Coupons and the Class Action Fairness Act

Georgetown Journal of Legal Ethics, The, Fall 2005 by Tharin, James, Blockovich, Brian

In 1992 the phone rings amidst the chaos of the SPX pit on the Chicago Board Options Exchange ("CBOE"). An old college friend, a lawyer representing BMW in a class action lawsuit, is calling me. The case is weak, my friend explains, and BMW will accept only coupons to settle the case. Class counsel, fearing a recent Audi ruling rejecting a non-transferable coupon, is requiring a transferable coupon with some form of cash value. To provide cash value, BMW will consider a market maker, someone to purchase all the coupons at a guaranteed price or better, then resell the coupons in a market created by the market maker. So my friend called me, a seasoned market maker on the floor of the CBOE, to query my interest. I said yes, and a cottage industry was born.

Since 1993, Certificate Clearing Corporation, now Chicago Clearing Corporation ("CCC"), has created a market in ten unique class action coupon settlements. ' CCC is the only entity that has created a class action coupon market more than once. In addition, CCC has submitted affidavits and expert witness testimonies in numerous class action coupon settlements or in-kind settlements over the last twelve years.2 CCC has been mentioned in numerous publications.3 It has, quite by accident, become our life's work. This rich background uniquely qualifies CCC to comment on the Class Action Fairness Act of 2004 ("CAFA"), specifically on the section concerning coupon settlements and attorney's fees.4

The press, scholars, practitioners, and lawmakers increasingly have maligned class action settlements, especially coupon settlements, and sadly, often deservedly so. However, class action settlements can serve society to both deter and punish corporate misconduct. They allow a large number of claimants, similarly situated, to file their grievances as one, often because their individual claims are too meager to cost-effectively file alone. Unfortunately, more and more high profile abuses have tainted what is otherwise a useful tool.5

These abuses beg reform. We believe, on balance, that the reforms proposed in the CAFA will remedy the expanding exploitation and structural flaws of class action coupon settlements. Specifically, the reforms proposed in section 1712, which states: "the portion of any attorney's fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed" should fix the systemic problems of class action coupon awards, hopefully with few negative unintended consequences.6

If structured correctly, coupon settlements can work. Coupon settlements benefit class members when the coupon's face value exceeds the class member's claim and the discount coupon is used to purchase the defendant's product or service. If the coupon is transferable and a vibrant secondary market exists, the class member benefits when he sells his coupon for more than his underlying claim. Defendants accept coupon settlements because they pay only when a sale is made, spreading their liability over time while ridding themselves of risky litigation. Class counsel benefits because they get paid to deliver justice to their class in cases that are complex and often difficult to prosecute.

So, what's the problem? While the breathtaking headlines of "those grubby attorneys get all the cash and the class gets worthless coupons" grab all the attention, the real problem is persistently puny coupon redemption rates that deliver little value to the class, and contingency fees based on inflated redemption rate projections that far exceed the true value realized by the class. Class action coupon redemption rates, particularly absent a market maker and a viable secondary market, typically mirror the annual corporate issued promotional coupon redemption rates of l-3%.7 Yet, class action contingency fee awards are predominantly paid to class counsel immediately upon final approval in cash, not coupons, before a single coupon has been issued or redeemed by the class. Attorney's fees are often based on experts' unrealistic coupon redemption projections that disregard the overwhelming evidence of meager coupon redemption rates.

For example, in In re Domestic Air Transportation Antitrust Litigation, the experts, paid by class counsel, estimated a redemption rate of 50-75% of the $400 million of potential award, yet less than 10% of the potential class members bothered to claim the non-transferable coupons and well below 10% of the coupons issued were actually redeemed.8 At a minimum, the experts missed the mark by $160 million. Based on the experts' projections, the court in Domestic Air Transportation Antitrust Litigation awarded class counsel $14.4 million in fees.9 In Princeton Economics Group, Inc. v. AT&T, class counsel's expert predicted a redemption rate of 77.5% of the potential $160 million award.10 The final redemption rate was closer to 12%. The expert was over $100 million off. Class counsel in AT&T requested $16 million dollars in fees based on their ; expert's projections.11 In the Dismuke v. Edina Realty Co., CCC discovered that the defendant took a $260,000 charge against earnings for a coupon settlement that they and the plaintiff's experts argued in Court was worth $7 million to the class.12 Class counsel in Edina Realty Co. requested $2.5 million in fees and expenses.13 Reports and articles abound with similar examples of the disparity between attorney's fees and actual value delivered to the class.14 It's no wonder class action coupon settlements are so maligned.