In Redman v. RadioShack Corporation, 2014 U.S. App. LEXIS 18181 (7th Cir. Sept. 19, 2014), the Seventh Circuit held that the lower court erred when it approved a settlement in a class action that was filed under the Fair and Accurate Credit Transactions Act (FACTA), 15 U.S.C. § 1681c(g), against a company that sold electronic products to consumers, even though it was undisputed that the company violated the FACTA when it printed the expiration dates on customers’ credit cards on receipts it gave to customers. The Seventh Circuit held that the lower court incorrectly treated administrative expenses as if they were cash to the class members, and it also authorized payment of $990,291 in fees for class counsel when each consumer who was a victim of the violation received only a $10 coupon, which was one-tenth of the minimum statutory damages allowed under the Fair Credit Reporting Act.
The essential term of the settlement was that each class member who responded positively to the notice of the proposed settlement would receive a $10 coupon that it could use at any RadioShack store. The class member could use it to buy an item costing $10 or less (but he would receive no change if the item cost less than $10), or as part payment for an item costing more. He could stack up to three coupons (if he had them) and thus obtain a $30 item, or a $30 credit against a more expensive item. He also could sell his coupon or coupons, but the coupons had to be used within six months of receipt because they would expire at the end of that period. The Seventh Circuit held this to be inadequate value in light of the prospects for liability. The Seventh Circuit also found that there was substantial evidence of a willful violation, which made the coupon settlement even less acceptable.
The Seventh Circuit also held that the judge accepted the settlors’ contention that the defendant’s entire expenditures should be aggregated in determining the size of the settlement, and that it was this aggregation that reduced the award of attorneys’ fees to class counsel to a seeming 25 percent. But the court held that the roughly $2.2 million in administrative costs should not have been included in calculating the division of benefits between class counsel and class members. Those costs were part of the settlement but not part of the value received from the settlement by the members of the class. The court held that those costs therefore shed no light on the fairness of the division of the settlement fund between class counsel and class members.
The Seventh Circuit further held that Rule 23(h) of the civil rules requires that a claim for attorneys’ fees in a class action be made by motion, and “notice of the motion must be served on all parties and, for motions by class counsel, directed to class members in a reasonable manner.” Class counsel did not file the attorneys’ fee motion until after the deadline set by the court for objections to the settlement had expired, which the Seventh Circuit held violated the rule.
For all of the foregoing reasons, the Seventh Circuit reversed the settlement and remanded the case.
The Seventh Circuit’s decision indicates that courts are increasing their scrutiny on the value that is actually received by consumers as part of a proposed class settlement, as well as any award of attorneys’ fees that is based on that valuation. Troutman Sanders LLP will continue to monitor this case and other like decisions.