A number of recent cases show courts taking a more active role in approving class action settlements, more closely scrutinizing settlements meant to benefit class members.

Just last month in Redman v. RadioShack Corporation the Seventh Circuit rejected a class action settlement providing for dissemination of $10 coupons to class members and $1 million in attorneys’ fees to class counsel.

Although there were an estimated 16 million RadioShack customers in the class, notice of the proposed settlement was sent to less than 5 million. Of those receiving notice, only 83,000 submitted claims for the coupon—about one half of one percent of the entire class.

This made the attorneys’ fee award tantamount to a 55 percent contingent fee.

In his opinion, Judge Posner rejected as “naïve” the magistrate judge’s finding that the fact that 99.99 percent of class members had not objected to the proposed settlement or opted out suggested that the class generally approved of the settlement’s terms and structure.

Instead, the court noted that because the vast majority of class members did not submit claims, this “hardly shows ‘acceptance’ of the proposed settlement: rather it shows oversight, indifference, rejection, or transaction costs.”

Judge Posner acknowledged the inherent conflict of interest in class action settlements, as the defendant is interested only in how much the total settlement will cost, while class counsel is interested primarily in the size of the attorneys’ fees provided for in the settlement.

Thus, the “optimal settlement from the joint standpoint of class counsel and defendant . . . is therefore a sum of money moderate in amount but weighted in favor of attorney’s fees for class counsel.”

In light of this inherent conflict, Judge Posner flagged the need for courts to be more critical of class settlements, imploring judges to resist the urge “to assume the passive role that is appropriate when there is genuine adverseness between the parties . . .  .”

Judge Posner noted that the focus of class settlement approval should be what was actually achieved for the class members (which in the context of coupon settlements may require expert testimony on the true value of the coupons), not how much effort class counsel invested in the litigation.

Other notable class settlements

This recent opinion is not the only one taking a harder look at class settlements. In Saunders v. StubHub, Inc., a San Francisco Superior Court judge recently rejected a proposed settlement, because only about 1,000 members of the 70,000 member class filed claims, and 25 percent of the settlement fund was allocated to attorneys’ fees, which the court called “excessive.”

Similarly in Newman v. Americredit Financial Services, Inc., a judge in the Southern District of California denied preliminary approval of a class settlement because, among other reasons, it was not clear what recovery class members could actually expect.

Assessing actual value in coupon settlements

This trend highlights the need for plaintiffs and defendants to fully articulate an appropriate basis by which courts can conclude class settlements are fair, reasonable, and adequate to compensate class members. Specifically, in the context of coupon settlements, parties should consider the actual value of the coupons to consumers rather than the nominal value, and demonstrate that any attorneys’ fees are justified by the actual value of the benefit to the class.