Seventh Circuit Takes Hard Look at "Coupon" Settlements, Citing CAFA

  by Scott Nelson

As far as I can tell, there are not yet any reported federal decisions that apply the settlement provisions of CAFA, which are found at 28 U.S.C. 1711 - 1715.  (If I'm wrong, I'd love to hear about it.)  But in its recent decision in Synfuel Technologies, Inc. v. DHL Express (USA), Inc., 463 F.3d 646 (7th Cir. 2006), the Seventh Circuit cited what it considered to be CAFA's policy of "heightened scrutiny" of coupon settlements in support of a decision striking down a non-CAFA settlement because the district court did not adequately evaluate its fairness.  The opinion is interesting in a number of respects, a few of which I'll discuss.

Facts and Background

The Synfuel decision arose out of a class action alleging that Airborne Express, Inc. (now known as DHL) overcharged customers by charging them for a five-pound package when they failed to indicate the weight of the package on the airbill.  The class representative and the defendant negotiated a settlement that would compensate class members with up to four pre-paid shipping envelopes (worth about $13 each) or up to $30 in cash, depending on how many times they could document having been charged for a five-pound package by default.  The settlement also provided for some prospective changes in DHL's practices that would make it more likely that future customers would be charged based on the actual weight of packages, and it allowed for payment of fees to class counsel of up to $4.95 million, subject to approval of the court.

The district court approved the settlement as fair over objections posed by a number of groups of objectors, but awarded only $600,250 in fees.  Some of the objectors appealed the approval of the settlement, and class counsel appealed the fee award as inadequate (an appeal that the Seventh Circuit ultimately did not have to consider given that it vacated the district court's approval of the settlement).

Seventh Circuit's Decision

Jurisdiction:  The Seventh Circuit panel, in an opinion written by Judge Wood and joined by Judges Kanne and Rovner, first had to address a peculiar question of jurisdiction.  The district court complaint had asserted federal question jurisdiction, based on a line of federal precedents holding that federal common law governs civil actions against air carriers for lost or damaged goods.  As Judge Wood pointed out, however, this suit had nothing to do with lost or damaged goods, nor was it about late payment penalties charged by common carriers (which at least one federal court holds are subject to federal common law).  The Seventh Circuit panel found no basis for holding federal common law applicable to what it saw as no more than a claim of illegal billing practices, and hence no support for federal question jurisdiction.

Nonetheless, the court granted class counsel leave to amend the complaint while the case was on appeal to add allegations of diversity jurisdiction (based on the traditional pre-CAFA requirement of complete diversity between the named plaintiff and all defendants).  Counsel's first attempt to allege diversity was, according to the panel, ambiguous and inaccurate, but a supplemental filing convinced the panel that there was complete diversity and that the amount in controversy for the named plaintiff exceeded $75,000, including the value of injunctive relief.  (Interestingly, had the case been before a different Seventh Circuit panel, unclarity in establishing that the district court had diversity jurisdiction could possibly have led to the imposition of sanctions.  See BondPro Corp. v. Siemens Power Generation, Inc., No. 05-3077 (7th Cir. Oct. 19, 2006) (opinion of Judges Posner, Easterbrook and Wood imposing sanctions on counsel for appellant and appellee because briefs did not state citizenship of parties in diversity case)).

Fairness:  Having gotten past the jurisdictional hurdle, the panel turned to the question of the fairness of the settlement.  Judge Wood noted that claim forms had been submitted under the settlement by "a paltry three percent" of the class, an observation reflecting that the panel's starting point was a significant degree of skepticism about the value of the settlement to the class.

Applying Rule 23(e)(1)(C)'s standard that any class settlement must be "fair, reasonable, and adequate," the court focused primarily on three problems with the district court's approval of the settlement.  First, the court emphasized that a district court's evaluation of a settlement must be based on a careful weighing of a number of factors, the "most important" being the strength of the case balanced against the settlement amount.  Here, the district court had accepted class counsel's contention, "largely unsupported by any evidence or analysis," that the limited settlement amounts (and the progressively lower amounts received by class members who had been overcharged more often) reflected defenses that DHL would likely be able to assert against class members.  The court of appeals criticized the district court for not "attempt[ing] to quantify the value of plaintiff's case" or estimating "how many class memebrs' claims would be barred" by DHL's anticipated defenses.

Second, the court stressed that "the agreement's bias toward compensating class members with pre-paid Letter Express envelopes instead of cash" made it similar to a coupon settlement in that it offered "in-kind compensation" that would require class members to do business with DHL.  The court cited a number of critiques of coupon settlements and then added:

"And although this cases is not covered by the Class Action Fairness Act (CAFA) of 2005 [because it was filed before the Act was signed into law], we note that in that statute Congress required heightened judicial scrutiny of coupon-based settlements based on its concern that in many cases 'counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value.'"

Third, the court rejected the argument that the benefits of the prospective relief offered by the settlement justified the district court's approval of the deal.  The court stated that most of these benefits would be reaped by "future customers who are not plaintiffs in this suit," and that benefits to such non-class members counted for little or nothing in balancing the fairness of the settlement: "The fairness of the settlement must be evaluated primarily based on how it compensates class members for ... past injuries."

Synfuel's Significance

There are several striking aspects of the court's decision.  Judge Wood's assertion that CAFA calls for "heightened scrutiny" of coupon settlements is interesting because CAFA's provision regarding scrutiny of coupon settlements actually provides only that such settlements may be approved if they are "fair, reasonable, and adequate" --exactly the same standard that Judge Wood applied to this pre-CAFA settlement under Rule 23(e)(1)(C).  (CAFA does provide for new limits on attorney fees in coupon settlements once they are approved, but this has nothing to do with the standard of scrutiny of the settlement itself.)

Judge Wood's opinion thus suggests that the perception of judges that CAFA is more hostile to coupon settlements than pre-CAFA law may lead them, at least in some cases, to view coupon settlements more skeptically, even though the standard of review is nominally the same.  And in this case, that skepticism even bled over into review of a case not governed by CAFA.  That is, in my view, a salutary development, but of course it remains to be seen whether other judges will share Judge Wood's perception that CAFA somehow alters the acceptability of such settlements.  Only when cases that are actually governed by CAFA's settlement provisions begin making their way through the appellate courts will we begin to get a good feel for whether CAFA affects the courts' willingness to approve coupon settlements.

Another positive feature of the opinion is its emphasis on the requirement that the district court engage in a rigorous analysis of the actual benefits of the settlement, weighed against a particularized rather than conclusory analysis of the risks and possible benefits of litigation.  In addition, the court's insistence that the benefits flow to actual class members and that they be weighed against the alleged past injuries suffered by class members should help ensure that settlements are not sustained by illusory or make-weight benefits that offer little of tangible worth to the class.

(I should note here that the court did not prejudge how this analysis would apply to the settlement before it on remand:  The court did not hold that this settlement could not be found to be fair, but simply that, in view of the features of the settlement focused on by the panel, the district court had provided an inadequate evaluation of its fairness.)

Finally, the decision is of interest because of the ongoing debate over the role of so-called "professional objectors."  Some of the objectors and objectors' counsel in Synfuel (including John Pentz of the "Class Action Fairness Group") have been labeled "professional objectors" by their detractors.  Why it is necessarily worse to focus one's professional efforts on representing objectors than on representing plaintiffs or defendants has always been a mystery to me.  Synfuel is an example of a case where a court concluded that the claims of such "professional objectors" were not only not frivolous or vexatious, but meritorious (at least in part -- since the actual fairness of this settlement has yet to be finally determined).  The decision is refreshing in that, unlike some others, it displays no bias against the objectors and treats their arguments as respectfully as it does those of any other players in the process.