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Coupon Settlements: Two Steps Forward, One Step Back

Coupon relief is notoriously bad for consumers in class action settlements. So bad that Congress targeted such relief, among other class action abuses, in the Class Action Fairness Act of 2005 (CAFA). CAFA sought to address the use of coupon settlements as a cover for the payment of disproportionate attorneys’ fees to plaintiffs’ attorneys in exchange for a cheap release of claims for defendants. Plaintiffs’ lawyers often sought fees based on the value of the issued coupons regardless of whether any class members actually used them, resulting in drastically inflated settlement values, and thus attorneys’ fees. Defendants are willing to play along because coupons enable them to settle at a lower cost than cash relief and result in increased sales from those receiving the coupons. Meanwhile, harmed class members are left with often valueless coupons that require them to do future business with a defendant that harmed them to recoup any of their loss.

Among its varied remedial measures, CAFA requires courts to apply heightened judicial scrutiny of attorneys’ fee awards in coupon cases and to value the settlement, at least for fee purposes, based on the value to class members of the coupons that are redeemed. Since passage of CAFA, courts generally have subjected coupon relief to the close scrutiny that is required. Nevertheless, some plaintiffs’ attorneys and defendants have attempted to circumvent the law by labeling settlement relief that otherwise looks, acts, and sounds like a coupon as “vouchers,” “credits,” and “certificates,” among other euphemisms. Using these terms, they have tried to shoehorn the relief into a narrow exception created by the U.S. Court of Appeals for the Ninth Circuit in In re Online DVD-Rental Antitrust Litigation, 779 f.3d 934 (9th Cir. 2015). Online DVD held that gift cards that are freely transferrable, never expire, and operate essentially as cash because of the wide variety of products available for purchase (literally millions of different items) are not “coupons” for purposes of CAFA.

Most courts have looked to the function of the relief, undercutting the parties’ semantic efforts to evade CAFA. Perhaps most recently, in Knapp v. Art.com, the U.S. District Court for the Northern District of California held that the $10 “vouchers” issued to class members for use on Art.com’s e-commerce sites were in fact coupons, contrary to the protestations of the plaintiffs’ lawyers. The court pointed out that the vouchers—which are valid for only 18 months, can be used to purchase only the narrow category of products sold by the defendant, and cannot be combined with other vouchers—triggered the concern that a defendant in a coupon settlement is not forced to disgorge any ill-gotten gains and often benefits from consumers spending more money than the value of the voucher. Adopting that and other arguments put forth in an objection filed by CEI, the court deferred any award of attorneys’ fees until the coupon redemption rate is known.  

Not all courts have followed suit, however, and CEI completed briefing last month in an appeal of one of the most egregious cases. In In Re: EasySaver Rewards Litigation, the U.S. District Court for the Southern District of California held that “merchandise credits” issued to class members by a defendant with flower- and gift-delivering websites were not “coupons” under CAFA and instead fit within the exception created by Online DVD. Under the settlement approved by the district court, plaintiffs’ attorneys were awarded $8.5 million; the eight named plaintiffs were awarded $80,000; and 0.2% of class members received a total of $225,000. All other class members received only $20 credits for use on the defendant’s websites. But the “credits” could be used for only certain products, expired after one year, and were not valid during peak flower- and gift- giving periods, including Christmas week, the ten days before Valentine’s Day, and for two weeks in May around Mother’s Day. Historical evidence suggests the voucher redemption rate will be a low single digit. The disproportionate allocation between what the attorneys recover and what the class recovers illustrates why CAFA was necessary; however, consumers don’t benefit from the law’s protections if courts fail to examine the true nature of the relief.

Online DVD’s exception is completely divorced from the statutory language; nothing in CAFA said coupons aren’t coupons if they’re more likely to be redeemed. But it’s clear that maybe only two or three retailers should qualify for even the Online DVD exception, and then only if the coupons truly have the legal protections of gift cards. Thus, CEI seeks reversal of the settlement approval in EasySaver to reiterate the limited exception of Online DVD and ensure a more uniform and correct application of CAFA.