Joseph J. Spirut
In a class-action lawsuit over Southwest Airlines’ free booze coupons, the lead counsel for the plaintiffs wanted more money while a pair of unsatisfied class members said he was paid too much.
The 7th U.S. Circuit Court of Appeals panel saw some truth in both arguments in a 28-page ruling last week that reads like a dissertation on the ethics of structuring class-action settlements.
In reaching a settlement that provided class members one-for-one replacements for drink coupons Southwest abruptly ceased to honor in 2010, Joseph J. Siprut earned his fee of more than $1.6 million, a three-judge panel ruled last week.
But by failing to disclose that a lead plaintiff in the case was also Siprut’s co-counsel in another class-action litigation, the panel ruled Siprut and Adam J. Levitt both must give up $15,000, the amount of an “incentive award” Levitt earned as lead plaintiff.
“Our message to the class-action bar is short and simple: When in doubt, disclose,” Judge David F. Hamilton wrote. Judges Joel M. Flaum and Ann Claire Williams concurred.
Theodore M. Frank, president of the Center for Class Action Fairness in Washington, D.C., who argued the settlement was unfair to its class members, said he planned to file an appeal for a rehearing or an en banc hearing.
“The panel’s decision is based on the premise that the class got complete relief, when in fact only less than 9 percent of the class will get anything,” Frank said, referring to the number of class members who received new drink coupons through a claims process.
“We think there is a conflict within the existing 7th Circuit court rulings and we’ll ask the 7th Circuit to reconcile the cases.”
Siprut said in an e-mail statement: “We’re pleased the court upheld the settlement and reaffirmed the trial court’s finding that the settlement represents an ‘exceptional’ result for the class.”
The case dates back to August 2010 when Southwest stopped honoring drink vouchers despite the fact that they were issued without an expiration date. Siprut filed a lawsuit against Southwest alleging breach of contract, unjust enrichment and violations of state consumer fraud laws.
After some litigation in which the U.S. District Judge Matthew F. Kennelly dismissed all claims except for breach of contract, Siprut reached a settlement with Southwest that included three provisions.
First, Southwest would issue replacement coupons to any class member who filed a claim. Southwest also agreed to injunctive relief if a similar expiration-date controversy arose in future. And, finally, the lead plaintiffs would receive $15,000 “incentive awards.”
Southwest had also agreed to pay $3 million in attorney fees, but Kennelly used what is known as the lodestar method to calculate a fee for class counsel of $1,649,118.
Under the lodestar method, an attorney is paid a reasonable billable hour rate multiplied by a factor that depends on the result of the case. In this case, the multiplier was 1.5, “for good results,” the ruling says.
Two class members objected to the attorney fees on multiple grounds.
First, by paying the attorneys $3 million and only agreeing to provide “coupon relief” to the class members, the settlement disproportionately compensated the class counsel.
Second, the settlement included provisions known as “clear-sailing” and a “kicker” that are favorable to the defendant at the expense of the class.
A clear-sailing clause is when a defendant agrees not to oppose an attorney fee award up to a certain amount, while a kicker clause ensures that any reduction of the agreed-to fee by a court benefits the defendant rather than the class.
And third, the attorney fee should not be calculated under the lodestar method, but should rather be a portion of the value of the coupons Southwest agreed to replace.
While noting that “clear-sailing” and “kicker” clauses are “troubling,” the court wrote “the dominant feature of the settlement is that it provides class members with essentially complete relief.”
“It is an exceptional settlement that actually makes the class whole,” Hamilton wrote. “When counsel come away from the negotiating table with everything the client could hope for, they should be compensated accordingly. That is what happened in this case.”
Huey Thomas Wells Jr., a Birmingham, Ala.-based shareholder at Maynard, Cooper & Gale P.C. who represented Southwest, said the airline was “very pleased” with the ruling.
“We entered into the settlement because we wanted to be fair to some of our best customers,” Wells said.
On appeal, Frank said he will argue that the settlement did not make those customers whole, as the court ruled.
Frank said less than 9 percent of class members actually received a new drink coupon and that the 7th Circuit has recently based attorney fees in class-action settlements on the value of actual claims paid, rather than a “hypothetical maximum.”
He pointed to two decisions written in 2014 by Judge Richard A. Posner, Pearson v. NBTY, Inc. and Redman v. RadioShack Corp.
“The attorneys were asking for $3 million and the class was going to get about $1.5 million worth of coupons,” Frank said. “And that’s exactly the sort of ratio that Pearson condemned.”