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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

Seventh Circuit Holds CAFA Permits Lodestar Method to Calculate Attorneys’ Fees in Coupon Settlements

Posted in Case Summaries

In re Sw.  Airlines Voucher Litig., 799 F.3d 701 (7th Cir. 2015).

In In re Southwest Airlines Voucher Litigation, the Seventh Circuit held that the “coupon settlement” provision of CAFA, 28 U.S.C. § 1712, permits a district court to award attorneys’ fees to class counsel based on the lodestar method, rather than the value of coupons actually redeemed by class members.  This decision creates a split with the Ninth Circuit, which previously held that CAFA Section 1712 only permits a district court to award attorneys’ fees to class counsel in a “coupon settlement” based on the value of the coupons redeemed by class members. See In re HP Inkjet Printer Litig., 716 F.3d 1173 (9th Cir. 2013).

In this case, Southwest issued vouchers to “Business Select” passengers that could be redeemed for one free in-flight alcoholic drink.  Some passengers saved their vouchers to use on later flights.  While the vouchers did not have an expiration date, Southwest stopped honoring them in August 2010.  Two class representatives filed suit against Southwest on behalf of a putative “class of plaintiffs holding unredeemed Business Select drink vouchers that were suddenly worthless.”

The parties reached a settlement that required Southwest to issue replacement vouchers to each class member who filed a claim form.  The settlement also provided injunctive relief to prevent similar controversies over expiration dates on newly issued vouchers and a $15,000 incentive reward to each of the two lead plaintiffs.  Pursuant to the settlement, Southwest agreed to pay class counsel up to $3,000,000 in attorneys’ fees and $30,000 in expenses.  Citing CAFA Section 1712, two class members objected to the proposed fee arrangement.  In the objectors’ view, this was a pure “coupon settlement,” as defined under CAFA, and thus class counsel’s fee award must be calculated based on the value of coupons actually redeemed by class members, not any other method.

Despite this objection, the district court approved the settlement and awarded class counsel $1,649,118 in fees and $18,522.32 in expenses.  The district court agreed that CAFA Section 1712 governed this settlement, but the court determined that it had discretion under Section 1712 to calculate class counsel’s fees using the lodestar method.

On appeal, the Seventh Circuit affirmed.  The Seventh Circuit carefully analyzed the complete text, structure, and legislative history of CAFA Section 1712 and determined that it permits a district court to use the lodestar method to calculate attorneys’ fees as compensation for class counsel who obtain coupon relief for the class.  In so holding, the Seventh Circuit rejected the Ninth Circuit’s reasoning in In re HP Inkjet Printer Litigation, 716 F. 3d 1173 (9th Cir. 2013), which read 28 U.S.C. § 1712(a) in isolation to hold that the lodestar method cannot be used to calculate an attorneys’ fee award in a coupon settlement.  The Seventh Circuit, however, cautioned that when a district court considers using the lodestar method to calculate fees in a coupon settlement, “it will need to bear in mind the potential for abuse posed by coupon settlements and should evaluate critically the claims of success on behalf of a class receiving coupons.” 799 F.3d at 710.  Because the settlement in this case provided class members with everything they could have hoped for, the Seventh Circuit concluded that it was fair and reasonable.

While this decision created a split with the Ninth Circuit, it appears that the Seventh Circuit’s reasoning will likely win out, as it is based soundly on fundamental canons of statutory construction and the legislative history of CAFA.  Indeed, since In re Southwest Airlines Voucher Litigation, the Eighth Circuit has adopted the Seventh Circuit’s reasoning and held that the lodestar method is acceptable under CAFA Section 1712. Galloway v. Kansas City Landsmen, LLC, 833 F.3d 969, 974–75 (8th Cir. 2016).