Ninth Circuit Rules that Redemption Value of Coupons Cannot be Ignored in Calculating Attorneys’ Fees in Coupon Settlements

In In re HP Inkjet Printer Litigation, the Ninth Circuit reversed a District Court’s approval of a class action settlement providing “e-credits,” or coupons, to class members, on the ground that the class counsel fee award violated § 1712 of the Class Action Fairness Act (“CAFA”). The parties’ settlement agreement had provided for $5 million in coupons, as well as injunctive relief in the form of additional product disclosures. The District Court, recognizing that the coupons were worth significantly less than their face value, estimated that the “ultimate value” of the combined coupon and injunctive relief to the class was approximately $1.5 million, and awarded fees of $1.5 million based solely on the lodestar method, without calculating the actual redemption value of the coupons.

A divided panel of the Ninth Circuit concluded that the District Court’s use of the lodestar method as the only basis for calculating the fee award was contrary to § 1712. Based on fundamental rules of statutory construction, the majority held that § 1712 requires that “[w]hen a settlement provides for coupon relief, either in whole or in part, any attorney’s fee ‘that is attributable to the award of coupons’ must be calculated using the redemption value of the coupons.” The majority rejected the dissent’s view that “[t]he limit CAFA imposes with regard to cases in which there is a coupon recovery is a limit on the district court’s method of calculating percentage-of-recovery fees, should it choose that approach,” and not on whether the District Court is allowed to use the lodestar method as an alternative approach.

As explained by the majority, the practical effect of § 1712, taken as a whole, is that if a class settlement provides for only coupon relief, the fee award must be based on a calculation of the actual redemption value of the coupons. If, however, a settlement provides for coupon and equitable relief, the fee award must be based on two separate calculations: (1) the fees attributable to the coupon relief must be based on the redemption value of the coupons; and (2) the fees attributable to the equitable relief must be based on the lodestar method.

The Ninth Circuit’s decision also provides guidance to parties in structuring coupon settlements. The majority noted that the responsibility for the District Court’s error lied principally with the parties because the settlement specified that no coupons could be issued until after entry of final judgment, making it impossible for the District Court to calculate the redemption value as required by § 1712. In order to avoid this problem, parties seeking approval of a settlement involving coupon relief should structure the settlement so that the redemption value is ascertainable before final settlement approval.

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