Coupons after CAFA: Settlements that work for everyone

Many believed that the passage of the Class Action Fairness Act (CAFA) in 2005 meant the end of class action coupon settlements. But, CAFA wasn’t about eliminating coupons as a means of compensating class members. The legislation aimed to ensure fair value for class members and a reasonable relationship between attorney fees and the benefits to the class. With the right perspective and a deep understanding of the nuances of CAFA, coupons can be a powerful tool for crafting a settlement that benefits all parties.

How coupon settlements help defendant businesses

The benefit of a coupon settlement to the defendant in a class action case is obvious. Coupons are more economical for several reasons. First, providing a product or service doesn’t cost as much as paying out cash. A product that retails for $50 might only cost $10 to produce. So, a coupon giving the class member $50 worth of value may only cost the company $10 plus some costs of administration.

Second, coupons can ultimately be profitable for the defendant company, in that they may generate new or repeat business. This is especially true when the business offers more expensive products and services, meaning the coupon user may be combining class action coupons and cash for an eligible purchase. But, even when the coupon covers the full price of an item, redemption allows a business whose reputation may be suffering because of the issues that caused the class action, an opportunity to provide great service and perhaps retain the customer.

Why coupons can be good for consumers/class members

For class members, the benefit of coupon settlements isn’t as immediately clear. Given the choice, most of us would probably rather have cash than coupons with limited application and time restrictions. But, it’s not an apples to apples comparison. As the example above illustrates, coupon settlements give the defendant the flexibility to offer the same value at the same relative cost. While most people might prefer a $50 check to a $50 coupon, that analysis may change when the compensation offered is a $10 check or a $50 coupon.

Coupon settlements can also benefit consumers in that the option of offering coupons may make settlement viable for a cash-strapped company that would not otherwise be in a position to offer a meaningful settlement. In that situation, the class can press forward with litigation. But, if the company is truly facing financial challenges, litigation could drive them into bankruptcy, leaving class members with nothing.

Even when the defendant company is financially stable, a coupon settlement may mean the matter is resolved more quickly and easily. Since coupon settlements have less impact on cash flow for a business, they may be much more likely to enter a settlement and may reach an agreement much sooner.

Coupon settlements can be win-win propositions. But, only when certain criteria are met. And, that doesn’t always happen.

Coupon settlement challenges

Most in the industry agree that the increased oversight under CAFA is a positive development, especially for class action plaintiffs. But, CAFA left a lot open to interpretation. And, some elements – such as basing attorneys’ fees on the actual value of coupons redeemed – are difficult to quantify and calculate. That means attorneys on both sides of a class action suit are often working in a gray area, uncertain whether a settlement agreement will be approved by the court.

Coupon settlements have presented a wide range of problems in the past. For example, when a settlement is paid exclusively or largely in coupons, an injured consumer is often unable to secure any compensation unless he or she is willing to do business with the company responsible for the harm. Historically, coupons have been transfer-restricted or extremely difficult to transfer. Coupons have sometimes been difficult to redeem or time-limited in a way that limits their usefulness to class members. Accurately or not, these complications have sometimes been perceived as intentional obstacles meant to limit the cost to defendant companies.

Coupon settlements are also often viewed as a tool of unscrupulous attorneys, who may collect significant attorneys’ fees while class members receive only coupons they may or may not be able to use.

These problems have created some skepticism toward coupon settlements in general. But, these problems aren’t inherent in coupon settlements. There is a better, more fair, more easily quantifiable way to structure coupon settlements – one that benefits class members, attorneys, and defendants. These settlements are even beneficial to courts, since the value received by class members is easier to quantify, and the appropriateness of attorney fees is easier to measure.

Structuring successful coupon settlements

A coupon settlement that is beneficial to everyone is also a coupon settlement that is more likely to be approved by the court. Fortunately, there is a way to structure a coupon settlement that:

• - Is fair and beneficial to class members
• - Ensures that coupons have value for all class members, even if they choose not to do further business with the company
• - Is manageable and palatable for the defendant company
• - Aligns the interests of class attorneys with those of class members
• - Provides more concrete valuation of a coupon settlement for the purpose of calculating attorneys’ fees

Successful structuring in action

At Certificate Clearing Corporation (CCC), we’ve helped to structure and manage several very successful coupon settlements. One example involved two airlines, Korean Air and Asiana Airlines. The suit claimed the airlines had conspired in price fixing with regard to air travel between the United States and the Republic of Korea.

With CCC’s guidance as the coupon code consultant, the parties limited the type of restrictions that may cost a coupon settlement into question by ensuring that the coupon codes were freely transferable, the redemption period was ample, and some coupon codes could be combined for redemption.

This structure eliminated obstacles that could otherwise prevent class members from receiving fair value. For example:

• - The three-year redemption period ensured that class members were not locked out of redeeming their coupon codes due to short deadlines or scheduling conflicts,
• - Transferability allowed class members who did not have relevant travel needs or opted not to use the defendant airlines a means of receiving value through sale of the coupon codes, and
• - The market for transferring coupon codes helped to establish a clear economic value the court could rely on in assessing the appropriateness of attorney fees in the case

CCC served not only as the coupon consultant and administrator, but also as market maker. This added service protects consumer interests and can streamline both approval and redemption, since CCC will purchase any and all coupons offered by class members. CCC will also purchase coupons from attorneys. This option allows the court and attorneys to have a clear understanding of the guaranteed value of the coupons, and makes it simpler and safer for attorneys to accept fees in coupons.

The case above resulted in a 100% redemption rate involving $36 million in coupons and more than $60 million in redeemed tickets.

Key elements in a successful coupon settlement

To craft a coupon settlement that is acceptable and beneficial to both parties and likely to be approved by the court:

• - Structure coupons in a way that allows the defendant to minimize costs while maximizing value
• - Ensure that the coupons provide real value to class members by limiting restrictions on when and how the coupons may be redeemed and making the coupons transferable so that every class member can benefit
• - Provide a market to ensure that class members can easily transfer their coupons and receive fair value

• - Make a portion of attorney fees payable in coupons to show alignment of interests between the class and its attorneys
• - Seamlessly manage the process by working with a coupon consultant that can also serve as administrator and market maker

How Certificate Clearing Corporation can help

We bring more than three decades of experience creating class action coupon settlement markets across diverse sectors to your matter. Our deep knowledge of the full process, from structuring a successful coupon settlement to managing distribution and making markets helps to:

• - Facilitate negotiations and reach a settlement that’s beneficial to all
• - Improve the likelihood of settlement approval
• - Support a vibrant secondary market that allows class members receive value efficiently while generating sales for the defendant company
• - Significantly increase participation and redemption rates

To learn more about how we can help, contact Omar Reyes at (312) 204-6969 or OReyes@certificateclearing.com