Under the coupon settlement provision of the Class Action Fairness Act (CAFA), do attorneys’ fees always have to be based on the value of the coupons redeemed, or can they be based on a lodestar calculation?  The Ninth Circuit recently addressed this question and held, in a 2-1 decision, that any award of fees “attributable to” an award of coupons must take into consideration the value of redeemed coupons.  In re HP Inkjet Printer Litigation, No. 11-16097, 2013 U.S. App. LEXIS 9744 (9th Cir. May 15, 2013).  The majority concluded that lodestar fees would be appropriate only to compensate for non-coupon relief, such as injunctive relief.  A lengthy dissent would have concluded that CAFA permits the use of a lodestar calculation in any case involving a coupon settlement.

This case involved allegations that HP engaged in unfair business practices with respect to ink cartridges for inkjet printers.  The settlement called for HP to provide up to $5 million in “e-credits” for purchases of printers and supplies on its website.  In addition, HP agreed to injunctive relief requiring it to make certain disclosures regarding its business practices.  Under the terms of the settlement, the “e-credits” would not be issued until the settlement was finalized, after appeal, but 122,000 of the millions of class members claimed the “e-credits.”  The district court estimated the value of the settlement to the class at $1.5 million, and awarded attorneys’ fees of $1.5 million and costs of approximately $600,000.  (Notably, the opinion did not comment on the fact that the plaintiffs’ attorneys were awarded essentially the same amount as the entire value of the relief the class received, as calculated by the district court.)  Three class members filed objections, including one filed by Ted Frank of the Center for Class Action Fairness, who argued the appeal (it appears he objected for himself as a class member and also on behalf of another class member). 

The debate between the majority and dissent focused largely on 28 U.S.C. § 1712(a), which provides that:

If a proposed settlement in a class action provides for a recovery of coupons to a class member, 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.  (Emphasis added.)

The majority focused primarily on the words “any” and “attributable to,” concluding, based on dictionary definitions, that “an attorneys’ fees award is ‘attributable to’ an award of coupons where the attorneys’ fees award is a ‘consequence’ of the award of coupons.”  Id. at *22.  The majority also reasoned that, where all of the relief is coupons, “the portion of any attorneys’ fees award that is attributable to the award of the coupons must be one hundred percent.”  Id. at *24.  The majority also found support for its interpretation in the other provisions of § 1712, and in the legislative history.  The majority ultimately suggested that the parties erred in providing for the coupons to be issued after the entry of a final judgment, which prevented the district court from taking into consideration the value of the redeemed coupons.  The court suggested that fee awards be bifurcated so that the fee award would not be finalized until the coupons had been redeemed.  Id. at *38-39 & n.19.

Judge Berzon, dissenting, focused on the word “portion,” and would have held that if no “portion” of the fee award is “calculated as a percentage of the coupon value,” a district court would be free to rely entirely on a lodestar calculation.  Id. at *61-65 (Berzon, J., dissenting).  Judge Berzon also found support for her interpretation in the text of § 1712 as a whole, and in the legislative history.

This kind of issue rarely arises in insurance class actions, but might potentially come into play if a settlement offered class members “coupons” towards future purchases of insurance.  The Ninth Circuit noted that “coupon settlements may be appropriate . . . where class members have repeat-business relationships with the defendant,” id. at *11 n.4, which is typically true for insurance.  It seems to me that one way to potentially avoid the problem that arose in this case, if you are negotiating this kind of settlement, is to have the attorneys’ fee award determined in a separate proceeding, after the class has received all of the relief.  This has the benefit of further distancing the plaintiffs’ attorneys’ personal incentives from the negotiation of the class benefits.  They would have to negotiate the deal for the class, while only being able to guess at how that might impact their own fees.  A ceiling probably could still be placed on fees, but the ultimate award would have to take into account the ultimate value of what the class received.