Class-action settlements that pay lawyers millions of dollars and give plaintiffs coupons that are sometimes useless are drawing ire in Congress and some courts.
Inc. agreed in 2001 to settle a class-action lawsuit over late fees by
issuing coupons for free or dollar-off movie rentals.
who filed the lawsuit in Texas will do better. The court capped their
fees and expenses at $9.25 million.
the paltry settlement for consumers and the big legal fees as another
glaring example of what is wrong with a system whose prime beneficiaries
often are lawyers. The case is on appeal.
have gotten such a bad rap that Congress is weighing changes in the rules
governing such awards as part of broader legislation aimed at reforming
are intervening despite attempts by lawyers to dress up some coupons by
making some convertible into cash. In fact, one Chicago company has created
a business of trading coupons.
revision, however, is a proposal to link plaintiff attorneys' fees to
the value of coupons redeemed. The rule would clip big legal paydays because
the number of coupons used is a fraction of the coupons distributed.
change is intended to ensure that fees are based solely on the value received
by class members or the reasonable value of the legal work that was actually
performed," said Beth Levine, spokeswoman for Sen. Charles Grassley
(R-Iowa) who recently introduced a new version of bill, the so-called
Class Action Fairness Act. "The thought is that lawyers will be less
apt to file frivolous class-action lawsuits."
both sides say that attacking attorneys' fees may have some unintended
consequences that ironically could cost big business--which has been lobbying
for class-action legislation--in the long run.
objective it seems is to rein in the number of coupon settlements,"
said Michael Hyman, a plaintiffs' attorney with the Chicago firm of Much
Shelist Freed Denenberg Ament & Rubenstein. "But this language
could backfire on defendants because it may lead to more cash settlements."
past president of the International Association of Defense Counsel, said
it is "quite a possibility" that the legislation could result
in fewer coupon deals. If that happens, it will "bring some inflexibility
to the negotiating system," said Pope, a partner at McDermott, Will
involving everything from claims of airline price fixing to unsafe pickup
trucks, scrip has been used to settle disputes.
awards have ranged from $4,000 off a new BMW to a $25 reduction in Apple
Computer products to a free bottle of Poland Spring water.
benefits to coupons that make them attractive to both sides. If the scrip
involves a small-ticket item like a compact disc, as it did in a case
involving music clubs like BMG, it has value, legal experts say. In addition,
some coupons are readily convertible into cash.
Big corporations see coupons as a cheap way to escape protracted litigation.
don't use coupons as much as cash," said David Schoenfeld, an attorney
at Chicago law firm Grippo & Elden, who has defended companies in
of coupon settlements is not tracked. Some are hidden because they never
become part of the public record.
some cases, coupons can help increase their sales," said Schoenfeld.
In effect, consumers are forced to buy the very product they complained
about just to use the coupons.
"If you hand out a coupon and no one uses it, the lawyers still walk away with fees, the defendants walk away from a potentially serious problem and class members end up holding the bag," said Brian Wolfman, a lawyer with Public Citizen, a public interest group in Washington that has objected to proposed coupon settlements.
highlight the problems:
In a 1996 settlement of claims involving leaky Ford Mustangs, the automaker offered $400 nontransferable coupons good for a year toward a new Ford. Public Citizen offered evidence from previous auto settlements that only 2 percent to 5 percent of the class would get any value from the scrip. The legal fees? $1.5 million.
discounts on future travel for as little as $8 or as much as $25 in a
1993 case charging airlines with collaboration to fix fares. The judge
approved about $16 million in legal fees.
paid $1.75 million in fees, or approximately $2,000 per hour, in a class
action case against Cheerios over cereal that was tainted with pesticides,
although there was no evidence of injury to consumers. Members of the
class were entitled to coupons for a free box of cereal only if they could
show evidence of a previous cereal purchase.
state courts have countered criticism by scrutinizing settlements more
closely and not authorizing some of them.
In a case
against General Motors Corp. claiming side-mounted gas tanks on pickup
trucks were unsafe, Philadelphia federal appeals court judges rejected
a coupon deal worth $1,000 toward a new truck purchase. The judges saw
the deal as a potential "marketing boon to GM" and also questioned
a $9.5 million awarded to plaintiffs' lawyers.
some of the shortcomings of coupon settlements, some lawyers began looking
at ways to encourage redemption.
Schoenfeld was working on a class-action suit involving a claim that BMW
had oversold what was to have been a limited-edition model, the 1988 M5.
Some of the class wanted cash but the carmaker offered $4,000 rebate coupons
good toward a future purchase or lease.
called James Tharin, a former college roommate and a trader at the Chicago
Board of Trade, and asked if he would be willing to buy the certificates
to try to resell them.
"We ended up buying and selling 750 certificates," Tharin said. "We paid an average of $2,600 for them."
born a cottage industry that deals in trading scrip for cash. Tharin's
company, Chicago Clearing Corp., has created a secondary market for coupons
in 10 class-action cases, one of the most recent the 2001 settlement of
price-fixing claims against auction houses Sotheby's and Christie's International.
million settlement was a mix of cash and transferable certificates to
former buyers and sellers at either auction house. Of the 130,000 people
who received claim forms, which include collectors, museums and art dealers,
about half replied, an unusually high redemption rate, Tharin said.
dealer Peter Bartlow filed a claim and received about $40,000 in cash
and $22,000 in rebates to be used to pay for commissions in future sales.
Since he does not sell much at auction, Bartlow sold the certificates
to Tharin's company and received about 60 percent of their value in return.
was like winning the lottery," said Bartlow, who owns a gallery off
Michigan Ave. "How many times have you received these coupons and
never gotten anything?"
But a secondary market is not feasible in settlements involving coupons valued at less than $250 because the transaction costs are too high, Tharin said. Also, some defendants resist making coupons transferable.
"They're not happy to have them redeemed by someone who's going to buy the product anyway," Tharin said.
To give plaintiffs'
lawyers an incentive to improve redemption, some judges have taken the
rare step of ordering that legal fees partly consist of the coupons lawyers
won for clients.
before the U.S. Senate goes one step further to align lawyer's interests
with those of the class, Wolfman said.
tying legal fees to coupon redemption was not included in the original
bill that was introduced last fall in the Senate and fell one vote short
of the 60 needed to break a Democratic filibuster. The House has already
passed a version of the bill.
Public Citizen have been lobbying for such a rule for years.
- - -
Class-action winners and losers
Examples of class-action settlements in which consumers receive coupons and lawyers get cash.
Allegation: Blockbuster's late fee was not clearly disclosed.
Who was affected: Consumers who paid late fees on video rentals between Jan. 1, 1992, and April 1, 2001.
Case status: Settlement was reached in 2001 for $450 million, but it is being appealed.
ATTORNEY FEES: $9.25 million
CUSTOMER SETTLEMENT: $1-off coupon for movie rental and free movie rental
Allegation: Customers were not told of licensing and marketing fees the company received from the bank issuing the loans.
Who was affected: 700,000 customers in Texas who received tax-refund loans from 1992 to 1996.
Case status: Settled in 2002 for $262 million.
ATTORNEY FEES: $49 million
CUSTOMER SETTLEMENT: $100 coupons for tax preparation services and coupons for tax guides and software for five years
Who was affected: 17 million California consumers and businesses who purchased software between Feb. 18, 1995, and Dec. 15, 2001.
Allegation: Microsoft used its dominant market share of PC software to overcharge.
Case status: Settled in 2003 for $1.1 billion, but judge has yet to approve.
ATTORNEY FEES: $294 million*
CUSTOMER SETTLEMENT: Vouchers (rebate coupons) for new software or hardware
*Microsoft has contested the amount.
Source: Microsoft and news reports
Chicago Tribune/Melissa Deegan and Phil Geib