Citing a conflict of interest between class representatives and a class, the Ninth Circuit Court of Appeals recently invalidated a $45 million class action settlement that had previously been approved by the district court. The case, Radcliffe v. Experian Information Solutions, Inc., concerned, among other issues, allegations that certain consumer credit reporting services issued consumer reports with negative entries for debts that had been discharged in bankruptcy. In 2009, the parties settled the case for $45 million dollars. As structured, the settlement provided an incentive of up to $5,000 for named class representatives who supported the settlement (the Court stated other class members were eligible for payouts between $26 and $750). Several class members objected to the settlement, including former class representatives.

On appeal, the Ninth Circuit Court of Appeals invalidated the settlement. The Court recognized that it had validated previous settlements with incentives to class representatives, but it cautioned that courts must carefully scrutinize those awards to ensure that class representatives remain adequate representatives for the class at large. In relation to the settlement at issue, the Court held that “the incentive awards here corrupt[ed] the settlement by undermining the adequacy of the class representatives and class counsel” because it: (1) conditioned the incentives for the representatives on support for the settlement, therefore changing the motivations for the class representatives; (2) created significant disparity between the payouts to certain class representatives and other class members; and (3) created a circumstance where counsel for the class simultaneously represented class members with conflicting interests. (Emphasis added). Ultimately, the Court remanded the matter for further proceedings and warned that courts “must be vigilant in guarding against conflicts of interest in class-action settlements because of the unique due process concerns for absent class members who are bound by the court’s judgments.”

Radcliffe serves as a reminder of how carefully class action settlements must be structured to protect unnamed members of a class. This is particularly true when incentives are given to class representatives as part of the settlement. While Radcliffe did not prohibit those incentives altogether, it demonstrates that those incentives cannot create improper disparities between class representatives and a class itself.