United States: Seventh Circuit Provides Guidance On Fairness Of Class Action Settlement Agreements And Fee Awards

In In Re Southwest Airlines Voucher Litigation, Case No. 13-3264 (7th Cir. Aug. 20, 2015), the U.S. Court of Appeals for the Seventh Circuit upheld a fee award to class counsel in a class action that resulted in a "coupon settlement" – a settlement in which the defendant agrees to issue coupons to the class members. In upholding the fee award, the Seventh Circuit also discussed the propriety of a number of settlement provisions and practices that are frequently at issue in class action settlement negotiations. While not a workplace class action, this decision should be of interest to any employers who are involved in class action litigation because it provides guidance about how courts in the Seventh Circuit and beyond will view certain class action settlement provisions and practices.

Case Background

Southwest Airlines issued vouchers to its "Business Select" passengers that could be redeemed for one free in-flight alcoholic beverage. Some passengers saved their beverage vouchers so they could use them on later flights. In August 2010, Southwest Airlines announced that these vouchers could only be used on the flight covered by the "Business Select" ticket. The plaintiffs filed a class action against Southwest Airlines for breach of contract, unjust enrichment, and violations of state consumer fraud laws.

The district court dismissed the unjust enrichment and consumer fraud claims as being preempted by the Airline Deregulation Act. The parties subsequently agreed to settle the remaining breach of contract claim on a class-wide basis. Under the terms of the settlement, Southwest Airlines agreed to provide all class members with a voucher that was good for one free in-flight alcoholic beverage and further agreed to pay class counsel $3 million in attorneys' fees. The parties also agreed on a "clear-sailing" clause that provided that Southwest Airlines would not object to the attorneys' fee request up to the agreed-to amount, and further agreed to a "kicker" clause, which provided that, if the district court were to reduce the fee award, the reduction would benefit Southwest Airlines rather than the class. The parties also agreed on limited injunctive relief that would constrain how Southwest could issue vouchers in the future.

Several class members objected to the class settlement, focusing primarily on the fee award. They argued that the settlement was a "coupon settlement" within the meaning of the Class Action Fairness Act ("CAFA"), and that therefore the fee award needed to be a percentage of the value of the vouchers actually redeemed by class members. As such, they contended that class counsel sought inflated fees to the detriment of the class. They further argued that the settlement agreement was unfair because it contained the "clear-sailing" and "kicker" clauses, which manifested the lack of a fair and adequate settlement.

The district court agreed that the CAFA applied, but held that attorneys' fees nonetheless could be calculated using the lodestar method of determining attorneys' fees. Under this method, fees are calculated by multiplying the hours spent on litigation by a reasonable hourly rate and then adjusting the award based on various factors, such as whether the work was taken on a contingency basis and the quality of the result. Using this method, the district court awarded $1,649,118 in attorneys' fees. The district court further held that the "clear-sailing" and "kicker" clauses did not render the settlement agreement unfair because the class was receiving what amounted to the full value of their claims. Both class counsel and several class members appealed that decision.

The Seventh Circuit's Decision

The Seventh Circuit agreed with the district court that the CAFA applied because, in the Seventh Circuit, a voucher is considered to be a coupon. Southwest Airlines, at 7. It then considered whether the district court correctly concluded that the lodestar method nonetheless could be applied to determine the fee award. Disagreeing with the Ninth Circuit's decision in In Re HP Inkjet Printer Litigation, 716 F.3d 1173 (9th Cir. 2013), the Seventh Circuit concluded that attorneys' fees could be calculated using the lodestar method in coupon settlements, while simultaneously warning district courts to use the method only after "evaluat[ing] critically the claims of success of a class receiving coupons." Id. at 16-17.

The Seventh Circuit further considered whether the settlement agreement was fair and reasonable in light of Southwest Airlines' agreement to pay $3 million in attorneys' fees and in light of the "clear-sailing" and "kicker" clauses. Addressing the objecting class members' argument that the fact Southwest Airlines was willing to pay $3 million in attorneys' fees showed that there was additional money class counsel could have recovered on behalf of the class, the Seventh Circuit held that this argument, while potentially powerful in other cases, was of "little force" here because "the class members [would] receive essentially everything they could have hoped for. As the district court put it, 'the class members are getting back exactly what they had before, an unexpired drink voucher.'" Id. at 18-20.

The Seventh Circuit also addressed the "clear-sailing" and "kicker" clauses. It pointed out that, while it had "deep skepticism about such clauses, which seem to benefit only class counsel and can be signs of a sell-out," it would not adopt a rule finding that such clauses per se bar settlement approval. Id. at 21. On the record before it, the Seventh Circuit concluded that the settlement agreement was fair and reasonable despite these clauses because the class members got everything they could have hoped for in the settlement. Id.

Finally, the Seventh Circuit addressed class counsel's argument that he should receive $3 million in fees because Southwest Airlines agreed to provide that amount. It held that judicial deference to the provisions of class action settlements is not appropriate, and that the district court did not abuse its discretion in awarding class counsel $1.6 million in fees. Id. at 22.

Implications For Employers

Employers who are involved in class action litigation should use this case for guidance on how courts in the Seventh Circuit and beyond will react to proposed class action settlement agreements. Employers should be aware that including "clear-sailing" or "kicker" clauses in such agreements will cause district courts – and any appellate court on appeal if objectors attack the settlement – to more closely examine the fairness of the proposed settlement because such clauses may only benefit class counsel. In the right circumstances, employers may also be able to use this case to argue that they are providing full relief to a class even when they are not providing monetary relief if they can plausibly argue that they are providing something else that remedies a past wrong. Finally, employers who agree to provide nearly full relief to the class to settle a class action can use this case to overrule objections to the terms of a class action settlement.

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