The Franchise Memorandum

The Ninth Circuit Court of Appeals has reversed the approval of a $10 million voucher settlement and a $2.6 million attorneys’ fee award in a class action over increased membership fees charged by Massage Envy franchises. McKinney-Drobnis v. Oreshack, --- F.4th ---, 2021 WL 4890277 (9th Cir. Oct. 20, 2021). The plaintiffs claimed the franchisor of the Massage Envy franchise system told customers their Massage Envy membership rates would not change after they signed up, and that they could cancel their memberships at any time. However, the company allegedly raised membership rates and intentionally made it hard for customers to cancel their memberships. The parties reached a settlement before a class was certified. Under the settlement, in exchange for the release of all claims against Massage Envy, class members could submit claims for vouchers for Massage Envy products and services. The trial court approved the settlement over the challenge of one objector, who appealed.

The Ninth Circuit agreed with the objector. First, the appellate court held that the trial court erred in finding the vouchers not to be “coupons” under the Class Action Fairness Act. As a result, the trial court evaluated the settlement under a less exacting standard and relied on an incorrect settlement value (the total settlement value, rather than the value of the redeemed coupons) in awarding attorney fees. Second, the Ninth Circuit held that the trial court abused its discretion by failing to adequately investigate and substantively grapple with some of the potentially problematic aspects of the relationship between the attorney-fee award and the benefits to the class. To that end, the Ninth Circuit held that the district court failed to apply the requisite heightened scrutiny for pre-class certification settlements.