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Massage Envy $10 mln coupon settlement, fee award tossed by 9th Circuit

4 minute read

The James R. Browning U.S. Court of Appeals Building, home of the 9th U.S. Circuit Court of Appeals, is pictured in San Francisco, California. REUTERS/Noah Berger

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  • Appeals court sets new rules for "coupon" settlements
  • Court sides with objector counsel Ted Frank in scrapping $2.6 million in attorneys' fees

(Reuters) - The 9th U.S. Circuit Court of Appeals sided with an objector and threw out a $10 million settlement and about $2.6 million in attorneys’ fees on Wednesday in a class action against Massage Envy after finding the deal required more scrutiny under the Class Action Fairness Act.

The three-judge panel agreed with objector Kurt Oreshack and his attorneys at the Hamilton Lincoln Law Institute’s Center for Class Action Fairness in vacating the settlement’s approval, finding that the deal qualified as a “coupon” settlement under the act.

The panel also found that U.S. District Senior Judge Maxine Chesney failed to properly evaluate whether some terms of the settlement could indicate collusion between the plaintiffs’ counsel and Massage Envy in reaching the agreement. The panel concluded that the lower court deficiencies were enough to vacate the settlement in whole.

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The Class Action Fairness Act puts restrictions on the attorneys' fees stemming from settlements that award class members vouchers for products or services, saying the fees must be based on the redemption value of the vouchers.

Wednesday's decision is particularly notable because the appellate court provided new information about what qualifies as a coupon settlement. The circuit had previously laid out a three-part test for judges to use in evaluating settlements with vouchers, directing them to consider factors such as whether the vouchers required class members to spend more money to use them. But in Wednesday's opinion, the panel said the test's three factors should be balanced against one another and don't have to all be met.

Asked for comment about the decision, Center for Class Action Fairness founder Ted Frank referred to his tweets, which indicated he predicts more confusion over coupon settlements instead of less from the decision. “It’s worth millions to settling parties to try to game things, and this just invites uncertainty and further litigation in the future,” he wrote.

Counsel for Massage Envy, Ted Boutrous of Gibson, Dunn & Crutcher, did not respond to a request for comment, nor did a spokesperson for the company.

Jeffrey Krinsk of Finkelstein & Krinsk, who represented the proposed class, said the team will proceed to get a settlement approved. He said there was absolutely no risk of collusion between his side and the defense, and viewed the panel's comments about the risk as a warning to the entire class action bar.

“This was not a particularly profitable undertaking by plaintiffs’ counsel,” Krinsk said.

The underlying case accused Massage Envy franchisees of raising membership fees without the members’ approval. It settled in 2019, with the parties reaching a deal that gave class members vouchers for services at Massage Envy franchises, according to court records.

The deal set aside $10 million to cover the vouchers for the class members that claimed them. The settlement included a clause that said Massage Envy wouldn’t challenge the plaintiffs’ attorneys request for up to $3.3 million in fees, and another that said any difference between that figure and the actual amount awarded would revert back to Massage Envy, the opinion said.

The appellate panel said the clauses involving the plaintiffs’ counsel’s fees should have given the judge more pause.

“When a settlement provides non-cash relief and a reverter provision, a district court must be on the alert for an attorneys’ fee award that is artificially inflated in relation to the relief provided to the class,” the panel wrote.

Chesney, the trial court judge, did not immediately respond to a request for comment.

The case is Baerbel McKinney-Drobnis, et al v. Massage Envy Franchising, 9th U.S. Circuit Court of Appeals, No. 20-15539.

For the class: Trenton Kashima of Sommers Schwartz; and Jeffrey Krinsk and John Nelson of Finkelstein & Krinsk

For Massage Envy: Theodore Boutrous Jr, Kahn Scolnick, Martie Kutscher Clark, and Daniel Adler of Gibson Dunn & Crutcher; Luanne Sacks, Cynthia Ricketts, Robert Bader, and Mike Scott of Sacks Ricketts & Case

For Oreshack: Adam Schulman and Ted Frank of the Hamilton Lincoln Law Institute, Center for Class Action Fairness

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