09 March 2006

Clipping Coupons

Professor Tushnet describes a rather disturbing "coupon settlement" from a false-advertising class action in New York. Her comments reveal some interesting aspects of class litigation that both the plaintiffs'-side bar and the defendants'-side bar (and their insurers) would rather not have widely understood.

[T]he reasonableness of the settlement is at issue. There was no indication that the proposed discount coupons had any intrinsic cash value, or that they could be assigned, aggregated, or transferred in any way, which made it harder to find that they provided definite value to the class. Moreover, the settlement didn't propose to distribute the coupons directly to the class, but instead to the general public. Where it's difficult to locate class members or distribute funds directly to them, this cy pres distribution may be a "useful complement" to more traditional formulas. But the record didn't show that the trial court considered the alternatives, and this is particularly troubling because the coupons are unlikely to benefit class members with the most serious grievances.

After all, the defendant changed the label, not the fat and calorie content. People who relied on the misrepresentation are unlikely to buy the correctly labeled product.

"NY Appellate Court Keelhauls Pirate's Booty Settlement" (08 March 2006).

Unfortunately, this is an all-too-common means for defendants and insurance companies to avoid paying damages—and it's economically inefficient. Really. After all, what does a coupon settlement do? In order to get value from the coupons (which are usually nontransferable, or at least in the matters I've handled and examined), the recipient must continue to do business with the company that victimized her in the first place. In other words, the victim must internalize part or all of the costs caused by the perpetrator.1 Often, this is for a similar or identical item or service. It's one thing to get a coupon good on any "MegaCorp product"; it's another thing entirely to get a coupon for that exact item.

The usual justification for coupon settlements is that the damages if paid in cash would ruin the defendant. This, of course, ignores the potential insurance funds available, and more importantly implicates a question raised by Professor Ribstein regarding the UAL bankruptcy. What if economic efficiency would be better served by driving a "bad actor" out of business? A "bad actor" in the economic sense could be a mismanaged behemoth that is warping the price curve through quasimonopolistic practices and excessive costs; it could also be warping the price curve through a culture that encourages lawbreaking.2 If the culture is that ingrained, perhaps it needs to be eradicated—in the name of economic efficiency.3

  1. I am purposely using language parallel to a criminal action here, primarily for clarity's sake. Frequently in matters of this nature, the defendant is an amorphous and/or corporate entity, which may be distinct from the perpetrator. Further, this also avoids bringing the propriety of insurance for willful actions into play—and all too often these are willful actions.
  2. The obvious rejoinder is that some of the laws in question are needlessly burdensome or just plain wrong. That's what the ballot box is for; one of the consequences of "civil disobedience" is that those who disobey the law must feel so strongly about the wrongfulness of the law that they're willing to accept the consequences. That doesn't make the law in question more or less right.
  3. Of course there is more to a corporation (or other business) than "economic efficiency"! My point is that most Western swords cut on the backstroke, too.