A recent Law.com article by Diane Flannery, Trent Taylor, Frank Talbott, and Andrew Gann of McGuireWooods LLP, “A Mixed Ruling on Coupon Redemption Rates and Atty Fees,” reports on the recent Sixth Circuit ruling on coupon settlements and awarding attorney fees.  This article was posted with permission.  The article reads:

In an Aug. 12 ruling in Linneman v. Vita-Mix Corp., the U.S. Court of Appeals for the Sixth Circuit joined the U.S. Court of Appeals for the Seventh Circuit in holding that the Class Action Fairness Act, or CAFA, does not require that a court consider coupon redemption rates when assessing an award of attorney fees under Title 28 of the U.S. Code, Section 1712, and that a court may instead choose to utilize a lodestar method alone.

The Sixth Circuit, however, did not write off analysis of coupon redemption rates wholesale.  Instead, it held that those rates may be relevant to the overall reasonableness of the award.  In so doing, the Sixth Circuit deepened a circuit split — and offered a reminder to litigants that coupon redemption rates may still play an important role in determining an appropriate attorney fee award in class action settlements.

Accordingly, litigants should be cognizant of practical implications that result if courts require the use of redemption rates in class action coupon settlements — including the potential chilling effect of lengthening litigation for years, in order to analyze such rates to determine any attorney fee award.

The litigants in Linneman originally settled the underlying claims related to defective blenders for two classes of plaintiffs: a household class and a commercial class.  The household class would be eligible for a $70 gift card or replacement blade assembly for their blenders, while the commercial class would only be eligible for a replacement blade assembly.  Although the settlement provided for an award of attorney fees, the parties could not agree on a specific amount.  The parties "then spent most of the next two years arguing about attorney's fees."

Ultimately, the U.S. District Court for the Southern District of Ohio applied a lodestar analysis to the issue.  The calculation resulted in a $2.2 million award, which the district court then enhanced by 75%, for a final award of approximately $4 million.

The parties did not seriously contest that the settlement qualified as a coupon settlement, but Vita-Mix argued that the district court erred by applying a lodestar analysis without consideration of the coupon redemption rate as required under Section 1712.  Subsection (a) provided that in coupon settlements, "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."

Subsection (b), however, provided that if "a portion of the coupons is not used to determine the attorney's fee to be paid to class counsel, any attorney's fee award shall be based on the amount of time class counsel reasonably expended working on the action."

Section 1712, as the Sixth Circuit noted, "is not a model of draftsmanship."  Although subsection (a) seemingly required an analysis of what may be "attributable to" any coupon, Congress gave courts an escape hatch in subsection (b).

According to the Sixth Circuit, that subsection makes it clear: (1) that a district court might not "use ... " a portion of a coupon award "to determine the attorney's fee" and (2) that in such cases the court should determine the fee "based upon the amount of time class counsel reasonably expended working on the action" (i.e., the lodestar method).

Subsection (c) only reinforced this view, because it required that when awarding attorney fees on a "mixed basis" (some based on coupon value, some not), the portion not attributable to the coupon value should be calculated under a lodestar analysis.  Thus, the Sixth Circuit followed the Seventh Circuit's holding in In re: Southwest Airlines Voucher Litigation in finding that a district court could utilize a lodestar method to calculate an attorney's fee award under Section 1712.

In so doing, the Sixth Circuit rejected the U.S. Court of Appeals for the Ninth Circuit's holding in In re: HP Inkjet Printer Litigation, stating that the Ninth Circuit's interpretation that subsection (a) prohibited the utilization of a lodestar analysis would "erase" subsection (b) completely.  The Sixth Circuit then tweaked the Ninth Circuit for "disregarding its own admonition that 'intelligent drafters do not contradict themselves.'"

Although the Sixth Circuit endorsed the lodestar method as appropriate under Section 1712, it did not completely toss out the notion that redemption rates need not be considered when assessing an attorney's fee award.  A district court still must ensure that an attorney's fee award is reasonable — an analysis that includes assessing the value of the settlement to the class, "the most critical factor" being "the degree of success obtained."

And a district court "will often abuse its discretion if it fails to consider the redemption rate as part of that analysis."  That is because courts "know from experience (and Congress) that the face value of a coupon may be quite different from its actual value to the class members — even if the coupon is for more than an 'illusory amount.'"

Because "the district court failed to make any specific findings about the value of the settlement," the Sixth Circuit found error.  The "most straightforward way" to remedy this would include evidence regarding the coupon redemption rate, but the Sixth Circuit did not "rule out the possibility that a court might be able to determine the reasonableness of an award . . . without reference to redemption rates."

In Linneman, the Sixth Circuit deepened the circuit split regarding whether Section 1712 permitted a purely lodestar analysis, or required only an assessment of redemption rates in coupon settlements.  Although the Sixth Circuit endorsed the view that the lodestar analysis was permissible, it did not enunciate a rule that said coupon redemption rates were not important.

In fact, the Sixth Circuit endorsed that these rates were likely the best indicator of what value the class received in a settlement — and, therefore, were relevant to any attorney's fee award.  Thus, litigants should be cognizant that while a lodestar analysis alone under CAFA is likely permissible, redemption rates may still play an important role in determining whether any ultimate attorney's fee award is reasonable.

At first blush, this may not appear to be a significant issue for class action defendants, especially given the fact that such analysis is cabined to the award of attorney fees for plaintiffs' counsel.  But practical considerations make this decision potentially important.

First, any redemption rate requirement could drag out litigation for years past final approval.  For example, many coupons provided in litigation can be redeemed for years after receipt.  Thus, the parties may be waiting two, three, five or more years until it is possible to clearly determine the redemption rate.

Second, and related, a redemption rate requirement could have a chilling effect on the use of coupons in settlement.  In some cases, a coupon provides the only possibility of settlement.  If plaintiffs counsel know that the redemption of these coupons will determine their fees, it is likely they will begin to not accept these settlements — resulting in prolonged litigation that is not beneficial to either party.  While other practical considerations likely exist, these two prove the potential import of resolution of the circuit split.

Diane P. Flannery and R. Trent Taylor are partners, and Frank Talbott V and Andrew F. Gann Jr. are associates, at McGuireWoods LLP.