Under New Laws, Trial Judges Get More Discretion
Los Angeles Daily Journal
LOS ANGELES, CA — Companies who use coupons to settle massive consumer fraud class actions are having to work a little harder these days to satisfy judges.
People who receive the coupons instead of cash have long sneered at such settlements. After all, who wants $5 off a new television from the company who sold you a defective one?
Defendant-Friendly Venue
The Legislature frowned on the settlements, as well. In February 2005, under heavy pressure from the business community, it passed the Class Action Fairness Act, which moved many class actions to federal court, traditionally a more defendant-friendly venue. But the act also gave federal judges greater discretion in approving coupon settlements, to ensure that they provide value to the class.
That provision has made the lives of attorneys on both sides of the table more difficult. They must show judges that coupons don’t just give lip service to the interests of the class.
Using Extra Caution
Although the federal law doesn’t apply in state courts, legal experts say California Superior Court judges are following suit and using extra caution before approving coupon settlements.
As a result, an auto insurance company that’s been trying for years to resolve a consumer fraud suit this month saw a proposed coupon settlement shot down for the second time.
The proposed settlement called for Mercury Insurance to offer its auto insurance customers a $45 coupon good for upgraded renewal coverage or a new policy.
But Los Angeles County Superior Court Judge Victoria G. Chaney rejected the settlement May 15, as she had rejected a previous settlement proposal in February.
According to her ruling, Chaney rejected the settlement in part because the coupons required conditions for their use.
“In this situation, you have to buy more coverage or get a bigger deductible or add someone to your policy, which all costs more than the amount of money you’re supposed to get back,” said Harvey Rosenfield, an attorney with the Foundation for Taxpayer and Consumer Rights, which objected to the settlements. “That’s like a thief saying, ‘I’ll give the 50 bucks I stole, but I insist that you give me 60 bucks first.'”
Chaney also rejected the settlement because there was no estimation of how many coupons would be redeemed – which is one way the Class Action Fairness Act determines how attorney fees will be awarded.
Class counsel Drew E. Pomerance, of Roxborough, Pomerance & Nye in Woodland Hills, said attorney fees in the most recent settlement were to be $1.5 million, an amount he calculated based on the hours worked on the case.
Harry W.R. Chamberlain II, the immediate past president of the Association of Southern California Defense Counsel and an attorney at Theodora Oringher Miller & Richman, said the Class Action Fairness Act’s coupon redemption rate provision was put into place to ensure that attorneys considered class interests.
“It’s really about making settlements benefit the class instead of just attorneys on both sides of the case, which is sort of what these settlements had been doing before,” he said.
Chamberlain said he believed the state courts were adopting some of the act’s standards because “they don’t want to be left behind.”
The case against Mercury was filed in 2001 on behalf of customers who claim they were cheated out of a “good driver discount” because they had a lapse in their coverage. According to 1988’s Proposition 103, insurance companies are required to offer a good driver discount and cannot withhold it because of a lapse in coverage. Donabedian v. Mercury Insurance Co., BC249019 (L.A. Super. Ct., filed April 20, 2001).
Mercury‘s attorney, Theresa A. Kristovich, of Los Angeles’ Gordon & Rees, issued a statement in which her client denies liability.
“Mercury entered into the settlement with plaintiff… to avoid the continuing cost and uncertainty of litigation,” she wrote. “Mercury intends to continue to work with plaintiff’s counsel to address the court’s concerns and to resolve the case.”
According to Pomerance, the class is just a million with $77 million in damages, or $77 per person. Forty-five million dollars in coupons, he said, was not “ideally what we wanted.”
“That’s why it’s a settlement,” he said, “because both sides are vigorously defending their view.”
Like Kristovich, Pomerance said he would return to negotiations in hopes of a settlement. He added that he would try the case if he has to.
Stroock & Stroock & Lavan Los Angeles partner Stephen J. Newman said he’s noticed that California Superior Court judges were more cautious in approving coupon settlements. Newman recently worked on a case for a major corporation in which the settlement involved credits similar to frequent-flier points. The points were awarded to class members instead of a cash-payout.
One of the provisions of the settlement that seemed to “comfort the judge,” he said, was that points also were used to compensate the class counsel.
“If it was good enough for the attorneys, it was good enough for the class,” he said.
But he added that the settlement process was not “rubber-stamped” by the judge.
“The judge wanted to make sure it would adequately compensate the class,” he said. “In this case, the class had lost points, so they were being awarded points. You just get the sense that judges are much more cautious, as they are in any nonmonetary compensation. They want to see an explanation.”
Gibson, Dunn & Crutcher Los Angeles partner Gail Lees agreed. She said Los Angeles County Superior Court judges recently made clear in a panel discussion with lawyers that they are looking more closely at two aspects of coupon settlements: whether they offer real value to class members and whether class members are adequately notified of the settlement.
One Los Angeles County Superior Court judge who did not wish to be identified confirmed that viewpoint.
“CAFA is certainly a signal to any judge to take a look and try to verify or ascertain whether a coupon settlement really contains value for the class,” the judge said. “One of the largest sources of criticism from the public on class actions deals with coupon settlements: Sometimes, they’re worth 5 cents, they’re not transferable, they’re going to expire in a week and the lawyers get $35 million. That’s what worries a lot of judges.”
The judge added that such settlements must be viewed case by case and that they may provide excellent benefit to the class if they are structured properly.
The extra caution on the part of judges is making attorneys work harder for coupon settlements, which are often viewed by defense attorneys as an easy out, according to James M. Burgess, the head of the class-action group at Los Angeles’ Sheppard, Mullin, Richter & Hampton.
Burgess said many defense attorneys believe that corporations “threw out the baby with the bath water” in supporting the Class Action Fairness Act because “a lot of defendants like coupon settlements because it’s easier to settle.”
Burgess said that, although he may be in the minority in the defense bar, he doesn’t support coupon settlements. He said he doesn’t think they offer tangible benefits. If they were harder to obtain, he said, perhaps judges would look more closely at which cases they certified as class actions.
“Some judges have the view that these cases settle easily and therefore, certify now and ask questions later,” he said. “If you eliminate coupon settlements, which the defense knows it can fall back on, then maybe it would eliminate this mentality.”
State judges are following the lead of their federal counterparts, said Georgene M. Vairo, a Loyola Law School professor who specializes in complex litigation.
But their motivation for doing so, Vairo said, may be about self-preservation.
“I think one of the problems that state-court judiciaries are having is that they are seeing Congress pass more and more legislation taking state-court causes of action out of state court and into federal,” she said. “I think more state judges are thinking, ‘If we’re excessive in terms of approving these kinds of settlements, we may be egging Congress on to do more things to allow corporate defendants to remove even more types of lawsuits into federal court.'”
Vairo agreed that defendants might live to regret supporting the Class Action Fairness Act.
“Now, it’s tougher to get coupon settlements approved by any court,” she said. “What’s that saying? Be careful what you wish for; you just might get it?”
