The coupon quandary: restructuring incentives in CAFA coupon settlements.

• Author: Gallagher, Michael, II
• Position: Class Action Fairness Act of 2005

INTRODUCTION

Envision the following scenario:

In one state court class action involving faulty pipes, lawyers for a group of Alabama plaintiffs received more than $38.4 million in fees, and lawyers for a class of Tennessee plaintiffs received $45 million, or the equivalent of about $2,000 an hour. In contrast, the homeowners only received 8 percent rebates toward new plumbing--and to get those rebates, they had to first prove that they had suffered leaks and then go out and buy a new system. The money in the settlement flowed primarily to class counsel. (1) Consider further that "[t]o settle an Illinois state court class action in which it was accused of improperly including asbestos in its crayons, a manufacturer agreed to issue class members 75-cent coupons toward the purchase of new crayons. The attorneys got $600,000 in fees." (2)

These cases are precisely why coupon settlements in class action lawsuits garner attention. Essentially, members of the class receive very little while the attorneys receive large--and, in some instances, surprisingly large--payments to settle the claims. Generally, there is a fear that these settlements will be the result of collusion between the defendants and class counsel. Both have much to gain from a lucrative payout. The class counsel will walk away with a hefty sum, and the defendants will avoid incurring costs associated with litigating the case. The fear is that the plaintiffs will be left powerless to adequately redress their grievances.

Congress addressed these concerns by enacting the Class Action Fairness Act (CAFA), (3) which contained a section on coupon settlements. However, as courts have interpreted CAFA, the following question has arisen: When attorneys' work results in coupons for the class, does CAFA preclude the use of the lodestar method (4) for calculating their fees? Or, conversely, is a contingency fee mandatory?

In answering this question, this Note seeks to accomplish the following goals: (1) examine the precise question whether CAFA precludes the use of the lodestar method to calculate attorneys' fees in cases where the attorneys' work resulted in coupon settlements; and (2) propose a solution that more closely aligns the incentives of class counsel to those of the class. Generally speaking, Congress wrote CAFA to allow for the use of the lodestar method--although it did so in convoluted language--yet evinced a broad legislative intent to disallow the method. For this reason, the case law expounding on the provision has culminated in a circuit split. The Ninth Circuit, in In re HP Inkjet Printer Litigation, (5) held that the statute prohibited the use of the lodestar method when coupons were the relief obtained. (6) Conversely, the Seventh Circuit, in In re Southwest Airlines Voucher Litigation, (7) held that district courts have the discretion to allow either the lodestar method or a contingency fee, and parties should be accorded the autonomy to negotiate any method subject to other statutory constraints. (8)

This Note argues that, while the Ninth Circuit has a compelling policy argument, the Seventh Circuit has the superior legal argument. This is so because [section] 1712(a), when interpreted along with [section] 1712(b) and [section] 1712(c), contemplates the existence of a choice between the lodestar method and a contingency fee. The legislative history, although relied upon heavily by the Ninth Circuit, also weighs in favor of the Seventh Circuit. (9) The Ninth Circuit's argument cannot be immediately refuted, however, because Congress clearly evinced an intent to alter the incentives at play in coupon settlements. This conflict between intent and statutory language illuminates yet again how poorly CAFA was drafted. (10)

This Note proceeds in five parts. Part I provides a background of coupon settlements with special attention paid to the incentives of class counsel. Part II oudines CAFA's relevant statutory provisions and examines them in light of the "Purposes" section in the statute and the Senate report accompanying the legislation--the most illuminating indicia of legislative intent. Part III examines the rationale supporting both cases in the circuit split and the implications behind both interpretive regimes. Part IV argues that the Seventh Circuit has the better legal argument for two reasons: (1) its strong textual argument; and (2) its support found in the Senate report. The Seventh Circuit's reasoning makes it difficult to reconcile the Ninth Circuit's opinion with the text and legislative history of the statute. Part V concludes by arguing that coupon settlements under CAFA raise a significant issue that should be addressed by Congress. Congress employed strong language throughout the Senate report indicating that it wanted to closely align the incentives of class counsel with members of the class. Part V continues by suggesting a methodology for courts to follow. This approach aims to accommodate both the interests of class counsel and class members to create a reasonable solution.

This Note does not decide whether coupon settlements are per se desirable or undesirable. There is robust scholarly literature describing the incentive structures inherent in coupon settlements and the pros and cons concerning their use. Arguments on both sides have merit, and these arguments are discussed later in the Note. (11) This Note does, however, explain that the broad purpose evinced in the legislative history--attempting to avoid situations in which attorneys act at the expense of their clients--is not supported by the statutory text. CAFA is all bark with no proverbial bite. This Note provides a remedy to more closely align those incentive structures. If citizens truly do want to limit the availability of the lodestar method to alter class counsel's incentives, they should attempt to change that through their elected representatives in Congress.

1. COUPON SETTLEMENTS

   1. Mechanics of the Coupon Settlement

   First, it is necessary to elaborate on the mechanics of the coupon settlement process to ensure a working understanding of the material at issue. Typically, once a class action suit is certified, settlement is the norm and trial is the exception. (12) In its simplest form, the defendant will offer the class coupons in exchange for the class dropping all claims against the defendant. Coupons have generally been accorded a capacious definition that allows for more than merely a discount on a product. For example, courts have ruled that a voucher falls within the definition of coupon pursuant to CAFA. (13) What constitutes a coupon has more to do with the "nonpecuniary" aspect of the relief than a rigid, generally accepted definition of coupon. (14)

   Two scholars elaborated on the intricacies of the coupon settlement process as follows:

   Generally, as part of the settlement, the defendant agrees to pay all costs of notice and administration as well as the plaintiffs' attorneys' fees. The defendant usually includes a cash component with the nonpecuniary settlement to finance these costs and fees. Typically, the defendant denies all wrongdoing, and the class releases the defendant from any and all liability in connection with the allegations in the complaint. (15) B. Coupon Settlements in the Public Eye

   Coupon settlements have generally been greeted with significant skepticism and hostility in public discourse. (16) Behind these critiques is the fear that attorneys will sacrifice their clients' interests (i.e., the best relief possible given the factual and legal circumstances of each case) for the advancement of their personal interests (i.e., obtaining the highest attorney fee award possible). Presumably for this reason, one scholar opined that if the attorneys get paid an exorbitant sum of money, "the reputation of the profession might suffer." (17) That is precisely why--in addition to normative concerns of fundamental fairness--finding the optimal sum is imperative.

   This criticism was not confined solely to the public arena, however. Scholars and politicians have also argued that coupon settlements create incentives that work to the detriment of consumers who represent the class. (18) Generally, this opposition has been rather strong and even characterized as "vociferous" in some contexts. (19)

   On the other end of the spectrum, however, scholars posit that this criticism is misguided--or at least overstated. In response to Congress's reliance on anecdotal evidence to address attorneys' fees and coupon settlements in CAFA, (20) scholars Thomas E. Willging and Shannon R. Wheatman gathered empirical evidence concerning the class action legal landscape. (21) Their findings showed that most class action lawsuits did not even survive the certification stage of the class action process. (22) Typically, in lawsuits that did settle, members of the class received monetary sums. (23) Only nine percent of the cases in the survey featured a coupon settlement--either transferable or nontransferable. (24)

   This evidence supports the notion that coupon settlements are not as prevalent as legal lore might suggest. After all, anecdotal evidence that incites indignation because of seemingly unfair outcomes does not address how frequently an injury occurs. Each injustice is presented on a case-by-case basis. (25) While there are compelling arguments concerning the prevalence and significance of coupon settlements in practice, the fact of the matter is that Congress responded.

2. CAFA STATUTORY SCHEME AND SENATE REPORT 109-14

   1. Relevant CAFA Provisions and Purposes

      Congress enacted CAFA in 2005 in part to address the aforementioned concerns. (26) Of particular relevance here are [section][section] 1711-12, which establish definitions (27) and govern the processes by which the court may calculate and award attorneys' fees. (28)

      The statutory scheme is relatively straightforward. Section 1712 is divided into five sections. The first three provisions...