Lawyers get most in coupon settlements, critics say

Blockbuster agreed in 2001 to settle a class-action lawsuit over late fees by issuing coupons for free or dollar-off movie rentals.

The lawyers who filed the lawsuit in Texas will do better. The court capped their fees and expenses at $9.25 million.

Critics blasted the paltry settlement for consumers and the big legal fees as another glaring example of what is wrong with a system whose prime beneficiaries often are lawyers. The case is on appeal.

Coupon settlements have gotten such a bad rap that Congress is weighing changes in the rules governing such awards as part of broader legislation aimed at reforming class-action laws.

Legislators are intervening despite attempts by lawyers to dress up some coupons by making some convertible into cash. In fact, one Chicago company has created a business of trading coupons.

The biggest revision, however, is a proposal to link plaintiff attorneys' fees to the value of coupons redeemed. The rule would clip big legal paydays because the number of coupons used is a fraction of the coupons distributed.

"The change is intended to ensure that fees are based solely on the value received by class members or the reasonable value of the legal work that was actually performed," said Beth Levine, spokeswoman for Sen. Charles Grassley, R-Iowa, who recently introduced a new version of bill. "The thought is that lawyers will be less apt to file frivolous class-action lawsuits."

Lawyers on both sides say that attacking attorneys' fees may have some unintended consequences that could cost big business — which has been lobbying for class-action legislation — in the long run.

"The objective, it seems, is to rein in the number of coupon settlements," said Michael Hyman, a plaintiffs' attorney with the Chicago firm of Much Shelist Freed Denenberg Ament & Rubenstein. "But this language could backfire on defendants because it may lead to more cash settlements."

Michael Pope, past president of the International Association of Defense Counsel, said it is "quite a possibility" that the legislation could result in fewer coupon deals. If that happens, it will "bring some inflexibility to the negotiating system," said Pope, a partner at McDermott, Will & Emery.

In cases involving everything from claims of airline price fixing to unsafe pickup trucks, scrip has been used to settle disputes.

Noncash awards have ranged from $4,000 off a new BMW to a $25 reduction in Apple Computer products to a free bottle of Poland Spring water.

Cheap way to halt litigation

There are benefits to coupons that make them attractive to both sides. If the scrip involves a small-ticket item like a compact disc, as it did in a case involving music clubs like BMG, it has value, legal experts say. In addition, some coupons are readily convertible into cash.

Big corporations see coupons as a cheap way to escape protracted litigation.

"People don't use coupons as much as cash," said David Schoenfeld, an attorney at Chicago law firm Grippo & Elden, who has defended companies in class actions.

The number of coupon settlements is not tracked. Some are hidden because they never become part of the public record.

"In some cases, coupons can help increase their sales," said Schoenfeld. In effect, consumers are forced to buy the very product they complained about just to use the coupons.

"If you hand out a coupon and no one uses it, the lawyers still walk away with fees, the defendants walk away from a potentially serious problem and class members end up holding the bag," said Brian Wolfman, a lawyer with Public Citizen, a public interest group in Washington that has objected to proposed coupon settlements.

Several cases highlight the problems:

• In a 1996 settlement of claims involving leaky Ford Mustangs, the automaker offered $400 nontransferable coupons good for a year toward a new Ford. Public Citizen offered evidence from previous auto settlements that only 2 to 5 percent of the class would get any value from the scrip. The legal fees? $1.5 million.

• Fliers received discounts on future travel for as little as $8 or as much as $25 in a 1993 case charging airlines with collaboration to fix fares. The judge approved about $16 million in legal fees.

• Lawyers were paid $1.75 million in fees, or approximately $2,000 per hour, in a class-action case against Cheerios over cereal that was tainted with pesticides, although there was no evidence of injury to consumers. Members of the class were entitled to coupons for a free box of cereal only if they could show evidence of a previous cereal purchase.

Federal and state courts have countered criticism by scrutinizing settlements more closely and not authorizing some of them.

In a case against General Motors claiming side-mounted gas tanks on pickup trucks were unsafe, Philadelphia federal appeals court judges rejected a coupon deal worth $1,000 toward a new truck purchase. The judges saw the deal as a potential "marketing boon to GM" and also questioned a $9.5 million awarded to plaintiffs' lawyers.

To address some of the shortcomings of coupon settlements, some lawyers began looking at ways to encourage redemption.

In 1993, Schoenfeld was working on a class-action suit involving a claim that BMW had oversold what was to have been a limited-edition model, the 1988 M5. Some of the class wanted cash but the carmaker offered $4,000 rebate coupons good toward a future purchase or lease.

Schoenfeld called James Tharin, a former college roommate and a trader at the Chicago Board of Trade, and asked if he would be willing to buy the certificates to try to resell them.

"We ended up buying and selling 750 certificates," Tharin said. "We paid an average of $2,600 for them."

Thus was born a cottage industry that deals in trading scrip for cash. Tharin's company, Chicago Clearing , has created a secondary market for coupons in 10 class-action cases, one of the most recent the 2001 settlement of price-fixing claims against auction houses Sotheby's and Christie's International.

The $512 million settlement was a mix of cash and transferable certificates to former buyers and sellers at either auction house. Of the 130,000 people who received claim forms, which include collectors, museums and art dealers, about half replied, an unusually high redemption rate, Tharin said.

"People filed claims because there was real money there," he said.

Chicago art dealer Peter Bartlow filed a claim and received about $40,000 in cash and $22,000 in rebates to be used to pay for commissions in sales. Since he does not sell much at auction, Bartlow sold the certificates to Tharin's company and received about 60 percent of their value in return.

"It was like winning the lottery," said Bartlow. "How many times have you received these coupons and never gotten anything?"

But a secondary market is not feasible in settlements involving coupons valued at less than $250 because the transaction costs are too high, Tharin said. Also, some defendants resist making coupons transferable.