Coupon Settlements: The Emperor's Clothes of Class Actions

Georgetown Journal of Legal Ethics, The, Fall 2005 by Hantler, Steven B, Norton, Robert E

Class actions can allow for the convenient and efficient grouping of plaintiffs sharing a common complaint to link up in a single lawsuit. Such suits have deep roots in English common law. When used correctly, class actions allow courts to resolve in one action many smaller, similar claims that might otherwise remain unheard because the cost of any particular suit would exceed the possible benefit to the claimant. Defendants can focus their energies on resolving all claims in one lawsuit and prevent courts from being flooded with duplicative claims. When used incorrectly, class actions can provide incentives that pervert the civil justice system: injuries need only be perceived, not real; attorneys hire plaintiffs, they are not hired by plaintiffs; settlements are driven by cost, not justice; and the plaintiffs' attorneys receive money, plaintiffs may not.

There have been two core factors that have lead a significant portion of class action litigation to stray from its usefulness as an efficient means of dispensing justice. First is the seduction of gargantuan contingency fees for the plaintiffs' attorneys. second is the change to Rule 23 of the Federal Rules of Civil Procedure in 1966 that reversed an opt-in provision to an opt-out provision. This rule change allows people to be dragooned as plaintiffs in a class action lawsuit unless they affirmatively notify the plaintiffs' attorneys they want out.1 As a result, countless thousands of plaintiffs can be conscripted into class actions, often unknowingly.

By the 1990s, class action lawsuits were flooding the nation's courts.2 A survey of Fortune 500 companies found that from 1988 to 1998, the number of class action filings against them increased by 338 percent in federal courts and more than 1000 percent in state courts.3 The more troubling class actions that flourished during this time period were the so-called "coupon settlements," which were fueled by the combination of the contingency fee and opt-in arrangement. In coupon settlements, instead of a cash award, plaintiffs receive coupons or other promises for products or services. Their lawyers, on the other hand, receive cash fees in amounts that generally dwarf the award recovered by individual plaintiffs. As we have learned over the past decade, coupon settlements are subject to abuse and should be carefully scrutinized.

At first, coupon settlements appeared to be a win-win situation. Plaintiffs would receive a benefit and an incentive would be created to correct whatever defects may have existed, if any, in the product, service or pricing mechanism at issue. Defendants then could resolve the litigation and focus on the business of business. But something happened on the way to the courthouse. Some plaintiffs' lawyers structured coupon settlements so their fees would consume a greater percentage of the money the defendants were willing to spend on the settlement. They inflated the apparent value of the coupons by overstating the number of anticipated class members so that the cumulative value of the settlement would be artificially high when it was used as the basis for the plaintiffs' lawyers' fees. And, in some cases, it appears that the process of redeeming coupons was so cumbersome that only a few would be redeemed.

In one such case in the early 1990s, consumers sued the airline industry for price-fixing claims arising from the industry's use of a computerized ticket price clearinghouse jointly owned by the airlines.4 While the claims apparently were of questionable merit,5 the settlement provided the class members a total of $408 million in discount airline ticket coupons and more than $50 million in attorneys' fees and administrative costs.6 The discount coupons were heavily restricted, as they were subject to black-out dates, could not be combined or used with other discounts, and were good only for up to ten percent off a flight. Critics charged that the settlement was primarily "a promotional scheme to induce travelers to fly" during off-peak travel periods and "a deal" worked out so class counsel could reap their fees, calculated at between $500 and $1,400 an hour.7

Rather than being a way to settle honest disputes between a company and its customers, most coupon settlements degenerate into another get-rich-quick scheme for plaintiffs' lawyers.

I. BEHIND THE LITIGATION VENEER

In many coupon settlement cases, the factual dispute and elements of the cause of action can be illusory, leading to significant potential for fraud or abuse. These cases differ from the traditional class action, in which people who believe they were injured by others seek lawyers, expand the suits into class actions upon rinding out that others are in the same situation, and, if successful, are compensated for their loss.

First, in coupon settlement cases, the litigation is usually generated by the lawyers.8 As a Wall Street Journal editorial writer explained, "[t]he typical case begins with a lawyer scanning the press for some business miscue so small that no single consumer would bother to complain about it. When thousands of consumers are aggregated in a class action, however, the prospect of a big fee begins to loom."9 The Des Moines Register further observed that "[s]ome lawyers have transformed class actions into a major industry, trolling the American marketplace in search of the tiniest flaws in products and services for any opportunity to sue."10 Once plaintiffs' lawyers identify the miscue, they typically find a friend or colleague to be the representative plaintiff." Often, nobody has been injured and the trial lawyers just represent themselves.