Los Angeles restaurateurs who sued Rewards Network Inc. have won a settlement valued between $26 million and $28 million.
The suit, filed in May 2004, alleged that restaurant owners who accepted cash advances to get their businesses off the ground, were paying interest above the legal limit of 10 percent on what were ostensibly loans. Some allegedly paid higher than 50 percent interest to the publicly traded Rewards, which is based in Chicago.
“Resolving this lawsuit is the right thing to do for our business,” said Rewards President and Chief Executive Ron Blake. “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.”
The preliminary settlement agreement provides for 3,000 eligible California class participants to receive a combination of cash and airline miles in three installments between 2007 and 2009, valued at up to $28 million. Rewards will also forego certain collections. The company will record a provision between $30 million and $34 million in the fourth quarter of 2006 to provide for settlement expenses.
Daniel L. Brockett of Quinn Emanuel Urquhart Oliver & Hedges LLP, lead attorney for the plaintiffs, could not comment due to settlement constraints, but indicated he was pleased with the outcome.
Most of the restaurateurs had turned to Rewards for startup money because the notoriously high failure rate for new dining spots makes it extremely difficult to secure startup loans. Restaurant owners who accepted cash advances from Rewards signed an agreement to allow their lender to debit the amount owed directly from credit card payments at the restaurant.
Rewards has partnered with a number of credit card purveyors that offer airline miles with purchases, and the company promises savings when member credit cards are used at restaurants. Rewards would also buy “dining credits” in advance of a restaurant’s opening, providing the new business with much-needed cash.
Since most restaurant patrons pay with credit cards, and many of those card companies are Rewards partners, a restaurant could wind up paying out as much as 50 percent of their receipts in a given month. In an industry with thin margins, many restaurant owners felt that they had to continue taking advances from Rewards to keep their doors open.
Rewards said it expects a preliminary fairness hearing on the settlement early this year, with final approval expected to follow soon after.
