Sept. 4, 2015 – Traveling for Labor Day weekend? Does your airline fare come with a free in-flight drink? If so, you may be interested in this case involving two travelers who filed a class action after discovering an airline stopped honoring in-flight drink vouchers.

The travelers, Adam Levitt and Herbert Malone, purchased “Business Select” fares from Southwest Airlines, which included a drink voucher. But they didn’t use the voucher on the corresponding flight; they held onto the vouchers and tried to use them later.

They later learned that Southwest Airlines, in August 2010, stopped accepting old drink vouchers despite the fact that the vouchers contained no expiration date.

They filed a class action lawsuit for breach of contract, seeking to represent all persons who bought flights with vouchers that were discontinued. The parties reached a settlement: class members could redeem a drink voucher good for one year on any Southwest flight. The two lead plaintiffs also received a $15,000 “incentive” award.

The parties also reached a settlement on class counsel fees. Southwest agreed to pay up to $3 million in attorney fees plus up to $30,000 for expenses. Using the “lodestar method,” the district court judge awarded $1.6 million in fees and $18,500 in expenses.

Class counsel appealed, and so did two class members who said the class counsel fee was disproportionate to class relief. The class members argued that attorney’s fees should correspond to the value of coupons actually redeemed by members of the class.

In Malone et al. v. Southwest Airlines Co., (Aug. 20, 2015), a three-judge panel for the U.S. Court of Appeals for the Seventh Circuit affirmed the class counsel fee award.

The primary issue was whether the federal Class Action Fairness Act (CAFA), 28 U.S.C. § 1712, allowed the district court to apply the “lodestar method” when calculating attorney fees, a formula using factors to determine what is a “reasonable” attorney fee.

Section 1712 deals directly with contingent fees in class “coupon settlements.”

It says that attorney’s fees in settlements providing a recovery of coupons should be a percentage “based on the value to class members of the coupons that are redeemed.”

Another provision says fees, if not based on the percentage value, can be based on “the amount of time class counsel reasonably expended working on the action.”

CAFA prohibits attorney’s fees in class coupon settlements to be based on the “face value” of all coupons issued, rather than those actually redeemed. But as the three-judge panel noted, the law “does not expressly prohibit use of the lodestar method.”

“We hold that §1712 permits a district court to use the lodestar method to calculate attorney fees to compensate class counsel for the coupon relief obtained for the class, “ wrote Judge David Hamilton, noting this decision creates a circuit split.

In 2013, a three-judge panel for the Ninth Circuit ruled that the lodestar method is not permissible to determine attorney fees in class coupon settlements, unless the lodestar method is used to compensate counsel for work not attributable to the coupon award.

Panel Rejects Other Arguments

The class members also said the fee agreement included “clear-sailing” and “kicker” clauses, evidence the settlement was not fair to class members. A clear-sailing clause prohibits challenges to attorney fee awards up to a certain amount. Kicker clauses allow defendants, not the class, to benefit if a court orders a reduced attorney fee.

The panel noted that clear-sailing and kicker clauses, while closely scrutinized, are not per se bars to settlement approval. The panel also noted that that the class members here received everything they asked for: redeemable drink vouchers on a future flight.

“[T]his settlement makes the class whole, and the district court carefully scrutinized – and significantly reduced – the fee request,” Judge Hamilton wrote.

“Even if the court had rejected the settlement, it is hard to imagine the class receiving any better result after further negotiations or a trial. The district court therefore did not abuse its discretion by approving the settlement as fair and reasonable.” 

The class attorneys argued that the district court judge should have deferred to the amounts agreed in the settlement, rather than reduce the attorney fee award. The panel also rejected this argument, noting the district court did not abuse its discretion.

Conflict of Interest

Finally, the court rejected the claim that the settlement class should not have been certified based on a “conflict of interest” between the lead class counsel, Joseph Siprut, and Adam Levitt, one of the two class representatives who initiated the case.

Siprut and Levitt, also a lawyer, are co-counsel on a class action pending in California, but did not disclose the relationship to the district court.

The panel noted that Siprut and Levitt should have disclosed the relationship, since class representatives represent the interests of the class in dealing with counsel and defendants. However, the panel ruled that the class was adequately represented, and refused to reverse on the grounds that the class should not have been certified.

“The failure to disclose the relationship by Siprut and Levitt should be addressed in another way,” wrote Hamilton. “Plaintiff Levitt should not receive a $15,000 incentive award. His failure to disclose was an important failure in protecting the interests of the class. For the same reason, Siprut’s fee should be reduced by the same amount.”