Rewards network agrees to $64m settlement to end lawsuit

Nation's Restaurant News,  Jan 15, 2007  by Lisa Jennings

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CHICAGO -- More than 3,000 California restaurant operators who conducted business with Rewards Network Inc. could be eligible to participate a $64 million settlement the national loyalty program provider has entered to end a class-action lawsuit charging it with violations of state usury laws and unfair business practices.

California operators who worked with Chicago-based Reward Networks between May 2000 and December 2004 could be entitled to portions of the settlement, which still must be approved in U.S. District Court in Los Angeles. Those hearings are expected to be held in February or early March.

If approved by the court, the settlement also would bring an end to litigation that was first filed in 2004 by the owners of three Los Angeles-area restaurants: Tournesol Bistro of Studio City, Calif.; the now-defunct Gray Whale in Malibu, Calif.; and Minibar Lounge, also in Studio City. The suit was later certified as a class action

Those plaintiffs charged that Rewards Network preyed on vulnerable businesses by offering what are essentially loans in the form of a cash advance and requiring payback of 100-percent interest in food-and-beverage discounts for loyalty program members. A cash advance of $20,000, for example, entitled operators to $40,000 in dining credits, according to the lawsuit. California law prohibits nonlicensed lenders from charging annual loan interest rates higher than 10 percent.

Last month, officials reached an agreement in principle to settle the dispute, with Rewards Network offering eligible class participants a combination of cash and airline miles in three installments over the next three years valued at up to $28 million.

In addition, Rewards Network has agreed to forgo collection of about $36 million in outstanding dining credits owed by class participants, according to plaintiffs' attorneys, as well as paying the attorney fees and administrative costs of the settlement.

Rewards Network officials, however, said they do not include the uncollected dining credits as an expense. The company expects to record a provision for $30 million to $34 million during the fourth quarter of 2006 for settlement-related expenses.

Still, the company--which was founded in 1984 as Transmedia Network Inc.- admits no wrongdoing.

"Resolving this lawsuit is the right thing to do for our business," Ron Blake, president and chief executive of Rewards Network, said in a statement. "We believe that we have always acted lawfully and provided value to our customers. We have decided to settle this matter to avoid ongoing distraction and allow us to focus entirely on serving our customers and building for the future."

Speaking on behalf of the plaintiffs, attorney Dan Brockett of Quinn Emanuel Urquhart Oliver & Hedges in Los Angeles said they were very pleased with the proposal.

"It's a very good settlement and represents a lengthy and difficult negotiation process," he said.

Although it is unusual for such a settlement to include compensation in airline miles, Brockett said the plaintiffs saw value in the offer, in part because such miles can be traded and sold and have a cash value.

"The company had a limited amount of cash, and we felt there would be some value" in the addition of airline miles, Brockett said.

Under the agreement, eligible class participants may be repaid some of the interest already paid out in dining credits, amounting to about 35 cents on the dollar, Brockett said.

In October 2006, a U.S. District Court judge in Los Angeles ruled in favor of the plaintiffs after a request for summary judgment on the litigation. Rewards Network appealed that ruling, but, if approved, the settlement also would bring an end to that appeal.

A publicly traded company, Rewards Network is one of the nation's largest providers of dining awards through various loyalty programs, as well as offering marketing services, business intelligence and access to capital. The company, which operates in 46 states and Canada, works with hotels, credit card companies, nine major airlines and other corporations to offer various rewards to members, such as discount dining at participating restaurants.

To restaurateurs, Rewards Network promises to bring in new traffic by promoting the venues on Web pages and in various mailings to members.

"We help restaurants with their business," said Christopher Curtis, Rewards Network vice president of corporate affairs. "And we bring restaurants and consumers together. And we provide a lot of information to restaurateurs about who is coming to their restaurants and how much money they're spending."

Curtis said about 15 percent of Rewards Network's business comes from operators in California, although the total number of restaurants in the state currently doing business with the company was fewer than 1,000.

According to quarterly reports, for the nine months ended Sept. 30, 2006, Rewards Network had 8,626 participating restaurant merchants throughout the United States and Canada, a 15.9-percent drop from the 10,259 reported during the same period in 2005.