In an August 20, 2015 decision, In re: Southwest Airlines Voucher Litigation, the US Court of Appeals for the Seventh Circuit held that the coupon settlement provisions of CAFA, 28 U.S.C. § 1712, permit a district court to award class counsel attorneys' fees based on the lodestar method rather than the value of the redeemed coupons (No. 14-2602, (7th Cir. Aug. 20, 2015)). In such instances, the district court judge must consider the potential for abuse posed by coupon settlement and should critically evaluate the claims of success on behalf of a class receiving coupons. This decision has created a circuit split on this question.

This class action involved a group of plaintiffs who purchased Southwest Airlines "Business Select" airplane tickets. In the past, purchasers of these airline tickets were given a voucher good for one in-flight alcoholic drink. Even though the vouchers did not have an expiration date, Southwest Airlines stopped honoring them in August 2010. The two named plaintiffs filed suit, and the court certified the class. The class reached a settlement agreement with Southwest which:

Two class members objected to this fee arrangement, arguing that the fee award was disproportionate when compared to the class relief and that the "clear sailing" and "kicker" provisions were designed to shield the fee award from challenge. They also argued that 28 U.S.C. § 1712 requires attorneys' fees in coupon settlement class actions to be based on the value of the coupons actually redeemed by class, and not calculated by using the lodestar method. Despite these objections, the district court approved the settlement and awarded counsel $1,649,118 in attorneys' fees and $18,522.32 in expenses. The objecting class members appealed, challenging the fairness of the settlement and the fee award and raising a new issue: challenging class certification because of an undisclosed conflict of interest between class counsel and one of the lead plaintiffs.

The Seventh Circuit affirmed the district court's decision. The court carefully read § 1712 and determined that § 1712(c) permits a district court to use the lodestar method to calculate attorneys' fees to compensate class counsel for the coupon relief obtained for the class. The court noted that courts using the lodestar method in such cases must be aware of the potential for abuse posed by coupon settlements and should critically evaluate the claims of success on behalf of a class receiving coupons. The Seventh Circuit recognized that its opinion creates a circuit split, as the US Court of Appeals for the Ninth Circuit held that the lodestar method cannot be used to calculate the fee for class counsel in coupon relief cases (see In re: HP Inkjet Printer Litig., 716 F.3d 1173 (9th Cir. 2013)).

Addressing the plaintiffs' claims of an undisclosed conflict of interest, the court found that a conflict existed. However, since the class received full compensation, the court was satisfied that the class had not been adversely affected by the failure to disclose. As a reminder to litigants to disclose when in doubt, both the offending plaintiff and class counsel were penalized for their failures to disclose; the named plaintiff was not given his $15,000 incentive award, and the attorney's fee was reduced by the same amount.

Practitioners should consider that the use of the lodestar method to calculate attorneys' fees in coupon settlement cases is unsettled as it is approved for use in the Seventh Circuit but prohibited in the Ninth Circuit. Class action counsel are also reminded to disclose any potential conflicts of interest with plaintiffs and to follow the mantra repeated by the court in this case: "When in doubt, disclose."