McKinney-Drobnis v. Massage Envy Franchising, LLC, No. 20-15539 (9th Cir. 2021)
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A putative nationwide class of current and former members sued MEF, a membership-based spa-services company, alleging that MEF increased fees in violation of the membership agreement. The parties settled. In exchange for the release of all claims against MEF, class members could submit claims for “vouchers” for MEF products and services. The district court approved the settlement as “fair, reasonable, and adequate” under FRCP 23(e).
The Ninth Circuit vacated. If a class action settlement is considered a “coupon” under the Class Action Fairness Act (CAFA) additional restrictions apply to the settlement approval process. The court did not defer to the district court’s determination that the MEF vouchers were not coupons but applied a three-factor test, examining whether settlement benefits require class members “to hand over more of their own money before they can take advantage of” those benefits, whether the credit was valid only for “select products or services,” and how much flexibility the credit provided. The district court also failed to adequately investigate some of the potentially problematic aspects of the relationship between attorneys’ fees and the benefits to the class, which impacted the fairness of the entire settlement, not just attorneys’ fees. The district court did not apply the appropriate enhanced scrutiny; it failed to adequately address the three warning signs of implicit collusion.
Court Description: Class Action Settlement The panel vacated the district court’s judgment overruling objections, certifying a class for settlement, approving the settlement, and granting most of class counsel’s requested fee award in a class action arising out of a dispute between Massage Envy Franchising, LLC (“MEF”), a membership-based spa-services company, and a putative nationwide class of current and former members. The class complaint alleged that MEF began periodically increasing membership fees in violation of the membership agreement. After extensive discovery and motions for class certification and summary judgment, the parties settled. In exchange for the release of all claims against MEF, class members could submit claims for “vouchers” for MEF products and services. The district court approved the settlement as “fair, reasonable, and adequate” under Fed. R. Civ. P. 23(e). Objector Kurt Oreshack challenged the * The Honorable Ronald Lee Gilman, United States Circuit Judge for the U.S. Court of Appeals for the Sixth Circuit, sitting by designation. MCKINNEY-DROBNIS V. ORESHACK 3 approval, contending that the vouchers provided to the class under the settlement were “coupons” under the Class Action Fairness Act (“CAFA”); and further contending that even if CAFA’s coupon restrictions did not apply, the district court abused its discretion by disregarding warning signs of class counsel’s self-interest that warranted additional scrutiny. The panel held that the district court erred in finding that the vouchers were not “coupons” under CAFA. If a form of class action settlement is considered a “coupon” under CAFA, then additional restrictions apply to the settlement- approval process. The panel, following the Fourth Circuit’s approach, held that de novo review applied to determine the applicability of CAFA’s coupon provisions. The panel, therefore, did not defer to the district court’s determination that the MEF vouchers were not coupons under CAFA. In In re Online DVD-Rental Antitrust Litigation, 779 F.3d 934 (9th Cir. 2015), this court outlined a three-factor test for determining whether an award constituted a coupon settlement. The panel held that the first factor – whether settlement benefits require class members “to hand over more of their own money before they can take advantage of” those benefits – was inconclusive as to whether the vouchers were coupons. The panel further held that under factor two – whether the credit was valid only for “select products or services” – the vouchers appeared to be coupons. Under factor three – how much flexibility the credit provided – the panel held that the vouchers were flexible, and this favored not viewing the vouchers as coupons. The panel concluded that no single Online DVD factor was dispositive, and held under de novo review that the vouchers were coupons, and subject to CAFA’s requirements for coupon settlements. The panel vacated the district court’s approval of the attorneys’ fee award and remanded for the district court to 4 MCKINNEY-DROBNIS V. ORESHACK use the value of the redeemed vouchers in awarding fees, as required by 28 U.S.C. § 1712(a). The panel next addressed Oreshack’s contention that, independent of CAFA’s applicability to the fee award, the district court erred by approving the settlement as “fair, reasonable, and adequate” under Rule 23(e). The panel noted, as a preliminary matter, that determining that vouchers were coupons under CAFA and vacating the fee award, did not necessarily require invalidating the entire settlement approval order. But given the objector’s challenge to the settlement agreement, the panel analyzed the entire agreement for fairness. The panel held that the district court abused its discretion by failing to adequately investigate and substantively grapple with some of the potentially problematic aspects of the relationship between attorneys’ fees and the benefits to the class. Because the errors made by the district court impacted the fairness of the entire settlement under Rule 23(e), and not just attorneys’ fees, the panel vacated the approval and remanded for the district court to analyze more deeply whether the settlement should be approved. Specifically, the panel held that the district court abused its discretion in failing to apply the requisite heightened scrutiny for pre-certification settlements. The district court did not apply the appropriate enhanced scrutiny because it failed to adequately investigate and address the three warning signs of implicit collusion articulated in In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935 (9th Cir. 2011). Judge Miller joined the court’s opinion in full, but wrote separately to note his disagreement with this court’s approach to determining when vouchers are “coupons” MCKINNEY-DROBNIS V. ORESHACK 5 under CAFA. He wrote that in an appropriate case, the court should reconsider en banc In re Online DVD-Rental Antitrust Litigation, 779 F.3d 934 (9th Cir. 2015), and its three-factor test for determining whether an award constitutes a coupon settlement.
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