In McKinney-Drobnis v. Oreshack, the Ninth Circuit Court of Appeals reversed the district court’s determination that vouchers awarded to class members were not “coupons” under the Class Action Fairness Act (CAFA), and it admonished the district court’s failure to apply heightened scrutiny to a pre-certification class settlement. No. 20-15539, 2021 U.S. App. LEXIS 31524 (9th Cir. Oct. 20, 2021). The court stated the instructive factors for evaluating whether awards to class members qualify as vouchers or “coupons” under the CAFA, which in turn places additional requirements on attorneys’ fees and reinforced the Ninth Circuit’s approach to evaluating pre-certification class settlements for fairness.
The plaintiffs in McKinney sued Massage Envy Franchising LLC (MEF) for allegedly increasing monthly membership fees in violation of the membership agreement. Prior to class certification, the plaintiffs and MEF executed a settlement agreement through which class members would receive vouchers in exchange for releasing all claims against MEF. The voucher value would correspond with the fee increases each class member paid, would expire after 18 months, and could be used on a variety of MEF services.
The proposed settlement also provided for a settlement floor of $10 million. If class members did not claim enough vouchers to reach the floor amount, each claimant’s voucher would increase by a pro rata share until the total value reached $10 million. MEF agreed not to object to class counsel’s request for attorneys’ fees of $3.3 million, and if the court awarded less than $3.3 million in fees, the parties agreed the surplus funds would revert back to MEF. Ultimately, the value of claimed vouchers fell below $3 million, so the voucher values were adjusted, resulting in vouchers ranging from $36.28 to $180.68.
The district court approved the settlement and awarded the requested $3.3 million in attorneys’ fees. The court determined that the settlement did not qualify as a “coupon” settlement, meaning attorneys’ fees could be calculated based on the face value of the settlement fund rather than the value of vouchers actually redeemed. One objector appealed, arguing that the settlement was a “coupon” settlement and that it unfairly benefited class counsel over class members. The objector pointed to three factors as evidence of unfairness: (1) class counsel’s receipt of a disproportionate portion of the settlement award, (2) an agreement that the defendant would not challenge the agreed-upon attorneys’ fees amount, and (3) an agreement that unawarded attorneys’ fees would revert to the defendant rather than the class. The Ninth Circuit had previously identified these three factors as warning signs of possible collusion in In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935 (9th Cir. 2011), and required district courts to apply heightened scrutiny when such factors are present.
On appeal, the Ninth Circuit evaluated whether the vouchers qualified as coupons. Under CAFA, if a class settlement qualifies as a “coupon” settlement, additional restrictions apply — including a requirement that class counsel’s fees must be calculated based on the actual value of redeemed vouchers rather than the face value of claimed vouchers. The court considered three non-dispositive factors: “(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 transferable.”
The first factor suggested the vouchers were coupons because the smallest voucher awarded was “not enough to purchase most of [MEF’s] services.” On the second factor, the court noted that the limited pool of product offerings available for redemption suggested the vouchers were coupons. Only the third factor weighed against finding the vouchers were coupons because the vouchers provided flexibility and did not expire for 18 months. Weighing all three factors together, the court concluded the vouchers were coupons. The court vacated the district court’s approval of the attorney’s fee award and remanded to the district court, instructing it to use the value of the redeemed vouchers in awarding fees as required under CAFA.
The court next addressed the argument that the settlement agreement unfairly benefited class counsel. Examining the Bluetooth factors, the court stated that the proportionality of the attorneys’ fees could not be determined prior to the district court’s recalculation on remand. On the last two factors, the court acknowledged that the lower court correctly identified the existence of “clear-sailing” and “reverter” provisions but abused its discretion in failing to apply heightened scrutiny based on the presence of these factors.
McKinney is instructive on the factors courts typically use to evaluate whether a settlement qualifies as a “coupon” settlement. Additionally, the decision is another example of courts applying heightened scrutiny in evaluating pre-certification class settlements.