Coupon Settlements: The Emperor's Clothes of Class Actions

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

In Fischl v. Direct Merchants Credit Card Bank, N.A.,66 the credit card company was accused of charging excessive fees or fees for services that customers did not purchase. Before the suit was filed, the Office of the Comptroller of the Currency ("OCC") investigated the Merchants Bank and, in 2001, reached settlement on these charges. The plaintiffs' lawyers based their suit on work done by the federal regulators, yet in the 2002 class action settlement, the attorneys took $5.6 million. The class was offered coupon books (valued at $19.95) or $8 charitable donations made in their names,67 in addition to reimbursements for certain credit services and a low-interest credit card. Overall, the individual benefit per claimant ranged from $10 to $70. Interestingly, the claimants were only allowed one opportunity to call the settlement fund to state a claim; they were not permitted to call, educate themselves as to how the settlement would apply to them, and then call back with more questions or decisions.68

In another follow-on case, this one involving charges that Renaissance Cruises padded port charges, the Miami Daily Business Review reported that the judge accused the lawyers of piggybacking on enforcement efforts by the Florida Attorney General and engaging in "fuzzy math."69 According to the report, the judge "said he considered denying plaintiffs' lawyers any legal fees On the basis of their blatant disregard for their ethical obligations to the class and to the court.'"70 The settlement called for $10 to $60 coupons towards another cruise; the judge cut the $1.4 million fee request to $294,000 and ordered a quarter of that fee to be paid in the coupons.

V. SOLUTIONS

There are several avenues for stopping coupon and abusive settlements. The quickest solution is for companies to structure non-cash settlements so they truly serve the public's interest, rather than that of the plaintiffs' bar. Where the parties and the judicial system cannot find the right balance, federal or state legislation could enforce a more evenhanded approach.

A. CORPORATE RESPONSIBILITY

There is no denying the old adage that "it takes two to tango." Coupon settlements will not proliferate if companies resist them and find other ways to resolve purported class actions. If the litigation is frivolous, companies should fight it. If there is merit to the suit, cash or non-cash solutions that are narrowly tailored to the alleged problems should be explored. And by no means should the companies pay exorbitant sums to plaintiffs' counsel for accepting the deal.

1. AVOID "BLACKMAIL SETTLEMENTS"

As has been suggested in this article, the granting of class certification in a lawsuit can unfairly skew the outcome of a case. Class action filings attract litigants in staggering numbers,71 and evidence indicates that the aggregation of claims increases both the likelihood that a defendant will be found liable and the size of any damages award that may result.72 "[F]or defendants, the risk of participating in a single trial [of all claims], and facing a once and for all verdict is ordinarily intolerable," even where an adverse verdict is improbable.73 As a result, "[i]nnocent firms often pay off the extortionist lawyers to make them go away."74 As Judge Posner of the Seventh Circuit Court of Appeals observed, certification of class actions forces defendants "to stake their companies on the outcome of a single jury trial, or be forced by the fear of bankruptcy to settle even if they have no legal liability."75 Judge Posner called the resulting settlements "blackmail settlements,"76 a term echoed by other courts.77