Ninth Circuit Showing A Significant Trend To Review Class Action Settlements Closely, Especially Where Non-Cash Relief, Clear Sailing Provisions, And Reverter Features Are Involved.
The Ninth Circuit certainly has taken a much closer scrutiny of coupon/voucher/non-cash relief settlements in a series of decisions we have posted on in the past under our category “Class Actions”—Kim (our Aug. 17, 2021 post); Briseno (our June 1, 2021 post); and Chambers (our Nov. 11, 2020 post). Baerbel McKinney-Drobins v. Massage Envy Franchising, LLC, No. 20-15539 (9th Cir. Oct. 20, 2021) (published) is another published opinion which exemplifies this trend.
There, a pre-certification class action settlement was reached between class members (users of spa products and services through a membership arrangement) and defendant. The settlement provided vouchers to class members, with there being a $10 million settlement “floor” such that the issued vouchers not requested by class members would be increased pro rata in value so as to reach this “floor” amount. The settlement had a “clear sailing” provision by which the defense would not object to a $3.3 million fee request by class counsel. It also had a reverter provision by which any fee amount awarded under $3.3 million would revert back to the defendant rather than the class. 6.2% of the class requested vouchers (under $3 million in value), so that those requesting them had their vouchers adjusted upward so the vouchers ranged from $36.28 - $180.68. The district judge approved the settlement as fair and reasonable, finding this was not a CAFA “coupon” settlement. However, he awarded class counsel $2,612,500, 25% of the $10 million face amount after making an adjustment for $450,000 in notice/class administration costs.
The Ninth Circuit vacated and remanded the settlement, including the fee award.
Most crucial to its determination was that the vouchers were CAFA “coupons,” which required a different examination on the actual redemption rates of the issued vouchers—not the $10 million face value of the vouchers. The Ninth Circuit panel (3-0, but with a concurring opinion) found that a de novo review analysis applied on whether a coupon was involved, determining a coupon was truly involved under its Online DVD opinion. (The concurring justice wanted an en banc review of Online DVD.) That alone required a restudy.
However, the panel also indicated that this pre-certification settlement needed heightened scrutiny, with certain “red flags” of collusion between class counsel and defendant potentially being present. Specifically, the presence of non-cash relief, the clear sailing provision, and the reverter were indicia that defendant reached a settlement unduly benefiting class counsel rather than the interest of the class. These factors needed to be looked at further on remand.
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