When Incentive Payments to Class Representatives Come With Strings Attached
It is not uncommon for class action settlements to include an “incentive award” for class representatives for their service to the class in bringing the lawsuit. Neither is it uncommon for courts to approve such settlements, so long as the incentive award is not so large as to undermine class representatives’ adequacy to represent the class.
A recent settlement approved by a Los Angeles federal court, however, added another dimension to incentive awards. In Radcliffe v. Experian Information Solutions, a settlement agreement with three credit reporting bureaus not only included a $5,000 incentive award to each class representative, but also conditioned that award on the class representative’s support of the settlement. If a class representative objected to the settlement, he or she would forfeit the $5,000 incentive award and recover the same proceeds as the represented class members—which worked out to between $26 and $750, depending on the type of damages incurred by the class member.
The Ninth Circuit reversed the settlement approval. By explicitly conditioning the incentive award on the class representatives’ support for the settlement, the court held, the settlement agreement undermined the adequacy of the class representatives and class counsel. “Instead of being solely concerned about the adequacy of the settlement for absent class members,” the panel held, “the class representatives now had a $5,000 incentive to support the settlement regardless of its fairness and a promise of no reward if they opposed the settlement.” The conditional awards thus “removed a critical check on the fairness of the class-action settlement, which rests on the unbiased judgment of class representatives similarly situated to absent class members.”
The court also criticized the amount of the incentive award, suggesting that even if the award’s conditionality had not doomed the settlement, its magnitude would have: “There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards.” Although the court held only that the amount of the awards “exacerbated the conflict of interest” created by their conditional nature, the language of the opinion strongly suggests that the court would have rejected the settlement even if the payments had not been conditional.
With respect to class counsel, the court held that counsel’s adequacy was undermined because once the conditional incentive award “divorced the interests of the class representatives from those of the absent class members, class counsel was simultaneously representing clients with conflicting interests.” However, because the conflict developed late in the representation, the panel directed the district court to determine, on remand, the extent to which class counsel should be permitted to participate in any fee award. (The majority reached this determination over the objections of a concurring judge, who argued that class counsel’s role in the creation of the conditional incentive award should disqualify them from any fees awarded as part of the settlement agreement).
The moral: in negotiating a class action settlement, counsel must not only ensure that any incentive award to class representatives is not so excessive as to create a disincentive for them to fairly evaluate the settlement. Attorneys must also ensure that any incentive award, no matter how small, is independent of the class representatives’ ultimate position on the settlement.
The Supreme Court held today that a collective action under the
The Supreme Court’s 5-4 decision last week to overturn the certification of a class of cable television subscribers is extraordinary—not because it continues the Court’s exhortations to lower courts to make merits determinations at the class certification stage, but because of the level of merits-related scrutiny the Court is now requiring.
While the Supreme Court’s recent jurisprudence has increasingly favored merits inquiries at the class certification stage, there is one area in which the Court has been reluctant to blur the distinction between certification and merits: the “fraud on the market” presumption in securities class actions. This reluctance is manifest in the Court’s recent opinion in
The Supreme Court held today that a named class plaintiff’s pre-certification stipulation that the class will seek less than $5 million in damages does not defeat federal diversity jurisdiction under CAFA.
Late last year, the
The 2012-13 Supreme Court term has been a hotbed of class action activity, with the justices set to decide at least half a dozen cases that will directly affect class action litigation. Although none of this term’s decisions is likely to have the impact of the Court’s recent decisions in
Four years ago, the Fifth Circuit became one of the first courts to consider the application of
The question of
Three years ago, a class action alleging a violation of privacy rights by Facebook was settled prior to class certification. The settlement provided for no compensation to class members, no injunction against similar conduct by Facebook in the future, and a substantial expansion of the class beyond the definition proposed in the complaint. The plaintiffs’ attorneys received approximately $3 million in fees.
The
A recent New Hampshire case provides yet another example of the difficulty of establishing predominance for class certification purposes in advertising/consumer deception cases. This time, the industry is one that is amply familiar with class action jurisprudence: the tobacco industry.
The Pennsylvania Supreme Court last week upheld the decertification of a class of H&R Block customers challenging the tax preparer’s “Rapid Refund” program as deceptive, holding that the existence of a confidential relationship between H&R Block and each class member—a prerequisite to the plaintiff’s claim for breach of fiduciary duty—cannot be determined on a classwide basis.
A recent New York federal court opinion illustrates the difficulty in establishing predominance where the primary injury alleged is overpayment for a defective product based on misrepresentation or concealment of the defect.