Coupon Settlements: The Emperor's Clothes of Class Actions

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

Ford Motor Company found itself in a similar situation a few years ago over litigation involving ignition switches that plaintiffs alleged could cause cars to stall.83 Notwithstanding the judge's unprecedented threat to stand in the shoes of the National Highway Traffic Safety Association and order a recall of the automobiles with the switch in question,84 Ford reached a settlement that appeared to address the specific charges. Under the 2001 settlement, Ford reimbursed those who paid to repair the ignition systems (estimated at $160 per car), extended the warranty to 100,000 miles, agreed to pay for related expenses (such as towing fees), and gave $5 million towards funding automotive safety reports. Thus, those who experienced the ignition switch problems were made whole, and resources were not expended on ancillary items.

Equitable, non-cash relief is appropriate for other industries as well. For example, in the securities class action, Zucker v. Occidental Petroleum Corp. ,85 the company was charged with misleading investors by claiming the company was committed to a policy of paying dividends of $2.50 per share, but approving only a $ 1.00 per share dividend. Rather than pay shareholders in cash or coupons, the company agreed to a certain dividend policy for the future, though the policy would still be "subject to the exercise by the Board of its fiduciary obligations."86 The fee to the plaintiffs' lawyers was originally negotiated at $2.975 million, but was reduced by the court to $1.5 million.87

3. LET JUDGES SET ATTORNEY FEES

Most plaintiffs' lawyers operate under a contingency fee system, which is intended to help plaintiffs with legitimate claims obtain legal counsel when they cannot afford to do so otherwise.88 While contingency fees can be, and are, regularly abused, at least the fee paid to the lawyer is "contingent" on whether and how much the plaintiff recovers. It would be improper, and likely unethical, in these cases for a company to arrange a side fee deal with the plaintiffs' lawyers because it could create a conflict of interest between plaintiffs and their lawyers.89 Imagine the uproar in a personal injury case if the defendant negotiated in private with the plaintiffs' lawyers to pay them a million dollars to settle a case and gave the actual plaintiffs a fraction of that amount.90

A different predicament arises in non-cash, or coupon class actions, as there often is no settlement fund or pool from which the plaintiffs' lawyers can draw their contingency fee. Thus, plaintiffs' lawyers must receive their compensation from the defendants.91 The conflicts of interest inherent in this situation present a challenging issue for courts overseeing the litigation. As Judge Kleinfeld wrote in Zucker v. Occidental Petroleum Corp.,

It is hard to see how cutting plaintiffs' attorneys' fees can do [the plaintiff] any good. He gets the same money whether the fee is cut or not-none . . . [but a plaintiff] who employs a lawyer to litigate against a third party has a legitimate interest in having his lawyer refrain from taking the third party's money in exchange for throwing the fight."92