As we’ve commented before, class actions frequently take on a life of their own. They involve large sums of money, frequently raise difficult discovery and case management issues, and are subject to surprises for all the litigants. At the same time, recognizing that tensions exist between the class and class counsel regarding attorney fees, courts are more closely scrutinizing settlements, particularly where the attorney fee award approaches, or even surpasses, the relief to the putative class members.

A recent case from the Seventh Circuit addresses all of these things, and rejects a settlement involving a failing company in which the parties sought to support the attorney fee award, at least in part, by the high costs of settlement administration. Although not an employment case, many of the same issues will apply with equal force in the employment setting.

In Redman v. RadioShack Corp., Case Nos. 14-1470, -1471, -1685 (7th Cir. Sept. 19, 2014), the plaintiffs brought a consumer class action against the RadioShack electronics chain. The crux of the case was that, for a period of time, the receipts given to customers contained the expiration date of their credit cards in violation of the Fair and Accurate Credit Transactions Act (“FACTA”), a statute designed to help limit credit card fraud. According to the complaint, RadioShack issued some 16 million receipts with the expiration date before changing its registers to limit the amount of information given.  Under FACTA, each violation had a minimum penalty of $100, for a total of $1.6 billion.

RadioShack doesn’t have that. In the words of the court: “RadioShack is in terrible financial shape.” The parties settled the case for a maximum of $4.3 million. Importantly, however, that amount consisted mostly of $2.2 million in administrative costs, with $1 million in attorney fees, and roughly $830,000 to the class.

There was no shortage of problems with the settlement. Among these problems was the fact that the payments to the class consisted of a $10 coupon or voucher, which itself drew much negative attention from the court. That’s probably the topic of another blog, as coupon settlements are rare in employment cases, but the parties raised the court’s ire by trying to characterize what were, in essence, coupons as vouchers to avoid attorney fee limitations under CAFA. The court was likewise troubled that limitations on the use of the vouchers/coupons meant that the class would get far less than even the $830,000.

Turning to the subject of this blog, administering the settlement, and presumably the coupons, consumed over half the settlement amount. The plaintiffs’ attorneys argued that, as their fees were less than 25% of the total settlement, they were reasonable.

The Seventh Circuit rejected this analysis and, in addition to many other issues:

-Discounted the amount being paid to the class due to limitations on redemption of coupons/vouchers by the class;

-Found that courts should look more closely at fee awards when the plaintiff has been given a “clear sailing” clause where the defendant agrees not to oppose the award;

-Noted that the attorney fee application should have been submitted before the deadline for objections to the settlement;

-Questioned the relationship between the lead plaintiff, a law firm employee, and class counsel, even though they worked in different firms;

-Compared the attorney fee award to the amount paid to the class, without consideration of the large administrative costs.

The Redman case reflects not just frustration with what was, in essence, a coupon settlement, but the question of the amount of attorney fees and provisions of the agreement that made them harder to challenge. The court’s impatience echoes that of many other courts, particularly in California, where courts are increasingly examining attorney fees independently and suspiciously.

The Bottom Line: Scrutiny of attorney fee awards is growing, and courts are especially wary of terms that make challenges to fee applications more difficult.