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Not So Fast – Seventh Circuit Rejects Radio Shack’s FACTA Class Action Settlement

Not So Fast – Seventh Circuit Rejects Radio Shack’s FACTA Class Action Settlement

In Redman v. RadioShack Corp., 2014 U.S. App. LEXIS 18181 (7th Cir. Sept. 19, 2014), the Seventh Circuit Court of Appeals joined a recent line of cases rejecting proposed class action settlements because the value provided to class members was overshadowed by the fee allocated to plaintiff’s class counsel.  In Redman the court rejected a proposed coupon settlement between RadioShack and a class of individuals who alleged violations of the Fair and Accurate Credit Transactions Act (“FACTA”), 15 U.S.C. § 1681c(g).  The plaintiff class alleged that RadioShack printed credit card expiration dates on customers’ receipts in violation of FACTA (which prohibits anyone who accepts credit or debit cards from printing more than the last five digits of the credit card number or the expiration date on any receipt provided to the cardholder).  The parties agreed to a “coupon” settlement providing class members a $10 coupon and payment of attorneys’ fees of approximately $1 million. Of the approximately 16 million potential class members—5 million of whom were provided notice at a cost of approximately $2 million—83,000 submitted claims for the $10 coupons, so the total payout to the plaintiffs in coupons was $830,000.  The district court approved the settlement, but certain class members appealed.

In an opinion written by Judge Posner, the Seventh Circuit squarely rejected the terms of the proposed settlement.  Emphasizing that the $10 coupons were worth significantly less than $10 each because no change would be given, the coupons expired in six months, and many class members would not use them, Judge Posner suggested the value of the coupon settlement to class members would be no more than $500,000.   This resulted in the attorneys’ fee award constituting a 67 percent contingent fee.  In rejecting this as unreasonable, the court noted that “the central consideration [in approving class settlement terms] is what class counsel achieved for the members of the class rather than how much effort class counsel invested in the litigation.”  Id. at 17.  The court suggested that here, the parties or the court on its own could have obtained expert testimony on the true value of the coupons, and that such testimony would have been useful in determining the reasonableness of the fee.  Alternatively, the court suggested that in some cases it may be appropriate for there to be a partial, up-front payment to class members and counsel and then a final payment when the settlement is wound up—thus ensuring that the fee is reasonable in relation to the actual value received by class members.  Id. at 19.

Redman, like the recent decision in Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), is a strong reminder to class action counsel that economic settlement terms agreed to by counsel may not withstand judicial scrutiny. As Judge Posner emphasized in Redman,“[t]he judge asked to approve the settlement of a class action is not to assume the passive role that is appropriate when there is genuine adverseness between the parties rather than the conflict of interest recognized and discussed in many previous class action cases, and present in this case.”  Id. at 9, citing Eubank v. Pella Corp., 753 F.3d 718, 720 (7th Cir. 2014); Staton v. Boeing Co., 327 F.3d 938, 959-61 (9th Cir. 2003); In re GMC Pick-Up Truck Fuel Tank Products Liability Litigation, 55 F.3d 768, 801, 819-20 (3d Cir. 1995).   Counsel negotiating class settlements should be mindful of this tension and the trend of appellate courts closely scrutinizing class action settlement terms.

Eric E. Hudson