Companies may be inclined to offer “coupons” or similar benefits to settle consumer class actions. While offering coupons is permissible, in In re Easysaver Rewards Litigation, No. 16-56307, 2018 U.S. App. LEXIS 28000 (9th Cir. Oct. 3, 2018), the Ninth Circuit has reaffirmed that the full face value of coupons cannot be included when calculating the total value of the settlement, which may reduce the attorneys’ fees awarded to Plaintiffs’ class counsel.

Defendant Provide Commerce (“Provide”) is an online purveyor of flowers, chocolates, and fruit baskets. Plaintiffs alleged that Provide enrolled its customers into a membership program without their consent and mishandled their billing information. The class included 1.3 million consumers.

To settle the dispute, Provide agreed to reimburse membership fees upon submission of a claim, and to automatically distribute a $20 “credit” to all class members. The credit was transferrable, but was subject to restrictions including that it expired within one year and could not be used in the lead-up to Christmas, Valentine’s Day or Mother’s Day. The U.S. District Court for the Southern District of California valued the settlement at $38 million, with the $20 credits accounting for $25.5 million of that value. Plaintiffs’ counsel was awarded $8.7 million based on the $38 million total settlement amount.

Class members submitted claims totaling $225,000 in cash refunds, leaving approximately $3 million of the settlement’s cash fund to be distributed to certain cy pres beneficiaries. On appeal, objector Brian Perryman argued that the Class Action Fairness Act (“CAFA”) required the credits be treated as coupons for purposes of calculating the value of the settlement (and also challenged the cy pres awards).

The Ninth Circuit agreed the credits were coupons under CAFA. In enacting CAFA, “Congress was concerned that when coupons that class members would not use were factored into the value of a settlement, they inflated the nominal size of a settlement fund without a concomitant increase in the actual value of relief for the class. And when a court relied on the size of such a settlement fund to calculate attorney’s fees, this inflation dramatically increased the size of the fee award—allowing class counsel to reap the lion’s share of the benefits.” In re Easysaver, 2018 U.S. App. LEXIS at *11 (internal citations omitted). To avoid this result, CAFA requires district courts to consider the value of only those coupons that are actually redeemed. Id., *11-12.

CAFA does not define “coupon.” The Ninth Circuit employs a three-part test to make this determination: “(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. Id., *12-13 (citing In re Online DVD, 779 F.3d 934, 950 (9th Cir. 2015)).

The Ninth Circuit found that the district court erred by conflating the settlement approval analysis with the determination of whether the credits were coupons. In re Online DVD, the Walmart gift cards at issue were deemed not to be coupons for several reasons, including that they could be used for any products on walmart.com, did not expire, and did not require consumers to spend their own money. The credits available to members of the Easysaver class, by contrast, could be used only for a limited selection of products, required payment of shipping charges, and forced class members to buy the products from the company that had allegedly mishandled their billing information in the first place. Because the district court incorporated the full face value of the coupons into both its percentage-of-recovery calculation and lodestar calculation of the attorney’s fee award, this error required recalculation of the fee award on remand; any diminution in the fee awards to class counsel would be added to the cy pres awards, which were upheld.

In light of this case, companies seeking to settle consumer class actions should be mindful of the types of restrictions placed on credits, as later reclassification of the credit as a coupon may result in a costly litigation delay or even disapproval of the settlement.