In Chavez v. Netflix, Inc., ___ Cal.App.4th ___ (Apr. 21, 2008), the Court of Appeal (First Appellate District, Division One) rejected the objectors' challenges to a class action settlement and attorneys' fees award. The case challenged Netflix's DVD rental practices, which allegedly reduced the number of DVDs "that high-consuming members would receive ... per month." Slip op. at 3. The settlement was tailored to the alleged violation, providing class members with a month of free DVD rentals. Id. at 1, 5. The benefits of the settlement were valued at $4.29 million. Id. at 6. The attorneys' fees award was $2,040,000, which constitutes about a 2.5 multiplier and amounts to 21.8% of $4.29 million. Id. at 6, 26-27.
The settlement agreement appears to have been extensively negotiated. In fact, the Federal Trade Commission filed an amicus brief objecting to one of the terms of a prior settlement. Id. at 5. That term would have allowed Netflix to automatically renew the accounts of those class members who chose to take part in the settlement. Id. at 4-5. The parties went back to the negotiating table and eventually agreed to simply eliminate that objectionable settlement term. Id. at 5. The FTC and 428 other objectors then formally withdrew their objections. Id. Four objectors remained to pursue an appeal. Id. at 6.
The Court of Appeal rejected all of the objectors' challenges to the settlement and the notice provided to class members. Id. at 8-18. The opinion is noteworthy for its discussion of coupon settlements. The Court took pains to explain that the settlement before it was not a pure coupon settlement and, what's more, it was fair, adequate and reasonable:
Only one objector, Ellis, continues to argue that the settlement is unreasonable. Ellis makes no claim that any of the factors supporting a presumption of fairness is not present in this case. Instead, Ellis bases her entire argument on the premise that this is a coupon settlement and that such settlements are, in general, inherently suspect and improper. In fact, these premises are neither entirely accurate nor particularly useful for evaluating the fairness of the specific settlement terms before us. Although the settlement reached in this case may be classified as a variant of the coupon settlement, it does not in fact share all of the attributes of the category. In a pure coupon settlement, the class members would receive a coupon, voucher, or discount that would partly defray the cost of making a new purchase of goods or services from the defendant. In many cases, the coupon might induce the member to make a purchase he or she would not otherwise have made, which may actually produce a net benefit for the defendant. That is not the case here. The Netflix class members are not being offered a discount that requires them to make new purchases. They are being offered an opportunity to obtain a limited number of rentals at no charge. While it is possible that some existing customers might be induced by the free rentals to purchase a higher level of service and some past customers might be induced to resume their lapsed subscriptions, the potential for Netflix to actually benefit financially from the settlement is much reduced compared to a pure coupon discount program. Ellis’s generic discussion of the evils of coupon settlements completely ignores the distinguishing features of this settlement.
The claim that coupon settlements are inherently suspect or improper is also not persuasive. Ellis relies on a law review article and a handful of cases not decided under California law.[fn2] She also asserts that the federal Class Action Fairness Act of 2005 (CAFA) (28 U.S.C. § 1712), although inapplicable to this proceeding, is “highly suspicious” of coupon settlements because it requires the court to hold a special hearing to determine their value. But while the valuation of coupon settlements may pose special challenges, neither CAFA nor any of the authorities Ellis cites hold that coupon settlements are per se improper. Notably, Ellis does not discuss or distinguish California cases in which coupon settlements have been found to be fair and reasonable. (See, e.g., In re Microsoft I–V Cases, supra, 135 Cal.App.4th at pp. 711–713; Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 247; Dunk, supra, 48 Cal.App.4th at pp. 1804–1805.)
Most importantly, Ellis failed to perform any analysis of the settlement terms to try to overcome the presumption of fairness to which they are entitled. Ellis cites one of the federal cases she relies on for the proposition that the most important factor in evaluating the fairness of a settlement is the strength of the plaintiff’s case weighed against the amount of the settlement. (See Synfuel Technologies, Inc. v. DHL Express (USA), supra, 463 F.3d at p. 653.) Nowhere in her 14-page discussion of coupon settlements, does Ellis attempt such a comparative analysis. In fact, the benefit provided by the settlement—free DVD rentals worth $6 to current subscribers and $16.99 to former subscribers—directly addresses the harm alleged in the complaint, which was Netflix’s alleged failure to deliver as many DVD’s as promised. While the dollar value of the settlement per class member is small, it must be remembered that the damages allegedly caused by Netflix’s allocation and delivery policies were hardly unlimited either, and plaintiffs would have encountered considerable difficulties in trying to prove their amount.
Other than suggesting that a cash settlement would have had more value to class members and more deterrent value, Ellis fails to explain why the settlement terms are not fair and reasonable in relation to the range of possible results further litigation might have produced, including no class certification and/or zero or minimal recovery of damages by class members. The issue before the trial court was not whether the settlement agreement was the best one that class members could have possibly obtained, but whether it is “fair, adequate, and reasonable.” (Dunk, supra, 48 Cal.App.4th at p. 1801.) On that question, we find nothing in Ellis’s arguments to overcome the presumption of fairness that applies in this case.
[fn2] The cases Ellis cites are not particularly germane on their facts. (See Acosta v. Trans Union, LLC (C.D.Cal. 2007) 240 F.R.D. 564 [free credit report as part of settlement had little or no value because consumers are entitled to one free credit report per agency per year and few take advantage of that right]; Bloyed v. General Motors Corp. (Tex.Ct.App. 1994) 881 S.W.2d 422 [$1,000 coupon toward purchase of new van or truck within 15 months]; Synfuel Technologies, Inc. v. DHL Express (USA) (7th Cir. 2006) 463 F.3d 646 [in-kind compensation worth less than cash since some goods or services offered will not be used and will have no cost for defendant].) The law review article is Leslie, A Market-Based Approach to Coupon Settlements in Antitrust and Consumer Class Action Litigation (2002) 49 UCLA L.Rev. 991 (hereafter Leslie), which argues that coupon settlements will be overused as long as class counsel are compensated in cash.
Id. at 10-12 (emphasis added).
A couple of things are noteworthy in the opinion's discussion of the class notice. First, the Court of Appeal held that a class notice need not specify the amount originally sought in damages or compare that sum to the settlement amount actually achieved:
Ellis’s claim that the notices were deficient for failing to provide a dollar estimate of the overall value of the settlement in relation to the damages sought by plaintiffs is also without merit. Ellis cites no authority requiring that such notice be given. The notice gave sufficient information to allow each class member to decide whether to accept the benefit he or she would receive under the settlement, or to opt out and pursue his or her own claim. (See Oswald v. McGarr (7th Cir. 1980) 620 F.2d 1190, 1197 [notice should contain sufficient information to enable a class member to determine whether to accept the offer to settle, the effects of settling, and the available avenues for pursuing his claim if he does not settle].) No more than that was required. The class-wide damages claimed by one side in the litigation, which the opposing party hotly contests, does not in any event provide very useful information for evaluating the fairness of the overall settlement, much less for enabling an individual class member to decide whether to opt out.
Id. at 13-14 (emphasis added).
Also worthy of note, the Court of Appeal approved the use of emailed summary notice coupled with an online long-form notice and an online claims submission process:
The summary notice and long-form notice together provided all of the detail required by statute or court rule, in a highly accessible form. The fact that not all of the information was contained in a single e-mail or mailing is immaterial. The manner of giving notice is subject to the trial court’s virtually complete discretion. Using a summary notice that directed the class member wanting more information to a Web site containing a more detailed notice, and provided hyperlinks to that Web site, was a perfectly acceptable manner of giving notice in this case. (See Browning v. Yahoo! Inc. (N.D.Cal. 2006) 2006 WL 3826714 at *8–9 [approving two-tiered notice system using summary e-mail and long-form notice posted on Web site].) The class members conducted business with defendant over the Internet, and can be assumed to know how to navigate between the summary notice and the Web site. Using the capability of the Internet in that fashion was a sensible and efficient way of providing notice, especially compared to the alternative Vogel apparently preferred—mailing out a lengthy legalistic document that few class members would have been able to plow through. We find no abuse of discretion or deprivation of due process in the trial court’s approval of the form and content of the notice given in this case.
Id. at 16 (emphasis in original).
Finally, in approving the attorneys' fees award, the Court of Appeal held (among other things) that the trial court appropriately considered the fee award as part of the benefit achieved for the class when conducting its percentage-of-the-benefit analysis:
To establish a benchmark for determining the enhanced lodestar amount, the court used the percentages that a hypothetical enhanced fee would represent of the sum of the fee plus the aggregate value of the benefits claimed by class members under the Original Agreement ($4.29 million). It viewed the resulting number as being equivalent to a contingency fee percentage that might be specified in the typical contingent fee contract. For illustrative purposes using the $4.29 million figure, the court plugged different hypothetical fee amounts into this formula that would translate into contingency fee percentages of 20, 25, and 40 percent, which the court believed encompassed the 20 to 40 percent range of contingency fee contracts found in the marketplace. It established class counsel’s initial award in an amount ($1.3 million) that would translate into a contingency fee percentage, approximately 23 percent, that was close to the low end of the 20 to 40 percent range. ....
We find no error or abuse of discretion in the court’s methodology. If a contingency fee contract provides that the attorneys are to receive, for example, 25 percent of the plaintiff’s recovery, the plaintiff who recovers $100,000 keeps $75,000 and pays $25,000 to his attorneys. If we did not already know the contingency fee percentage set by the parties’ fee contract, that number could be calculated by dividing the amount received by the attorney ($25,000) by the sum of the amount received by the client and the amount received by the attorney ($100,000). That is the same formula the court used to calculate a benchmark for enhancing the lodestar amount in this case.
Vogel appears to be arguing that it was error for the court not to use the exact same percentage-of-the-benefit method discussed in Lealao, supra, 82 Cal.App.4th at pages 25–36, which would typically look at the straight ratio of proposed fees to class benefits and compare that to the percentage of fees awarded in common fund cases. (See Lealao, at p. 36.) In our view, the Lealao court did not purport to mandate the use of one particular formula in class action cases. The method the trial court used here and that discussed in Lealao are merely different ways of using the same data—the amount of the proposed award and the monetized value of the class benefits—to accomplish the same purpose: to cross-check the fee award against an estimate of what the market would pay for comparable litigation services rendered pursuant to a fee agreement. (See Lealao, at pp. 47–50.) It is not an abuse of discretion to choose one method over another as long as the method chosen is applied consistently using percentage figures that accurately reflect the marketplace.[fn11]
[fn11] Using the percentage of the benefits to class claimants as a benchmark, class counsel’s initial award was 30.3 percent of the benefits, and the final fee award was 27.9 percent of the benefits. This is not out of line with class action fee awards calculated using the percentage-of-the-benefit method: “Empirical studies show that, regardless whether the percentage method or the lodestar method is used, fee awards in class actions average around one-third of the recovery.” (Shaw v. Toshiba America Information Systems, Inc. (E.D.Tex. 2000) 91 F.Supp.2d 942, 972.)
Id. at 24-25.