The Seventh Circuit ruled that when the class members receive their relief in their entirety in a settlement due to the class counsel’s efforts, the class counsel should be compensated accordingly. The Seventh Circuit found the CAFA gives the district courts the discretion to apply the lodestar method in calculating their attorney’s fees in coupon settlements.
In August 2010, Southwest Airlines stopped honoring certain in-flight drink vouchers issued to customers who had bought “Business Select” fares. Southwest customers, Adam Levitt and Herbert Malone, brought a putative class action. The parties reached a settlement to provide replacement drink vouchers to all members of the class, as well as injunctive relief constraining how Southwest could issue vouchers in the future.
Two class members, Gregory Markow and Alison Paul, objected to the settlement. Markow argued that the settlement violated Federal Rule of Civil Procedure 23(e) because the fee award was disproportionate to class relief. He further objected because the fee settlement included “clear-sailing” and “kicker” clauses designed to shield the fee award from challenge. In a typical “clear-sailing” clause, the defendant agrees not to oppose a fee award up to a certain amount. A “kicker” clause provides that if a court reduces the attorney fee sought in a class action, the reduction benefits the defendant rather than the class. Markow also argued that the attorney fee in this “coupon settlement” had to be based on the value of coupons actually redeemed by class members, under a provision of the CAFA, 28 U.S.C. § 1712.
The district court approved the class settlement as fair and reasonable. The court focused primarily on the fact that the settlement provided essentially complete relief to the class. The district court determined that § 1712 applied to the settlement because the vouchers were “coupons” within the meaning of that provision. The court made this finding even though the usual concerns about coupon settlements were minimal here–the class’s claim itself is for the value of coupons that already required class members to buy plane tickets to use. The court further determined that § 1712 permits the use of the lodestar method to determine attorney fees based on coupon relief. The court used the lodestar method, with a multiplier of 1.5 for good results, to calculate a fee of $1,332,206.25, plus $18,522.32 in expenses. On counsel’s Rule 59(e) motion, the district court held an evidentiary hearing and increased the fee award to $1,649,118 by using higher hourly rates.
Markow and Paul appealed to the Seventh Circuit.
At the outset, the Seventh Circuit held that § 1712 applied to this settlement. The Seventh Circuit remarked that the provision applied to class action settlements that provide for recovery of coupons, the replacement vouchers for free drinks were indeed coupons.
The Seventh Circuit stated that the more difficult issue was whether § 1712 allowed the court to use the lodestar method to calculate the fee award for class counsel. Markow contended that § 1712(a) prohibited the use of lodestar method and that only permissible basis for a fee award here would be the value of the new coupons actually redeemed by the class members. Under this view, use of the lodestar method in a coupon settlement is not permissible.
The court observed that this view was adopted by the Ninth Circuit in In re HP Inkjet Printer Litig., 716 F.3d 1173 (9th Cir. 2013). The dissent in HP Inkjet argued that § 1712 gave the district court discretion to use the lodestar method to calculate attorney fees for both coupon and non-coupon relief.
The Seventh Circuit remarked that, in essence, it agreed with the dissent in HP Inkjet. One portion of § 1712 if interpreted in isolation, supported HP Inkjet majority’s view, but a broader view of the text and structure of § 1712 along with its legislative history and purpose, the Seventh Circuit remarked, persuaded it that § 1712 allows a district court discretion to use the lodestar method to calculate attorney’s fees, even when those fees were intended to compensate class counsel for the coupon relief he or she obtained for the class.
Section 1712 (a) provides that if a proposed settlement in a 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. Markow argued that subsection (a) prohibits the use of lodestar method except to the extent a fee award is based on injunctive or other non-coupon relief in a settlement. Markow interpreted the phrase “attributable to” invoking dictionary definition to mean “caused by.” Markow argued that the entire fee in this case was “caused by” the coupons under the settlement, so he concluded that the fee award for this settlement must be calculated using § 1712(a)’s percentage of coupons used method. Under this method, Markow argued that the District Court’s use of lodestar method was an error.
The Seventh Circuit observed that § 1712(a) did not expressly prohibit use of the lodestar method. Rather, § 1712(a) does unambiguously reject the most abusive method for calculating a fee in a coupon settlement: calculating the fee as a percentage of the face value of all the coupons issued.
The court explained that under the common fund doctrine, an attorney who recovers a common fund for the benefit of a class is entitled to a reasonable portion of the fund that is made available to the class, rather than the amount actually claimed by the class. Because of the low claims rates, the difference can be dramatic even where both the class recovery and attorney fee are paid in cash. The Seventh Circuit remarked that when applied to coupon settlements, this method invites abuse. A class counsel and a defendant could agree on a settlement providing class members with coupons, which are valuable only if class members are willing to do business with the defendant again, and providing counsel with a cash payment calculated as a percentage of the face value of all coupons made available to class members, regardless of whether they are actually used or even likely to be used. In this case, for example, the class counsel estimated that the class would receive coupons with nominal values totaling $29 million. They initially proposed a fee of $7 million, which might have seemed reasonable as less than 20% of the imaginary common fund that combined actual cash with the face value of the available coupons.
The Seventh Circuit stated that the meaning of subsection (a) becomes clearer when read with subsections (b) and (c). Subsection b(1) both contemplates and allows the possibility that a portion of the recovery of the coupons will not be used to determine the fee for class counsel. Instead, the lodestar method will be used. The Seventh Circuit remarked that this view of subsections (a) and (b) was the same described in the key Senate committee report on the bill that became CAFA. Subsections (a) and (b), the Seventh Circuit found, fit together to force a choice between the lodestar method and a percentage of coupons redeemed.
Subsection 1712(c), the Seventh Circuit observed, allows a combination of percentage-of-coupons-used and lodestar, but it does not require that any portion of the fee be based on the percentage of coupons used. Based on the foregoing, the Seventh Circuit held that § 1712 permits a district court to use the lodestar method to calculate attorney fees to compensate class counsel for the coupon relief obtained for the class.
Next, discussing the fairness of the settlement, the Seventh Circuit noted that the settlement here provides replacement drink coupons, on a one-for-one basis, and that the class members would receive everything they reasonably could have hoped for. The objectors nevertheless, argued that the settlement was unfair because of (i) ratio of class relief to the attorney’s fees in this case; and (ii) the clear-sailing and the kicker clauses.
As to the ratio of the class relief to the attorney’s fees, the Seventh Circuit noted that here, the class members received everything that they wanted. When class counsel return from a negotiating table with everything the client could hope for, the Seventh Circuit concluded that they should be compensated accordingly. The Seventh Circuit next held that the existence of a clear-sailing or a kicker clause does not make a settlement unfair. Finally, the Seventh Circuit, addressing the class counsel’s cross appeal, found that the District Court did not abuse its discretion by lowering the attorney’s fees to $1.65 million when Defendant was willing to pay up to $3 million.
Accordingly, the Seventh Circuit affirmed the District Court’s finding.