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From Banking and Finance Law Daily, September 22, 2014

Willful card receipt violation discussed, class action settlement terms ripped

By Richard A. Roth, J.D.

The U.S. Court of Appeals for the Seventh Circuit has contrasted the facts in two Fair Credit Reporting Act class actions to illustrate what constitutes a willful violation of the ban on printing too much information on a credit or debit card receipt. However, the majority of the opinion in the two consolidated cases is devoted to criticizing the size of the attorney fee award contained in a settlement of one of the two suits—an award sufficiently disproportionate to what was received by the class members that it led the appellate court to reverse the approval of the settlement (Redman v. RadioShack Corp., Sept. 19, 2014, Posner, Circuit Judge).

The appellate court chose to consolidate for decision two class actions claiming that merchants had wilfully violated the FCRA ban on including more than the last five digits of a card number or the card’s expiration date on an electronically printed receipt (15 U.S.C. §1681(c)). Much of the opinion was given over to an analysis of the settlement that was approved by the district court in Redman v. RadioShack Corp. The issue in Nicaj v. Shoe Carnival, Inc., was whether the company’s FCRA violation—if there was a violation—was willful.

Willfulness. Whether a merchant willfully included prohibited information on a receipt is important because statutory damages are available to a consumer in the case of a willful violation. If the merchant acted negligently, a consumer is required to prove damages to recover; however, if the merchant acted willfully, a statutory award of up to $100 per violation can be recovered even if the consumer did not suffer any damages.

According to the court, Shoe Carnival had created receipts that omitted the year when the card would expire but included the month. Given that the FCRA does not define “expiration date,” it was not clear that this was a violation at all, the court said. At the very least, the company’s legal interpretation that the month could be included was plausible, meaning that any error would not have been willful.

However, RadioShack’s error most likely was a violation, the court said. The company included entire expiration dates on the receipts it gave even after it had been found to have violated an Ohio law that prohibited it from doing so. The company had to know there was a risk of an error since it already had lost the state court suit, yet it did not take adequate steps to prevent a recurrence. That indicated a willful violation, the court said.

Settlement terms. The settlement agreed to by RadioShack, approved by the district court, and challenged by a dissatisfied class member, gave class members only coupons. Each identified class member who applied would receive one coupon worth $10 toward a purchase at RadioShack. No cash refunds would be given if an item was purchased for less than $10, and the coupons expired in six months. The appellate court noted that while the class might have had as many as 16 million members, fewer than 5 million were notified of the settlement and their entitlement to a coupon. In the end, only about 83,000 made coupon requests.

The class attorneys were to receive fees of nearly $1 million.

Criticism of settlement approval. The appellate court opinion severely criticized the magistrate judge’s decision to approve the settlement, going so far as to call several of her conclusions “naïve.” Class members’ failure to object to the settlement was more likely due to “oversight, indifference, rejection, or transaction costs” than to their approval of its terms, the appellate court said. The magistrate’s belief that the settlement must be fair because it resulted from arm’s length negotiations between experienced attorneys also was termed naive, since the class counsel were subject to a conflict of interest that arose from their own economic interests that could influence the result of those negotiations.

The appellate court also observed that the magistrate “questionably” thought that class members’ .5-percent response rate to the notice represented “a considerable portion” of the class.

Class action settlements are subject to an unavoidable conflict of interest, the appellate court said. The defendant wants to settle for the lowest possible total cost. The class counsel is interested in securing high attorney fees, and that interest could shift the value of the settlement away from the class members and toward the class counsel. That is why a judge must decide whether a proposed settlement is reasonable, and the magistrate considering the RadioShack settlement “failed to analyze the issues properly,” the appellate court said.

The appellate court also criticized the magistrate specifically for permitting an illegal procedure. The Federal Rules of Civil Procedure require that a motion for attorney fees be filed and notice be given to the class members in a reasonable manner. However, the magistrate allowed the class counsel to file a motion for fees after the deadline for class members’ objections to the settlement had passed. “There was no excuse for permitting so irregular, indeed unlawful, a procedure,” the court said.

Size of fee award. The appellate court’s concerns boiled down to a determination that the fees for the class counsel were too high in relation to the total value of the recovery. The court discussed in detail why it was difficult to estimate the value of the coupons to class members. However, even if one assumed that the value was the full amount of the coupons that had been issued, the class counsel would receive $1 million while consumers would receive $830,000. In other words, the attorney fees would be about 55 percent of the total recovery, if administrative and notice costs were not considered.

In fact, the court opined, the value to the class members was probably far less than $830,000. Moreover, since the company’s violation most likely was willful, and the class members’ claims likely were worth $100 cash in statutory damages, not a $10 coupon, it was inappropriate to give the class counsel so much of the recovery.

There were several possible solutions, the court said. Perhaps RadioShack could pay more, although that was said to be unwise given the company’s precarious financial condition. “[I]t would seem therefore that the equities favor a reallocation of some of what we are calling the spoils from class counsel to class members who have submitted claims for coupons.”

The case is No. 14-1470, 14-1471, 14-1658, and 14-1320.

Attorneys: Karl Leinberger (Markoff Leinberger) for Scott D.H. Redman. Theodore H. Frank (Center for Class Action Fairness) for Michael Rosman. James R. Daly, III (Jones Day) for RadioShack Corp. Curtis C. Warner (Warner Law Firm, LLC) for Sulejman Nicaj. Aaron D. Van Oort (Faegre Baker Daniels LLP) for Shoe Carnival Inc.

Companies: RadioShack Corporation; Shoe Carnival, Incorporated.

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