In 2011, Walmart agreed to settle a class action lawsuit worth $27.5 million by paying participants via check or gift card. The settlement was in response to a deal made in 2005, in which the CEOs of Walmart and Netflix allegedly agreed to share the DVD market. Both parties agreed that Walmart would not rent DVDs if Netflix promised not to sell them. The deal was designed as a promotional agreement to help each party market one another’s specific movie business on their own websites.
This agreement prompted Netflix subscribers to file suit against the two companies in 2009 alleging that they violated anti-trust laws by improperly entering into an unlawful market allocation agreement. Walmart settled the lawsuit in 2011, while Netflix stated that the suit was without merit. The suit against Netflix was eventually dismissed, and later affirmed, based on summary judgment because the participants did not prove that Netflix had conspired with Walmart.
In 2015, roughly 750,000 U.S. consumers received a suspicious email entitled “Online DVD Rental Settlement has sent you a $12.32 eGift Card for Walmart.” Many of the recipients were concerned by the email and believed it was spam. Although the email was not spam, the settlement itself is controversial, as many believe it was a way for the plaintiffs’ attorneys to enrich themselves at the detriment of claimants.
Ted Frank, the Director of the Center for Class Action Fairness, filed a legal objection to the settlement. He claimed that claimants were steered towards the Walmart gift card rather than the check because they could redeem the gift card online but had to submit a mailed request for the check.
At first glance, this seems like a beneficial practice that makes it easier for claimants to receive their portion of the settlement. Under closer examination however, this tactic is also a way for the plaintiffs’ attorneys to artificially inflate the attorney’s fees they receive. This concern was addressed by the Class Action Fairness Act (CAFA) of 2005, which sought to limit attorney’s fees in class action suits, specifically by limiting “coupon settlements”CAFA sought to limit attorney’s fees, so that they are based on the number of people who actually redeem the coupons from the settlement, rather than the number of people eligible for the coupons.
The problem is that CAFA never defined the term “coupon,” therefore, CAFA did not eliminate or even materially restrict their use. Instead, creative attorneys, as in this case, are ableto work around this classification. Judge Phyllis J. Hamilton ruled in this case that the gift cards were distinct from coupons as they were freely transferrable, do not expire, and do not require consumers to spend their own money.
This loophole allowed plaintiffs’ attorneys in this case to be awarded $6.8 million in fees based on the $27 million that claimants are entitled to, rather than the much smaller amount actually redeemed by possible claimants. As with many regulations, CAFA sought to fix a problem, but so far has fallen short based on numerous loopholes available to creative attorneys.
*Hunt Harris is a second year law student at Wake Forest University School of Law. Before law school, he studied Political Science and Spanish at North Carolina State University in Raleigh, North Carolina.