Ted Frank, Center for Class Action Fairness

The Class Action Fairness Act may have curbed the use of coupons in class action settlements, but a federal appeals court Wednesday grappled with another question: What exactly constitutes a coupon?

The ruling, by the U.S. Court of Appeals for the Ninth Circuit, vacated $8.7 million in attorney fees in a class action of 1.3 million consumers of ProFlowers.com and RedEnvelope.com who unknowingly signed up to a rewards program that charged them a $1.95 activation fee and a $14.95 monthly membership. The 2012 settlement of the case offered $3.5 million in refunds and a $20 credit for each class member toward a future online purchase on the same sites. But just 3,000 class members submitted claims totaling $225,000.

Ted Frank, of the Center for Class Action Fairness at the Competitive Enterprise Institute, appealed the settlement on behalf of an objector, insisting that U.S. District Judge Cynthia Bashant of the Southern District of California included un-redeemed coupons in violation of the Class Action Fairness Act when estimating the settlement's value at $38 million, on which she based the fees.

The Ninth Circuit agreed.

“That brings us to the million—here, multimillion—dollar question: whether defendants' credits are coupons,” Circuit Judge Michelle Friedland wrote. “We hold that, applying the correct legal standard, the only logical conclusion is that they are.”

But the panel didn't go so far as to reverse the settlement's approval. It also upheld a cy pres portion of the deal in which $3 million is set to go to three San Diego universities. Frank had challenged that part of the settlement, noting that one of the plaintiffs attorneys, James Patterson of the Patterson Law Group in San Diego, was an alumnus of the University of San Diego School of Law.

Frank made similar arguments in a separate case against Google, Frank v. Gaos, which the U.S. Supreme Court is set to hear on Oct. 31.

“We are gratified that the court rejected class counsel's attempt to evade the Class Action Fairness Act's restrictions on coupon settlements,” Frank wrote in a statement, “but the fact that the court was willing to countenance attorneys choosing to prefer their alma mater and local San Diego schools to nationwide class recovery, while collecting 15 to 40 times as much as their clients, shows why the Supreme Court needs to reverse in Frank v. Gaos. We are considering our options for further review.”

Plaintiffs attorney Jennie Lee Anderson of Andrus Anderson in San Francisco did not respond to a request for comment. The other lawyers in the case were Patterson, Bruce Steckler of the Steckler Gresham Cochran in Dallas, who argued for the plaintiffs, and Michael Singer of San Diego's Cohelan Khoury & Singer.

Leo Norton, special counsel in Cooley's San Diego office, who argued for the defendants, did not respond to a request for comment. The defendants were Provide Commerce Inc. and Regent Group Inc., which provided the rewards program.

The case, originally filed in 2009 in the U.S. District Court for the Southern District of California, has made two trips to the Ninth Circuit. Frank appealed after U.S. District Judge Anthony Battaglia approved the deal in 2013.

But the Ninth Circuit sent the case back down to the district court to address its 2015 holding in In re Online DVD-Rental Antitrust Litigation, which found that $12 gift cards to Walmart weren't coupons.

The cases were transferred to Bashant, who approved the deal in 2016, concluding that the fee award was 23 percent of the settlement's value and reasonable given a billing estimate of $4.3 million.

Frank appealed again. This time, attorneys general from 13 states, including Arizona, Louisiana and Texas, wrote in an amicus brief supporting Frank that the settlement “bears the hallmarks of a coupon settlement.”

The panel noted that, unlike the Online DVD case, the $20 credits had several restrictions, such as an expiration date and blackouts for Valentine's Day and Mother's Day, both popular holidays for buying chocolates and flowers.

As to the cy pres recipients—San Diego State University, the University of California at San Diego and the University of San Diego School of Law—the panel found nothing improper.

“Objector's bare allegation that the institutions were selected for an improper reason is insufficient to show that it was an abuse of discretion for the district court to approve their selection,” Friedland wrote.

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