Just about anyone who owns a printer has strong opinions on toner cartridges. An enterprising group of plaintiffs’ lawyers sought to capitalize on consumer annoyance with printer cartridges by filing three class actions in the Northern District of California against toner manufacturer Hewlett Packard.

Their cases didn’t go so well. Some of the complaints were dismissed on the pleadings. They lost a bid at class certification. And trial court called their evidence of causation and injury "weak." These setbacks must have been particularly difficult because these plaintiffs’ counsel had spent a great deal of time and money imposing discovery costs on HP, making the case particularly hard fought. When it came time to talk settlement, both sides were ready to be done with the case. They just faced the classic dilemma: HP didn’t want to pay much, but class counsel wanted their fees.

So the parties turned to a classic solution: injunctive relief and coupons. Coupons tend not to cost a defendant much (and may bring it new business), but can be used to justify larger fee awards for class counsel. It sounds like a win-win, until one remembers that many absent class members don’t like coupons very much, which has led to coupon settlements falling into disapproval in the last decade.

So when it looked like the plaintiffs lawyers were going to walk away with more than $2 million in fees and costs, while the plaintiffs would receive "e-credits" (electronic coupons) for toner that could only be redeemed on the company website (where prices were higher than other retailers’), the settlement drew objections, most notably from the Center for Class Action Fairness. [Disclosure: I have, pro bono, written several amicus briefs for the Center.]

The Ninth Circuit agreed with the CCAF’s objection, and, in Feder v. Frank, 2013 U.S. App. LEXIS 9744 (9th Cir. May 15, 2013), it reversed the approval of the class settlement with orders to recalculate the attorneys’ fees based on the actual redemption rate of the coupons.

In the course of doing so, the court provided a concise explanation of the costs and benefits of coupon settlements:

Typically, courts try to ensure faithful representation by tying together the interests of class members and class counsel. That is, courts aim to tether the value of an attorneys’ fees award to the value of the class recovery. Where both the class and its attorneys are paid in cash, this task is fairly effortless. The district court can assess the relative value of the attorneys’ fees and the class relief simply by comparing the amount of cash paid to the attorneys with the amount of cash paid to the class. The more valuable the class recovery, the greater the fees award. And vice versa.

But where class counsel is paid in cash, and the class is paid in some other way, for example, with coupons, comparing the value of the fees with the value of the recovery is substantially more difficult. Unlike a cash settlement, coupon settlements involve variables that make their value difficult to appraise, such as redemption rates and restrictions. For instance, a coupon settlement is likely to provide less value to class members if, like here, the coupons are non-transferable, expire soon after their issuance, and cannot be aggregated. Of course, consideration of these variables necessarily increases the complexity of the district court’s task–comparing the ultimate "value" of the coupon relief with the value of a proposed fees award. And perhaps more importantly, the additional complexity also provides class counsel with the opportunity to puff the perceived value of the settlement so as to enhance their own compensation."

(Emphasis added, internal citations omitted.) And it engaged in a thorough analysis of the provisions of the Class Action Fairness Act (CAFA) that govern coupon settlements:

Indeed, if the legislative history of CAFA clarifies one thing, it is this: the attorneys’ fees provisions of § 1712 are intended to put an end to the "inequities" that arise when class counsel receive attorneys’ fees that are grossly disproportionate to the actual value of the coupon relief obtained for the class. This point cannot be overemphasized …

(Emphasis added.) So the 9th Circuit found that the trial court had erred in using a lodestar calculation (which relies on the effort the attorneys expended instead of the benefit the class received) to determine the attorneys’ fees in this coupon settlement. It quickly stressed,

however, that the responsibility for this error lies principally with the parties. Because the settlement agreement specifies that no coupons may issue until after entry of a final judgment, it would have been impossible for the district court to calculate the redemption value of the coupons as required by § 1712(a). By structuring the settlement in this way, the parties essentially invited the error here.

So what’s the takeaway here? An oldie but goodie: trying to settle on the cheap can get expensive very quickly. If the settling parties don’t provide real benefits to absent class members, they run a high risk of drawing objections that could scuttle approval of any classwide settlement.