Court Opinion

ID: 5125309
Source: CourtListenerOpinion
Date Created: 2021-11-11 21:00:45.543853+00
Date Added: 2024-06-11T08:22:49.390559
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

BAERBEL MCKINNEY-DROBNIS;                  No. 20-15539
JOSEPH B. PICCOLA; CAMILLE
BERLESE, individually and on behalf           D.C. No.
of all others similarly situated,          3:16-cv-06450-
                  Plaintiffs-Appellees,        MMC

                  v.
                                             OPINION
KURT ORESHACK,
             Objector-Appellant,

                  v.

MASSAGE ENVY FRANCHISING, LLC,
             Defendant-Appellee.

      Appeal from the United States District Court
         for the Northern District of California
      Maxine M. Chesney, District Judge, Presiding

           Argued and Submitted June 8, 2021
                  Seattle, Washington

                  Filed October 20, 2021
2              MCKINNEY-DROBNIS V. ORESHACK

    Before: Ronald Lee Gilman, * Ronald M. Gould, and
              Eric D. Miller, Circuit Judges.

                    Opinion by Judge Gould;
                   Concurrence by Judge Miller

                            SUMMARY **

                     Class Action Settlement

    The panel vacated the district court’s judgment
overruling objections, certifying a class for settlement,
approving the settlement, and granting most of class
counsel’s requested fee award in a class action arising out of
a dispute between Massage Envy Franchising, LLC
(“MEF”), a membership-based spa-services company, and a
putative nationwide class of current and former members.

    The class complaint alleged that MEF began periodically
increasing membership fees in violation of the membership
agreement. After extensive discovery and motions for class
certification and summary judgment, the parties settled. In
exchange for the release of all claims against MEF, class
members could submit claims for “vouchers” for MEF
products and services. The district court approved the
settlement as “fair, reasonable, and adequate” under Fed. R.
Civ. P. 23(e). Objector Kurt Oreshack challenged the

    *
       The Honorable Ronald Lee Gilman, United States Circuit Judge
for the U.S. Court of Appeals for the Sixth Circuit, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
             MCKINNEY-DROBNIS V. ORESHACK                     3

approval, contending that the vouchers provided to the class
under the settlement were “coupons” under the Class Action
Fairness Act (“CAFA”); and further contending that even if
CAFA’s coupon restrictions did not apply, the district court
abused its discretion by disregarding warning signs of class
counsel’s self-interest that warranted additional scrutiny.

    The panel held that the district court erred in finding that
the vouchers were not “coupons” under CAFA. If a form of
class action settlement is considered a “coupon” under
CAFA, then additional restrictions apply to the settlement-
approval process. The panel, following the Fourth Circuit’s
approach, held that de novo review applied to determine the
applicability of CAFA’s coupon provisions. The panel,
therefore, did not defer to the district court’s determination
that the MEF vouchers were not coupons under CAFA. In
In re Online DVD-Rental Antitrust Litigation, 779 F.3d 934
(9th Cir. 2015), this court outlined a three-factor test for
determining whether an award constituted a coupon
settlement. The panel held that the first factor – whether
settlement benefits require class members “to hand over
more of their own money before they can take advantage of”
those benefits – was inconclusive as to whether the vouchers
were coupons. The panel further held that under factor two
– whether the credit was valid only for “select products or
services” – the vouchers appeared to be coupons. Under
factor three – how much flexibility the credit provided – the
panel held that the vouchers were flexible, and this favored
not viewing the vouchers as coupons. The panel concluded
that no single Online DVD factor was dispositive, and held
under de novo review that the vouchers were coupons, and
subject to CAFA’s requirements for coupon settlements.
The panel vacated the district court’s approval of the
attorneys’ fee award and remanded for the district court to
4           MCKINNEY-DROBNIS V. ORESHACK

use the value of the redeemed vouchers in awarding fees, as
required by 28 U.S.C. § 1712(a).

    The panel next addressed Oreshack’s contention that,
independent of CAFA’s applicability to the fee award, the
district court erred by approving the settlement as “fair,
reasonable, and adequate” under Rule 23(e). The panel
noted, as a preliminary matter, that determining that
vouchers were coupons under CAFA and vacating the fee
award, did not necessarily require invalidating the entire
settlement approval order. But given the objector’s
challenge to the settlement agreement, the panel analyzed
the entire agreement for fairness. The panel held that the
district court abused its discretion by failing to adequately
investigate and substantively grapple with some of the
potentially problematic aspects of the relationship between
attorneys’ fees and the benefits to the class. Because the
errors made by the district court impacted the fairness of the
entire settlement under Rule 23(e), and not just attorneys’
fees, the panel vacated the approval and remanded for the
district court to analyze more deeply whether the settlement
should be approved.

    Specifically, the panel held that the district court abused
its discretion in failing to apply the requisite heightened
scrutiny for pre-certification settlements. The district court
did not apply the appropriate enhanced scrutiny because it
failed to adequately investigate and address the three
warning signs of implicit collusion articulated in In re
Bluetooth Headset Products Liability Litigation, 654 F.3d
935 (9th Cir. 2011).

   Judge Miller joined the court’s opinion in full, but wrote
separately to note his disagreement with this court’s
approach to determining when vouchers are “coupons”
            MCKINNEY-DROBNIS V. ORESHACK                 5

under CAFA. He wrote that in an appropriate case, the court
should reconsider en banc In re Online DVD-Rental
Antitrust Litigation, 779 F.3d 934 (9th Cir. 2015), and its
three-factor test for determining whether an award
constitutes a coupon settlement.

                       COUNSEL

Adam E. Schulman (argued) and Theodore H. Frank,
Hamilton Lincoln Law Institute, Center for Class Action
Fairness, Washington, D.C., for Objector-Appellant.

Trenton R. Kashima (argued), Sommers Schwartz P.C., San
Diego, California; Jeffery R. Krinsk and John J. Nelson,
Finkelstein & Krinsk LLP, San Diego, California; for
Plaintiffs-Appellees.

Theodore J. Boutrous Jr. (argued), Kahn A. Scolnick, Martie
P. Kutscher, and Daniel R. Adler, Gibson Dunn & Crutcher
LLP, Los Angeles, California; Luanne Sacks, Cynthia A.
Ricketts, Robert B. Bader, and Mike Scott, Sacks Ricketts &
Case LLP, San Francisco, California; for Defendant-
Appellee.
6           MCKINNEY-DROBNIS V. ORESHACK

                         OPINION

GOULD, Circuit Judge:

    This appeal concerns a district court’s approval of a class
action settlement that the parties reached before class
certification. When a federal court considers whether to
approve a settlement, we require the court to closely
scrutinize the agreement for any evidence that class
counsel’s self-interest infected the negotiations at the
expense of the class. When that approval comes before the
class is certified and therefore before class counsel have
expended substantial resources, there is an even greater risk
that class counsel will breach the fiduciary duty owed to
absent class members.

    The class action at issue in this appeal arose out of a
dispute between Massage Envy Franchising, LLC (“MEF”),
a membership-based spa-services company, and a putative
nationwide class of current and former members. The class
complaint alleged that MEF began periodically increasing
membership fees in violation of the membership agreement.
The district court approved the settlement as “fair,
reasonable, and adequate” under Federal Rule of Civil
Procedure 23(e). Objector Kurt Oreshack challenges that
approval, contending that the vouchers provided to the class
under the settlement are “coupons” under the Class Action
Fairness Act, 28 U.S.C. § 1712 (“CAFA”). Oreshack also
contends that even if CAFA’s coupon restrictions do not
apply, the district court abused its discretion by disregarding
warning signs of class counsel’s self-interest that warrant
additional scrutiny.

    We hold that (1) the district court erred in finding that
the vouchers are not “coupons” under CAFA, and (2) the
district court abused its discretion in failing to apply the
            MCKINNEY-DROBNIS V. ORESHACK                   7

requisite heightened scrutiny for pre-certification
settlements. Specifically, we conclude that the court did not
apply the appropriate enhanced scrutiny because it failed to
adequately investigate and address the three warning signs
of implicit collusion that we articulated in In re Bluetooth
Headset Products Liability Litigation, 654 F.3d 935 (9th Cir.
2011).

                             I

                             A

    MEF operates as a franchisor selling spa services to
consumers through a system of more than 1,100 Massage
Envy locations nationwide. The franchisee locations sell
products and provide spa services under the Massage Envy
brand name. MEF locations are membership-based. For a
monthly fee, members receive one prepaid massage per
month and lower prices than non-members pay for additional
services. The prepaid services can accrue on the members’
accounts. Members enter into “Membership Agreements”
with the franchisee location. MEF provides Membership
Agreement templates to its franchisees for use with their
members.

    Baerbel McKinney-Drobnis, Joseph Piccola, and
Camille Berlese (collectively, “Plaintiffs”) represent a
putative nationwide class of current and former MEF
members who paid membership fee increases during the
class period. The class members signed Membership
Agreements with franchisees in different states (California,
Arizona, and Texas). In their amended class complaint,
Plaintiffs alleged that, beginning in 2013, MEF locations
began unilaterally increasing membership dues without
authorization. Many class members discovered an initial
price increase of $0.99 per month, and then in some cases, a
8            MCKINNEY-DROBNIS V. ORESHACK

second, bigger monthly increase of $10 or more. Based on
the unauthorized membership fee increases, the amended
complaint alleged breach of contract, intentional
interference with contractual relations, and state consumer-
protection-law violations. The parties vigorously dispute
whether the fee increases violated the Membership
Agreements that class members signed.

                               B

    Six years before the settlement at issue in this case, class
counsel sued MEF on behalf of different clients, asserting
contract and tort claims that flowed from the loss of accrued
services following membership termination. See Hahn v.
Massage Envy Franchising, LLC, No. 12cv153-CAB, 2013
WL 12415927, at *1 (S.D. Cal. Feb. 25, 2013). After
extensive discovery and motions for class certification and
summary judgment, the parties settled. The class was
divided up for settlement purposes: Hahn for former MEF
members, and Zizian for current MEF members.

    The Hahn and Zizian settlements included a release
provision that resolved the specific claims concerning
accrued and unused massages and extinguished “any claim
asserted or that could have been asserted in [Hahn/Zizian]”
and any “claims that any Membership Agreement . . .
constituted a fraudulent, unlawful, unfair, or deceptive
business practice; was unconscionable; violated consumer
protection statutes; and for breach of contract and breach of
the covenant of good faith and fair dealing.” Both
settlements were approved by the district court. After the
objection and opt-out deadline expired in Zizian, Plaintiffs
filed this case.
            MCKINNEY-DROBNIS V. ORESHACK                   9

                             C

    Before the settlement in this case, the district court
adjudicated several competing motions between Plaintiffs
and MEF. In January 2017, Plaintiffs moved to strike MEF’s
affirmative defenses. MEF responded by filing a motion for
judgment on the pleadings, or in the alternative, to strike
class allegations. MEF’s motion was based on the Zizian
settlement release. The court granted the motion to strike as
to 25 of MEF’s 29 affirmative defenses, and then denied
MEF’s motion for judgment on the pleadings. The court also
denied MEF’s request to certify the court’s order for
interlocutory appeal.

    The parties began discovery. Plaintiffs propounded
55 document requests, 25 interrogatories, and several
subpoenas. Plaintiffs “reviewed over 7,000 pages of
documents.” Plaintiffs also benefitted from discovery
regarding MEF’s business practices that came to light in the
Hahn settlement. Plaintiffs began seeking electronic-
discovery experts and scheduled depositions of MEF
officers. These efforts continued until the date the parties
reached the settlement at issue.

    During the discovery period, the parties periodically
explored settlement. On October 27, 2017, the parties met
to exchange their settlement positions.        After one
unsuccessful mediation and continued discovery, the parties
met for a second mediation in November 2018. At the
second mediation—and importantly, before any motion for
class certification was filed—the parties agreed on the
material terms of a settlement.
10          MCKINNEY-DROBNIS V. ORESHACK

                             D

    The proposed settlement agreement was executed on
March 11, 2019. The settlement class includes current and
former members of MEF franchisees who paid membership-
fee increases during the class period.

    In exchange for the release of all claims against MEF,
class members can submit claims for “vouchers” for MEF
products and services. The voucher that each class member
receives corresponds to the fee increase the class member
paid. The vouchers expire after eighteen months. The
vouchers may be used at any MEF location to purchase retail
products, massage sessions, enhancements, and/or facial
sessions. MEF offers 251 different items for sale. The
vouchers also have some flexibility because they are
transferable, may be combined with other promotions and
discounts, and can be used in multiple transactions until
exhausted. On the other hand, the vouchers are not
redeemable for cash and cannot be used to pay monthly
membership fees or tips.

    The settlement provides for a $10 million “floor”; in
other words, if class members do not claim enough vouchers
to use up the full $10 million fund, the settlement will
increase voucher amounts to claimants pro rata until the
$10 million floor is reached. MEF also agreed to injunctive
relief requiring the franchisees to adopt a template
Membership Agreement that mandates a 45-day advance
written notice before membership fees can be increased.
Under the agreement, each named Plaintiff has the right to
request a $10,000 incentive award without opposition.

    Two additional settlement terms are particularly relevant
to this appeal. First, MEF agreed to a “clear-sailing”
provision for attorneys’ fees, which means that MEF would
            MCKINNEY-DROBNIS V. ORESHACK                  11

not object to class counsel’s fee request so long as counsel
request no more than $3.3 million. Second, the settlement
contains a “reverter” or “kicker” provision, which means
that, if the court awards less than $3.3 million in fees, the
excess funds revert to MEF rather than to the class.

    A direct-notice program reached an estimated 96.9% of
the 1.7 million class members. After the claims period
closed, a total of 105,693 class members (or about 6.2% of
the class) submitted valid voucher requests. At the time of
preliminary approval of the settlement, the estimated cost of
notice and settlement administration was $450,000. The
requested vouchers amounted to under $3 million in value,
well below the $10 million floor provided in the settlement.
As a result, each claimed voucher’s value was adjusted
upwards on a pro rata basis in proportion to the fee increase
that the class member paid. After the adjustment, the
vouchers ranged in value from $36.28 to $180.68. The
Attorneys General of Plaintiffs’ home states—Arizona,
California, and Texas—scrutinized the settlement agreement
and did not object.

                             E

    The district court granted preliminary approval of the
settlement in June 2019. Class counsel sought the maximum
$3.3 million award that MEF had agreed not to oppose. In
the fee request, counsel contended that CAFA, which
governs attorneys’ fees in class-action settlements that
provide for a recovery of “coupons” to class members, did
not apply because the settlement vouchers were not
“coupons” covered by CAFA.

    Class member and now Objector-Appellant Oreshack
timely objected to the settlement, class certification, and
attorneys’ fee request. Oreshack contended, among other
12            MCKINNEY-DROBNIS V. ORESHACK

things, that: (1) the settlement was a “coupon” settlement
under CAFA, but the settlement did not follow CAFA’s
procedures (namely, CAFA requires class counsel’s fees to
be calculated based on the value of vouchers that class
members ultimately redeem, rather than the face value of the
claimed 1 vouchers; here, $10 million); (2) the settlement
unfairly benefits class counsel at the expense of the class
because of the economic reality that many vouchers will
expire unredeemed; and (3) the three Bluetooth 2 factors were
present. Oreshack contended that, at a minimum, CAFA
requires that the district court not award attorneys’ fees until
the voucher redemption rate is known. Oreshack also
requested that the court investigate the previous settlement
negotiated between class counsel and MEF in Hahn;
specifically, he asked the court to request that Plaintiffs’ and
MEF’s respective counsel provide the redemption rate for
the vouchers issued in that settlement.

    The class approved the proposed settlement. Of the
1.7 million class members, 523 (0.03%) opted out and 19,
including Oreshack, objected.

     1
       We refer to vouchers for which class members submitted claims as
“claimed” vouchers, and the rate at which class members submitted
claims as the “claim rate.” By contrast, we refer to claimed vouchers
that class members have used—submitted to the defendant business
before the expiration date—as “redeemed” vouchers. We refer to the
rate at which class members redeemed vouchers as the “redemption
rate.”

     2
      In In re Bluetooth Headset Products Liability Litigation, 654 F.3d
935 (9th Cir. 2011), we described “subtle signs” that class counsel may
have “allowed pursuit of their own self-interests . . . to infect the
negotiations.” Id. at 947. Courts considering whether to approve a
settlement exhibiting these signs must scrutinize the agreement closely
for potential collusion. Id. at 946–47.
             MCKINNEY-DROBNIS V. ORESHACK                    13

                               F

    The district court held a fairness hearing on February 28,
2020. The court overruled all objections, certified the class
for settlement, approved the settlement, and granted most of
class counsel’s requested fee award.

    The district court discussed whether the settlement was
a coupon settlement with the parties. It concluded that the
vouchers were not CAFA coupons because class members
could purchase “quite a bit of variety” without spending their
own money, the vouchers could be redeemed for a range of
products that class members have shown interest in, and the
vouchers provided “a fair amount of flexibility” because
they can be transferred or stacked and do not expire for
18 months.

    In calculating attorneys’ fees, the district court stated
that: “If it’s not a coupon settlement, at least [in] the Ninth
Circuit, you look at what the fund is,” even though
“everybody knows that that fund is not going to be used up.”
The district court acknowledged that some of the voucher
value would go back to MEF if the vouchers expired without
being redeemed, but the court still decided to use the
$10 million face value of the claimed vouchers to calculate
fees instead of the expected or estimated voucher redemption
rate as requested by Oreshack. The district court then
calculated class counsel’s fees on a percentage-of-recovery
basis by adding together the $10 million value of the voucher
relief with the expected $450,000 in notice and
administrative costs, and then awarding 25% of that total
($2,612,500) as the attorneys’ fee award.

    The district court determined that the benefits to the class
were adequate relief given the significant obstacles that the
class faced in litigating their claims, including the difficulty
14           MCKINNEY-DROBNIS V. ORESHACK

of proving contract claims on behalf of a class that signed a
variety of different membership agreements containing
different language. The court also noted the low opt-out rate
and that three states’ Attorneys General had scrutinized the
settlement and did not object.

    The parties dispute the extent to which the district court
considered the Bluetooth “red flag” factors, i.e., potential
signs of class counsel’s self-interest. The court stated that it
had not been “shown” that class counsel “receive[d] a
disproportionate amount of the consideration,” and the court
was not “prepared to find that there was collusion here.” The
court noted that the settlement included a “clear-sailing”
provision and a “reversion” to MEF of any difference
between class counsel’s requested and awarded attorneys’
fees, but it determined that the settlement did not reflect
collusion that weighed against settlement approval.

    In sum, the district court found the settlement to be “fair,
reasonable, and adequate” under Federal Rule of Civil
Procedure 23(e). The court issued an order granting final
settlement approval on March 2, 2020, and its final judgment
and dismissal order on March 20, 2020. By operation of the
settlement’s reverter provision, and because the court
awarded class counsel less than the requested $3.3 million,
approximately $600,000 in unawarded fees reverted to MEF.

     Oreshack timely appealed.

                              II

    We first consider whether the district court erred in
finding that the vouchers are not “coupons” subject to
CAFA’s restrictions. Upon de novo review, we hold that the
vouchers are coupons.
            MCKINNEY-DROBNIS V. ORESHACK                    15

                              A

    If a form of class action settlement relief is considered a
“coupon” under CAFA, then additional restrictions apply to
the settlement-approval process. CAFA requires courts
(1) to apply “heightened scrutiny” to settlements that award
“coupons” to class members, and (2) to base fee awards on
the redemption value of the coupons, rather than on their
face value. In re EasySaver Rewards Litig., 906 F.3d 747,
754–55 (9th Cir. 2018) (citing 28 U.S.C. § 1712). “Congress
targeted such settlements for heightened scrutiny out of a
concern that the full value of coupons was being used to
support large awards of attorney’s fees regardless of whether
class members had any interest in using the coupons.” Id. at
755 (citing S. Rep. No. 109-14, at 15–20 (2005), reprinted
in 2005 U.S.C.C.A.N. 3, 15–20). Congress was concerned
that if courts use the face value of the coupons—given that
much of that value will go unused—the size of the settlement
fund would be “inflated . . . without a concomitant increase
in the actual value of relief for the class.” Id. By requiring
courts to use the redemption-rate value of the coupons
instead of the face value, CAFA “ensures that class counsel
benefit[s] only from coupons that provide actual relief to the
class.” Id.

    Because CAFA did not define the term “coupon,”
“courts have been left to define that term on their own,
informed by § 1712’s [CAFA’s] animating purpose of
preventing settlements that award excessive fees while
leaving class members with ‘nothing more than promotional
coupons to purchase more products from the defendants.’”
EasySaver, 906 F.3d at 755 (quoting In re Online DVD-
Rental Antitrust Litig., 779 F.3d 934, 950 (9th Cir. 2015)).

   In Online DVD, we outlined three factors to guide the
inquiry of whether settlement relief should be considered a
16          MCKINNEY-DROBNIS V. ORESHACK

coupon under CAFA: “(1) whether class members have ‘to
hand over more of their own money before they can take
advantage of’ a credit, (2) whether the credit is valid only
‘for select products or services,’ and (3) how much
flexibility the credit provides, including whether it expires
or is freely transferrable.” EasySaver, 906 F.3d at 755
(quoting Online DVD, 779 F.3d at 951). Applying those
factors in Online DVD, we concluded that a settlement
providing $12 gift cards to Walmart was not a coupon
settlement within the meaning of CAFA, “given Walmart’s
extensive inventory of low-cost products.” Id. at 756 (citing
Online DVD, 779 F.3d at 951). Importantly, the gift cards
did not expire, were freely transferable, and gave class
members the option to receive $12 in cash instead. Id.

     In EasySaver, we applied the Online DVD factors to a
class action suit alleging that the defendant company
enrolled the class members in a membership-rewards
program without their consent and then mishandled their
billing information. Id. at 752. As part of the settlement,
defendants agreed to email every class member a $20 credit
to purchase items on the company’s website. Id. at 753. The
credits were fully transferable, but they included restrictions
such as a one-year expiration date, blackout periods, an
inability to use the credit for same-day orders, and an
inability to combine with other promotions. Id. We held
that the $20 credits were CAFA coupons because the credits
were “categorically different from Walmart gift cards” due
to the defendant company’s small universe of products and
the numerous restrictions on class members’ use of the
credits. Id. at 756–57.

    Most recently, we applied the Online DVD framework in
a class action brought by dishwasher purchasers against the
manufacturer concerning a design defect. Chambers v.
            MCKINNEY-DROBNIS V. ORESHACK                    17

Whirlpool Corp., 980 F.3d 645 (9th Cir. 2020). We
determined that the rebates offered in this settlement
constituted coupon relief under CAFA, reasoning that even
with the rebate, class members had to spend hundreds of
dollars to purchase a dishwasher, the rebate applied only to
the brands that contained the defect at issue, and the
expiration period constituted a small fraction of the average
life of the product. Id. at 660. The Online DVD framework
thus provides us with a helpful guide in determining whether
the MEF vouchers are coupons.

                              B

    The parties disagree about the standard of review that we
should use in analyzing whether the vouchers in question are
coupons. Oreshack contends that we should review the
district court’s determination that the vouchers are not
coupons de novo because that determination involves
statutory interpretation. See, e.g., United States v. Havelock,
664 F.3d 1284, 1289 (9th Cir. 2012) (en banc). MEF
responds that interpreting the word “coupon” in Section
1712 might constitute a question of law, but it is one we have
already answered by articulating the Online DVD factors; we
should thus ask instead whether the district court abused its
discretion in applying that established framework.

    We have not previously designated the correct standard
of review for deciding the applicability of CAFA’s coupon
provisions. See EasySaver, 906 F.3d at 755 n.5; Online
DVD, 779 F.3d at 950 n.8. The Fourth Circuit recently chose
de novo review, and it appears to be the only court of appeals
to have expressly selected a standard of review to use in this
context. In re Lumber Liquidators Chinese-Manufactured
Flooring Prods. Mktg., Sales Pracs. & Prods. Liab. Litig.,
952 F.3d 471, 488 (4th Cir. 2020). We now follow the
Fourth Circuit’s approach and hold that de novo review
18           MCKINNEY-DROBNIS V. ORESHACK

applies to determine the applicability of CAFA’s coupon
provisions for the following reasons.

    First, determining whether CAFA applies to a particular
settlement is necessarily a question of statutory
interpretation. And “[l]ike all other questions of statutory
interpretation,” we should review this question of law de
novo. United States v. Paulk, 569 F.3d 1094, 1094 (9th Cir.
2009). In the CAFA context specifically, we tend to review
the “construction, interpretation, or applicability” of
CAFA’s requirements de novo. Bush v. Cheaptickets, Inc.,
425 F.3d 683, 686 (9th Cir. 2005). And when, as here,
“elements of legal analysis and statutory interpretation”
factor into the attorneys’ fee award, those elements are
properly reviewed de novo. K.C. v. Torlakson, 762 F.3d 963,
966 (9th Cir. 2014) (citation omitted).

    MEF is correct that we already construed the statute
when we developed the Online DVD framework. But
establishing a framework for interpreting a statute does not
alter the fact that statutory interpretation is a legal question
that we review de novo. The Online DVD factors help
answer the legal question of whether settlement relief
constitutes a “coupon” as Congress intended that term under
CAFA. This is still “primarily a legal question” to which we
should apply de novo review in seeking our answer. United
States v. Marbella, 73 F.3d 1508, 1515 (9th Cir. 1996).

    The Supreme Court has provided guidance in this area.
“[W]hen applying the law involves developing auxiliary
legal principles of use in other cases,” appellate courts
should use de novo review, but when questions “immerse
courts in case-specific factual issues” such as weighing
evidence and making credibility judgments, appellate courts
should typically review with deference. U.S. Bank Nat’l
              MCKINNEY-DROBNIS V. ORESHACK                          19

Ass’n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at
Lakeridge, LLC, 138 S. Ct. 960, 967 (2018).

    Further, section 1712(a) uses mandatory language,
stating that if a proposed settlement provides for coupon
relief, the attorneys’ fee award “shall” be based on the
redemption value of the coupons. 28 U.S.C. § 1712(a).
Given this mandatory command, it follows that abuse of
discretion cannot be the appropriate standard of review for
this question. See United States v. Ped, 943 F.3d 427, 433
(9th Cir. 2019) (“The word ‘shall’ generally imposes a
nondiscretionary duty.” (quoting SAS Inst., Inc. v. Iancu,
138 S. Ct. 1348, 1354 (2018))). We therefore do not defer
to the district court’s determination that the Massage Envy
vouchers are not coupons under CAFA. Instead, we review
this question de novo using the Online DVD three-factor
framework as a guide. 3

    The first factor—whether settlement benefits require
class members “to hand over more of their own money
before they can take advantage of” those benefits—is
somewhat inconclusive as to whether the vouchers are
coupons. On the one hand, even class members receiving
the smallest voucher, in the amount of $36.28, would be able
to purchase entire products without spending their own
money. Cf. EasySaver, 906 F.3d at 757 (noting that, with

     3
       Oreshack construes Online DVD as a “limited exception” to
CAFA’s coupon definition when the credits or vouchers do not expire
and can be used to purchase many different types of products. He also
suggests that EasySaver clarified the Online DVD holding by concluding
that this exception “applies only to coupons that all class members view
as ‘equivalently useful’” to cash. See EasySaver, 906 F.3d at 758. We
do not construe EasySaver as establishing a mandatory checklist or a
“cash equivalent” test. We construe Online DVD and EasySaver as
establishing a three-factor balancing test.
20          MCKINNEY-DROBNIS V. ORESHACK

shipping charges, class members would inevitably have to
spend more of their own money to use the $20 credit).

    On the other hand, a $36.28 voucher is not enough to
purchase most of Massage Envy’s services. Class members
receiving the $36.28 voucher could not even purchase a
single massage—the service that is the basis for the
membership fee that class members were allegedly injured
by—without spending their own money. Because the ability
to get a massage (rather than ancillary products) is central to
the membership program of Massage Envy, on balance we
view this factor as favoring the conclusion that the vouchers
are coupons.

    Under factor two—whether the credit is valid only for
“select products or services”—the vouchers appear to be
coupons. We recognize that MEF offers much more than
massages. It sells 251 different products within the sphere
of health and wellness: spa services and add-ons to spa
services; skincare products such as lotions, oils, exfoliants,
sun protection, anti-aging products, and skin care kits; and
fitness equipment, including products like foam rollers, foot
exercisers, and stretchers. Even so, the 251 products that
MEF sells pale in comparison to the millions of low-cost
products that Walmart sells, as in Online DVD. MEF is a
highly specialized retailer and, although it offers more than
200 products, all of the products fall under the same
umbrella category of health and wellness. And although the
vouchers do not expressly limit which MEF products or
services can be obtained using the vouchers, they are
practically limited by the fact that MEF does not sell
products online and not all 251 Massage Envy products and
services are available at every Massage Envy location. The
limited range of products and services available at Massage
Envy, even considering the breadth offered within the
             MCKINNEY-DROBNIS V. ORESHACK                    21

product category, favors viewing the vouchers as coupons
under CAFA.

    Under factor three—how much flexibility the credit
provides—the vouchers are flexible, as noted by the district
court. The vouchers may be transferred, sold, and
aggregated. Unlike the credits rejected in EasySaver, the
vouchers here have no blackout dates and remain valid for
more than one year. The vouchers do not have a “use it or
lose it” restriction, meaning that class members could keep
going back and buying products over time until the value of
their voucher is fully extinguished. Because of these terms,
MEF’s vouchers are more flexible than settlement benefits
that we have held are coupons. See, e.g., In re HP Inkjet
Printer Litig., 716 F.3d 1173, 1176 (9th Cir. 2013) (coupons
expired in six months, were non-transferrable, and could not
be used with other discounts or coupons); see also Hadley v.
Kellogg Sales Co., No. 16-CV-04955-LHK, 2020 WL
836673, at *1 (N.D. Cal. Feb. 20, 2020) (coupon benefits
“expire in a mere four months, must be used in a single
transaction, and are only stackable to the extent permitted by
retailers” (internal quotation marks omitted)). This factor
favors not viewing the vouchers as coupons.

    In sum, factors one and two support finding that the
Massage Envy vouchers are coupons. And although the
third factor supports the opposite conclusion, no single
Online DVD factor is dispositive. See EasySaver, 906 F.3d
at 756 n.7 (describing that while one factor weighed in favor
of the district court’s determination about CAFA’s
applicability to the settlement, the remaining factors did not).
Here, the relatively narrow range of products offered (Factor
Two), combined with the vouchers failing to allow most
class members to buy massage services—MEF’s flagship
offering—without spending their own money (Factor One),
22           MCKINNEY-DROBNIS V. ORESHACK

suggests that these vouchers should be viewed in law as
coupons. Although flexible, the vouchers do ultimately
expire, and there is no evidence that a secondary market for
Massage Envy vouchers exists. See Redman v. RadioShack
Corp., 768 F.3d 622, 628 (7th Cir. 2014) (“[T]he secondary
market in coupons is bound to be thin.”). Upon de novo
review of the vouchers under the Online DVD framework,
we hold that they are coupons and, consequently, are subject
to CAFA’s requirements for coupon settlements. We
therefore vacate the district court’s approval of the attorneys’
fee award and remand for the district court to use the value
of the redeemed vouchers in awarding fees, as required by
28 U.S.C. § 1712(a).

                              III

     We next address Oreshack’s contention that,
independent of CAFA’s applicability to the fee award, the
district court erred by approving the settlement as “fair,
reasonable, and adequate” under Rule 23(e). As in Roes, 1–
2 v. SFBSC Management, LLC, 944 F.3d 1035 (9th Cir.
2019), “the main thrust of Objector[’s] argument on appeal
is that the district court abused its discretion in approving a
class action settlement that does not provide enough benefit
to class members and contains indicia of collusion.” Id.
at 1044.

    As a preliminary matter, determining that the vouchers
are coupons under CAFA and vacating the fee award does
not necessarily require invalidating the entire settlement
approval order. See Bluetooth, 654 F.3d at 945. But when
an objector brings a challenge to the settlement agreement
under Rule 23(e), we must analyze the entire agreement for
fairness, looking in particular at the Bluetooth warning signs
when, as here, we are reviewing a pre-certification
settlement agreement. See Chambers, 980 F.3d at 669; see
            MCKINNEY-DROBNIS V. ORESHACK                    23

also In re Sw. Airlines Voucher Litig., 799 F.3d 701, 706 (7th
Cir. 2015) (finding that CAFA applies to the fee award, and
then examining the entire settlement agreement for fairness
using the Ninth Circuit’s Bluetooth signs).

     Oreshack makes two independent arguments to support
his request to vacate the settlement approval. First, he
contends that the district court erred by valuing the vouchers
for purposes of attorneys’ fees at $10 million. Second, he
contends that the court erred in approving a settlement that
exhibits preferential treatment to class counsel under
Bluetooth. We need not consider Oreshack’s first argument,
given our holding in Part II and instructions on remand for
the district court to recalculate the fee award using the value
of the redeemed vouchers. As for Oreshack’s second
argument, we hold that the court abused its discretion by
failing to adequately investigate and “substantively grapple
with some of the potentially problematic aspects of the
relationship between attorneys’ fees and the benefit to the
class.” Roes, 944 F.3d at 1051 (cleaned up). Because the
errors made by the court impact the fairness of the entire
settlement under Rule 23(e), and not just attorneys’ fees, we
vacate the approval and remand for the court to analyze more
deeply whether the settlement should be approved. To that
end, the court may employ whatever procedures it considers
helpful to its more rigorous analysis.

                              A

     Before approving a class settlement under Rule 23(e),
district courts must scrutinize the settlement and ensure that
it is “fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e).
These requirements are in place “[b]ecause of the unique due
process concerns relating to absent class members and the
inherent risk of collusion between class counsel and defense
counsel.” Roes, 944 F.3d at 1048.
24           MCKINNEY-DROBNIS V. ORESHACK

    “We review a district court’s approval of a class action
settlement for clear abuse of discretion.” Bluetooth,
654 F.3d at 940. “When the issue presented is the
substantive fairness of the settlement, we must refrain from
‘substitut[ing] our notions of fairness for those of the district
judge.’” Campbell v. Facebook, Inc., 951 F.3d 1106, 1121
(9th Cir. 2020) (alteration in original) (quoting Bluetooth,
654 F.3d at 950).

    Notwithstanding our limited appellate review of
substantive fairness, “we hold district courts to a higher
procedural standard when making that determination of
substantive fairness: ‘To survive appellate review, the
district court must show it has explored comprehensively all
factors, and must give a reasoned response to all non-
frivolous objections.’” Allen v. Bedolla, 787 F.3d 1218,
1223–24 (9th Cir. 2015) (emphasis in original) (citation
omitted).     This is because, “[p]rior to formal class
certification, there is an even greater potential for a breach
of fiduciary duty owed the class during settlement.”
Bluetooth, 654 F.3d at 946. District courts must ensure that
class counsel do not “collude with the defendant to strike a
quick settlement without devoting substantial resources to
the case.” Briseño v. Henderson, 998 F.3d 1014, 1024 (9th
Cir. 2021). Accordingly, when a settlement precedes class
certification, as it did here, the district court must apply “an
even higher level of scrutiny.” Roes, 944 F.3d at 1049
(quoting Bluetooth, 654 F.3d at 946).

   In 2018, Congress amended Rule 23(e)(2) to provide
specific factors for a district court to consider in determining
whether a settlement is “fair, reasonable, and adequate.”
Fed. R. Civ. P. 23(e)(2). Those factors include whether:
            MCKINNEY-DROBNIS V. ORESHACK                   25

       (A) the class representatives and class
       counsel have adequately represented the
       class;

       (B) the proposal was negotiated at arm’s
       length;

       (C) the relief provided for the class is
       adequate, taking into account:

           (i) the costs, risks, and delay of trial and
           appeal;

           (ii) the effectiveness of any proposed
           method of distributing relief to the class,
           including the method of processing class-
           member claims;

           (iii) the terms of any proposed award of
           attorney’s fees, including timing of
           payment; and

           (iv) any agreement required to be
           identified under Rule 23(e)(3); and (D)
           the proposal treats class members
           equitably relative to each other.

Id. (emphasis added). Under the plain language of the Rule,
courts must scrutinize “the terms of any proposed award of
attorney’s fees.” Id. at 23(e)(2)(C)(iii). We have interpreted
the amended Rule 23(e)(2) as imposing an obligation on
district courts to “examine whether the attorneys’ fees
arrangement shortchanges the class. In other words, the new
Rule 23(e) makes clear that courts must balance the
‘proposed award of attorney’s fees’ vis-à-vis the ‘relief
26           MCKINNEY-DROBNIS V. ORESHACK

provided for the class’ in determining whether the settlement
is ‘adequate’ for class members.” Henderson, 998 F.3d
at 1024.

                               B

    It is well established that class settlements present the
unavoidable risk that class counsel might not have
adequately represented the interests of absent class
members, and it is equally well established that this concern
is salient in the pre-certification settlement context. In
Bluetooth, we recognized that class counsel’s self-interest
could lead counsel to negotiate a disproportionate share of
settlement relief for itself compared to the relief obtained by
absent class members. 654 F.3d at 945–46. Given these due
process concerns, we must review “a pre-certification
settlement approval not only for whether the district court
has explored comprehensively all factors, given a reasoned
response to all non-frivolous objections, and adequately
developed the record to support its final approval decision,
but also for whether the district court has looked for and
scrutinized any subtle signs that class counsel have allowed
pursuit of their own self-interests to infect the negotiations.”
Roes, 944 F.3d at 1043 (cleaned up).

    We have identified three such “subtle signs,” which we
call the Bluetooth factors: (1) “when counsel receive[s] a
disproportionate distribution of the settlement; (2) when the
parties negotiate a clear-sailing arrangement, under which
the defendant agrees not to challenge a request for an agreed-
upon attorney’s fee; and (3) when the agreement contains a
kicker or reverter clause that returns unawarded fees to the
defendant, rather than the class.” Henderson, 998 F.3d
at 1023 (cleaned up). District courts must apply the
Bluetooth factors in examining pre-certification settlements
“to smoke out potential collusion.” Id.
            MCKINNEY-DROBNIS V. ORESHACK                    27

    If we conclude that the district court did not adequately
consider the Bluetooth factors, and therefore did not
adequately consider signs that the parties had negotiated an
unreasonable amount of attorneys’ fees in assessing
settlement fairness in the first instance, then “we must vacate
and remand the Approval Order [in addition to the attorneys’
fee award], so that the court may appropriately factor this
into its Rule 23(e) analysis.” Bluetooth, 654 F.3d at 946.

    In Roes, we applied Bluetooth and considered the
settlement relief provided to a putative class of exotic
dancers who worked at adult-entertainment clubs managed
by the defendant. 944 F.3d at 1039. The settlement provided
$2 million in cash, distributed as follows: class counsel
received $950,000 in fees, the class received $864,115, and
the rest went to administrative costs and incentive payments.
Id. at 1043. The settlement also provided non-cash relief in
the form of injunctive relief and “dance fee payment
vouchers.” Id. For purposes of attorneys’ fees, the district
court valued both forms of relief at $1 million each, with the
objectors challenging both valuations on appeal. Id.
at 1051–52. As relevant here, the district court valued the
dance fee payment vouchers at their full face value of
$1 million instead of $370,000—the value of the dance fee
payments that the class claimed but had not yet redeemed.
Id. at 1042.

    We held that the district court in Roes abused its
discretion by failing to apply “‘an even higher level of
scrutiny’ for evidence of collusion or other conflicts of
interest than is ordinarily required under Rule 23(e).” Id.
at 1043, 1060 (quoting Bluetooth, 654 F.3d at 936). The
Roes settlement agreement included “subtle signs of implicit
collusion,” including a clear-sailing agreement, a
disproportionate cash distribution for attorneys’ fees,
28           MCKINNEY-DROBNIS V. ORESHACK

disproportionate incentive payments to the named plaintiffs,
and reversionary clauses that would return unclaimed funds
to the defendants. Id. at 1049–50. We noted that “the district
court did not substantively investigate or address” some of
the objectors’ concerns, and it did not “explain why the
[vouchers] should [] be valued at its $1 million maximum”
even though only a portion of that maximum had been
claimed. Id. at 1052. Importantly, we stated that
“[r]egardless of whether the dance fee payment vouchers are
officially ‘coupons’ within the meaning of [CAFA], the
district court should have recognized that some of the same
concerns applicable to coupon settlements also apply here
and warranted closer scrutiny of the [vouchers as settlement
relief].” Id. Instead, the court dismissed the voucher
objection by asserting that the dance fee payment vouchers
provide “a tangible benefit” that was “not the ordinary
illusory coupon payment.” Id. Because the court failed to
“substantively grapple” with whether the Bluetooth warning
signs created an unfair settlement, id. at 1051, we vacated
the settlement approval and remanded for “a more searching
inquiry.” Id. at 1050 (quoting Allen, 787 F.3d at 1224).

                               C

     MEF contends that Oreshack asks us to ignore all of the
Rule 23(e) factors except for the part of Rule 23(e)(2)(C) that
requires courts to balance the adequacy of class relief in light
of “the terms of any proposed award of attorney’s fees.” It
is true that Rule 23(e)(2)(C) directs courts to evaluate
settlement fairness in light of, among other things, the “costs,
risks, and delay of trial and appeal.” Fed. R. Civ. P.
23(e)(2)(C)(i). And here, as the district court acknowledged,
the class would have faced obstacles if the case were
litigated further. So, according to MEF, as in Campbell v.
Facebook, Inc., Oreshack is challenging “only a subset of
             MCKINNEY-DROBNIS V. ORESHACK                    29

the considerations that were relevant to the district court’s
holistic assessment of the settlement’s fairness.” See
951 F.3d 1106, 1122 (9th Cir. 2020) (affirming the
settlement approval where the objector challenged the
district court’s award of “worthless injunctive relief”
(citation omitted)).

     We disagree. First, Campbell is readily distinguishable.
For one thing, although we noted that the objector in
Campbell was challenging only a subset of relevant
considerations, it was in the context of the objector’s failure
to weigh the value of the injunctive relief against the strength
of the claims that the class members would have given up.
Id. at 1122–24. We then separately concluded that, unlike
here, the district court had adequately considered the
Bluetooth factors. Id. at 1125. Finally, Campbell is factually
distinguishable because it involved a post-certification Rule
23(b)(2) settlement for solely injunctive relief. Id. We
concluded that the district court did not abuse its discretion
in finding that Bluetooth’s second and third warning signs—
clear-sailing agreements and reverter provisions—were
inapplicable in that context. Id.

    Second, MEF’s focus on the strength of Plaintiffs’ case
does not persuade us because even a recognition that the
substantive claims present a weak case cannot cure a district
court’s failure to apply the requisite heightened scrutiny to a
pre-certification settlement agreement. Before Rule 23(e)’s
2018 amendment provided factors for courts to consider in
assessing settlement approval, we “filled in the gaps,”
Henderson, 998 F.3d at 1023, by instructing courts to weigh
the following factors:

       (1) the strength of the plaintiffs’ case; (2) the
       risk, expense, complexity, and likely duration
       of further litigation; (3) the risk of
30             MCKINNEY-DROBNIS V. ORESHACK

         maintaining class action status throughout the
         trial; (4) the amount offered in settlement;
         (5) the extent of discovery completed and the
         stage of the proceedings; (6) the experience
         and views of counsel; (7) the presence of a
         governmental participant; and (8) the
         reaction of the class members to the proposed
         settlement.

Churchill Vill., LLC v. Gen. Elec., 361 F.3d 566, 575 (9th
Cir. 2004) (the “Churchill factors”) (emphasis added). 4 But
we have also held that adequately considering the Churchill
factors is insufficient if the district court failed to adequately
investigate or address the Bluetooth factors. Indeed, even
where several Churchill factors militate towards settlement
approval, if “a settlement agreement is negotiated prior to
formal class certification, consideration of these eight
Churchill factors alone is not enough to survive appellate
review.” Bluetooth, 654 F.3d at 946 (emphasis in original).
Accordingly, we conclude that Oreshack does not
impermissibly challenge only a subset of the district court’s
fairness assessment.

                                     D

    Oreshack contends that the district court erred by failing
to apply enhanced scrutiny to a pre-certification settlement.
We agree that the court did not apply the requisite scrutiny
and thereby abused its discretion in failing to “investigate or

     4
       The amended Rule 23(e) did not “displace” this court’s previous
articulation of the relevant factors, and it is still appropriate for district
courts to consider these factors in their holistic assessment of settlement
fairness. See Fed. R. Civ. P. 23 advisory committee’s note to the 2018
amendment.
             MCKINNEY-DROBNIS V. ORESHACK                    31

adequately address” the economic reality of the settlement
relief and the Bluetooth warning signs. See Roes, 944 F.3d
at 1049; Bluetooth, 654 F.3d at 947–48.

    Oreshack contends that all three Bluetooth warning signs
are present in the settlement. We address each Bluetooth
factor in turn. The first factor is whether class counsel has
received a “disproportionate distribution of the settlement.”
Bluetooth, 654 F.3d at 947 (quoting Hanlon v. Chrysler
Corp., 150 F.3d 1011, 1021 (9th Cir. 1998)). Because we
have determined that the vouchers are coupons and have
directed the district court to reassess the fee award, on
remand it will be important for the district court to reconsider
whether class counsel received a “disproportionate
distribution of the settlement” in light of the adjusted fee
award.

    The parties do not dispute that the second and third
Bluetooth factors—the clear-sailing and reverter
provisions—are present. We agree with Oreshack that the
district court did not adequately investigate or address the
implications of those provisions.          In Bluetooth and
subsequent cases, we have considered how the Bluetooth
factors can operate on their own and in tandem to provide
warning signs of collusion. When a clear-sailing provision
is paired with a reverter, the terms together increase the risk
that class counsel will unreasonably raise the amount of
requested fees, and the class members will have less
incentive to push back because the recovery of any
unawarded fees will inure to the benefit of the defendants,
not the class members. In Roes, we noted that clear-sailing
arrangements are not prohibited, but that they are
“disfavored” because they are “important warning signs of
collusion.” Id. at 1050–51 (citations omitted). This is
because “[a] clear sailing provision signals the potential that
32           MCKINNEY-DROBNIS V. ORESHACK

a defendant agreed to pay class counsel excessive fees in
exchange for counsel accepting a lower amount for the class
members.” Henderson, 998 F.3d at 1027 (citing Bluetooth,
654 F.3d at 949).

    Although the presence of a clear-sailing provision is not
a “death knell,” the district court has a duty to scrutinize the
agreement for signs that the fees requested by counsel are
unreasonably high. Kim v. Allison, 8 F.4th 1170, 1180 (9th
Cir. 2021). Similarly, we have identified “reverter” or
“kicker” provisions as red flags because if the defendant “is
content to pay [millions of dollars] to class counsel but the
court finds the full amount unreasonable, there is no
plausible reason why the class should not benefit from the
spillover of excessive fees.” Id. So, unless the court makes
a finding in this case that the two provisions together
promote the best interest of the class, and not just class
counsel, it is “less likely that the settlement can be
approved.” Bluetooth, 654 F.3d at 949.

    The district court assessed these warning signs by first
stating that “we do have what might be called a clear sailing
provision here.” Without further analysis of the clear-sailing
provision—and no party disputes that the term in question is
a clear-sailing provision—the court ultimately found that
“since there aren’t some of the other red flags,” it wasn’t
“prepared to find that there was collusion here.” Thus, the
court’s only reference to the clear-sailing provision was to
say that because other red flags are not present, the clear-
sailing agreement is not dispositive. This is a questionable
conclusion given that the agreement also contains a reverter
provision. Moreover, although it is true that such clear-
sailing arrangements are not per se prohibited, it is also true
that “[t]he very existence of a clear sailing provision
increases the likelihood that class counsel will have
             MCKINNEY-DROBNIS V. ORESHACK                      33

bargained away something of value to the class.” Bluetooth,
654 F.3d at 948 (emphasis added) (citation omitted).

    The district court next considered the reverter provision
and stated: “The settlement provides that the fees sought but
not awarded would revert to the defendant rather than remain
in the settlement. Well, they won’t be paid if they’re not
paid.” The parties dispute the meaning of this statement—
“[w]ell they won’t be paid if they’re not paid”—but we
conclude that whether the “they” in question refers to class
counsel or to counsel’s fees, the court did not adequately
scrutinize the provisions for evidence of whether class
counsel’s self-interest had “infect[ed] the negotiations.” Id.
at 947. Here, the reverter operated to return almost $602,000
to MEF rather than to the class, even though MEF had shown
itself willing to pay that amount in connection with the
settlement. The court acknowledged only that class counsel
would not be paid an unreasonable fee if the court chose to
reduce that fee, not that the fee reduction would itself benefit
MEF rather than the class.

    When a settlement provides non-cash relief and a
reverter provision, a district court must be on the alert for an
attorneys’ fee award that is artificially inflated in relation to
the relief provided to the class. See Roes, 944 F.3d at 1053–
54. The more undesirable or inflexible a voucher is in
comparison to cash or to a gift card, the greater the risk that
the settlement value may be overinflated. This is because
the risk that such settlement relief will be artificially inflated
“is even more grave when the value of unused coupons will
revert back to defendants.” Id. In other words, if the likely
redemption rate is low—which is to be expected in a
consumer class action providing non-cash relief—then MEF
and class counsel can inflate the perceived settlement value
while knowing that MEF is unlikely to pay more than a
34           MCKINNEY-DROBNIS V. ORESHACK

fraction of that amount. Id. at 1054 (“Unchecked, such
reversions would allow defendants to create a larger coupon
pool than they know will be claimed or used, just to inflate
the value of the settlement and the resulting attorneys’ fees,
because they know that they will not be on the hook for the
full coupon pool.”).

    In the pre-certification context, the district court must do
more than acknowledge that warning-sign provisions exist
and then conclude that they are not dispositive without
further apparent scrutiny. This is especially true when the
court does not “substantively grapple,” Roes, 944 F.3d
at 1051, with the ways in which the red-flag provisions and
specific voucher characteristics work together to present
“multiple indicia of possible implicit collusion,” Bluetooth,
654 F.3d at 947. Here, the court asserted that it is “not
unusual for there to be a fund in which not all the funds are
used,” and “one can always argue” that unawarded fees
should have gone to the class. Even if that is so, the court is
not free to discount settlement terms that we have held are
evidence of potential collusion without adequate
investigation and analysis. See id.

    Accordingly, because the district court did not conduct
the required heightened inquiry, we hold that the court
abused its discretion in granting approval of the settlement.
See Roes, 944 F.3d at 1060. On remand, we do not restrict
the scope of the court’s inquiry regarding whether the
settlement should be approved. It might be that in the end,
after adjusting the attorneys’ fees using the voucher
redemption rate and applying the heightened scrutiny that
Bluetooth requires, the court will conclude that the
settlement agreement is fair. But because we hold the court
to a higher procedural standard, the court must “provide the
necessary explanations” in making that finding. Bluetooth,
             MCKINNEY-DROBNIS V. ORESHACK                      35

654 F.3d at 945 (citation omitted). We remand for that
purpose.

                               IV

    Under Rule 23(e), a federal court may approve a class
action settlement only if it finds the agreement is “fair,
reasonable, and adequate.” Fed. R. Civ. P. 23(e). For the
foregoing reasons, we vacate and remand the district court’s
approval of the settlement and its fee award. We instruct the
court to use the value of the redeemed vouchers as required
by CAFA and to analyze the pre-certification settlement
agreement with heightened scrutiny. In so holding, we
express no opinion on the ultimate fairness of the settlement
that the parties have negotiated—a conclusion properly
within the purview of the district court. Id. at 949–50.

   VACATED AND REMANDED. Each party shall
bear its own costs on appeal.

MILLER, Circuit Judge, concurring:

    I join the court’s opinion in full. I write separately to note
my disagreement with our circuit’s approach to determining
when vouchers are “coupons” under the Class Action
Fairness Act of 2005 (CAFA), Pub. L. No. 109-2, 119
Stat. 4.

    District courts must review proposed class-action
settlements to determine whether they are “fair, reasonable,
and adequate.” Fed. R. Civ. P. 23(e)(2). An inherent danger
in class-action settlements is that the defendant (who cares
only about the total amount of the settlement, not how it is
distributed) will agree to a settlement in which most of the
36          MCKINNEY-DROBNIS V. ORESHACK

recovery flows to class counsel, with only modest benefits
to the class members (none of whom individually has
enough at stake to have an incentive to object). That danger
is particularly acute when the benefits to the class come in
the form of coupons for the defendant’s products. If the court
were to assess the reasonableness of the settlement based on
the nominal value of the coupons—many of which the class
members might never use—then the apparent value of the
settlement fund would be artificially inflated and would
exceed the actual benefit to the class. See Roes, 1–2 v.
SFBSC Mgmt., LLC, 944 F.3d 1035, 1053–54 (9th Cir.
2019).

    To avoid that result, CAFA provides that “[i]f a proposed
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.” 28 U.S.C. § 1712(a). By
directing the court to count only “the value to class members
of the coupons that are redeemed,” id., the statute “ensures
that class counsel benefit only from coupons that provide
actual relief to the class, lessening the incentive to seek an
award of coupons that class members have little interest in
using—either because they might not want to conduct more
business with defendants, or because the coupons are too
small to make it worth their while,” In re EasySaver
Rewards Litig., 906 F.3d 747, 755 (9th Cir. 2018).

    But although determining whether a settlement involves
coupons is central to calculating attorney’s fees correctly,
CAFA does not define the term “coupon.” Normally, when
a statute does not define a term, we look to its ordinary
meaning. Mississippi Band of Choctaw Indians v. Holyfield,
490 U.S. 30, 47 (1989). As Judge Friedland has observed,
             MCKINNEY-DROBNIS V. ORESHACK                    37

the ordinary meaning of “coupon” encompasses “any type of
award that is not cash or a product itself, but that class
members can redeem to obtain products or services or to help
make future purchases.” Hendricks v. Ference, 754 F. App’x
510, 514 (9th Cir. 2018) (Friedland, J., concurring in part
and dissenting in part); see 3 Oxford English Dictionary
1050–51 (2d ed. 1989) (defining “coupon” as “a form, ticket,
part of a printed advertisement, etc., entitling the holder to a
gift or discount”); Webster’s Third New International
Dictionary 522 (2002) (defining “coupon” as a “form, slip,
or section of a paper resembling a bond coupon in that it may
be surrendered in order to obtain some article, service, or
accommodation” or a “form or check indicating a credit
against future purchases or expenditures”).

    Under that definition, the vouchers in this case, which
have no cash value but simply grant class members an
amount ranging from $36.28 to $180.68 off Massage Envy
products or services, are plainly coupons—so plainly that
class representatives’ counsel repeatedly             (albeit
unintentionally) referred to them as “coupons” during oral
argument. It would be best if we could resolve this case by
stating the obvious: A voucher is a coupon, so class
counsel’s attorney’s fees must be calculated based on the
value of any Massage Envy vouchers that are redeemed. See
Redman v. RadioShack Corp., 768 F.3d 622, 636 (7th Cir.
2014) (concluding that the term “coupon” is
“interchangeable with ‘voucher’”).

    Unfortunately, our precedent commands otherwise. In In
re Online DVD-Rental Antitrust Litigation, 779 F.3d 934
(9th Cir. 2015), we prescribed a three-factor test for
determining whether an award constitutes a coupon
settlement: “(1) whether class members have ‘to hand over
more of their own money before they can take advantage of’
38          MCKINNEY-DROBNIS V. ORESHACK

a credit, (2) whether the credit is valid only ‘for select
products or services,’ and (3) how much flexibility the credit
provides, including whether it expires or is freely
transferrable.” EasySaver, 906 F.3d at 755 (quoting Online
DVD, 779 F.3d at 951). That test has no basis in the statutory
text. And as Judge Friedland has observed, it introduces
“needless complication and confusion” to the evaluation of
class-action settlements. Hendricks, 754 F. App’x at 516
(Friedland, J., concurring in part and dissenting in part).

    This case is a good example. We hold that one of the
three factors is “somewhat inconclusive” but “on balance”
points one way; another “appear[s]” to point the same
direction; and a third points to the opposite conclusion. Just
how to balance the factors against each other is unclear
because they are not readily commensurable. Here, we
conclude that the vouchers are coupons. If one of the three
factors were slightly different, would the conclusion be
different? Further litigation will be required before anyone
can know for sure.

    None of this is a criticism of today’s decision; the court
does as well as anyone could in applying the Online DVD
test. The problem is with the test itself. In an appropriate
case, we should reconsider Online DVD en banc.