We missed a day this week, so here’s an extra post to make up for it.
Redman was a coupon settlement with the usual pathetic – less than one half of one percent – response rate to the settlement notice (itself sent to only 5 million of the estimated 16 million class members).
Slip op. at 7. It involved something called the Fair and Accurate Credit Transactions Act, but that doesn’t matter for present purposes. The settling parties claimed that this pathetic response was the same as acquiescence in the settlement’s terms, but Judge Posner saw through that easily:
The fact that the vast majority of the recipients of notice did not submit claims hardly shows “acceptance” of the proposed settlement: rather it shows oversight, indifference, rejection, or transaction costs. The bother of submitting a claim, receiving and safeguarding the coupon, and remembering to have it with you when shopping may exceed the value of a $10 coupon to many class members.
Slip op. at 7.
But even that (although interesting for other reasons) doesn’t matter for present purposes.
What’s interesting to us is the number that Judge Posner does on the attorney fee request made by class counsel.
Wisely, class counsel (unlike some other settlements we can recall) didn’t even attempt to use the value of theoretical, but unsought coupons. Counsel did, however, use the full face value of the coupons ($830,000), even though various factors (again not relevant to our point, but including that no change was given for less-than-face-amount uses) made them worth less than face value to the class who filled out the forms to get them. Slip op. at 11-12. Judge Posner pointed out, id. at 12, that the restrictions “chipping away” at the value of these coupons were “even more egregious” than in Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), a settlement he had famously denounced as “scandalous.” The nominal face value of the coupons, therefore, could not be used as part of the denominator for determining the reasonableness of class counsel’s fee request.
[W]hile we don’t know how much $830,000 of coupons would be worth to the class, we can be confident that it would be less than that nominal amount, doubtless considerably so. And we note that were the value only $500,000 − and it may indeed be no greater – the agreed‐upon attorneys’ fee award would be the equivalent of a 67 percent contingency fee.
Redman, slip op. at 14.
Counsel also sought to inflate the denominator for purposes of their fee request by including “administrative costs.” Id. at 10. That wasn’t proper either, because those costs did not represent any “value received” by the class at all, since none of that sum went into the pockets of class members:
[T]he roughly $2.2 million in administrative costs should not have been included in calculating the division of the spoils between class counsel and class members. Those costs are part of the settlement but not part of the value received from the settlement by the members of the class. The costs therefore shed no light on the fairness of the division of the settlement pie between class counsel and class members.
Id. (emphasis added). To treat “every penny” of administrative costs as “value” to the class was “perverse”:
[It] eliminated the incentive of class counsel to economize on that expense − and indeed may have created a perverse incentive; for higher administrative expenses make class counsel’s proposed fee appear smaller in relation to the total settlement than if those costs were lower.
Id. at 10-11 (emphasis added).
The only sums properly included in the denominator for purposes of determining the reasonableness of a class action fee request are “benefit to the class,” meaning “what the class members received”:
The ratio that is relevant to assessing the reasonableness of the attorneys’ fee that the parties agreed to is the ratio of (1) the fee to (2) the fee plus what the class members received. At most they received $830,000. That translates into a ratio of attorneys’ fees to the sum of those fees plus the face value of the coupons [case-specific calculation omitted]. Computed in a responsible fashion by substituting actual for face value, the ratio would have been even higher because 83,000 $10 coupons are not worth $830,000 to the recipients.
Slip op. at 11 (emphasis added).
Cy pres? No way!
Cy pres awards, like the “administrative costs” excluded in Redman, do not go into the pockets of class members – not one cent. Indeed, cy pres awards are even further removed from being “benefit to the class” because, as Judge Posner acknowledged (but found insufficient), some of the costs at least were to give “notice to the class.” Id. at 10. Cy pres distributions, which take money supposedly belonging to class members and give it to non-class members (such as organizations devoted to fomenting more litigation, or class counsel’s law school) are the antithesis of “benefit to the class.” Far from being sums “received by class members,” cy pres distributions take money away from the class and give it to supposedly deserving bystanders.
Whether or not courts should ever have the power to redistribute money belonging (if at all) to a class to persons not even in the class, under Judge Posner’s reasoning in Redman, there’s no way cy pres distributions can properly be considered in evaluating the reasonableness of a fee request. The same “perverse incentive” exists, maybe even more strongly, with cy pres. It’s an easy way to inflate the denominator artificially with sums that do not benefit the class – particularly when actually distributing the same money to class members would give rise to additional “administrative costs” that are themselves improper to include in that same denominator.
Although we would prefer to abolish cy pres outright as an abuse of judicial power, removing cy pres sums from the denominator in fee calculation strikes us as the next best alternative, since we believe that without the “perverse incentive” so aptly identified by Judge Posner, cy pres distributions would be few and far between.