U.S. District Judge Cecilia M. Altonaga
(October 2007)

It used to be one of the slickest maneuvers in class action litigation. A retailer had sold some malfunctioning, over-hyped or generally lousy product to millions of people. The dissatisfied customers formed a class and sued for damages. But the class action suit was settled by the class’s attorney by negotiating a payment from the defendant corporation in discounted coupons for purchase of more merchandise¬Öfrom the same company that had sold the bad stuff in the first place! Unlike other kinds of lawsuits, the plaintiffs in a class action don’t get to individually agree to a settlement deal; once it is approved by a judge, it’s done. Not surprisingly, about 70% of the coupons in these kinds of settlements are never used, making them a sweet deal for the defendant companies. And here’s the best part, if you were the class’s attorney who engineered one of the coupon pay-offs: your fee was based on the total face value of all the coupons, whether they were used or not.

So let’s say a million people in a class action suit received a ten buck coupon as settled damages for their purchase of a weight-loss pill that didn’t work, and only 300,000 members of the class ever used the coupon. That would be a $3,000,000 cost to the company (though it is really much less, since the coupons simply require sales that would not have taken place otherwise, and are usually used as partial payment for more pricey items), and a ten dollar benefit to 30% of the class (though a zero benefit to the rest). The attorney’s fee might be 35-40% of the $10,000,000 “value” of the coupons¬Ö3.5 to 4 million dollars for getting most of the clients $10 coupons they would never use, or coupons that they would have to use to buy something from a company they no longer trusted.

In the immortal words of Michael Keaton in “Night Shift,” “Is this a great country or what?”

Eventually, media attention, criticism from legal commentators and public scrutiny caused this approach to be discredited, and judges began rejecting most coupon deals. The Class Action Fairness Act of 2005 also discouraged the practice by providing for a reduction in attorney fees when coupons rather than cash went to class members. Still, the judge has to be ready to court the ire of all parties when a coupon settlement is signed and sealed and just awaiting a judicial green light, and the one in the black robe says, “No.”

That’s what U.S. District Judge Cecilia M. Altonaga did, when she was recently asked to approve a settlement deal in which almost three million purchasers of the Sharper Image’s popular, state-of-the-art and essentially non-functional Ionic Breeze purifier would be given Sharper Image coupons worth $19 each. Declaring the arrangement a violation of the spirit of the Class Action Fairness Act, she rejected it, and with it the $2 million fee the class’s attorneys were due to receive. The attorney fees were not out of line with the Act’s guidelines, but Altonaga found the coupon-only settlement to be neither “fair, adequate or reasonable.”

What would be fair, adequate and reasonable? It’s called “cash.” The Sharper Image says that if required to pay cash, it might be forced into bankruptcy, meaning that the Ionic Breeze purchasers might get nothing. But nothing is only marginally worse than a 19 dollar coupon for merchandise at a store where virtually everything costs a lot more than 19 dollars, even “air purifiers” that (according to Consumer Reports) don’t purify the air. The one in question typically retailed for more than $300 each. Sharper Image would be getting a generous deal by having to reimburse purchasers less than 10% of this amount in cash. Its argument now basically is that it can’t afford to do right by its customers, so its customers should be nice and let it off the hook.

This isn’t that great a country for badly run businesses. Judge Altonaga is right: The Sharper Image needs to come up with a new settlement offer that actually compensates the class. And the class’s lawyers need to do more for their clients before they can collect that $2,000,000 fee.

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