Appeals court returns class action to lower court after only $225,000 paid out to class members, but $12M awarded to attorneys and third-party universities

By John Breslin | Nov 30, 2018

SAN FRANCISCO — Attorneys involved in a class-action lawsuit must return to a lower court to renegotiate close to $9 millon in fees awarded, the Federal Ninth Circuit Court has ruled, following an objection that affected class members only received $225,000 out of a $12-million settlement.

The $8.7 million in fees awarded following the Easy Savers Rewards litigation, which began nearly a decade ago, amounted to three-quarters of the total settlement, with the remaining quarter going to class members and, if unclaimed, to three universities in the San Diego area. Only $225,000 was claimed by individuals.

The disbursement of the attorneys' fees and money to the three universities—San Diego State University, the University of California at San Diego, and the University of San Diego School of Law—was halted after a libertarian think-tank objected.

Objections over the fees turned on whether customer credits included as part of the settlement could be used in the calculation, or whether they were, in fact, coupons, many of which were not redeemed.

In its decision based on the objection by the Competitive Enterprise Institute (CEI), the Ninth Circuit remanded the fee issue to the U.S District Court for Southern California, but allowed the disbursement of the money to the universities under the "cy pres" doctrine.

This doctrine states that if an amount is not claimed, or it is found that the individual amounts are so small that it costs more to disburse them, then the money would go to a nonprofit or charitable organization with interests related to the action.

"We think the court got it half right," attorney Adam Schulman, who argued the CEI's position before the appeals court, told the Northern California Record, adding that the remanding of the attorney fees was welcome, but it still allowed millions of dollars to be disbursed to non-class members. The institute objects to the way the "cy pres" doctrine is used in class actions.

In the underlying case, which began in 2009, several companies were sued in a class action over the operation of an online "rewards" program. Customers on one site were presented with a pop-up advertisement promising a $15 money-off deal, which sent them to a second site.

If they clicked "accept" on the second site, the customers ended up being charged a $1.95 activation fee and a recurring $14.95 monthly membership fee.

Schulman said those suing certainly had a good case, but the only ones that have benefited from the action were the attorneys, the universities, and even the defendants, who will have buildings named them under the settlement.

"We got involved when a class member contacted us when he got notice of the settlement," said Schulman as he outlined his organization's objections to both how the fees were calculated and the way the "cy pres" doctrine was deployed.

The attorney fees, as agreed by the district court, amounted to $8.7 million, with $3.5 million for the class to redeem, in cash, membership enrollment fees. A total of $225,000 was claimed, the rest of which would, under the settlement, go to the universities.

But the settlement also included a provision where every class member—out of approximately 1.3 million—received a $20 credit, that is the equivalent plus $5 for clicking on the money-off deal. But class members were unable to buy anything with the credit unless they paid additional money, Schulman said.

The attorney fees were calculated based on the total credit value—$25.5 million—and the $12 million in cash settlement.

However, the District Court also took into account the total billed hours, which amounted to just over $4 million, then added a "lodestar" value, which essentially multiples the hours based on how well the work was done. The court deemed reasonable the $8.7 million under this method, marrying it with the calculation based on the cash and coupon total.

Bruce Steckler, of Steckler, Gresham and Cochran, who argued in support of the settlement before the appeals court, said the class achieved full benefit under the settlement, that is everyone involved in the program, to the fullest extent possible, were given notice of the cash refunds and credits. He added that the low take up had much to do with the length of time between the filing and resolution of the case..

"I think that the appeals court simply clarified the way in which fees in class action settlements should be viewed," Steckler told the Northern California Record. .   

The Ninth Circuit had to decide in part, whether the settlement breached the Class Action Fairness Act (CAFA) introduced by Congress specifically to address the concern that coupons not redeemed would be used to inflate the overall value of an award, and therefore the percentage charged by attorneys.

The appeals court decided the district court "failed to treat the credits as coupons" under CAFA, and remanded the fee issue for further consideration.

But the Ninth Circuit upheld the "cy pres" element of the settlement, ruling that the CEI as the objector failed to argue persuasively that not enough was done to reach out to members of the class.

In an opinion penned by Judge Michelle Friedland, the court found that "cy pres" is a mechanism to distribute unclaimed funds and the argument made by the objector could be the same in any class action.

The doctrine is under scrutiny in the U.S Supreme Court in another case out of the Ninth Circuit.

The high court is currently pondering Frank versus Gaos, which involved $8.5 million owed by Google following a class action. But the class was so large that the district court ruled the entire amount should go to several top universities. A total of $2.1 million in legal fees was also agreed. Oral argument was heard Nov. 1.

Several justices expressed deep skepticism over the doctrine, including newly confirmed Justice Brett Kavanaugh, who, according to a report on SCOTUSblog, mentioned several times how "strange” it is to give the proceeds of class litigation “to people who weren’t injured at all, who have affiliations with the counsel."

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Organizations in this Story

Competitive Enterprise Institute U.S. Court of Appeals for the Ninth Circuit University of San Diego School of Law

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