Topic: Business & Commercial

What’s Wrong with Coupon Settlements

Ah, coupon settlements: they’re marvelous deals for class action plaintiff attorneys. The lawyers together huge numbers of plaintiffs with small claims against a company. They negotiate a settlement deal that gives each of the plaintiffs a coupon that can be redeemed with the defendant corporation for a modest amount. Then the lawyer gets a percentage of the supposed value of all the coupons combined—perhaps as much as 40%—as his or fee in the case. The defendant company doesn’t have to pay out too much cash, and the coupons force the plaintiffs to buy more product and services from it. The plaintiffs don’t get anything at all if they don’t use the coupons, and if they do use the coupons, they are going back to the same company that left them dissatisfied in the first place…small surprise, then, that surveys indicate considerably less than 50% of coupon recipients ever use them. While each plaintiff in the class gets only a small amount of potential cash benefit from the coupon, the plaintiffs’ lawyer may collect millions.

Is this a great country, or what?

Such settlements are unethical, and many judges refuse to accept them…many, but not all. Maybe after the latest coupon fiasco, that will change. Only seventy-five Ford Explorer owners out of a possible one million redeemed discount coupons secured as part of 2007's four-state legal settlement, according to a report filed in Sacramento County Superior Court in June, 2009. Under terms of the original deal, owners of Ford Explorers sold between 1990 and 2001 could apply $500 toward a new Explorer, or use the coupon as $300 to buy a different model of Ford, Lincoln or Mercury. The settlement was advertised in magazines, television ads and on the internet, and was supposed to settle lawsuits in California, Connecticut, Illinois and Texas based on the Explorer’s documented tendency to have deadly rollovers. The period to apply for a voucher ended April 29, 2008.

Clarence Ditlow, executive director of the Center for Auto Safety, said the low participation numbers prove that coupon settlements rarely benefit consumers. "In most class action settlements, particularly ones involving automobiles, claims of hundreds of millions of dollars are often settled with coupons," Ditlow said. "Our position is they're not really worth the paper they're printed on."

Except for the lawyer who sells the class on accepting them, of course.

Ditlow sees a silver lining to the low participation numbers resulting from this most recent coupon hustle. The next time a judge asks for proof that a proposed coupon settlement will benefit consumers, he’ll have the Explorer numbers to show what sham awards they really are.

To be fair, class counsel in this case had a special problem. It was likely that Ford could not have survived a large cash judgment, and if Ford had gone bankrupt, the consumers in the class wouldn’t have received anything, not even coupons. Still, it seems perverse for counsel to be able to base their fees on the face value of coupon discounts that are more theoretical than real. Why not at least calculate counsel’s fees on a reasonable estimate of how many coupons will be cashed in?

It was sensitivity to these issues that led counsel for the Explorer drivers to contribute $950,000 of their fees to car safety research. Don’t be too impressed, however. Those fees were based on a percentage of 500 million dollars, the approximate value of the coupons. The most any one class member—you know, the people who actually purchased and drove the dangerous vehicles?— received in the settlement was five-hundred dollars off the price of his next Ford.

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