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 its ruling, the court said that trial courts have an affirmative duty, regardless of whether any party objects, to review the attorneys' fees and ensure there is a sufficient basis for the amount paid.93

The most sensible approach for companies to take with non-cash settlements, therefore, is to negotiate the benefit to the plaintiff class with the plaintiffs' attorneys first, and then insist that the judge overseeing the litigation determine the attorneys' fees after the final settlement is presented to the court. In some instances, the final fee could be made contingent on the amount of recovery. DaimlerChrysler's effort to keep attorneys' fees proportional to the class benefit is best illustrated by a case involving our Mercedes division, where the allegations were that the company did not warn customers not to use non-synthetic motor oils, which, according to the allegations, could cause premature engine wear. Under the settlement, Mercedes would reimburse the costs of repairing any damage caused by non-synthetic oils to the engine and gave the 350,000 members of the class a voucher for $35 towards an oil change so that Mercedes could replace any non-synthetic oils in the car.94 The plaintiffs' lawyers tried to hike the attorneys' fees to $7 million by suggesting that the extended warranty made the settlement worth more than $100 million. Because we required in the settlement that the judge set the attorneys' fees, the judge was able to reject this claim and assess the value of the extended warranty on his own (which came to a third of the amount professed by the plaintiffs' lawyers), ultimately awarding attorneys' fees of $4.9 million.

B. LEGISLATION

1. FEDERAL LEGISLATION

After several years of debate, Congress enacted the Class Action Fairness Act, S. 5 ("the Act"), and President Bush signed it into law on Feb. 18, 2005.95 This new law moves interstate class action lawsuits into federal courts, allowing lawsuits that are truly intrastate to remain in state court.96 The Act is intended to restore the federal judiciary's role in deciding large cases involving residents of different states. Federal courts now will have jurisdiction over class action lawsuits in which the aggregate amount in controversy is $5 million, there are more than one hundred plaintiffs, and that involve individuals who are residents of different states.97 The inclusion of a nominal in-state defendant would not preclude federal jurisdiction.

The Act also addresses unfair coupon settlements. It states that a court can approve coupon settlements only after holding a hearing and making a written finding that the settlement is fair, reasonable, and adequate for class members.98 The Act also prohibits charitable contributions and bases class counsel fees on the number of hours spent on the case or, where coupons make up a portion of the settlement, on the value of coupons that the class members redeem."

2. STATE LEGISLATION

The Texas Legislature also has taken pointed action. In June 2003, it enacted legislation stating that "if any portion of the benefits recovered for the class are in the form of coupons or other non-cash common benefits, the attorney fees awarded in the action must be in cash and non-cash amounts in the same proportion as they recover for the class."100 The rationale for the bill, as explained by Senator Ratliff who introduced the bill, is to give the lawyers and the class the same type of payout. In addition to reducing the number of abusive coupon settlements, the bill would ensure that the class would receive something of value. As Senator Ratliff pointed out, "[t]he argument we get when we criticize coupons is that, Oh, well, there's actually a secondary market for them on the Internet. You can actually trade those coupons. They're actually legal tender.' If that's true, this is no handicap" for the plaintiffs' attorneys in obtaining their fees.101