Coupon Settlements: The Controversy and Recent Reforms

Introduction

Few aspects of class action settlements have generated as much controversy as coupon-based settlements. These arrangements, where class members receive vouchers, rebates, or discounts instead of cash, have been both praised as practical solutions and criticized as delivering minimal value to consumers while enriching attorneys.

In the early 2000s, coupon settlements became so contentious that they prompted federal legislation specifically designed to reform their use. Despite these reforms, the debate over coupon settlements continues, with ongoing discussion about their effectiveness, fairness, and appropriate application.

This article explores the controversy surrounding coupon settlements, examines the legislative and judicial reforms aimed at addressing their shortcomings, and considers when coupon-based compensation might be appropriate in class action resolutions.

What Are Coupon Settlements?

Coupon settlements are class action resolutions in which class members receive some form of non-cash compensation that can be redeemed for products or services, typically from the defendant company. These settlements can take various forms:

• Discount coupons: Vouchers offering percentage or fixed-amount discounts on future purchases
• Product vouchers: Certificates redeemable for specific products or services at no cost
• Rebates: Offers requiring class members to make new purchases before receiving compensation
• Credits: Value added directly to customer accounts or loyalty programs
• Free services: Complimentary add-ons, extensions, or enhancements to existing services

Proponents of coupon settlements argue they can provide meaningful value in cases where:

• Class members are likely to continue doing business with the defendant
• The alleged harm was relatively minor
• Cash payments would be too small to be meaningful
• The settlement provides substantial discounts or valuable products
• The administrative costs of cash distribution would significantly reduce the net settlement value

Coupon settlements are particularly common in consumer class actions involving retail products, airline services, telecommunications, and other industries where customers have ongoing relationships with the defendant companies.

The Controversy: Why Coupon Settlements Face Criticism

Despite potential benefits, coupon settlements have faced significant criticism for several reasons:

• Low redemption rates: Studies consistently show that many class members never redeem their coupons, with redemption rates often falling below 5%. This means the actual compensation delivered to the class is frequently much lower than the theoretical settlement value.
• Forced future business: Coupon settlements often require class members to do additional business with the very company that allegedly wronged them in order to receive any benefit.
• Promotional value: Critics argue that some coupon settlements effectively function as marketing programs that generate new sales for defendants rather than genuinely compensating consumers for past harm.
• Transfer of costs: Some defendants simply raise prices temporarily to offset the cost of honoring coupons, transferring the settlement cost back to consumers.
• Attorney fee misalignment: Before reforms, attorneys' fees were often calculated based on the theoretical face value of all coupons issued, not on those actually redeemed, creating incentives to accept settlements with limited real-world value to class members.
• Use restrictions: Many coupons come with significant limitations, such as short redemption periods, blackout dates, minimum purchase requirements, or restrictions on combining with other discounts.

The notorious 1995 settlement against General Motors provides a classic example of these problems. The settlement addressed allegations that certain pickup trucks had dangerously positioned gas tanks. Class members received coupons worth $1,000 toward the purchase of a new GM truck—a benefit only valuable to those willing and able to purchase another expensive vehicle from the same manufacturer. The settlement was eventually overturned on appeal.

CAFA Reforms: Congressional Response

The controversy surrounding coupon settlements led to significant legislative reform through the Class Action Fairness Act of 2005 (CAFA). This federal legislation included several provisions specifically targeting coupon settlements:

• Changed fee calculations: CAFA requires that attorneys' fees in coupon settlements be based on the value of coupons actually redeemed by class members, not the theoretical value of all coupons issued. Alternatively, fees can be based on the reasonable value of the attorneys' work (lodestar method).
• Judicial scrutiny: The law directs courts to conduct a hearing and make written findings that the settlement is "fair, reasonable, and adequate" for class members before approving any coupon settlement.
• Expert valuation: CAFA allows courts to appoint independent experts to assist in determining the actual value of coupon relief before approving fee awards.
• Charitable distributions: The law provides guidance on distributing unclaimed settlement benefits to charitable organizations.

These reforms aimed to realign incentives by ensuring attorneys are compensated based on actual value delivered to class members rather than theoretical coupon value. The goal was to discourage settlements that provide minimal real benefits to consumers while generating substantial fees for lawyers.

Following CAFA's enactment, the frequency of pure coupon settlements declined significantly as attorneys became more reluctant to accept arrangements where their compensation would depend on unpredictable redemption rates.

Increased Judicial Scrutiny

Beyond CAFA's statutory requirements, courts have increasingly applied heightened scrutiny to proposed coupon settlements. Judges now routinely demand detailed information about:

• Expected redemption rates: Courts often request data on comparable coupon programs or redemption rates from similar settlements.
• Real-world value: Judges may require evidence that coupons provide genuine value beyond what is normally available through regular promotions or discounts.
• Transferability: Whether coupons can be sold, transferred, or aggregated affects their practical value to class members.
• Restrictions and limitations: Courts closely examine expiration dates, minimum purchase requirements, blackout periods, and other conditions that might diminish coupon value.
• Cash alternatives: Many courts now favor settlements that offer class members a choice between coupons and cash, even if the cash amount is lower.

Several prominent settlements have been rejected by courts specifically because of concerns about coupon-based compensation. For example, in In re Subway Footlong Sandwich Marketing and Sales Practices Litigation, the Seventh Circuit Court of Appeals rejected a settlement that would have mainly provided injunctive relief and attorney fees, calling it "worthless" to class members.

This increased scrutiny has led to more creative and balanced settlement structures that either avoid coupons entirely or combine them with cash components or other benefits that provide genuine value to class members.

When Coupon Settlements Work: A Successful Example

Despite the general skepticism toward coupon settlements, there are cases where they may represent a reasonable approach. The Online DVD Rental Antitrust Litigation settlement against Walmart and Netflix in 2012 provides an illustrative example.

In this case:

• Cash option: The settlement offered class members a choice between a cash payment (around $12) or a Walmart gift card (around $12).
• Added value for gift cards: The gift cards carried no expiration date, could be used online or in-store, and were freely transferable.
• Practical utility: Walmart sells a wide range of essential goods, making the gift cards highly usable for most class members.
• Redemption process: The claim process was simple, and gift card redemption required no additional purchases beyond the card's value.
• Fee calculation: Attorney fees were calculated based on the total settlement fund, not on theoretical coupon value.

This settlement was approved because it provided genuine options to class members, ensured the gift cards had practical value, and aligned the interests of class counsel with actual benefits delivered to the class.

Similarly, coupon settlements may be appropriate when:

• The product or service involved is something class members regularly purchase
• Coupons represent a significant discount or free product (not just a minimal percentage off)
• Redemption is straightforward with limited or no restrictions
• Coupons are transferable or can be aggregated
• The settlement includes a cash alternative or other non-coupon benefits

The Future of Coupon Settlements

The landscape for coupon settlements continues to evolve. Several trends are shaping their future use:

• Hybrid settlements: More settlements now combine coupon components with cash options, allowing class members to choose their preferred form of compensation.
• Digital delivery and tracking: Advanced digital platforms make it easier to distribute, track, and analyze coupon redemption, potentially addressing some historical concerns about redemption rates.
• Automatic benefits: When class members can be identified through defendant records, settlements increasingly provide benefits automatically rather than requiring claim forms.
• Secondary markets: Online platforms for buying and selling settlement vouchers have emerged, potentially increasing the liquidity and value of transferable coupons.
• Continued judicial scrutiny: Courts continue to develop more sophisticated approaches to evaluating the real value of coupon settlements.

While pure coupon settlements have become less common since CAFA, they remain a potential tool in the class action resolution toolkit. When properly structured with adequate protections and value for class members, coupon components can still play a role in certain types of cases.

The most successful modern settlements tend to be those that provide options to class members, recognizing that different individuals may have different preferences and abilities to use coupon-based compensation.

Advice for Class Members Receiving Coupon Settlements

If you receive notice of a coupon settlement, consider these steps to maximize your benefits:

• Evaluate all options: If the settlement offers multiple compensation choices, carefully compare their real-world value based on your personal situation.
• Check restrictions: Review all limitations on coupon use, including expiration dates, minimum purchase requirements, and combination restrictions.
• Calendar redemption dates: Set reminders for both claim deadlines and coupon expiration dates to avoid missing out on benefits.
• Consider transferability: If you're unlikely to use the coupons yourself, check whether they can be transferred to family members or sold on secondary markets.
• Combine when possible: Some settlements allow multiple coupons to be combined into a single, higher-value benefit.
• Object if warranted: If you believe a proposed coupon settlement provides inadequate compensation, consider filing a formal objection before the approval hearing.

Remember that settlement participation is voluntary. If you believe a coupon settlement does not adequately compensate you for the harm alleged in the lawsuit, you may have the right to opt out and preserve your ability to pursue individual legal action.

Conclusion

Coupon settlements represent a complex and evolving aspect of class action practice. While they have been justifiably criticized for sometimes providing illusory benefits to class members, reforms have addressed many historical concerns and improved oversight.

The key question in evaluating any coupon settlement is whether it provides genuine, practical value to class members proportionate to the claims being released. When properly structured with reasonable terms, adequate value, and appropriate attorney fee calculations, coupon components can be a legitimate part of class action resolutions.

As courts continue to develop more sophisticated approaches to evaluating coupon settlements and technology enables better tracking and distribution, we can expect ongoing refinements in how these settlements are structured and approved. The goal remains ensuring that class action settlements—whether cash, coupons, or combinations—provide meaningful benefits to the class members they are designed to compensate.