 1. In re Sw. Airlines Voucher Litig., 799 F.3d 701, 710 (7th Cir. 2015) (“ We hold that § 1712 p ermits a district court to use the lodestar method to calculate attorney fees to compensate class counsel for the coupon relief obtained for the class. When a district court considers using the lodestar method in this manner, it will need to bear in mind the potential for abuse posed by coupon settlements and should evaluate critically the claims of success on behalf of a class receiving coupons . . . .”). 2017] EXTREME COUPONING 1337 coupon settlements in some aspects. 2 These countervailing interpretations highlight that the current version of CAFA is poorly written and ambiguous. Congress must act and reform the statute to better protect class members in coupon settlements. This Note suggests such a reform. Part II of this note will discuss the importance of class action settlements and examine the history of Congress’s attempts to reform the class action system. Part III will then explain and analyze the Seventh and Ninth Circuits’ interpretations of CAFA. Lastly, this Note will offer a reformed version of section 1712 and discuss how the various changes to the statute would better protect class members in a class action coupon settlement. II. CLASS ACTIONS AND COUPON SETTLEMENTS: HISTORY, BENEFITS, DISADVANTAGES, AND FAILED REFORM Part II will discuss the history of class actions and coupon settlements, why class actions are needed, the alleged abusive practices by class action lawyers, and Congress’s attempt to fix these abusive practices with CAFA. Lastly, this part will highlight section 1712’s ambiguity and help illustrate why the Seventh and Ninth Circuits have interpreted the statute differently, creating a clear circuit split and the potential of undermining the intended reforms of CAFA. A. H ISTORY OF C LASS A CTIONS AND C OUPON S ETTLEMENTS A class action lawsuit allows “a single person or a small group of people to represent the interests of a larger group” against one or more defendants. 3 The class action lawsuit in the United States is derived from the English common law. 4 In 1842, the Federal Rules of Equity codified attorneys’ ability to litigate on behalf of absent plaintiffs. 5 After several changes to the Federal Rules of Equity, the class action device was eventually included in the Federal Rules of Civil Procedure via Rule 23. 6 Following the inception of Rule 23, courts and attorneys struggled with the classifications that the rule provided. 7 2. In re HP Inkjet Printer Litig., 716 F.3d 1173, 1175–76 (9th Cir. 2013) (“ When a settlement provides for coupon relief, either in whole or in part, any attorney’s fee ‘that is attributable to the award of coupons’ must be calculated using the redemption value of the coupons. Since the district court awarded fees that were ‘attributable to’ the coupon relief, but failed to first calculate the redemption value of those coupons, we reverse the orders of the district court and remand for further proceedings consistent with this opinion.” (citation omitted)). 3. Class Action , BLACK’S LAW DICTIONARY (10th ed. 2014). 4. Susan T. Spence, Looking Back . . . in a Collective Way , BUS. L. TODAY, at 21 (July–Aug. 2002), http://www.americanbar.org/content/dam/aba/publications/blt/2002/07/looking-back-200207. authcheckdam.pdf. 5. Id. at 23. 6. Id. 7. Robert H. Klonoff, The Decline of Class Actions , 90 WASH. U. L. REV. 729, 736 (2013) (“The prior version, from 1938, contained several classifications—‘true,’ ‘hybrid,’ and ‘spurious’ classes—that were difficult to apply and ‘baffled both courts and commentators.’” (quoting 1338 IOWA LAW REVIEW [Vol. 102:1335 As a result, the rule was amended in 1966 to provide a supposedly simpler format, in an attempt to encourage more class action lawsuits. 8 Since 1966, Congress and courts across the country have continued to wrestle with the alleged benefits and procedural difficulties that class actions create. 9 In general, the class action lawsuit is a hotly debated issue, both in and outside of the legal community. Proponents of class actions argue that class action lawsuits provide similarly situated plaintiffs with access to justice. 10 On the other hand, opponents of class actions argue that the class action system is abused by plaintiffs’ lawyers and does not provide members of a class with the requisite justice or monetary reward. 11 Opponents’ main contention is Charles A. Wright, Class Actions , 47 F.R.D. 169, 176 (1970))). 8. Id. 9. Id. at 736–38. One such procedural problem that the courts and Congress have wrestled with over the years is diversity jurisdiction in class action lawsuits. Class action claims arising under a federal question have not caused much difficulty. On the other hand, the amount in controversy requirement for diversity jurisdiction in relation to multiple class members has required a lot of litigation and changed significantly over the years. Originally the Supreme Court ruled that each member of the class had to meet the minimum amount in controversy requirement. Due to the fact that class actions are designed to aggregate small claims of individuals, the Supreme Court’s ruling made bringing a class action lawsuit in federal court nearly impossible. However, two changes in 2005 drastically altered plaintiffs’ ability to file class action lawsuits in federal...