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.