CONSUMER CLASS ACTIONS AND COUPON SETTLEMENTS:

ARE CONSUMERS BEING SHORTCHANGED?

Originally Published In Advancing The Consumer Interest, Vol. 12, No. 2, Fall/Winter 2000 And May Not Be Reproduced Without The Permission Of Thomas A. Dickerson. �By Judge Thomas A. Dickerson and Brenda V. Mechmann¹

Class actions brought in both Federal and State Courts on behalf of consumers victimized by defective or misrepresented goods and services can generate substantial cash or product recoveries. These benefits may be rendered illusory, however, by settling a consumer class action with the issuance of coupons, credits or certificates for the purchase of goods or services from the defendants. The stark reality of coupon settlements is that they may only benefit the attorneys representing the class, who are paid in cash, and the defendants who are relying on a coupon design and redemption process which guarantees that very few coupons will ever be redeemed. The telltale sign of this lawyer's " bargain " is that very few coupon settlement agreements provide for coupon tracking or promise to continue issuing coupons until a specific dollar amount is redeemed. Under these circumstances neither the attorneys for the class nor the defendants may have any interest in making known to the class or the general public the actual redemption rate of settlement coupons.

Low coupon redemption rates make a mockery of the concept that class members should receive value for settling their claims. This is especially true when class attorneys are paid in cash while class members receive only coupons of dubious value. In In re Domestic Air Transportation Antitrust Litigation² a class action alleging a price fixing conspiracy³ between nine domestic airlines, the settlement provided for over $400 million in flight coupons and $50 million in cash for attorneys fees and administrative costs. Objectors⁴ criticized the proposed settlement as being nearly worthless because of numerous use restrictions, e.g.,

(1) although transferable to a designated person the coupons could not be sold to coupon brokers or others willing to purchase them,
(2) the coupons were useable only in small units so that claimants would simply forget about or not bother to use the coupons,
(3) one way flights were excluded,
(4) black out periods such as Thanksgiving/Christmas/New Years were excluded, and
(5) tickets purchased with other coupons/awards were excluded. Notwithstanding these objections of the limited value of the flight coupons⁵ the settlement was approved.⁶

How To Make Coupon Settlements Real

An offer of cash allows the Court and the class to more accurately evaluate the settlement's true value⁷ However, there are occasions when a non‑cash settlement of coupons for the purchase of goods or services from the defendant is appropriate and necessary⁸. First, an individual class member's cash recovery may be so small that it is exceeded by the costs of distribution. This reality, known as de minimus damages, may justify the denial of class action status. In Maffei v. Alert Cable TV of North Carolina⁹ class certification was denied because each class member's recovery of $.29 " would conceivably not even cover the cost of postage and stationary for a claimant to notify the court of his inclusion in the class ". Second, because of the nature of the underlying transaction, e.g., most low end retail sales, the names and addresses of class members may never be known. Some courts have responded to bothde minimus damages and an unidentifiable class by approving of the use of a fluid recovery plan for damages distribution. Fluid recovery¹⁰ seeks to put recovered monies to " the(ir) next best use"¹¹ by rewarding the next best class. Fluid recovery plans may involve a rollback of defendant's prices, escheat to a governmental body, establishment of a consumer trust fund, funding of educational funds or the issuance of coupons to regular customers on theory that they were members of the victimized class. In Feldman v. Quick Quality Restaurants, Inc.¹² nearly sixteen million consumers of Burger King fast food products were overcharged $.01 on each purchase. The settlement provided for the issuance of $.50 coupons for the purchase of food to future customers on the theory some, if not all, were repeat customers and, hence, members of the class. Third, the defendant may be impoverished and unable to pay cash to the class. Naturally, as a threshold matter, the defendant must be willing to establish it's financial inability to pay cash.¹³

Transferability

The distribution of coupons, typically, requires the purchase of specific goods or services which the class member may not want. Consumers would be far better served if the coupons were convertible into cash either by redemption or by being transferable to persons or entities, e.g., coupon brokers, willing to pay cash for them. In Charles v. Goodyear Tire & Rubber Co¹⁴ the credit vouchers were freely transferable as they were in In re Cuisinart Food Processor Antitrust Litigation¹⁵ Willmann v. GTE Corp.¹⁶ and Buchet v. ITT Consumer Finance Corp.¹⁷ Cash convertibility, even at a discount, would be preferable to non-cash redeemable ones. In Langford v. Bombay Palace Restaurants¹⁸ the settlement coupons could be redeemed for cash at 30% of their face value while in Weiss v. Mercedes-Benz¹⁹ the certificates for the purchase of a new Mercedes were redeemable at one half face value after three years.

Redemption Rate

For the defendants, of course, the most attractive feature of a coupon settlement is that not all of the issued coupons will be redeemed. In fact, the average redemption rates on food and beverage coupons have consistently been between 2% and 6%²⁰ In evaluating the merit of a coupon settlement, the only proper means of measuring true value is by estimating the actual redemption rate of the offered coupon. Often experts will be enlisted by plaintiffs' or defendants' counsel to speculate upon potential redemption rates. Such dubious predictions may be challenged by discovery of the effectiveness of similar coupon programs. In In Re Domestic Air Transportation Antitrust Litigation²¹ objectors took the position that the true value of the flight coupons could only be established by estimating the actual redemption rate after discovery of the redemption rates of the airlines' prior frequent flyer, certificate and coupon programs.

In Dunk v. Ford Motor Company²² a settlement of coupons redeemable for $400 for the purchase of a new vehicle provided for an estimated redemption, unrebutted by objectors, of 65,000 coupons creating a settlement value of $26 million. On the other hand in Dollar v. General Motors Corp.²³ a settlement of $1000 coupons for the purchase of new vehicles with an estimated 10% to 45% redemption rate was rejected as providing little benefit to the class.

Coupon Tracking

A coupon settlement should require post settlement tracking of how many class members actually redeem the coupons. In In re General Mills Oat Cereal Consumer Litigation²⁴ the defendant issued certificates for free boxes of cereal and agreed to submit quarterly reports to insure that $10 million of cereal products were actually distributed. Notwithstanding rare exceptions such as the reported 94% coupon redemption rate in In re Sears Automotive Center Consumer Litigation²⁵ coupon redemption rates can be very low, indeed. In Perish v. Intel Corp.²⁶ 500,000 coupons offering a $50 rebate off of the purchase of a new microprocessor only generated 150 requests from class members for the coupons. And in In re Cuisinart Food Processor Antitrust Litigation²⁷ the claim rate was only 0.54% while the subsequent coupon redemption rate was even lower.

Keep On Issuing

To prevent this emasculation of the settlement concept there should be a 100% redemption of the offered coupons or credits. This means not only that the coupons must be transferable and cash convertible, but the defendant must continue to issue coupons until the agreed upon cash face value of the settlement is reached. In Feldman v. Quick Quality Restaurants²⁸ the settlement provided for the issuance of food coupons with a minimum value of $.50, which defendants were required to keep issuing and distributing to consumers until the agreed upon face value of the settlement was reached. This concept has been used in The Coca-Cola Co. Apple Juice Consumer Litigation ( coupons issued until $5,250,000 redeemed )²⁹ Tepper v.Tropicana Products, Inc ( $.50 coupons issued until $1,150,000 redeemed )³⁰ and Muller v. Cadbury Schweppes PLC ( coupons issued until $1,100,000 redeemed )³¹ Alternatively, defendants should agree to make up the difference between the actual value of redeemed coupons and the proposed settlement fund by making donations in cash³² , coupons³³ , goods³⁴ or services to charitable organizations.

Time & Method Of Redemption

Equally important in measuring the actual value of a coupon settlement is the time during which redemption must take place and the manner in which the coupons must be redeemed. As for the duration of the redemption the longer the time period the better. Redemption periods of three years [ Donley v. Marshall³⁵ ], two years [ Charles v. Goodyear Tire & Rubber Co.³⁶ ] and one year [ Dunk v. Ford Motor Company³⁷ ] are acceptable. As for the method of redemption the consumer should not be required to reveal his or her intention to use the coupon or credit until the price is agreed upon. For example, if the retailer is aware that the consumer intends to use a coupon or credit he may increase the sale price to compensate for the reduced payment. This potential problem was circumvented in Branch v. Crabtree³⁸ in which the settlement provided for the issuance of $1,000 certificates towards the purchase of a new or used car. The certificates could be withheld by the consumer until he or she had negotiated the best price. At that point the certificate could be produced for a further reduction in the vehicle price.

The Problem Of Attorneys Fees

Coupon settlements may provide class counsel with an opportunity for substantial self‑dealing. Considering the low redemption rate of coupon settlements, defendants may be willing to pay inordinately high cash fees to class counsel in return for support in promoting a non‑cash settlement in which the class receives near worthless coupons. In In re General Motors Corp. Pickup Truck Fuel Tank Products Liability Litigation³⁹ a proposed settlement which provided $1000 coupons for the purchase of a new truck and $4 million in legal fees was rejected as being of little value to class members. And in In re Ford Motor Co. Bronco Products Liability Litigation⁴⁰ a settlement providing class members with a " free " inspection, a road atlas and a lantern was rejected as inadequate. Certainly, fee awards should not be based on a percentage of an estimated settlement value which itself is based upon an estimated redemption rate. In Dunk v. Ford Motor Company⁴¹ the Court rejected a fee application of $985,000 based upon a percentage of an estimated value of redeemed coupons. The Court held that the percentage method of awarding fees should only be used when the common fund value is certain or an easily calculable sum of money.

To prevent this opportunity for abuse, the court may wish to consider requiring that class counsel accept a portion of their fees in the same non‑cash consideration being offered in settlement. In Aburime v. Northwest Airlines, Inc.⁴² class counsel accepted cash and $200,000 in non-transferable credit for travel. The rationale for requiring class counsel to share and share alike with class members is that this ensures value for the non‑cash component on the theory that class counsel would not accept as a fee something that is relatively worthless. In the alternative and, at the very least, counsel fees should be based upon the actual recovery to the class. And this requires cash convertibility, transferability, extended redemption periods, post settlement tracking and continued coupon issuance until the amount redeemed equals the promised cash value of the settlement.

Class Action Policies May Be Defeated

Coupon settlements may be little more than shams when the attorneys for the plaintiff class and the defendants are the only real beneficiaries. The salutary purpose of class actions may be defeated when attorneys consider their own economic interests before those of the class. As noted recently by the Court in In Re Auction Houses Antitrust Litigation⁴³ " Class action lawsuits protect plaintiffs' rights and promote accountability...At the same time, however, the relationship between a plaintiff class and its attorney may suffer from a...divergence of economic interests. The class action mechanism can redound more to the benefit of the attorney...as counsel has an incentive to act in its own best interest...the class action mechanism on occasion has proved to be Janus-faced ".

The settlement of consumer class actions with coupons for the purchase of goods or services can be good for defendants' business and good for the consumer class. Coupon settlements, however, must be carefully designed so that consumers actually receive something of value in return for releasing their claims against defendants. The attorneys for the plaintiff class should be adequately compensated, to be sure, but not at the expense of the persons on whose behalf the class action was brought.

FOOTNOTES

[1]. Thomas A. Dickerson is a Westchester County Court Judge with a Web Page at http://members.aol.com/judgetad/index.html. Judge Dickerson is the author of Class Actions: The Law of 50 States, Law Journal Press, New York, 1981-2000, updated annually, Web Page at http://members.aol.com/class50/index.html and Travel Law, Law Journal Press, New York, 1981-2000, updated biannually, Web Page at http://members.aol.com/travellaw/index.html and other articles concerned with consumer law, many of which are available at http://www.classactionlitigation.com/library/ca_articles.html Ms. Brenda V. Mechmann is Judge Dickerson's Principal Law Clerk.

[2].In re Domestic Air Transportation Antitrust Litigation, 137 F.R.D. 677 ( N.D. Ga. 1991 )( class certification granted ).

[3].See also In re North Atlantic Air Travel Antitrust Litigation, No. 84-1013 ( D.C. Cir. Dec. 11, 1985 )( $30 million in nontransferable air fare reduction coupons worth $50 per transatlantic round trip flight for two year period ).

[4]. See In Re Domestic Air Transportation Antitrust Litigation, MDL No. 861, U.S.D.C., N.D. Ga., Reply Of Objectors [ Andrew Hudders et al ] To Plaintiffs' And Defendants' Responses To Objections, November 5, 1992, pp. 24-30.

[5].In re Domestic Air Transportation Antitrust Litigation, 144F.R.D. 421 ( N.D. Ga. 1992 )( objectors to proposed settlement granted limited discovery ).

[6].In re Domestic Air Transportation Antitrust Litigation, 148 F.R.D. 297 ( N.D. Ga. 1993 ).

[7].In Kahn v. Bell Atlantic NYNEX Mobile, New York Law Journal, June 4, 1998, p. 29, col. 4 ( N.Y. Sup. ) the Court rejected a proposed settlement offering class members " free airtime " because it could not " make an independent assessment of the value of the airtime ".

[8].See e.g.,State of New York v. Nintendo of America, Inc., 775 F. Supp. 676, 681-682 ( S.D.N.Y. 1991 )( coupons for purchase of Nintendo software ); Weiss v. Mercedes-Benz of North America, 1995 WL 592273 ( D.N.J. 1995 )( certificates towards the purchase of new Mercedes ); Willmann v. GTE Corp., No. 96-492 ( S.D. Ill. June 11, 1996 )( $5.00 debit cards for long distance calls ); Buchet v. ITT Consumer Fin. Corp., 845 F. Supp. 684 ( D. Minn. 1994 )( certificates for reduced cost of life insurancepolicies ).

[9]. Maffei v. Alert Cable TV of North Carolina, 342 S.E. 2d 867, 872 ( N.C. Sup. 1986 ).

[10].See e.g., Gordon v. Boden, 586 N.E. 2d 461 ( Ill. App. 1991 ) ( adulterated orange juice; certification granted; fluid recovery approved ).

[11]. State v. Levi Strauss & Co., 41 Cal. 3d 460, 224 Cal. Rptr. 605, 714 P. 2d 564 ( 1986 ).

[12]. Feldman v. Quick Quality Restaurants, Inc., New York Law Journal, July 22, 1983, p. 12, col. 4 ( N.Y. Sup. ).

[13].See e.g., In re Montgomery County Real Estate Antitrust Litigation, 1979-2 CCH Trade Cas. 62,860 ( D. Md. 1979 ) ( defendants affirmatively established inability to pay cash ).

[14]. Charles v. Goodyear Tire & Rubber Co., No. 94-5626 ( D.N.J. Dec. 13, 1996 ).

[15].In re Cuisinart Food Processor Antitrust Litigation, 1983-2 CCH Trade Cas. 65,680 ( D. Conn. 1983 ).

[16].Willmann v. GTE Corp., No. 96-492 ( S.D. Ill. June 11, 1996 ).

[17].Buchet v. ITT Consumer Finance Corp., 845 F. Supp. 684 ( D. Minn. 1994 ).

[18].Langford v. Bombay Palace Restaurants, 1991 US Dist LEXIS 4730 ( S.D.N.Y. 1991 ).

[19].Weiss v. Mercedes-Benz of North America, 1995 WL 592273 ( D.N.J. 1995 ).

[20].See Weinstein, " The Love/Hate Dynamics: Coupons Issued By Manufacturers " 71 Progressive Grocer 117 ( May 1992 ).

[21]. In re Domestic Air Transportation Antitrust Litigation, 144 F.R.D. 421 ( N.D. Ga. 1992 )( objectors to proposed settlement granted limited discovery ).

[22]. Dunk v. Ford Motor Company, 48 Cal. App. 4^th 1794, 56 Cal. Rptr. 2d 483 ( 1996 ).

[23].Bloyed v. General Motors Corp., No. 06-93-00113-CV ( Tex. 71^st Jud. Dist. Harrison Co. Nov. 3, 1993 ), rev'd sub nom. 881 S.W. 2d 422 ( Tex. App. 1994 ), aff'd on other grounds 916 S.w. 2D 949 ( Tex. 1996 ).

[24].In re General Mills Oat Cereal Consumer Litigation, No. 94 CH 06208 ( Ill. Cir. Ct. Cook Co. July 29, 1994 ).

[25].In re Sears Automotive Center Consumer Litigation, No. 92-2227 ( N.D. Cal. Oct. 29, 1992 ).

[26].Perish v. Intel Corp., No. CV-75-51-01 ( Cal. Super. Ct. Santa Clara Co. June 22, 1998 ).

[27].In re Cuisinart Food Processor Antitrust Litigation, 1983-2-CCH Trade Cas. 65,680 ( D. Conn. 1983 ).

[28].Feldman v. Quick Quality Restaurants, Inc., New York Law Journal, July 22, 1983, p. 12, col. 4 ( N.Y. Sup. ).

[29].In re The Coca-Cola Co. Apple Juice Consumer Litigation, No. E-47054 ( Ga. Super. Ct. Fulton Co. May 4, 1998 ).

[30].Tepper v. Tropicana Products, Inc., No. 96-000846 ( Fla. Cir. Ct. Manatee Co. Nov. 13, 1998 ).

[31].Muller v. Cadbury Schweppes PLC, No. 96-0148788 ( Conn. Super. Ct. Waterbury Jud. Dist. June 29, 1999 ).

[32].See Ohio Public Interest Campaign v. Fisher Foods, 546 F. Supp. 1 ( N.D. Ohio 1982 )( contributions in cash or food to charitable organizations that give away food to the needy ).

[33].See Duboff v. SmithKline Beechum ( Pa. Ct. C.P. Philadelphia Co. Sept. 23, 1993 )( coupon booklets for purchase of 18 SmithKline products; unclaimed booklets to be distributed to charitable organization ).

[34].See Gordon v. Boden, No. 89 CH 6531 ( Ill. Cir. Ct. Cook Co. July 14, 1995 )( if redemptions of orange juice vouchers do not exceed $1 million defendant will fund consumer oriented research and make orange juice donations to schools ).

[35].Donley v. Marshall, No. 93 CH 1610 ( Ill. Cir. Ct. Cook. Co. Mar. 31, 1998 ).

[36].Charles v. Goodyear Tire & Rubber Co. No 94-5626 ( D.N.J. Dec. 13, 1996 ).

[37].Dunk v. Ford Motor Company, 48 Cal. App. 4th 1794, 56 Cal. Rptr. 2d 483 ( 1996 ).

[38].Branch v. Crabtree, Index No. 15822/89, N.Y. Sup. West. Cty. Oct. 31, 1995.

[39]. In re General Motors Corp. Pickup Truck Fuel Tank Products Liability Litigation, 55 F. 3d 768 ( 3d Cir. 1995 ), cert. denied 516 U.S. 824 ( 1996 ).

[40].In re Ford Motor Co. Bronco II Products Liability Litigation,1995 WL 222177 ( E.D. La. Apr. 12, 1995 ).

[41].See N. 33, supra.

[42].Aburime v. Northwest Airlines, Inc., No. 3-89-402 ( D. Minn. Aug. 16, 1991 ).

[43].In Re Auction Houses Antitrust Litigation, New York Law Journal, October 2, 2000.

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