The U.S. Court of Appeals for the Eighth Circuit recently held that plaintiff’s class counsel is allowed to submit proposals to the court regarding the method for calculation of reasonable attorney’s fees, but the court has the discretion to accept or reject such proposals and is not required to accept the plaintiff’s proposed method.

In so ruling, the Court also held that the Class Action Fairness Act’s “coupon settlement” provisions at 28 U.S.C. § 1712 permit a district court to use a combination of percentage-of-coupons-used and lodestar methods to calculate reasonable attorney’s fees, but CAFA does not require that any portion of the fee be based on the percentage of coupons used.

A copy of the opinion in Galloway v. Kansas City Landsmen, LLC is available at: Link to Opinion.

The plaintiffs filed a putative class action alleging that a number of car rental outlets violated the Fair and Accurate Credit Transactions Act (FACTA) by issuing receipts that contained more than five digits of the customer’s credit card numbers. See 15 U.S.C. § 1681c(g)(1). The parties mediated and agreed on a proposed class action settlement.

The settlement provided each class member would receive reduced prices on future car rentals and the defendants would be enjoined from violating FACTA. The total value of certificates redeemed was $8,000. In a “clear sailing” provision, the defendants agreed to an award of attorney’s fees and costs of no more than $175,000, and a class representative incentive fee of no more than $3,000.

The parties agreed that the certificates for future discounted car rentals were a non-cash benefit to the settlement class members, and that the “coupon settlements” provisions in the CAFA provisions at 28 U.S.C. § 1712 applied. Once the redemption period for the certificate expired, the plaintiffs filed an unopposed motion for almost $148,000 in attorney’s fees, more than $5,500 in expenses, and a $3,000 incentive award for the class representative. However, applying CAFA, the district court awarded only $23,137.46 in attorney’s fees and costs, and a $1,000 class representative incentive fee.

The plaintiffs appealed, arguing that the trial court erred in construing section 1712, but did not argue that the court abused its discretion to award reasonable attorney’s fees. See Hensley v. Eckerhart, 461 U.S. 424, 433-37 (1983); Travelers Prop. Cas. Ins. Co. of Am. v. Nat’l Union Ins. Co. of Pittsburgh, 735 F.3d 993, 1002 (8th Cir. 2013).

As you may recall, when a federal court has certified a class action, “the court may award reasonable attorney’s fees and nontaxable costs that are authorized by law or by the parties’ agreement.” Fed. R. Civ. P. 23(h). The federal Fair Credit Reporting Act, including as amended by FACTA, provides for reasonable attorney’s fees to be awarded to successful plaintiffs. 15 U.S.C. § 1681n(a)(3).

Courts may use one of two methods in exercising their discretion to award reasonable attorney’s fees. The “lodestar” method uses the hours expended by an attorney multiplied by a reasonable hourly rate, which amount the court may adjust up or down to reflect the individualized characteristics of the action. Johnston v. Comerica Mortg. Corp., 83 F.3d 241, 244 n.11 (8th Cir. 1996). The percentage of the benefit method uses some fraction of the common fund that the attorney successfully gathered in litigation. Johnston, 83 F.3d at 244-45. The court decides which method to apply, not the parties. Johnston, 83 F.3d at. 246.

The “coupon settlements” provision in CAFA is intended to address the inequity of “settlements under which class members receive nothing but essentially valueless coupons, while the class counsel receive substantial attorneys’ fees.” S. Rep. No. 109-14, at 15 (2005), as reprinted in 2005-4 U.S.C.C.A.N. 3, 30. “[N]othing in Section 1712 is intended to change current law regarding the circumstances under which an award of attorneys’ fees is appropriate.” Id., at 31.

Subsections § 1712(a)-(c) of CAFA, 28 U.S.C. § 1712(a)-(c), provide:

(a) Contingent fees in coupon settlements. — If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.

(b) Other attorney’s fee awards in coupon settlements. —

(1) In general. — If a proposed settlement in a class action provides for a recovery of coupons to class members, and a portion of the recovery of the coupons is not used to determine the attorney’s fee to be paid to class counsel, any attorney’s fee award shall be based upon the amount of time class counsel reasonably expended working on the action.

(2) Court approval. — Any attorney’s fee under this subsection shall be subject to approval by the court and shall include an appropriate attorney’s fee, if any, for obtaining equitable relief, including an injunction, if applicable. Nothing in this subsection shall be construed to prohibit application of a lodestar with a multiplier method of determining attorney’s fees.

(c) Attorney’s fee awards calculated on a mixed basis in coupon settlements. — If a proposed settlement in a class action provides for an award of coupons to class members and also provides for equitable relief, including injunctive relief —

(1) that portion of the attorney’s fee to be paid to class counsel that is based upon a portion of the recovery of the coupons shall be calculated in accordance with subsection (a); and

(2) that portion of the attorney’s fee to be paid to class counsel that is not based upon a portion of the recovery of coupons shall be calculated in accordance with subsection (b).

The Eighth Circuit noted that “[n]early every federal court to consider § 1712 has agreed with Judge Richard Posner’s observation, ‘This is a badly drafted statute.’” Redman v. RadioShack Corp., 768 F.3d 622, 633 (7th Cir. 2014), cert. denied, 135 S. Ct. 1429 (2015).

Here, the district court applied section 1712(a) and determined that a reasonable fee attributable to the certificates was 33 percent of the redeemed certificate value, which the trial court found was an average range attorneys typically charge for contingency work when settling cases of this nature. Then, the trial court used § 1712(b) and the lodestar method to determine that 10 percent of the total fee requested was reasonable for the injunctive relief provided and no adjustments were warranted by the 12 discretionary factors listed in Allen v. Tobacco Superstore, Inc., 475 F.3d 931, 944 n.3 (8th Cir. 2007).

The plaintiffs argued that CAFA gives class counsel the right to elect that all of its fees be calculated under the “lodestar” method. The district court disagreed and stated it is within the court’s discretion to choose which method to apply. Johnston v. Comerica Mortg. Corp., 83 F.3d 241, 244 n.11 (8th Cir. 1996).

The Eighth Circuit agreed with the trial court, and held that class counsel is allowed to submit proposals to the court, but the court has the discretion to accept or reject proposals.

The plaintiffs further argued the district court erred by construing § 1712(a) as requiring that a fee award based on the coupon portion of the settlement must be based solely on the value of the coupons redeemed. Although the Eighth Circuit agreed that this argument had merit, it found any error to be harmless.

At the time of the district court’s ruling, the Ninth Circuit had recently issued a ruling in In re HP Inkjet Printer Litig., 716 F.3d 1173, 1181-83 (9th Cir. 2013), holding that that subsections 1712(a) and (b) are not permissive and that a district court must calculate attorney’s fees for coupon awards as a percentage of the redeemed value and must use the lodestar method to calculate fees for injunctive relief.

The Seventh Circuit not long after issued a ruling in In re Southwest Airlines Voucher Litig., 799 F.3d 701, 707 (7th Cir.2015), which rejected the Ninth Circuit’s reasoning in HP Inkjet. The Seventh Circuit in Southwest interpreted § 1712(a) as meaning that “if any portion of the fee is attributed to the coupon benefits, then that portion of the fee must be based on the coupons used, but that is not the only method available,” such that “§ 1712 permits a district court to use the lodestar method to calculate attorney fees to compensate class counsel for the coupon relief obtained for the class keeping in mind the potential for abuse.” Southwest, 799, F.3d at 710. In addition, “[s]ubsection (c) allows a combination of percentage-of-coupons-used and lodestar, but it does not require that any portion of the fee be based on the percentage of coupons used.” Id.

The Eighth Circuit concluded that the Seventh Circuit’s interpretation of § 1712 in Southwest was more consistent with the discretion courts have historically had in determining attorney’s fees awards in accordance with the degree of success obtained.

The Court held that section 1712 leaves the court discretion to apply either the “percentage-of-benefit” or “lodestar” method for calculating reasonable attorney’s fees, with or without adjustment, or some combination of the two, subject to the abuse of discretion review.

Thus, the Eighth Circuit concluded that the district erred in following HP Inkjet, but the plaintiffs did not argue the award was a breach of the court’s discretion. The Court noted that if it remanded the case, it would be for its discretion in applying 1712 (a) – (c), and the Court held that any greater award of fees would be unreasonable in light of the limited success.

Accordingly, the judgment of the district court was affirmed.