Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—9thCir: Attorney’s Fee Award in Coupon Settlement Violated CAFA, (May 16, 2013)

By Jody Coultas, J.D.

A district court erred in granting final approval of a settlement of class actions alleging unfair business practices by Hewlett-Packard relating to inkjet printer cartridges because the attorney’s fee award violated the Class Action Fairness Act (CAFA), according to the U.S. Court of Appeals in San Francisco (In re HP Inkjet Printer Litigation, May 15, 2013, Smith, M.).

A district court approved a settlement that provided coupon and injunctive relief to class members as well as an award of attorneys’ fees in the amount of $1,500,000 and costs in the amount of $596,990.70. HP agreed to provide eligible class members with up to $5 million in coupons, or "e-credits," redeemable for printers and printer supplies on HP’s website. The coupons expire six months after issuance, are non-transferable, and cannot be used with other discounts or coupons. The objectors argued that the fee award violated the section of CAFA governing the calculation of attorneys’ fees in class action cases containing a coupon component because it did not calculate the redemption value of the coupons.

Coupon settlements are subject to greater scrutiny under CAFA and are generally disfavored. However, not all such settlements are prohibited. Coupon or other in-kind settlements may be appropriate where a defendant is in financial distress or where class members have repeat business relationships with the defendant. CAFA also sets forth specific rules governing attorney’s fees in coupon class settlements.

Section 1712(a) of CAFA states that the portion of any attorney’s fee award to class counsel that is attributable to the award of coupons shall be based on the value to class members of the coupons that are redeemed. Attorneys’ fees are "attributable to" an award of coupons where the attorneys’ fees award is a consequence of the award of coupons, or where the award of the coupons is the condition precedent to the award of attorneys’ fees. Section 1712(b) requires that if "a portion of the recovery of the coupons is not used to determine the attorney’s fee to be paid to class counsel, any attorney’s fee shall be based upon the amount of time class counsel reasonably expended working on the action." Section 1712(c) states that if a settlement gives coupon and equitable relief and the district court sets attorneys’ fees based on the value of the entire settlement, and not solely on the basis of injunctive relief, then the district court must use the value of the coupons redeemed when determining the value of the coupons part of the settlement.

Because the district court failed to consider the redemption value of the coupons prior to awarding attorney’s fees, the court reversed the final approval of the settlement agreement. The district court awarded lodestar fees based on its conclusion that the value of the settlement was $1.5 million. However, Sections 1712(a) and (c) required the district court to calculate the redemption value of the coupons before awarding any attorneys’ fees that were "attributable to" the coupon relief. The court may, however, award lodestar fees to compensate class counsel for any non-coupon relief they obtain, such as injunctive relief.

The court noted that the parties were responsible for the error. The terms of the settlement agreement specified that coupons may only issue after final judgment was entered. Therefore, it would have been impossible for the district court to calculate the redemption value of the coupons. Had the settlement been structured so that the redemption value of the coupons was ascertainable before final settlement approval, the attorneys would have been entitled to seek compensation for both the coupon and the injunctive relief obtained for the class.

Circuit Judge Berzon dissented and would hold that there was no violation of CAFA because the district court did not award a contingency fee calculated as a percentage of the purported value of the total class recovery. The district court awarded a lodestar fee calculated on the basis of hours worked and rates charged, and limited the award to a fair estimate of the amount of the benefit received by the class.

The case is No. 11-16097.

Attorneys: Theodore H. Frank (Center for Class Action Fairness LLC) for Theodore H. Frank. Samuel G. Liversidge (Gibson, Dunn & Crutcher LLP) for Hewlett-Packard Co.

Companies: Hewlett-Packard Co.

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