Massage Envy: Are All Vouchers Now Coupons Under CAFA?

The Ninth Circuit’s October 2021 McKinney-Drobnis v. Massage Envy Franchising decision might signal the death knell for voucher-based class action settlements that are not considered “coupon” settlements under CAFA. If this settlement cannot survive, it’s not clear what voucher-based settlement could.

The Back Story

In 2013, Massage Envy Franchising (“MEF”) began unilaterally increasing customers’ membership dues—first, $0.99 per month, then $10—without authorization. Years later, a class action was filed, followed by a nationwide class settlement, which permitted class members to submit claims for “vouchers” for MEF products and services, with each class member entitled to a voucher corresponding to the fee increase the class member paid. The vouchers:

• Were usable at any MEF location;
• Were freely transferable; 
• Could be used in multiple transactions until exhausted;
• Did not expire for 18 months; and
• Could be used to buy any of MEF’s 251 products and services.

The settlement provided for a $10m “floor,” meaning if class members did not claim enough vouchers to account for the full $10m fund, then the per-claimant voucher amount would increase pro rata until the floor was hit. After a direct notice program that reached approximately 97% of the 1.7m class members, a total of approximately 106,000 claimants submitted valid voucher requests seeking less than $3m in value. With the pro rata adjustment, the awarded vouchers ranged in value from $36.28 to $180.68.  

The Trial Court Rules It’s Not a Coupon Settlement

At the trial court, class counsel sought a $3.3m attorneys’ fee award, which represented 33% of the $10m “floor.”  Class counsel argued that this was proper because the settlement was not a “coupon” settlement. In response, one objector argued that this was a coupon settlement, which would dictate that the attorneys’ fee award be based not on the overall value of the vouchers, but on the value of the redeemed vouchers. The trial court overruled the objection, found that it was not a coupon settlement, and ultimately awarded class counsel $2.6m, which was 25% of the $10m fund plus the $450k paid to the settlement’s administrator. The objector appealed.

The Ninth Circuit’s Ruling

Under CAFA, if a class action settlement is a “coupon” settlement, a court must (1) apply heightened scrutiny to its evaluation; and (2) base the attorneys’ fee awards on the redemption value of the coupons, rather than on their face value. In re EasySaver Rewards Litig. , 906 F.3d 747, 754-55 (9th Cir. 2018). Because “coupon” is not statutorily defined, it has fallen on courts to do so. In In re Online DVD-Rental Antitrust Litig., the Ninth Circuit outlined three factors to guide the inquiry: (1) do class members have to hand over more of their own money before they take advantage of a credit; (2) whether the credit is valid only for select products or services; and (3) how much flexibility the credit provides, including whether it expires or is freely transferable.  779 F.3d 934, 951 (9th Cir. 2015). No single factor is dispositive.

In applying the facts of the case to the Online DVD test, the Ninth Circuit found that the voucher at issue was, in fact, a coupon. This was surprising.

The first factor questions whether class members have to hand over more of their own money to use the voucher.  Curiously, however, the court conceded that even those class members receiving the smallest voucher ($36.28) “would be able to purchase entire products without spending their own money.”  So, on its face, the answer to the first question was “no.”  But because class members with the lowest voucher amount would not be able to purchase a single massage, i.e., “the service that is the basis for the membership fee that class members were allegedly injured by,” without spending their own money, the court concluded that factor one favored the conclusion that vouchers are coupons.  This easily could have gone the other way.  

The second factor asks whether the credit “is valid only for select products or services.”  Here, the court acknowledged that MEF offers “much more than massages,” including “251 different products within the sphere of health and wellness.”  And it appears that the voucher could be used on every single product and service that MEF sells. Yet, bizarrely, the court found that this still fell on the coupon side of the line, noting that 251 products “pale in comparison to the millions of low-cost products that Walmart sells,” a fact related to a different case in which this issue was litigated. But it is unclear why the court would compare MEF to Walmart, a store that is known for selling just about everything (except massages). This, too, easily could have gone the other way.  

As for the third factor, the court found that because the vouchers were transferable and did not expire for 18 months, this factor “favors not viewing the vouchers as coupons.”  

In all, given the strength of the vouchers in question here, this case would be as good as any to find that they were not coupons. And yet, upon a de novo review, the court held that they are “coupons and, consequently, are subject to CAFA’s requirements for coupon settlements.”  Accordingly, it vacated the district court’s approval of the attorneys’ fee award and remanded so that the district court could use the value of the redeemed vouchers in awarding attorneys’ fees.

An Interesting Concurrence

Judge Miller wrote separately to “note [his] disagreement with [the Ninth] Circuit’s approach to determining when vouchers are coupons” under CAFA. Judge Miller stated that traditionally, if a statute does not define a term, then the court should “look to its ordinary meaning.”  And yet, with “coupon,” something is amiss.

The Oxford English Dictionary defines coupon as a “form, ticket…entitling the holder to a gift or discount,” while Webster’s defines it as a “form, slip…resembling a bond coupon in that it may be surrendered in order to obtain some article, service, or accommodation,” or a “form or check indicating a credit against future purchases or expenditures.”  There is no question that the vouchers in the instant case fit those definitions. Indeed, according to Judge Miller, “class representatives’ counsel repeatedly (albeit unintentionally) referred to them as ‘coupons’ during oral argument.”  Despite this, Judge Miller lamented how Ninth Circuit precedent requires the use of the Online DVD test, which has “no basis in the statutory text,” and doesn’t explain how the three factors work together and/or which one holds the most sway.  

In short, Judge Miller suggests that in an appropriate case, the Ninth Circuit “should reconsider Online DVD en banc.”  Only time will tell if it will do so.  

***

Risk Settlements, the industry leader in structuring class action settlements, can help defendants in class action litigation evaluate the litigation options and design an optimal settlement structure that is backed by full risk transfer to an insurer. Risk Settlements offers two insurance solutions for defendants in class action litigation.

Class Action Settlement Insurance (CASI) provides companies with the certainty they need to get back to business. It is the only product on the market that allows companies to mitigate, cap and transfer the financial risk of settlement in existing class action litigation. Designed by Risk Settlements in response to businesses’ need for financial certainty in class action lawsuits and resulting settlements, CASI eliminates the unintended consequences of settlement and helps businesses exit litigation for a known, fixed cost.

Litigation Buyout (LBO) Insurance provides companies with the ability to successfully ring-fence litigation exposure and transfer the full financial risk of class action, antitrust, and non-class litigation. With LBO Insurance, the insurance carrier takes on the financial risks and liabilities for businesses – at any time before settlement and for a known, fixed cost. In the context of an M&A transaction or financing, LBO Insurance negates the requirement for the use of escrows or indemnities, providing certainty and finality to both parties to the transaction.

Contact us today to learn more about our creative insurance solutions to resolve existing or ring-fence threatened or existing litigation for a known, fixed cost.

The post Massage Envy: Are All Vouchers Now Coupons Under CAFA? appeared first on Certum Group.