The Justice Department Really Doesn’t Like Coupon Settlements (But They Still Can Work)

It’s no secret that the Justice Department and state Attorneys General don’t like coupon settlements in class actions. Since 2007, groups of state AGs have been objecting regularly to coupon settlements that would force class members to pay more money to defendants accused of consumer fraud. On February 4, the Justice Department filed an amicus brief in Chapman v. Tristar Products, Inc., asking the Sixth Circuit to reverse approval of a coupon deal.

What’s most notable about this Chapman objection is that even though officials have been telling the class action bar for over a decade how not to structure coupon settlements, parties still occasionally poke the bear by proposing exactly the kinds of terms that these officials have said, over and over again, they will never condone. Class action settlements still can work in federal court, but settling parties have to think very carefully about how to use them. Restrictions like quick expiration, no ability to transfer, and a limited universe of products just won’t fly.

The plaintiffs in Chapman alleged that the defendant’s pressure cookers were defective, prone to explode if opened too quickly, and therefore worthless. A federal judge in Ohio certified a class in 2017, after which the case settled. Class members could receive warranty extensions and $72.50 coupons usable on their choice of only three new kitchen appliances the defendant sold with undiscounted price tags of $159 (not including shipping). The coupons were non-transferable, non-agreeable, and expired after 90 days. The Justice Department also noted that Amazon​.com sold the same appliances for far less than the defendant did, thus making the coupons essentially worthless.” Only 13,000 people, or 0.4 percent of the 3.2 million class members, filed claims for these coupons (the process for which, among other things, required them to watch a safety video).

The restrictive terms and settlement hurdles alone likely would have been enough to ensure government opposition to the settlement, but the Chapman plaintiffs’ counsel compounded the problem by seeking a $2.3 million fee and justifying it based on what the Justice Department termed erroneous assumptions about the value and redemption rate of the coupons.”

So what can a class action defendant do if it wants to make coupons a main component of a class settlement? The Chapman brief offers a road map.

First, offer a cash alternative to the coupons. The amount can be less than the coupon’s face value and it can take the form of residual” cash value if class members don’t redeem their coupons. The key is to avoid leaving class members with no choice but to fork over more money to the defendant if they want to obtain benefits from a consumer fraud settlement.

Second, make the coupons as permissive as possible. Give them the longest expiration periods you can tolerate and allow class members to transfer them and aggregate them. (In other words, let Jane give or sell her coupon to Joe and let Joe use multiple coupons together on the same purchase and thereby perhaps get an item for free.) Make the coupon usable on the broadest possible range of your products and, if possible, treat the coupons as rebates” so that class members can purchase the items from third-party sites and then have you refund the coupon amount.

Importantly, some defendants simply will not be able to offer a settlement with all of these features. When a deal can’t meet these minimums, however, the parties have to be ready to explain to the court in detail why they are not feasible in the particular case. This should be done proactively rather than waiting for objections that would be nearly inevitable.

Then, when plaintiffs’ counsel make their request for attorneys’ fees, remember that the Class Action Fairness Act, 28 U.S.C. § 1712(a), means exactly what it says: If a settlement offers coupons, the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed,” period. Class counsel can instead seek a fee based upon the amount of time [they] reasonably working on the action”—their lodestar, from which they can request a multiplier”—but if they choose that route, they can never seek to justify a multiplier based on how class members theoretically might claim and redeem settlement coupons.

The Chapman settlement, like virtually all prior deals that drew government objections, violated all three of these rules, without what the government considered sufficient justification. The Sixth Circuit may affirm the settlement anyway. That seems unlikely, however, and in any event, the case has become longer and more expensive because of governmental objections that were predictable and avoidable.