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In a decision evaluating a coupon settlement under provisions of the Class Action Fairness Act of 2005, District Judge Cecilia M. Altonaga of the Southern District of Florida declined to give final approval to the parties’ Third Amended Settlement Agreement. See Figueroa v. Sharper Image Corp., 2007 WL 2979285 (S.D. Fla. Oct. 11, 2007). In a lengthy opinion, Altonaga emphasized the congressional intent that coupon settlements post-CAFA be subjected to heightened judicial scrutiny. The Figueroa decision also reflects the powerful role that objectors play in final approval of class action settlements in a post-CAFA world. Of particular note, 35 state attorneys general and several individual objectors repeatedly challenged the settlement agreements. The objectors’ persistence, and the substance of their criticisms, convinced Altonaga that the Figueroa settlement did not satisfy standards for final settlement approval. The Figueroa decision is important because it provides an in-depth analysis of procedural and substantive fairness of coupon settlements in a post-CAFA world. Whereas coupon settlements were commonplace before CAFA, the repudiation of the Figueroa settlement now provides a cautionary tale to settling parties. CAFA requirements on coupon settlements The Figueroa class action was filed May 6, 2005, making the litigation subject to the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4. Although CAFA primarily created new original federal jurisdiction for diversity class actions and removal of class actions (see 28 U.S.C. 1332(d), 1453), CAFA also expanded notice requirements and included provisions relating to coupon settlements. CAFA requires that when settling parties file a proposed settlement, each defendant must notify appropriate state and federal officials of each state in which class members reside. This notice must include information about the complaint, settlement, class notice, proposed judgment and names of class members. A federal court may not approve class settlement earlier than 90 days after state and federal officials are notified. If notice to government officials is not provided, a class member may not be bound by any settlement or consent decree. Congress also sought to curb the abusive use of coupon settlements. Thus, CAFA requires a judge to evaluate the real monetary value and the likely utilization rate of the settlement coupons. 28 U.S.C. 1712(e). CAFA also ties coupon settlements to attorney fees, and specifies that attorney fee awards be based on value to class members of coupons actually redeemed. The Figueroa settlement evolved from a Florida class action brought on behalf of all U.S. consumers who purchased certain models of Ionic Breeze or other ionizing air purifiers from Sharper Image Corp. The plaintiffs alleged that Sharper Image engaged in unlawful marketing and sales conduct. Also, they alleged that the ionizing purifiers exposed consumers to hazardous levels of ozone. The original complaint asserted claims for breach of contract, breach of warranty, money had and received, and unjust enrichment. Sharper Image sought to stay the Florida action because there were several parallel class actions pending in California. The plaintiffs amended to add an additional defendant and claims, but the Florida court dismissed for these for lack of jurisdiction. Rather than stay the Florida action, Sharper Image chose to negotiate with the Florida attorneys. On the eve of class certification, and before the parties accomplished merits discovery, the parties notified that they had reached an agreement. The court granted provisional class certification and approved the first proposed settlement. In the ensuing year, the settling parties filed a second amended complaint, expanding the claims covered by the agreement. Ultimately, the settling parties would offer three successive settlement agreements, filed in response to repeated objections. Each Figueroa settlement agreement included new “enhancements” to meet objectors’ criticisms. The second settlement agreement would have provided class members a $19 merchandise credit for Sharper Image products. The $19 credits were tied to the price and number of air purifiers a consumer purchased. The credits could be aggregated. Some class members were to be provided a remedial Ozone Guard free; other class members would be permitted to purchase the Ozone Guard for $7. Sharper Image agreed to refrain from making certain advertising claims. The Third Amended Settlement Agreement specified that class members would not be required to log onto the settlement Web site or submit a claim form to receive credits. All class members in the Ionic Breeze database would receive individual mailings concerning the credits. The credits were made fully transferable, and would expire two years after the final settlement approval. Credits could now be used for any products Sharper Image products, not just branded products. The Third Amended Settlement Agreement also included cy pres relief. Sharper Image consented to an injunction to enforce modifications to its advertising claims, and class counsel requested $2 million in attorney fees. Altonaga’s patience ran out when the parties sought final approval of the Third Settlement Agreement. See Fed. R. Civ. P. 23(e)(1)(C). In the 11th U.S. Circuit Court of Appeals, a court’s final settlement approval is governed by six factors. Bennett v, Behring Corp., 737 F.2d 982, 986 (11th Cir. 1984). The “ Behring factors” require the court to evaluate: (1) the plaintiff’s likelihood of succeeding at trial; (2) the range of possible recovery; (3) the point on or below the range of possible recovery at which a settlement is fair, adequate, and reasonable; (4) the complexity, expense, and duration of further litigation; (5) the substance and amount of opposition to the settlement; and (6) the stage of proceedings at which settlement was achieved. Altonaga noted that Section 3 of CAFA contains a “Consumer Class Action Bills of Rights and Improved Procedures for Interstate Class Actions.” 28 U.S.C. 1711-15. Section 1712, in particular, contains provisions designed to protect class members in coupon settlements. Observing that CAFA requires federal judges to make findings of fairness of a coupon settlement, Altonaga interpreted this statutory directive “to imply the application of a greater level of scrutiny to the existing [approval] criteria than existed pre-CAFA.” Figueroa, 2007 WL 2979785, at *27; see 28 U.S.C. 1712(e). Applying this heightened scrutiny, Altonaga concluded that the proposed Third Amended Settlement Agreement was procedurally and substantively defective. Regarding procedural fairness, Altonaga determined that the agreement was not achieved through the arms’-length negotiation by experienced counsel with the ability to protect class members’ interests. Figueroa, 2007 WL 2979785, at *30. Reviewing the lengthy procedural machinations, Altonaga could not eliminate the perception that Sharper Image had “selected class counsel confronted with a most precarious position, insisted upon amendments to the pleading to broaden the scope of this litigation to obtain global peace, and then proceeded to offer and convince Class Counsel to accept highly undesirable terms to settle the case.” Id., at *28. Considering the specter of a stay, nature of the claims, state of discovery and probability of success on the merits, the court concluded that class counsel had negotiated from a position of weakness. Noting that the plaintiffs had limited information concerning the claims’ merits when they undertook to settle on the eve of class certification, the court criticized class counsel for negotiating without conducting a risk analysis. The court also faulted class counsel for retreating from their initial demand of 80% of the purchase price of $279, and agreeing to defendant’s offer of a $28.50 credit � a 1,000% drop. Subsequently, in the space of 11 hours, class counsel acceded to Sharper Image’s offer of a $19 credit. Sharper Image controlled the course of negotiations The court concluded that the procedural history supplied substantial evidence that Sharper Image controlled the course of negotiations, including the broadening of the claims to ensure global peace. Moreover, the court concluded that Sharper Image had played the plaintiffs off against the California actions, conditioning a settlement in Florida on an injunction prohibiting the already-certified California actions from going forward. Figueroa, 2007 WL 2979785, at *30. Applying the Behring factors to evaluate the settlement’s substantive fairness, the court found the Third Amended Settlement Agreement substantively deficient. Id., at *30-*36. The court concluded that the plaintiffs appeared to have a strong likelihood of success on some of their causes of action; therefore they capitulated too quickly and cheaply. Id., at *30-*32. The court found that the settlement proponents had not carried the burden of demonstrating that a $19 merchandise coupon was sufficient. Id., at *33-34. “The proposed settlement, in which Class Counsel receive close to $2 million in fees and class members are given a $19 coupon, is below the range of recovery in which a settlement might be considered fair.” Id., at *34. Finally, regarding the opposition to the proposed settlement, the court was clearly impressed with the persistence, vigor and substance of the settlement challengers. The court noted that “What distinguishes this case from other class actions, however, is the singular appearance of the Attorneys General of thirty-five states and the District of Columbia, representing hundreds of thousands, if not millions of eligible class members.” Id., at *35. Linda S. Mullenix holds the Morris and Rita Atlas Chair in Advocacy at the University of Texas School of Law. She can be reached at [email protected].

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