Coupon Settlements: The Emperor's Clothes of Class Actions

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

Consider, for example, a well-documented case involving antitrust charges against sellers of compact discs ("CDs").54 In this case, plaintiffs alleged that recording companies conspired to illegally raise the prices of music products by implementing minimum advertised price policies. The settlement offered claimants monetary compensation, but no more than $20 per person, even if that person purchased a high volume of CDs. The potential total cash payments were estimated at $67 million. Claimants whose cash payments would be less than $5 could not receive money, but could have their shares donated to charity in the form of CDs. The value of the charitable donations was estimated at $75.7 million (5.5 million CDs).55 Within days of the CDs being shipped to libraries, newspapers from around the country carried stories of libraries receiving CDs that they did not want, as the CDs tended to be old, unpopular, duplicative, and of little value.56 For example, the Milwaukee Library received 188 copies of Michael Bolton's 'Timeless" and 1235 copies of Whitney Houston's "Star-Spangled Banner."57 Further, some libraries were not allowed to discard unwanted titles, and had to expend the resources to catalogue each CD, even if the CDs were sent to storage.

In a class action against the vitamin industry in California, consumers received no part of the settlement, as their entire share was donated to charity and nonprofit organizations. In this case, In re Vitamin Cases,58 the defendants were charged with violating state antitrust laws by allegedly fixing the prices of certain products.59 In the settlement with consumers, the defendants paid $38 million to charitable, governmental, and nonprofit organizations that promote nutritional health,60 and $42 million to a separate class of commercial plaintiffs. The plaintiffs' lawyers took home $16 million plus expenses.61 Among the reasons the court gave for not allowing consumers to receive their portion of the award was the "high cost of administering direct cash payments to millions of consumers relative to the average likely award to those consumers."62 Rather than base the settlement on the bedrock principle of making alleged injured parties whole, the court upheld a settlement that gave away the plaintiffs' damages award to third parties that had nothing to do with the litigation, the alleged misconduct, or the alleged injuries.

IV. FOLLOW-ON CLASS ACTIONS

Coupon and other types of nominal settlements also can result from class action lawsuits where the benefit to the plaintiff class is wholly illusory, as the defendants may already have taken appropriate remedial steps on their own or in response to regulatory action. The class action, therefore, would be duplicative and inefficient. There would be no need for additional compensation, and the resulting settlements would provide no additional value to class members.

For example, Intel Corporation noticed a minor flaw in a chip that arose once in every nine billion random division operations.63 Intel created a program consumers could run to see if their chip was flawed, expanded its toll-free user hotline for inquiries, and offered a free lifetime replacement. As soon as Intel widely publicized the problem and solution, thirteen class actions were filed.64 In the settlement, the plaintiffs' lawyers took $4.3 million and the plaintiffs received nothing more than the company's continuation of its existing solutions.65