In a coupon settlement, instead of giving customers cash, companies offer compensation of a coupon, credit or certificate toward the purchase of future products or services. Except in the cases where a company is forced to end bad practices, consumers don’t win in these settlements.
Take, for example, the recent proposed settlement offered by Indiana-based membership club DirectBuy. Its stores are independent franchises that charge consumers thousands of dollars in fees for the privilege of being able to buy home-improvement goods and furnishings at supposedly deeply discounted prices.
The company is accused in a class-action lawsuit of fraudulent misrepresentation. Customers were told they could buy goods from manufacturers and suppliers at cost. According to the lawsuit, however, the company receives rebates from the suppliers and manufacturers, resulting in members paying more than the cost for such goods. The suit also alleges that DirectBuy did not disclose such arrangements to customers until early 2009.
So now there’s a settlement offer on the table.
Under the terms of DirectBuy’s proposed settlement, class members are divided into two groups. Current members would receive an automatic two-month extension of their memberships and the opportunity to purchase either a slightly discounted 28-month membership renewal for the price of a 24-month renewal or a 13-month renewal for the price of a 12-month renewal.
A second tier of customers, former DirectBuy members, would receive two months of membership and the option to purchase a renewal at $200 per year (up to 10 years), provided they have paid their initial membership dues in full.
Attorneys general of 37 states, Puerto Rico and the District think the proposal is a bad deal for consumers. Additionally, officials argue that DirectBuy wouldn’t be prohibited from continuing its arrangements with suppliers and manufacturers.
What DirectBuy is offering consumers, the attorneys general say, is a classic coupon settlement that is not fair or adequate.
“The proposed settlement is, in essence, a sales vehicle for defendants designed to drive current and former customers into membership renewal contracts and to the same manufacturers and suppliers from whom defendants have acknowledged receiving kickbacks and incentives,” they wrote in a brief filed in U.S. District Court in Connecticut.
The attorneys for the class make out pretty well. Under the proposed settlement, they could receive between $350,000 and $1 million. Named plaintiffs get $4,000.
A hearing on the fairness of the settlement is scheduled for May 10, according to DirectBuy spokesman Mike Georgeff.
“At DirectBuy, we were completely surprised by the announcement by this group of state attorneys general, as we are confident that the settlement is fair,” Georgeff wrote in an e-mail.
He went on to say, “DirectBuy has consistently maintained that its business practices are honest and lawful in all respects.”
Oh, the memories this case brings up. I was party to a settlement case involving my cellphone service provider 12 years ago. I was offered a $15 credit as a result of a class-action billing lawsuit. But the only way to redeem the credit was to spend more money with the mobile company. Under one scenario, I would have had to buy something for at least $75 to benefit from the so-called credit. Basically, the conditions of the settlement required that I give the company more cash to retrieve money than they took in from a questionable practice in the first place.
Reviewing the DirectBuy proposed offer, I had a flashback. Why do the courts continue to approve these types of settlements?
The judge assigned to the case will have to weigh the offer against the requirements of the Class Action Fairness Act of 2005 (CAFA), which is supposed to subject coupon settlements to a higher level of scrutiny than in the past. The Connecticut attorney general’s office believes this case is the largest number of states joining in opposition to a proposed class-action settlement since the passage of the fairness act.
DirectBuy’s offer “has all of the hallmarks of the abusive coupon settlements identified in CAFA’s legislative history,” the attorneys general wrote.
The fact is, many class-action settlements still stink. What’s fair about requiring consumers to spend more money to get compensation?
If you’ve ever received one of these settlement offers, you know the answer.
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