FRIEDLAND, Circuit Judge:
In this appeal, an objecting class member challenges the district court's approval of a class action settlement resolving claims that Provide Commerce, Inc. and Regent Group, Inc. (collectively, "Defendants") enrolled consumers in a membership rewards program without their consent and then mishandled their billing information. The settlement makes available $3.5 million to pay settlement administration costs and refund class members' enrollment fees, with any remaining funds designated for three cy pres beneficiaries. The settlement also provides that each class member will receive a $20 credit that may be used to purchase additional products from Defendants. It further anticipates that class counsel will receive $8.7 million in attorney's fees. We vacate the fee award because the district court failed to treat the credits as coupons under the Class Action Fairness Act ("CAFA") when calculating that award. We otherwise affirm.
Provide Commerce, Inc. ("Provide") operates online businesses that sell flowers, chocolates, fruit baskets, and other similar items. According to the Complaint, Plaintiff Josue Romero and seven other class representatives (collectively, "Plaintiffs") purchased items from a Provide business and were then presented with a pop-up advertisement for $15 off another item from the same website.
In 2009, Plaintiffs filed a putative class action against Defendants in the Southern District of California, alleging violations of various state laws arising from Defendants' operation of their membership rewards program. After more than two years of litigation, including extensive discovery and mediation, the parties agreed to settle. The proposed settlement provided class members with two forms of relief: monetary reimbursement of membership fees upon submission of a claim and a $20 credit.
The settlement established a $12.5 million fund from which Defendants would pay up to $8.7 million in attorney's fees; $80,000 in enhancement awards to the named plaintiffs; and $200,000 in litigation costs. The approximately $3.5 million remaining would be available to fund the settlement's administration costs and to reimburse class members for their membership fees "on a pro rata basis up to the full amount owed." To receive such a refund, class members had to submit a claim affirming that they had neither intended to enroll in the program nor used any program benefits other than the initial discount code. After the refunds were issued, any remaining funds were to be distributed as a cy pres award to San Diego State University, the University of California at San Diego, and the University of San Diego School of Law "for a chair, professorship, fellowship, lectureship, seminar series or similar funding, gift, or donation program . . . regarding internet privacy or internet data security."
The settlement also directed Defendants to email every class member a $20 credit that could be used to purchase items on Defendants' websites. Unlike with the refund, class members were not required to submit a claim to receive the credit. The credits would be fully transferable, but they would include a series of restrictions, including that they would expire one year after their distribution date and could not be used in the lead-up to Christmas, Valentine's Day, or Mother's Day. The credits also could not be used for same-day orders, nor could they be combined with other promotions.
In June 2012, the district court preliminarily approved the settlement. The parties informed the court that the class contained approximately 1.3 million consumers who had been enrolled in the rewards program at some point since August 2005.
Class members were then notified of the settlement and given a 135-day period to request a refund, during which only about 3,000 class members did so. Their submitted claims requested a total of $225,000 in cash refunds, leaving approximately $3 million of the settlement's cash fund to be distributed to the cy pres beneficiaries.
In January 2013, the district court held a final settlement approval hearing at which class member Brian Perryman ("Objector") objected to the settlement. He argued that the attorney's fee award did not comply with CAFA's requirements for settlements awarding coupons and that the cy pres award was improper. The court rejected these objections and issued a final
On remand, the district court determined that, under In re Online DVD, the credits should not be construed as coupons, and that it was therefore unnecessary to apply CAFA's requirements for coupon settlements. In the court's view, it was particularly significant that class members had, by virtue of their inclusion in the class, shown "an interest in getting $15.00 off their next purchase" from Defendants. Considering this factor in conjunction with the holding of In re Online DVD, the court concluded the "settlement was not a coupon settlement subject to the strictures of section 1712."
Again using $38 million as the total value of the settlement, the court then approved the fee award based on both percentage-of-recovery and lodestar calculations.
Objector has appealed again to challenge the attorney's fee and cy pres awards. With respect to the fee award, he argues that the district court erred by failing to comply with CAFA's requirements for coupon settlements and, relatedly, that the settlement provides class counsel with a disproportionate share of the recovery. With respect to the cy pres award, he contends that cy pres relief is not appropriate here and that, even if it were, the district court should have rejected the particular cy pres beneficiaries chosen in the settlement.
We address Objector's arguments in turn. We hold that his challenge to the attorney's fee award succeeds because the district court failed to treat the $20 credits as coupons under CAFA, but we reject his cy pres arguments.
CAFA imposes restrictions on attorney's fee awards for class action settlements
To avoid this result, CAFA requires district courts to consider the value of only those coupons "that were actually redeemed" when calculating the relief awarded to a class. In re Online DVD, 779 F.3d 934, 950 (9th Cir. 2015); see also 28 U.S.C. § 1712(a). Doing so ensures that class counsel benefit only from coupons that provide actual relief to the class, less—ening the incentive to seek an award of coupons that class members have little interest in using—either because they might not want to conduct more business with defendants, or because the coupons are too small to make it worth their while. See In re Sw. Airlines Voucher Litig., 799 F.3d 701, 706 (7th Cir. 2015) ("The potential for abuse is greatest when the coupons have value only if a class member is willing to do business again with the defendant who has injured her in some way, when the coupons have modest value compared to the new purchase for which they must be used, and when the coupons expire soon, are not transferable, and/or cannot be aggregated.").
CAFA, however, provides no definition of "coupon," so courts have been left to define that term on their own, informed by § 1712's animating purpose of preventing settlements that award excessive fees while leaving class members with "nothing more than promotional coupons to purchase more products from the defendants." In re Online DVD, 779 F.3d at 950 (quoting S. Rep. No. 109-14, at 15).
Here, the district court relied on an additional factor not present in In re Online DVD. It held that the credits should not be construed as coupons in part because it concluded that this settlement was "stronger than" the settlement in In re Online DVD in terms of how closely the relief matched class members' alleged injury. In this case, class members failed to receive a promised credit or received a credit but on terms they had not accepted, and the settlement provided a replacement credit without the unwanted enrollment in its rewards program. But the district court's inclusion of this factor conflated the coupon analysis with whether the settlement was fair and reasonable. Confronting a similar argument in In re Southwest Airlines Voucher Litigation, the Seventh Circuit held that drink vouchers awarded to settle claims that Southwest improperly stopped accepting certain in-flight drink vouchers were coupons under CAFA. 799 F.3d at 704. Even though class members would receive "essentially complete relief" by obtaining the new drink vouchers to replace their invalidated ones, id. at 711, the court explained that this equivalence bore on the fairness of the settlement—not on whether the vouchers were coupons under CAFA, id. at 706.
Thus, even assuming the district court was correct that "this settlement was specifically tailored to the harm suffered by the class members and the interest they had in receiving" a discount off a future purchase from Defendants' websites, it does not follow that the full face value of all the $20 credits should be used when evaluating the propriety of the fee award.
That brings us to the million—here, multi-million—dollar question: whether Defendants' credits are coupons. We hold that, applying the correct legal standard, the only logical conclusion is that they are.
Moreover, in In re Online DVD, Walmart's extensive inventory was significant in part because class members could use the gift cards without obtaining the product—DVDs—that led to their suit in the first place. See id. at 952. Here, in contrast, class members cannot use these credits without purchasing an item from Defendants. And, to do so, they must hand over their billing information again to the very company that they believe mishandled that information in the first place, at the very least to pay for shipping. Thus, although class members do not have a product-specific complaint, they cannot reap the benefits of the settlement without reengaging in the same purchasing activity that they believe led to their injury.
The credits at issue here are also far less flexible than those available in In re Online DVD. Although freely transferrable, they expire one year after issuance and have a series of blackout periods, including during the days before Valentine's Day, Mother's Day, and other holidays on which consumers most often buy flowers and chocolates. Defendants respond that there is a "reasonable explanation" for those restrictions given their need to preserve their ability to fill and deliver orders in a timely fashion "during peak periods." Maybe so, but the credits still cannot be used in anywhere near the same way as cash—including because they cannot be used on the dates on which people would be most interested in using them.
For all these reasons, we conclude that the only logical conclusion under the correct legal rule is that these credits are coupons under CAFA.
Because the district court incorporated the full face value of the coupons into both its percentage-of-recovery calculation and lodestar calculation of the attorney's fee award, this error requires recalculation of the fee award.
When a fee award in a coupon settlement is calculated using the percentage-of-recovery method, CAFA requires that any calculation of the size of the settlement fund—and thus the size of the fee award—be determined using the redemption rate of the coupons. Id. at 949-50; see also 28 U.S.C. § 1712(a) ("If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney's fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.").
The settling parties contend that the award can nevertheless be upheld based on the district court's lodestar calculation. Under § 1712(b)(1), which relates to "[o]ther attorney's fee awards" in settlements involving coupons, if "a portion of the recovery of the coupons is not used to determine the attorney's fee to be paid to class counsel, any attorney's fee award
In In re HP Inkjet Printer Litigation (In re HP), 716 F.3d 1173 (9th Cir. 2013), we explained that CAFA does not, however, permit a district court to approximate "the ultimate value of [a] settlement, and then award[] fees in exchange for obtaining coupon relief without considering the redemption value of the coupons." Id. at 1186. In particular, in a mixed settlement, a district court may use the lodestar approach provided that it does so without reference to the dollar value of the settlement fund—or, of course, it may reference the dollar value of the settlement fund if it accounts for the redemption rate of the coupons in calculating that dollar value. We held that the district court in In re HP had erred when it set the lodestar fee award in reference to "the `ultimate value' of th[e] settlement"—which, as calculated there, included the face value of the coupons not adjusted by their redemption rate. Id.
Here, the district court similarly went astray when it reverse-engineered the lodestar multiplier using a value of the settlement that included the full face value of all the $20 coupons. The court started with a lodestar fee of $4.3 million, calculated based solely on class counsel's billing rates and hours worked. But the court then worked backward from class counsel's proposed $8.7 million fee award, which the court had already deemed appropriate as a percentage of the total dollar value of the settlement fund. To do so, the court applied a multiplier of 2.1 to match the lodestar fee with the percentage-of-recovery fee. Thus, although the $4.3 million figure was derived independently of any specific consideration of the coupons, it lost this independence when the district court used a multiplier to match the lodestar fee to the percentage-of-recovery fee—which was, by definition, a percentage of the full value of the settlement, including the face value of the coupons.
Accordingly, the attorney's fee award must be vacated. On remand, the award should be recalculated in a manner that treats the $20 credits as coupons under CAFA.
Objector also challenges the use of cy pres to distribute the remaining settlement funds, and, if cy pres is to be used at all, the choice of recipients. We hold that it was not an abuse of discretion for the district court to approve the use of cy pres here or to approve these particular recipients.
Cy pres provides a mechanism for distributing unclaimed funds "to the `next best' class of beneficiaries." Nachshin v. AOL, LLC, 663 F.3d 1034, 1036 (9th Cir. 2011). Under the cy pres approach, "class members receive an indirect benefit (usually through defendant donations to a third party) rather than a direct monetary payment." Lane v. Facebook, Inc., 696 F.3d 811, 819 (9th Cir. 2012). The settlement agreement here provides for any unclaimed funds to be distributed to San Diego State University, the University of California at San Diego, and the University of San Diego School of Law to support scholarship in the area of internet privacy and data security. Objector argues that the approximately $3 million remaining in the settlement fund should have been distributed to the class instead.
We conclude that it was reasonable for the district court to approve
Nor was it an abuse of discretion for the district court to reject Objector's two proposed alternatives for distributing the remaining funds. Objector first suggests that the settlement should have distributed the remaining funds to the existing claimants. But the district court was under no obligation to adopt a distribution approach that might overcompensate claimants, all of whom will already be fully reimbursed for the money they lost through the rewards program.
Objector alternatively suggests that the remaining funds should have been distributed pro rata to non-claimant class members, whom Defendants will have to identify to distribute the coupons. It might be technically feasible to distribute the funds in this manner. But given that the existing fund contains approximately $3 million, and that there are over a million non-claimants, each non-claimant's recovery would be "de minimis," Lane, 696 F.3d at 821, particularly once the costs of distribution are deducted. Even if the district court substantially reduces the attorney's fee award, the amount each non-claimant might receive compared to the administrative costs of distribution prevents Objector from showing that the parties' resort to cy pres was inappropriate.
The recipients of cy pres funding should be selected in light of "the objectives of the underlying statute(s)" and "the interests of the silent class members." Nachshin, 663 F.3d at 1039. The court has "broad discretionary powers in shaping" a cy pres award. See Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1307 (9th Cir. 1990). We therefore review the selection of cy pres recipients for an abuse of discretion. Nachshin, 663 F.3d at 1038.
Objector argues that, even if a cy pres distribution was permissible here, these universities were inappropriate recipients because (i) all three are located in San Diego, even though the case involves a nationwide class; and (ii) three of the attorneys working on the case graduated from the University of San Diego School of Law. We disagree on both counts.
Objector's geographic challenge fails because these beneficiaries have a nationwide reach sufficient to justify their receipt of the cy pres award. Although the universities are all based in San Diego, it was reasonable for the district court to conclude that "the . . . funded academic programs will have a nation-wide impact." The award is designed to support scholarship in internet privacy and data security—topics of national scope. That the research will be spearheaded by scholars in San Diego in no way means that its impact will be confined to San Diego.
Objector's contrary argument based on Nachshin v. AOL, LLC is unavailing. In that case, which involved a nationwide challenge to AOL's online advertising practices, the settlement awarded its remaining funds to three cy pres recipients: the Legal Aid Foundation of Los Angeles, the Los Angeles and Santa Monica chapters of the Boys and Girls Club of America, and the Federal Judicial Center Foundation. 663 F.3d at 1037. Reversing the district court's approval of that settlement, we explained that the missions of the selected organizations had nothing "to do with the objectives of the underlying statutes on which [p]laintiffs base[d] their claims." Id. at 1040. As a result, the award failed to "account for the nature of the plaintiffs' lawsuit, the objectives of the underlying statutes, and the interests of the silent class members, including their geographic diversity." Id. at 1036.
That is not the case here. This award promotes a national dialogue on improving internet privacy and data security practices. It accordingly comports with our suggestion in Nachshin that the parties identify beneficiaries that will "work to protect internet users" from the types of predatory behavior underlying the lawsuit. See id. at 1041. As a result, the district court did not abuse its discretion in approving the selection of these institutions.
Second, the alumni connections of three of the (many) involved attorneys did not impermissibly taint the selection process. In some cases, "the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety." Id. at 1039. But that specter is far less haunting where, as here, the award is tethered to class members' interests and underlying claims. See id. Moreover, Objector has not suggested that there is a continuing relationship between the attorneys and their alma mater, nor has he challenged the parties' descriptions of what those institutions will do to further the interests of the class. Objector's bare allegation that the institutions were selected for an improper reason is insufficient to show that it was an abuse of discretion for the district court to approve their selection.
Finally, given both the structure of this settlement agreement and the focus of Objector's challenges, we hold that it is unnecessary to reverse the entire settlement approval in conjunction with our vacatur of the fee award. See Rodriguez v. W. Publ'g Corp., 563 F.3d 948, 969 (9th Cir. 2009) (reversing a fee award but otherwise affirming the settlement approval). The parties' settlement agreement expressly does not depend on approval of the fee award, and it provides that any decrease in the award "shall only serve to increase" the funds distributed to class members, as well as to the cy pres beneficiaries if necessary. Furthermore, because
Moreover, other than the challenges to the cy pres award that we rejected above, Objector cabined his arguments on appeal to attacks on the fee award. We are therefore not presented here with a general challenge to the fairness of the settlement under Federal Rule of Civil Procedure 23(e)(2). Absent an explanation of why the settlement as a whole does not pass muster, we will not assume that we must automatically reverse the settlement in conjunction with vacating the fee award.
For the foregoing reasons, we