Appellate Courts More Carefully Scrutinize Incentives for Class Reps in Class Settlements

Class action settlements have for some time included special provisions for additional relief to the named class representatives.  The justification for the extra relief is that the class reps worked on behalf of the class, perhaps had their depositions taken, and endured other burdens not shared by the absent class members.  There appears, however, to be a recent trend of appellate courts looking more closely at those class rep incentives.  Excessive class rep incentives can be seen as a means to "buy" the support of the class reps for a settlement desired by the plaintiff lawyers and the defendant but which provides little benefit to the class. The Ninth Circuit recently reversed the approval of a class action settlement in a case against the three major credit agencies (Experian, Equifax and Transunion) because the incentive awards to class reps were too generous and raised the specter of a conflict of interest (http://www.metnews.com/sos.cgi?0513//11-56376).  The Ninth Circuit first expressed concern that the incentives were contingent on supporting the settlement.  This concern seems somewhat overblown because class reps rarely object to a settlement brokered by their lawyers and presented to a court for approval.  However, the Ninth Circuit made clear that such conditions rendered the class reps per se inadequate representatives of the class.  Perhaps more significantly, the class rep incentives dramatically exceeded the relief provided to the class.  Absent class members could receive up to $1,400, but only if they could prove actual harm from false or misleading information in their credit reports in the form of lost jobs or declined loan applications.  Most class members would receive about $26.  The named class reps, however, received $5,000.  The Ninth Circuit went on to hold that class counsel was also rendered inadequate because counsel came to represent individuals with conflicting interests and called into question whether class counsel would ultimately obtain any fee award.  Other federal appellate courts have recently engaged in similar scrutiny and reached similar decisions.  (For example the Sixth Circuit decision in Vassalle v. Midland Funding, http://scholar.google.com/scholar_case?case=4730222556685349730&q=vassalle+v+midland+funding&hl=en&as_sdt=2,26).

The take-aways are several.  First, it is clear that incentive awards cannot be expressly contingent upon supporting approval of the class settlement.  More significantly, plaintiff counsel and defendants are unlikely to be able offer incentive awards sufficient to entice recalcitrant class reps to accept class settlements that do not provide substantial relief to a class.  This might result in more difficult negotiations for class action settlements.