Southwest settlement: Up to $7 million for attorneys; $5 drink vouchers for class

By  AMANDA SMITH-TEUTSCH

CHICAGO (Legal Newsline) – Dallas-based Southwest Airlines, the nation’s largest passenger air carrier, has agreed in federal court to settle a class action lawsuit over changes to a program that provided free drinks for business-class passengers.

While passengers in the class action suit will receive a benefit of about $5 each, lawyers who filed the suit stand to receive up to a $7 million payday.

Up until August 2010, the airline offered non-expiring premium drink coupons, good for beer, wine and mixed drinks, to passengers who paid for higher-priced Business Select air fares. With an eye on profitability, the airline suddenly changed the coupon program to make it so the drink coupons were only good on the day of the flight.

In a statement on the company’s website, Mike Hafner, company vice president, said at the time the change was effective immediately, and that the company’s practice of honoring the drink coupons regardless of issue date was hurting the company’s balance sheet.

“For years, Southwest Airlines has accepted all types of drink coupons on our planes – regardless of their expiration dates. Rapid Rewards coupons. Business Select coupons. Old Company Club coupons. Coupons from the 80s, coupons from the 90s. And we’ve done so for all the right reasons.  However, in an industry where the competition is always knocking (or banging) on the door and where watching the bottom-line is more important than ever, we owe it to our Employees, Customers, and Shareholders to find ways to operate smarter.  We’ve reached a point where being so flexible with drink coupons has put us in a position of having far too many in circulation,” he wrote on the company website.

Adam J. Levitt, of Cook County, Ill., was left with at least 45 unclaimed Southwest drink coupons on Aug. 1, 2010. He filed suit in federal court in Illinois in November 2011.

Alleging breach of contract, unjust enrichment and violation of the Illinois Consumer Fraud Act, the lawsuit claimed the drink coupons were part of the purchase contract for Business Select airfare, and while the airline had the right to cancel the program at any time, they were bound by the wording on the drink coupons to honor any coupons issued in the past. The court eventually dismissed the charges of unjust enrichment and violation of the consumer fraud act.

In a joint motion for settlement approved by the court Dec. 10, 2012, Southwest agreed to issue replacement vouchers – good for one year – for each Business Select drink coupon issued before Aug. 1, 2010 that passengers produce. The airline has until December 2013 to produce a list of the passengers who might be eligible for new drink vouchers, and will notify them by email and published notice of their potential eligibility for new drink coupons.

There are unknown amounts of drink coupons in circulation. Court documents state “conservative” estimates for the value of the settlement range between $29 million and $58 million, meaning Southwest expects a minimum of 5.8 million of the coupons were unused by Business Select passengers. The attorneys for the plaintiffs are still working on a settlement of their own with Southwest; right now, settlement discussions have set a floor of $1.75 million and a ceiling of $7 million, plus expenses and costs of $30,000.

The court set a deadline for final petition for class counsel’s attorney’s fees and expenses of April 4, 2013; Southwest will have until April 18 to file a response.

Plaintiff attorneys include Joseph J. Siprut, James M. McClintick, Aleksandra M.S. Vold and Gregg M. Barbakoff of Siprut P.C. in Chicago.

Legal observer Ted Frank, who writes for the Center For Class Action Fairness and The Center for Legal Policy, published a blog post recently where he opines in this case, attorneys’ fees could exceed the damages to the injured class.

“We know from decades of history of coupon settlements that less than $1 million of these coupons are going to get used; heck less than $1 million are likely to be claimed. The settlement is worth ‘perhaps more than $29 million’ only in the sense that ‘perhaps’ the atoms in the chair you are sitting on will all simultaneously shift one foot to the left,” he wrote in a blog posting Jan. 11.

Frank said in an interview that the class counsel has a definite incentive to overstate the size of the settlement – and that the method of redemption set forward will benefit Southwest Airlines.

Redeeming the replacement coupons is purposefully designed to limit Southwest’s exposure to financial liability from the settlement, he said. Email notification – but written form redemption processes – lead to a reduced incentive for Southwest customers to redeem their old coupons, he wrote. In the interview, he said he hadn’t seen the claims forms, but was basing his predictions off of past observations of settlements structured in similar ways.”

“Other coupon settlements have had low redemption rates,” he said. “Most people, if they were going to use the coupons, used it already. Others were lost. I would be surprised if we were looking at greater than a 5 percent return rate.”

Many people won’t be interested in redeeming unused coupons because they don’t drink, don’t plan on taking trips or threw away or lost their unused coupons, he notes – although there is a brisk market on the tickets on ebay.com, where they sell for $4 or less.

Frank said under the dictates of the Class Action Fairness Act, attorney awards should be tied to the value of redeemed coupons, which he asserts will be far less than the $29 to $58 million estimate.

“Southwest wants to limit its liability, but the attorneys want to maximize their payout; they both have the incentive to exaggerate the true value of the settlement,” Frank writes.

Fee awards that would be more in line with the Class Action Fairness Act, he said, would be a settlement structure that allows class participants up to a set period of time to file claims, and then to base awards off of the total value of coupons actually claimed, or to make awards progressively as claims are filed.

“That would mean the award would be closer to $300,000 to $400,000,” he said, not the $1.75 to $7 million class counsel is currently seeking.