The Coupon Quandry: Restructuring Incentives in CAFA Coupon Settlements

INTRODUCTION Envision the following scenario: In one state court class action involving faulty pipes, lawyers for a group of Alabama plaintiffs received more than $38.4 million in fees, and lawyers for a class of Tennessee plaintiffs received $45 million, or the equivalent of about $2,000 an hour. In contrast, the homeowners only received 8 percent rebates toward new plumbing--and to get those rebates, they had to first prove that they had suffered leaks and then go out and buy a new system. The money in the settlement flowed primarily to class counsel. (1) Consider further that "[t]o settle an Illinois state court class action in which it was accused of improperly including asbestos in its crayons, a manufacturer agreed to issue class members 75-cent coupons toward the purchase of new crayons. The attorneys got $600,000 in fees." (2) These cases are precisely why coupon settlements in class action lawsuits garner attention. Essentially, members of the class receive very little while the attorneys receive large--and, in some instances, surprisingly large--payments to settle the claims. Generally, there is a fear that these settlements will be the result of collusion between the defendants and class counsel. Both have much to gain from a lucrative payout. The class counsel will walk away with a hefty sum, and the defendants will avoid incurring costs associated with litigating the case. The fear is that the plaintiffs will be left powerless to adequately redress their grievances. Congress addressed these concerns by enacting the Class Action Fairness Act (CAFA), (3) which contained a section on coupon settlements. However, as courts have interpreted CAFA, the following question has arisen: When attorneys' work results in coupons for the class, does CAFA preclude the use of the lodestar method (4) for calculating their fees? Or, conversely, is a contingency fee mandatory? In answering this question, this Note seeks to accomplish the following goals: (1) examine the precise question whether CAFA precludes the use of the lodestar method to calculate attorneys' fees in cases where the attorneys' work resulted in coupon settlements; and (2) propose a solution that more closely aligns the incentives of class counsel to those of the class. Generally speaking, Congress wrote CAFA to allow for the use of the lodestar method--although it did so in convoluted language--yet evinced a broad legislative intent to disallow the method. For this reason, the case law expounding on the provision has culminated in a circuit split. The Ninth Circuit, in In re HP Inkjet Printer Litigation, (5) held that the statute prohibited the use of the lodestar method when coupons were the relief obtained. (6) Conversely, the Seventh Circuit, in In re Southwest Airlines Voucher Litigation, (7) held that district courts have the discretion to allow either the lodestar method or a contingency fee, and parties should be accorded the autonomy to negotiate any method subject to other statutory constraints. (8) This Note argues that, while the Ninth Circuit has a compelling policy argument, the Seventh Circuit has the superior legal argument. This is so because [section] 1712(a), when interpreted along with [section] 1712(b) and [section] 1712(c), contemplates the existence of a choice between the lodestar method and a contingency fee. The legislative history, although relied upon heavily by the Ninth Circuit, also weighs in favor of the Seventh Circuit. (9) The Ninth Circuit's argument cannot be immediately refuted, however, because Congress clearly evinced an intent to alter the incentives at play in coupon settlements. This conflict between intent and statutory language illuminates yet again how poorly CAFA was drafted. (10) This Note proceeds in five parts. Part I provides a background of coupon settlements with special attention paid to the incentives of class counsel. …