In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 14‐1470, ‐1471, ‐1658
SCOTT D.H. REDMAN, individually and on behalf of all
others similarly situated, et al.,
Plaintiffs‐Appellees,
v.
RADIOSHACK CORPORATION,
Defendant‐Appellee.
APPEAL OF: MICHAEL ROSMAN, et al.,
Objectors.
____________________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 6741 — Maria G. Valdez, Magistrate Judge.
_______________________
No. 14‐1320
SULEJMAN NICAJ,
Plaintiff‐Appellant,
v.
SHOE CARNIVAL, INCORPORATED,
Defendant‐Appellee.
2 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 13 C 7793 — Thomas M. Durkin, Judge.
____________________
ARGUED SEPTEMBER 8, 2014 — DECIDED SEPTEMBER 19, 2014
____________________
Before WOOD, Chief Judge, and POSNER and HAMILTON,
Circuit Judges.
POSNER, Circuit Judge. We have consolidated for decision
appeals in two class actions filed under the Fair and Accu‐
rate Credit Transactions Act (“FACTA”), 15 U.S.C.
§ 1681c(g). The Act provides, so far as relates to these cases,
that “no person that accepts credit cards or debit cards for
the transaction of business shall print [electronically, as dis‐
tinct from by handwriting or by an imprint or copy of the
card] more than the last 5 digits of the card number or the
expiration date upon any receipt provided to the cardholder
at the point of the sale or transaction.” §§ 1681c(g)(1), (2)
(emphasis added). The present cases concern the expiration
date. The idea behind requiring its deletion is that, should
the cardholder happen to lose the receipt of a transaction,
the less information the receipt contains the less likely is an
identity thief who happens to come upon the receipt to be
able to figure out the cardholder’s full account information
and thus be able to make purchases that the seller will think
were made by the legitimate cardholder.
A typical credit card has 16 digits and an expiration date
that is the last day of a designated month and year. Even if
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 3
the identity thief has all 16 digits, without the expiration
date he may be unable to use the card. He can of course
guess at the expiration date—the date is unlikely to be more
than a few years in the future and there are only 12 months
in a year; so if he guesses 60 times he’s very likely to hit the
jackpot. But if he guesses wrong the first few times that he
places an order, the card issuer may well get suspicious and
refuse to authorize his next order. See, e.g., D. Lee, “Nine
Reasons Your Credit Card Was Declined,” Fox Business, May
21, 2013, www.foxbusiness.com/personal‐finance/2013/05/21
/nine‐reasons‐your‐credit‐card‐was‐declined/ (visited Sept.
12, 2014, as were the other websites cited in this opinion). It’s
common in telephone and internet transactions for the con‐
sumer to be asked for an expiration date, and most systems
will not allow the would‐be customer to keep guessing at the
date, as the guessing suggests that he may be an identity
thief.
Additional reasons for requiring deletion of the expira‐
tion date include that “expiration dates combined with the
last four or five digits of an account number can be used to
bolster the credibility of a criminal who is making pretext
calls to a card holder in order to learn other personal confi‐
dential financial information. Expiration dates are solicited
by criminals in many e‐mail phishing scams …, are one of
the personal confidential financial information items traf‐
ficked in by criminals …, are described by Visa as a special
security feature …, [and] are one of the items contained in
the magnetic stripe of a credit card, so it is useful to a crimi‐
nal when creating a phony duplicate card.” Don Coker,
“Credit Card Expiration Dates and FACTA,” HGExperts.com,
www.hgexperts.com/article.asp?id=6665.
4 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
If a violation of the statute is willful, a consumer whose
receipt contains as a result of the violation data that should
have been deleted, but who sustains no harm because no one
stole his identity as a result of the violation, is nevertheless
entitled to “statutory damages,” as distinct from compensa‐
tory or punitive damages, of between $100 and $1000. 15
U.S.C. § 1681n(a)(1)(A). (Statutory damages are in effect
bounties—means of inducing private persons to enforce a
regulatory law.) In contrast, a consumer harmed by the vio‐
lation of the statute can obtain actual damages by showing
that the violation was the result of negligence, § 1681o; he
need not prove willfulness.
To act “willfully” is, for purposes of civil law, to engage
in conduct that creates “an unjustifiably high risk of harm
that is either known or so obvious that it should be known,”
Farmer v. Brennan, 511 U.S. 825, 836 (1994)—reckless conduct,
in other words, as held in Safeco Ins. Co. of America v. Burr,
551 U.S. 47, 56–60 (2007), but reckless conduct in the civil
sense. Criminal recklessness is generally held to require
“knowledge of a serious risk to another person, coupled
with failure to avert the risk though it could easily have been
averted,” Slade v. Board of School Directors, 702 F.3d 1027, 1029
(7th Cir. 2012); see also Black’s Law Dictionary 1298–99 (Bryan
A. Garner ed., 8th ed. 2004), “whereas in civil cases at com‐
mon law it is enough that the risk, besides being serious and
eminently avoidable, is obvious; it need not be known to the
defendant.” Slade v. Board of School Directors, supra, 702 F.3d
at 1029.
The known or obvious risk in this case would be failing
to delete the expiration date on the consumer’s credit‐card or
debit‐card purchase receipt, whereas to be guilty merely of
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 5
negligence it would be enough that a reasonable person
would have deleted it. See Wassell v. Adams, 865 F.2d 849, 855
(7th Cir. 1989).
Willfulness is an issue in both our cases. But it is a pe‐
ripheral issue in the RadioShack case, while it is the primary
issue in our other case, the Shoe Carnival case. Although
both are class action suits, the district court in Shoe Carnival
dismissed the suit with prejudice before certifying a class;
there are no issues in that case concerning class action pro‐
cedure. (The defendant could have sought class certification
in order to prevent future similar suits by other class mem‐
bers, but did not.) RadioShack, in contrast, is centrally about
class action procedure. The parties settled and the district
court approved the settlement, and the appeal is by class
members who objected to the approval. We begin with that
case but defer discussion of the willfulness issue in it to later,
when we take up the appeal in Shoe Carnival.
RadioShack Corporation is a large, well‐known retail
purveyor mainly of consumer electronics, cell phones, and
related consumer products such as batteries, see “Radi‐
oShack,” Wikipedia, http://en.wikipedia.org/wiki/Ra
dioShack, sold mainly in RadioShack’s thousands of stores
rather than online. The class action suit was filed on behalf
of consumers who bought products at RadioShack stores,
paid with credit or debit cards, and received electronically
printed receipts that contained the card’s expiration date.
The suit was filed in September 2011. In May 2013, before
any substantive motions had been decided, the named plain‐
tiffs (realistically, class counsel) agreed with RadioShack on
terms of settlement. The essential term was that each class
member who responded positively to the notice of the pro‐
6 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
posed settlement would receive a $10 coupon that it could
use at any RadioShack store. The class member could use it
to buy an item costing $10 or less (but he would receive no
change if the item cost less than $10), or as part payment for
an item costing more. He could stack up to three coupons (if
he had them) and thus obtain a $30 item, or a $30 credit
against a more expensive item. He could also sell his coupon
or coupons, but the coupons had to be used within six
months of receipt because they would expire at the end of
that period.
With regard to three‐coupon stacking, the only way a
member of the class could obtain more than a single coupon
would be to buy one or more coupons from another class
member, because the settlement allows only one coupon per
customer no matter how many of his or her RadioShack pur‐
chases involved the erroneous receipts (in itself an arbitrary
restriction on the value of the settlement to class members).
But coupons may be difficult to buy. The owner would be
reluctant to sell it for less than $10, as that would mean sell‐
ing at a loss, but no sane person would pay more because a
$10 coupon is worth only $10. Doubtless some owners, how‐
ever, will sell because they don’t plan to use the coupon or
have no interest in a product that doesn’t cost less than $10.
Those owners are potential sellers. Nevertheless the second‐
ary market in coupons is bound to be thin because of the
paucity of coupons, the short expiration date, the limit to
three per transaction (so people who want big‐ticket items
won’t find the secondary market attractive as a source of
coupons), and the bother of going online to buy $10 coupons
at small discounts.
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 7
Although the class was assumed to contain 16 million
members, notice of the proposed settlement was sent to few‐
er than 5 million. Actually no one can be sure whether the 16
million transactions involved 8 million different consumers,
12 million, or any other number, because of the one‐coupon‐
per‐person restriction. This may be a reason why the settle‐
ment administrator notified only about 5 million RadioShack
consumers, though cost may have been the primary reason.
Of those potential class members who received notice of
the proposed settlement, some 83,000 (we’ll assume for sim‐
plicity that it was exactly 83,000)—a little more than one half
of one percent of the entire class, assuming the entire class
really did consist of 16 million different consumers—
submitted claims for the coupon in response. The magistrate
judge’s statement that “the fact that the vast majority of class
members—over 99.99%—have not objected to the proposed
settlement or opted out suggests that the class generally ap‐
proves of its terms and structure” is naïve, as is her basing
confidence in the fairness of the settlement on its having
been based on “arms‐length negotiations by experienced
counsel.” The fact that the vast majority of the recipients of
notice did not submit claims hardly shows “acceptance” of
the proposed settlement: rather it shows oversight, indiffer‐
ence, rejection, or transaction costs. The bother of submitting
a claim, receiving and safeguarding the coupon, and re‐
membering to have it with you when shopping may exceed
the value of a $10 coupon to many class members. And
“arm’s‐length negotiations” are consistent with the existence
of a conflict of interest on the part of one of the negotiators—
class counsel—that may warp the outcome of the negotia‐
tions. The magistrate judge’s further reference to “the con‐
siderable portion of class members who have filed claims”
8 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
questionably treats one‐half of one percent as being a “con‐
siderable portion.”
Another term of the proposed settlement was that Radi‐
oShack would pay class counsel $1 million (reduced by the
district court to $990,291.88, but we’ll round it off to $1 mil‐
lion for simplicity) in attorneys’ fees, plus pay various ad‐
ministrative costs including the cost of notice. The agreed‐
upon attorneys’ fees, plus the $830,000 worth of coupons at
face value, plus the administrative costs, add up to about
$4.1 million. Class counsel argued that since the attorneys’
fees were only about 25 percent of the total amount of the
settlement, they were reasonable. The district court, agree‐
ing, approved the settlement, precipitating this appeal by
two groups of class members who objected to the settlement
in the district court.
A trial judge’s instinct, in our adversarial system of legal
justice, is to approve a settlement, trusting the parties to
have negotiated to a just result as an alternative to bearing
the risks and costs of litigation. But the law quite rightly re‐
quires more than a judicial rubber stamp when the lawsuit
that the parties have agreed to settle is a class action. The
reason is the built‐in conflict of interest in class action suits.
The defendant (as RadioShack’s lawyer candidly admitted at
the oral argument) is interested only in the bottom line: how
much the settlement will cost him. And class counsel, as
“economic man,” presumably is interested primarily in the
size of the attorneys’ fees provided for in the settlement, for
those are the only money that class counsel, as distinct from
the members of the class, get to keep. The optimal settlement
from the joint standpoint of class counsel and defendant, as‐
suming they are self‐interested, is therefore a sum of money
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 9
moderate in amount but weighted in favor of attorneys’ fees
for class counsel. Ordinarily—in this case dramatically—
individual members of the class have such a small stake in
the outcome of the class action that they have no incentive to
monitor the settlement negotiations or challenge the terms
agreed upon by class counsel and the defendant.
True, there is always a named plaintiff—a member of the
class (sometimes several members) listed as the plaintiff in
the case filings—because there is no civil suit without a
plaintiff. But often (though we were told at argument not in
this case) the named plaintiff is the nominee of class counsel,
and in any event he is dependent on class counsel’s good
will to receive the modest compensation ($5,000 in this case)
that named plaintiffs typically receive.
The judge asked to approve the settlement of a class ac‐
tion is not to assume the passive role that is appropriate
when there is genuine adverseness between the parties ra‐
ther than the conflict of interest recognized and discussed in
many previous class action cases, and present in this case.
See, e.g., Eubank v. Pella Corp., 753 F.3d 718, 720 (7th Cir.
2014); Staton v. Boeing Co., 327 F.3d 938, 959–61 (9th Cir.
2003); In re GMC Pick–Up Truck Fuel Tank Products Liability
Litigation, 55 F.3d 768, 801, 819–20 (3d Cir. 1995). Critically
the judge must assess the value of the settlement to the class
and the reasonableness of the agreed‐upon attorneys’ fees
for class counsel, bearing in mind that the higher the fees the
less compensation will be received by the class members.
When there are objecting class members, the judge’s task is
eased because he or she has the benefit of an adversary pro‐
cess: objectors versus settlors (that is, versus class counsel
and the defendant).
10 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
Unfortunately the magistrate judge in approving the set‐
tlement in RadioShack failed to analyze the issues properly.
Let’s begin with the value of the award to the class members.
The judge accepted the settlors’ contention that the defend‐
ant’s entire expenditures should be aggregated in determin‐
ing the size of the settlement; it was this aggregation that re‐
duced the award of attorneys’ fees to class counsel to a re‐
spectable‐seeming 25 percent. But the roughly $2.2 million in
administrative costs should not have been included in calcu‐
lating the division of the spoils between class counsel and
class members. Those costs are part of the settlement but not
part of the value received from the settlement by the mem‐
bers of the class. The costs therefore shed no light on the
fairness of the division of the settlement pie between class
counsel and class members.
Of course without administration and therefore adminis‐
trative costs, notably the costs of notice to the class, the class
would get nothing. But also without those costs class counsel
would get nothing, because the class, not having learned of
the proposed settlement (or in all likelihood of the existence
of a class action), would have derived no benefit from class
counsel’s activity. And without reliable administration the
defendant will not have the benefit of a valid and binding
settlement. Yet although the administrative costs benefit
class counsel and the defendant as well as the class mem‐
bers, the district court’s fee award incorrectly treated every
penny of administrative expense as if it were cash in the
pockets of class members. By doing so the court eliminated
the incentive of class counsel to economize on that ex‐
pense—and indeed may have created a perverse incentive;
for higher administrative expenses make class counsel’s
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 11
proposed fee appear smaller in relation to the total settle‐
ment than if those costs were lower.
We are mindful that in Staton v. Boeing Co., supra, 327
F.3d at 975, the Ninth Circuit said that “where the defendant
pays the justifiable cost of notice to the class—but not, as
here, an excessive cost—it is reasonable (although certainly
not required) to include that cost in a putative common fund
benefiting the plaintiffs for all purposes, including the calcu‐
lation of attorneys’ fees.” The reason the court gave was that
notice is a benefit to the class. The court overlooked the fact
that it is also a benefit to class counsel. And in this case the
administrative costs taken into account by the magistrate
judge in determining the “fairness” of the attorneys’ fee
award were not limited to costs of notice to the class.
The ratio that is relevant to assessing the reasonableness
of the attorneys’ fee that the parties agreed to is the ratio of
(1) the fee to (2) the fee plus what the class members re‐
ceived. At most they received $830,000. That translates into a
ratio of attorneys’ fees to the sum of those fees plus the face
value of the coupons of 1 to 1.83, which equates to a contin‐
gent fee of 55% ($1,000,000 ÷ ($1,000,000 + $830,000)). Com‐
puted in a responsible fashion by substituting actual for face
value, the ratio would have been even higher because 83,000
$10 coupons are not worth $830,000 to the recipients. Any‐
one who buys an item at RadioShack that costs less than $10
will lose part of the value of the coupon because he won’t be
entitled to change. Anyone who stacks three coupons to buy
an item that costs $25 will lose $5. Anyone who fails to use
the coupon within six months of receiving it will lose its en‐
tire value. (Six‐month coupons are not unusual, but redemp‐
tion periods usually are longer. See, e.g., In re Mexico Money
12 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
Transfer Litigation (Western Union & Valuta), 164 F. Supp. 2d
1002, 1010–11 (N.D. Ill. 2000) (35 months); Henry v. Sears Roe‐
buck & Co., 1999 WL 33496080, at *10 (N.D. Ill. 1999) (nearly
three years).) Anyone who sells his coupon will get less than
the coupon’s face value. Some recipients of coupons will lose
them or forget about them. The chipping away at the nomi‐
nal value of the settlement by the numerous restrictions im‐
posed in the settlement agreement echoes the even more
egregious such chipping away that we encountered in Eu‐
bank v. Pella, supra, 753 F.3d at 724–26.
No attempt was made by the magistrate judge or the par‐
ties to the proposed settlement to estimate the actual value
of the nominal $830,000 worth of coupons. Couponing is an
important retail marketing method, and one imagines that it
would have been possible to obtain expert testimony (in‐
cluding neutral expert testimony by the court’s appointing
an expert, as authorized by Fed. R. Evid. 706), or responsible
published materials, on consumer response to coupons. And
likewise it should have been possible to estimate the value of
couponing to sellers—a marketing device that in some cir‐
cumstances must be more valuable than cutting price, as
otherwise no retailer would go to the expense of buying and
distributing coupons. In fact couponing is believed to confer
a number of advantages on a retail seller (which RadioShack
is):
Regular use of good couponing strategy will provide a
steady stream of new customers and high quality sales
leads. … Coupons have the effect of expanding or in‐
creasing your market area. We know that consumers
will travel far to redeem a valuable coupon. Coupons
will entice new customers that have been shopping at
your competitor. It’s a proven fact that consumers will
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 13
break routine shopping patterns to take advantage of a
good coupon offer. Coupons attract new residents
when they are actively in the market for products and
services. … Coupons will re‐activate old customers.
Those customers that have been lured away by your
competitor will start buying from you again when you
give them a good reason to do so. … Coupon advertis‐
ing provides the opportunity for additional profits
through sale of related items. … When you offer a spe‐
cial ʺdealʺ on a coupon to invite a customer to do busi‐
ness with you, you have to remember that this same
customer will probably end up buying additional
items that carry a full profit margin. In addition, you
also are being given the opportunity to “sell‐up” to a
more profitable product or service. You would not
have had this opportunity had it not been for the cou‐
pon getting the customer through the door in the first
place. Coupons build store traffic which results in ad‐
ditional impulse purchases. Coupons are measurable
and accountable. … It’s simply a matter of counting the
number of coupons redeemed to judge the effective‐
ness of the offer. Wise use of this consumer feedback
will guide you in creating future offers that improve
your results.
Thom Reece, “How to Use Coupons to Promote Your Busi‐
ness,” business know‐how, www.businessknowhow.com/m
arketing/couponing.htm.
Another way in which couponing benefits a firm in Ra‐
dioShack’s position is that it costs the seller only the whole‐
sale price of a product bought by a customer with a coupon
in order to give the customer a retail benefit. RadioShack is
out of pocket only the wholesale price of a $10 item bought
with a coupon; it would have been out a full $10 had the set‐
14 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
tlement required it to pay class members in cash. True, there
are administrative costs in processing coupon transactions,
but there are such costs in processing cash transactions as
well. And while were there no coupons there would be more
cash sales, at full retail price, coupon selling must be advan‐
tageous for sellers relative to price cuts or else it wouldn’t be
as common as it is.
To the extent that couponing would thus benefit Radi‐
oShack, it reduces the cost of the proposed settlement and
therefore the likelihood that it would endanger the compa‐
ny’s solvency. That’s fine, as we’re about to see, because Ra‐
dioShack appears to be teetering on the brink of insolvency
and if it goes over the brink the value of the coupons may be
drastically impaired. But while we don’t know how much
$830,000 of coupons would be worth to the class, we can be
confident that it would be less than that nominal amount,
doubtless considerably so. And we note that were the value
only $500,000—and it may indeed be no greater—the
agreed‐upon attorneys’ fee award would be the equivalent
of a 67 percent contingency fee.
One possible solution, in a case in which the agreed‐upon
attorneys’ fee is grossly disproportionate to the award of
damages to the class, is to increase the share of the settle‐
ment received by the class, at the expense of class counsel.
Another possible solution is to jack up the award of damag‐
es, in this case for example from $830,000 to $2 million (cash,
not coupons), while leaving the fee award at $1 million. The
administrative costs might also be increased, specifically by
increasing the number of class members notified of the set‐
tlement, in order to give more class members a slice of the
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 15
pie. The total cost of the settlement might rise from $4.1 mil‐
lion to say $6 million.
But here’s the rub, regarding the second suggested ad‐
justment in the settlement, the adjustment that increases the
size of the settlement rather than its division between class
counsel and class members: RadioShack is in terrible finan‐
cial shape. Recently Moody’s reduced the company’s credit
rating to Caa2 (“rated as poor quality and very high credit
risk”). Moody’s Investor Service, “Rating Action: Moody’s
Downgrades RadioShack’s CFR to Caa2; Outlook Remains
Negative,” May 5, 2014, www.moodys.com
/research/Moodys‐downgrades‐RadioShacks‐CFR‐to‐Caa2‐o
utlook‐remains‐negative‐‐PR_294298. See also Will Ash‐
worth, “RadioShack Stock—Cue the Comeback? RSH Doled
Out a Doubler Within a Week, But How Real Are Radi‐
oShack’s Survival Chances?,” InvestorPlace, Sept. 2, 2014,
http://investorplace.com/2014/09/radioshack‐stock‐rsh‐come
back/#.VA9IrvldUnU. An article by William Alden ominous‐
ly entitled “RadioShack Sees Filing for Bankruptcy Near”
was published just last week in the New York Times, Sept. 12,
2014, p. B3.
Adding millions to the cost of the settlement to Radi‐
oShack might, if not precipitate the company’s failure, make
it more likely—an outcome that might leave very little for
the class members. A modest settlement is the prudent
course. And a coupon settlement has the virtue of boosting
RadioShack’s business, since as we’ve noted couponing is a
marketing device that must sometimes be more effective
than an equivalent price cut. So even if the proposed settle‐
ment of $830,000 in coupons is worth a good deal less than
face value and is therefore modest relative to a potential
16 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
class of millions of consumers, we think it was adequate in
the parlous circumstances in which the defendant finds it‐
self. But that is not to say that the $1 million attorneys’ fee is
reasonable; and if it were cut down the amount saved could
be reallocated to the class, thereby increasing the meager
value of the settlement to the class members. That was the
first possible modification that we mentioned: changing the
relative shares of the settlement received by class counsel
and class members without increasing the amount of the set‐
tlement.
The magistrate judge based the fee award on the amount
of time that class counsel reported putting in on the case, but
increased the amount so calculated by 25 percent to reflect
the risk created by the possibility that the suit would fail—
that, for example, RadioShack might be able to refute an in‐
ference of willfulness. But the reasonableness of a fee cannot
be assessed in isolation from what it buys. Suppose class
counsel had worked diligently—as hard and efficiently as
they say they worked—but only a thousand claims had been
filed in response to notice of the proposed settlement, so that
the total value of the class, even treating a $10 coupon as the
equivalent of a $10 bill, was only $10,000. No one would
think a $1 million attorneys’ fee appropriate compensation
for obtaining $10,000 for the clients, even though a poor re‐
sponse to notice is one of the risks involved in a class action.
In the present case, similarly though less dramatically, the
efforts of class counsel yielded an extremely modest harvest,
the value of which the district court made no effort to assess,
instead assuming unjustifiably that a $10 coupon is worth
$10 to every recipient.
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 17
Our response is the same to class counsel’s further argu‐
ment that had the case gone to trial the defendant might
have won because a jury might decide that the defendant’s
violation of the Fair and Accurate Credit Transactions Act
had not been willful. We’ll be discussing the application of
the Act’s concept of willfulness in connection with our other
case; suffice it to note here that, as we’ve explained, attor‐
neys’ fees don’t ride an escalator called risk into the financial
stratosphere. Some cases should not be brought, because the
litigation costs will exceed the stakes, and others are such
long shots that prudent counsel will cut his expenditure in
litigating them of time, effort, and money to the bone. Nei‐
ther course was followed by class counsel in this case. But, as
it happened, RadioShack’s violation probably was willful, as
we’ll see.
We have emphasized that in determining the reasona‐
bleness of the attorneys’ fee agreed to in a proposed settle‐
ment, the central consideration is what class counsel
achieved for the members of the class rather than how much
effort class counsel invested in the litigation. But in thus em‐
phasizing value over cost we may seem to be taking sides in
a controversy over the interpretation of the coupon provi‐
sions of the Class Action Fairness Act, in particular 28 U.S.C.
§§ 1712(a) and (b)(1), which read as follows:
(a) Contingent Fees in Coupon Settlements. If a proposed
settlement in a class action provides for a recovery of
coupons to a class member, the portion of any attor‐
ney’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.
(b) Other Attorneyʹs Fee Awards in Coupon Settlements.
(1) In general. If a proposed settlement in a class action
18 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
provides for a recovery of coupons to class members,
and 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 shall be based upon
the amount of time class counsel reasonably expended
working on the action.
This is a badly drafted statute. To begin with, read literal‐
ly the statutory phrase “value to class members of the cou‐
pons that are redeemed” would prevent class counsel from
being paid in full until the settlement had been fully imple‐
mented. For until then one wouldn’t know how many cou‐
pons had been redeemed. An alternative interpretation of
“value … of the coupons that are redeemed” would be the
face value of the coupons received by class members who
responded positively to notice of the class action. In this case
that would be 83,000 of the millions of class members who
received notice, though not all 83,000 will actually use the
coupon.
A thoughtful article, after pointing out that “in many sit‐
uations … it may not be possible or desirable to wait for ac‐
tual redemption rates to become known” before a coupon
class action is settled, nevertheless reads the statutory lan‐
guage “value … of the coupons that are redeemed” literally
and so is driven to suggest complicated methods, which
would require amending the Class Action Fairness Act, for
valuing a coupon settlement without delaying implementa‐
tion of the settlement indefinitely. Robert H. Klonoff & Mark
Hermann, “The Class Action Fairness Act: An Ill‐Conceived
Approach to Class Settlements,” 80 Tulane L. Rev. 1695, 1701–
02 (2006). This interpretation of section 1712(a) is, however,
in some tension with section 1712(d), which empowers the
district court to “receive expert testimony from a witness
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 19
qualified to provide information on the actual value to the
class members of the coupons that are redeemed.” Such a
witness could be asked to estimate the likely value of the
coupons to the class members before the redemption period
expires, and such evidence might provide a more efficient
method of compensating the class members and winding up
the litigation than waiting months or years for the redemp‐
tion period to expire and then revising the settlement by giv‐
ing the class members more or less, or class counsel more or
less. Moreover, if the settlement can’t be wound up until the
redemption period expires, this places pressure on the dis‐
trict court to approve a short redemption period, as in this
case—and the shorter the period, the less the value of the
coupon. And finally “value” could mean estimated econom‐
ic value of the settlement, rather than face value times num‐
ber of coupons.
There is no need for a rigid rule—a final choice, for all
cases, among the possibilities suggested. In some cases the
optimal solution may be part payment to class members and
class counsel up front with final payment when the settle‐
ment is wound up. That might be appropriate in a case such
as this. What was inappropriate was an attempt to determine
the ultimate value of the settlement before the redemption
period ended without even an estimate by a qualified expert
of what that ultimate value was likely to prove to be.
Another problem with section 1712 is that while subsec‐
tion (a) is mandatory—under it the attorneys’ fee in a cou‐
pon settlement must be based on the coupons’ redemption
value—subsection (b)(1) provides an alternative method of
determining attorneys’ fees in such a case: “the amount of
time class counsel reasonably expended working on the ac‐
20 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
tion”—what is called, in an opaque bit of legal jargon, the
“lodestar method” of calculating fee awards for class coun‐
sel.
In re HP Inkjet Printer Litigation, 716 F.3d 1173, 1183–84
(9th Cir. 2013), held (with one judge dissenting) that subsec‐
tion (b)(1) is limited to cases in which the settlement pro‐
vides both coupon and cash benefits to the class members—
whe there are just coupons subsection (a) must be used. The
reasoning is that coupon redemption value can’t be the sole
basis for calculating a reasonable attorneys’ fee for class
counsel if coupons are not the only benefit to the class, but
can be if they are the only benefit. This interpretation reflects
the suspicion of coupon settlements (the basis of the suspi‐
cion being well illustrated by this case) that was the motiva‐
tion for the coupon provisions of the Act. We need not com‐
plicate this opinion further by taking sides in HP Inkjet. The
important thing is that the district court should be alert to
the many possible pitfalls in coupon settlements—pitfalls
that moved Congress to amend the Class Action Fairness
Act with specific reference to such settlements.
It wouldn’t make much difference—maybe it wouldn’t
make any—if the district court could use the approach of
subsection (b)(1) even in all‐coupon case like this. The reason
is that hours can’t be given controlling weight in determin‐
ing what share of the class action settlement pot should go to
class counsel. The judge could start with hours but couldn’t
rightly stop there. The analogy to hourly billing by law firms
fails because law firms bill clients who have agreed to be
billed on that basis. Class counsel don’t have clients with
whom they negotiate billing. Class members do not tell class
counsel how much time to expend on a case and how much
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 21
they can charge per hour. The stakes for an individual class
member are typically (as in this case) too slight to induce
him to participate actively in the litigation. Class counsel’s
billing rate and maximum billable hours have to be deter‐
mined by the court in reviewing the terms of the proposed
settlement of the class action. And in that review the amount
of the class settlement allocable to class counsel should de‐
pend critically on the value of class counsel’s work to the
class.
Suppose that after working diligently for many days—an
amount of work for which normally they would charge a cli‐
ent $1 million—class counsel discovered that the expected
value of the litigation (the most reliable predictor of what a
judge or jury would award as damages and an appellate
court uphold) was $1.1 million, and on that basis they settled
the suit with the defendant for that amount. It would be ab‐
surd to approve a settlement that awarded class counsel ten
times the damages awarded the class ($100,000 in the exam‐
ple), on the basis of “the amount of time class counsel rea‐
sonably expended working on the action,” even if the ex‐
penditure was “reasonable” given what class counsel rea‐
sonably but mistakenly had thought the case worth to the
class. For that would be a settlement in which class counsel
had been able to shift the entire risk of the litigation to their
clients.
Analysis is more complex when the principal benefits of
the settlement are nonmonetary, as when equitable relief is
awarded rather than damages. A value must be attached to
the relief obtained by the class as part of the determination
of an appropriate attorneys’ fee for class counsel, but a
rough estimate may be permissible, especially when, as in
22 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
civil rights cases, much of the value of the equitable relief
may be nonmonetizable.
We have called this case an “all‐coupon” case but class
counsel call it a “zero‐coupon” case. They say that a coupon
that can be used to buy an entire product, and not just to
provide a discount, is a voucher, not a coupon. “Voucher” is
indeed the term used in the settlement agreement, because
the parties didn’t want to subject themselves to the coupon
provisions of the Class Action Fairness Act. But the idea that
a coupon is not a coupon if it can ever be used to buy an en‐
tire product doesn’t make any sense, certainly in terms of the
Act. Why would it make a difference, so far as the suspicion
of coupon settlements that animates the Act’s coupon provi‐
sions is concerned, that the proposed $10 coupon could be
used either to reduce by $10 the cash price of an item priced
at more than $10, or to buy the entire item if its price were
$10 or less? Coupons usually are discounts, but if the face
value of a coupon exceeds the price of an item sold by the
issuer of the coupon, the customer often is permitted to use
the coupon to buy the item—and sometimes he’ll be refund‐
ed the difference between that face value and the price of the
item. See, e.g., “Coupons: What Are They and Where Do I
Start?,” Penny Pinchin’ Mom, www.pennypinchinmom.com
/getting‐started‐on‐penny‐pinchin‐mom/coupons‐what‐are‐
they‐and‐where‐do‐i‐star/.
That is the character of RadioShack’s proposed coupons:
they can be used either to buy entire items priced up to $10
(though without a refund of any difference between the face
value of the coupon and the price of the item bought with it)
or to obtain a discount on a pricier item. There are no data
on how often a $10 coupon would be used in a RadioShack
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 23
store to buy an item costing $10 or less rather than to obtain
a discount on a pricier item. But it’s unlikely that a buyer
would use a coupon to buy an item costing less than $10,
since the buyer would receive no change. And we are not
told how many items in the typical RadioShack store cost
exactly $10. (For items that cost more, the coupon is a dis‐
count.) We are told that 6000 different products sold by Ra‐
dioShack are priced at $10 or less, out of some 20,000 differ‐
ent RadioShack products advertised in an online catalog. See
RadioShack—Do It Together, www.google.com/?gws_rd=ss
l#q=RadioShack%20products&nfpr=1&start=0. But we are
not told how many of each of the low‐priced products the
average RadioShack store carries. But it is apparent that the
products are actively promoted and presumably most in
demand by consumers are on average more expensive than
$10. See, e.g., Weekly Electronics Deals and Discounts, www.ra
dioshack.com/category/index.jsp?categoryId=41803466. And
this means that even if “coupon” is narrowly defined to
mean a discount, RadioShack’s coupons are mainly coupons
in just that narrow sense, and only occasionally vouchers.
In any event the narrow sense is untenable. As we said
before, from the standpoint of the dominant concerns that
animate the provisions of the Class Action Fairness Act re‐
garding coupon settlements it’s a matter of indifference
whether the coupon is a discount off the full price of an item
or is equal to (or for that matter more than) the item’s full
price. The Senate Report on the coupon provisions, S. Rep.
No. 109‐014, pt. IV.D.1 (Lawyers Receive Disproportionate
Shares of Settlements), https://beta.congress.gov/109/crp
t/srpt14/CRPT‐109srpt14.pdf., at pp. 15–20, does not define
coupon, but treats the term as interchangeable with “vouch‐
er, ” id. at 16, and evinces no wish to treat vouchers differ‐
24 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
ently from coupons in the evaluation of a proposed class ac‐
tion settlement.
Class counsel point out that elsewhere in the legislative
history concern is expressed with settlements that compel
class members to spend more money with the defendant if
they want to benefit from the settlement, as is the case with a
discount, but not with a voucher that is simply exchanged
for an item so that no cash changes hands. But this was not
Congress’s only concern, as shown by the Senate Report just
cited, which, as we pointed out, in documenting the abuses
of coupon settlements does not give “coupon” the narrow
definition urged by class counsel.
This case illustrates why Congress was concerned that
class members can be shortchanged in coupon settlements
whether a coupon is used to obtain a discount off the full
price of an item or to obtain the entire item; we have noted
the ways in which store credit for $10 is not as valuable to
the recipient as $10 in cash. Class counsel’s proposed distinc‐
tion between discount coupons and vouchers also would
impose a heavy administrative burden in distinguishing
coupons used for discounts on more expensive items (“cou‐
pons” in class counsel’s narrow sense of coupon) and the
identical coupons used to pay the full prices of cheaper
items (“vouchers” in class counsel’s lexicon and not “cou‐
pons” at all). Class counsel trumpet the 6000 items that class
members can buy with just the coupon—namely any prod‐
uct that costs $10 or less. As the present case illustrates, as‐
sessing the reasonableness of attorneys’ fees based on a cou‐
pon’s nominal face value instead of its true economic value
is no less troublesome when the coupon may be exchanged
for a full product. There is in short no statutory or practical
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 25
reason for distinguishing among coupons that offer 10 per‐
cent, 50 percent, 90 percent, or 100 percent cash savings.
The difficulty of valuing a coupon settlement exposes
another defect in the proposed settlement: placing the fee
award to class counsel and the compensation to the class
members in separate compartments. The $1 million attor‐
neys’ fee is guaranteed, while the benefit of the settlement to
the members of the class depends on the value of the cou‐
pons, which may well turn out to be much less than
$830,000. This guaranty is the equivalent of a contingent‐fee
contract that entitles the plaintiff’s lawyer to the first $50,000
of the judgment or settlement plus one‐third of any amount
above $50,000—so if the judgment or settlement were for
$100,000 the attorneys’ fee would be $66,667, leaving only a
third of the combined value (to plaintiff and lawyer) of the
settlement to the plaintiff.
Another questionable feature of the settlement is the in‐
clusion of a “clear‐sailing clause”—a clause in which the de‐
fendant agrees not to contest class counsel’s request for at‐
torneys’ fees. Because it’s in the defendant’s interest to con‐
test that request in order to reduce the overall cost of the set‐
tlement, the defendant won’t agree to a clear‐sailing clause
without compensation—namely a reduction in the part of
the settlement that goes to the class members, as that is the
only reduction class counsel are likely to consider. The exist‐
ence of such clauses thus illustrates the danger of collusion
in class actions between class counsel and the defendant, to
the detriment of the class members.
As explained (with copious references to both judicial
and academic sources) in William D. Henderson, “Clear Sail‐
ing Agreements: A Special Form of Collusion in Class Action
26 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
Settlements,” 77 Tulane L. Rev. 813 (2003), clear‐sailing claus‐
es are found mainly in cases such as the present one in
which the value of the settlement to the class members is un‐
certain because it is not a cash settlement. This complicates
the difficulty faced by the district court in determining an
appropriate attorneys’ fee, and a clear‐sailing clause exacer‐
bates the difficulty further by eliminating objections to an
excessive fee by the defendant. Clear‐sailing clauses have
not been held to be unlawful per se, but at least in a case
such as this, involving a non‐cash settlement award to the
class, such a clause should be subjected to intense critical
scrutiny by the district court; in this case it was not.
There is still more wrong with the settlement. Rule 23(h)
of the civil rules requires that a claim for attorneys’ fees in a
class action be made by motion, and “notice of the motion
must be served on all parties and, for motions by class coun‐
sel, directed to class members in a reasonable manner.”
Class counsel did not file the attorneys’ fee motion until after
the deadline set by the court for objections to the settlement
had expired. That violated the rule. In re Mercury Interactive
Corp. Securities Litigation, 618 F.3d 988, 993–95 (9th Cir. 2010);
see also Committee Notes on the 2003 Amendments to Rule
23. From reading the proposed settlement the objectors
knew that class counsel were likely to ask for $1 million in
attorneys’ fees, but they were handicapped in objecting be‐
cause the details of class counsel’s hours and expenses were
submitted later, with the fee motion, and so they did not
have all the information they needed to justify their objec‐
tions. The objectors were also handicapped by not knowing
the rationale that would be offered for the fee request, a mat‐
ter of particular significance in this case because of the invo‐
cation of administrative costs as a factor warranting in‐
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 27
creased fees. There was no excuse for permitting so irregu‐
lar, indeed unlawful, a procedure.
A final concern with the settlement involves the lead
named plaintiff, Scott Redman. He is employed by a law
firm for which the principal class counsel, Paul Markoff and
Karl Leinberger, once worked. “The named plaintiffs are the
representatives of the class—fiduciaries of its members—and
therefore charged with monitoring the lawyers who prose‐
cute the case on behalf of the class (class counsel).” Eubank v.
Pella, supra, 753 F.3d at 719. There ought therefore to be a
genuine arm’s‐length relationship between class counsel and
the named plaintiffs. We don’t say there wasn’t such a rela‐
tionship in the present case, but we do wish to remind the
class action bar of the importance of insisting that named
plaintiffs be genuine fiduciaries, uninfluenced by family ties
(as in Eubank) or friendships.
The magistrate judge, in approving the inadequate set‐
tlement proposal, may have been concerned with the cost of
litigation to fragile RadioShack if the settlement was disap‐
proved and the case had to be tried. But very few class ac‐
tions are tried, see id. at 720, and this one would not have
been an exception. RadioShack can’t afford costly litigation,
and class counsel can’t afford to risk a delay in settling, lest
RadioShack declare bankruptcy. A renegotiated settlement
will simply shift some fraction of the exorbitant attorneys’
fee awarded class counsel in the existing settlement that we
are disapproving to the class members.
We come at last to our second case, Shoe Carnival, which
pivots on the meaning of “willfully” in the Fair and Accurate
Credit Transactions Act. The willfulness issue in RadioShack
case was straightforward. The company had been found in
28 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
an earlier lawsuit to have left the expiration date on receipts
in violation of a parallel state statute, see Ferron v. RadioShack
Corp, 886 N.E.2d 286 (Ohio App. 2008), and apparently failed
to take adequate precautions against repeating the violation,
this time of the (materially identical) federal statute. By the
time RadioShack discovered the mistake, 16 million unlaw‐
ful receipts had been handed to its customers, as we know.
The company had to know that there was a risk of error be‐
cause the identical risk had materialized previously. Know‐
ing the risk and failing to take any precaution against it—
though a completely adequate precaution would have cost
nothing—were indicative of willful violation.
That RadioShack’s violation probably was willful under‐
scores the meagerness of the settlement value to the class
members. Class counsel—a handful of lawyers—divide up a
million dollars, under the settlement that the district court
approved, while a relative handful of class members (83,000
out of 16 million potential class members) receive only 10
cents on the dollar, since the coupon is only $10 even though
the minimum statutory damages for a willful violation is
$100. And 10 cents on the dollar is actually an exaggeration
of the benefit of the settlement to the class, because the cou‐
pons are worth less in the aggregate than their face value.
Yet as we also said, given RadioShack’s parlous financial
state it would be a mistake to increase the aggregate size of
the settlement beyond its current $4.1 million ceiling. Our
only concern therefore is the division of spoils between class
counsel and class members. It seems apparent that each class
member has a valid claim to a good deal more than one $10
coupon, and it would seem therefore that the equities favor a
reallocation of some of what we are calling the spoils from
class counsel to the class members who have submitted
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 29
claims for the coupons. We are mindful that recipients of
statutory damages are not being compensated for actual in‐
jury, but in effect are being paid bounties to assist in efforts
to reduce identity theft. But identity theft is a serious prob‐
lem, and FACTA is a serious congressional effort to combat
it.
The willfulness issue in Shoe Carnival is different from
that in RadioShack. There was no previous violation to alert
the company; and it is not argued that mistakes made by
other credit‐card sellers should have alerted it to the risk of
violating the statute inadvertently. And if there was a viola‐
tion, it was not willful because it consisted of a permissible
interpretation of an ambiguous statute. Cf. Safeco Ins. Co. of
America v. Burr, supra, 551 U.S. at 68. Instead of omitting the
entire expiration date from credit‐card receipts, Shoe Carni‐
val omitted just the year; the month in which the credit card
expired remained. Now “expiration date” is not a defined
term in the statute. It could mean the month, day (if other
than the last day of the month), and year in which the card
expires, and it is arguable that if any of these are left out
there’s no actual expiration date on the receipt, just a frag‐
ment of such a date.
The first part of the statutory provision, dealing with the
credit‐card number, is explicit that all the digits that make
up the number need not be deleted to avoid a violation; the
last five can remain. The second part of the provision, deal‐
ing with the expiration date, is not explicit. All that is clear is
that “January,” with no year, is not an expiration date; it’s
just part of such a date.
There wouldn’t be any purpose, however, in allowing the
seller to leave the month of expiration on the receipt. The
30 Nos. 14‐1470, ‐1471, ‐1658, ‐1320
last five digits of the card number are permitted to remain so
that in the event of a dispute with the card company or mak‐
er of the receipted sale, the customer’s ownership of the card
can be veritied; in addition, “printing any small subset of the
digits on a card enables the customer to know which card
was used for a particular purpose (that’s why merchants
want to print some of the digits), without enabling a stranger
to learn the full number.” Van Straaten v. Shell Oil Products
Co. LLC, 678 F.3d 486, 490 (7th Cir. 2012). All that allowing
the month to remain on the receipt does, however, is give an
identity thief a datum that he may be able to use in conjunc‐
tion with other data to determine the cardholder’s identity,
as when Merchant A prints the last 5 digits and the month,
Merchant B prints the last 5 digits and the year, and Mer‐
chant C prints no dates inadvertently prints the entire credit
card number—and an identity thief gains access to all three
receipts. Though that’s unlikely to happen, there is no up‐
side to allowing the month to appear on the receipt; and so
there is a persuasive argument for interpreting “expiration
date” in the statute to mean “expiration date or any part
thereof,” as held in Long v. Tommy Hilfiger U.S.A., Inc., 671
F.3d 371 (3d Cir. 2012), which noted that if part of the expira‐
tion date is allowed to remain on the receipt, and different
sellers leave different parts of the expiration date on their
receipts, a person who found different receipts for purchases
by the same cardholder might learn the entire expiration
date. This is why the statute permits the receipt to show only
the last five digits of the card number—if it could show any
five digits, an identity thief could reconstruct the entire
number if he obtained multiple receipts of sales to the same
cardholder.
Nos. 14‐1470, ‐1471, ‐1658, ‐1320 31
There is, however, sufficient ambiguity attending the
provision of the statute regarding the expiration date to jus‐
tify the district court’s determination that Shoe Carnival had
not willfully violated FACTA. The interpretation of the stat‐
ute advanced by the company was possible, indeed plausi‐
ble, possibly even correct; and that is enough, as the district
court held, to negate an inference of willfulness.
To conclude, the judgment approving the settlement in
RadioShack (Nos. 14‐1470, ‐1471, and ‐1658) is reversed and
the case remanded to the district court for further proceed‐
ings consistent with this opinion. The judgment in favor of
the defendant in Shoe Carnival (No. 14‐1320) is affirmed.