Incentive Awards Corrupted Class Action Settlement By Undermining Adequacy Of Class Representatives And Counsel

The United States Court of Appeals for the Ninth Circuit recently considered “the issue of whether class representatives and class counsel are adequate where the settlement agreement conditions payment of incentive awards on the class representatives’ support for the settlement.”  The court of appeals held that the representation of the class counsel and class representatives was inadequate due to the divergent interests of the class representatives and the class.  (Radcliffe v. Experian Information Solutions Inc. (--- F.3d ----, C.A.9 (Cal.), May 2, 2013).

Facts

A group of consumers who filed bankruptcy alleged that Experian Information Systems, Inc., TransUnion LLC, and Equifax Information Services LLC, (collectively “credit reporting agencies”) issued credit reports that stated consumers were delinquent on payments for debts that had been extinguished in bankruptcy.  Some of the consumers alleged that the credit reporting agencies failed to investigate even after the consumers notified them of the errors. The consumers alleged the credit reporting agencies violated the Fair Credit Reporting Act and California law when they “did not use ‘reasonable procedures to assure maximum possible accuracy’ in reporting debts discharged in bankruptcy,” and did not conduct a reasonable investigation after being informed of the errors. 

The consumers filed multiple lawsuits that were consolidated.  The parties reached a class action settlement after mediation.  The federal district court approved the settlement.  Under the settlement, the credit reporting agencies “agreed to implement procedures that would presume the discharge of certain pre-bankruptcy debts.”  The parties also reached an agreement for monetary relief.  Under that relief, each agency contributed $15 million to create a common fund of $45 million.  After the costs of settlement administration were paid, the settlement fund would pay “actual-damage awards” to members of the class who showed that they were actually harmed by the credit-reporting agencies’ conduct.  Members of the class who were denied employment would receive $750, members who were denied a housing rental or mortgage would receive $500, and members who were denied auto loans or credit would receive $150.  The settlement fund would then pay the class representatives and class counsel for their service in prosecuting the suit.  Each named plaintiff was to receive an incentive award of up to $5,000 upon application.  Class counsel were to petition for an award of attorneys’ fees and costs to be paid from the settlement fund.  The remainder of the settlement fund would be distributed to the remainder of the class as “convenience awards.”  Approximately 755,000 class members submitted claims for convenience awards and each claimant would receive approximately $26.

The district court held fairness hearings on the settlement.  Several former class representatives who were named plaintiffs and several objectors (“Objecting Plaintiffs”) challenged the settlement.  The district court rejected their objections and concluded that “the settlement was fair, reasonable, and adequate.”

Decision

On appeal, Objecting Plaintiffs challenged the district court’s conclusion that the settlement was fair, reasonable, and adequate.  Objecting Plaintiffs asserted the provision of the settlement agreement that provided incentive awards for named class representatives created a conflict of interest between class representatives and the class.  The Objecting Plaintiffs further argued that as a result of this conflict, class counsel engaged in conflicted representation because class counsel continued to represent the named class representatives and the class, even though the groups had developed divergent interests.  As a result of those conflicts, Objecting Plaintiffs contended that “the class representatives and class counsel were inadequate to represent the absent class members.”  The Court of Appeals agreed.

Incentives awards are payments made to class representatives for their service in bringing the class action lawsuit. The awards often come from the monetary settlement that the class receives from the defendants.  There is no legal basis for incentive awards, but class action settlements often contain them, and Courts have noted that incentive payments make sense because of a named class representative's presumptive extra efforts on a case, beyond the efforts of the rest of the class.  Incentive awards must be scrutinized by courts so that the awards do not undermine the adequacy of class representation.

The court of appeals held that the “incentive awards here corrupt the settlement by undermining the adequacy of the class representatives and class counsel.”  The settlement agreement conditions the receipt of an incentive award on the representative’s support for the settlement.  Counsel told a plaintiff that if he did not support the award, “he would ‘not be entitled to anything’ and he would ‘jeopardize the $5,000 [he] would receive [under the settlement].’”  The court concluded that “[w]ith the prospect of receiving $5,000 incentive awards only if they supported the settlement, Settling Plaintiffs had very different interests than the rest of the class.”  The conditional incentive awards changed the class representatives’ motivations.  “Instead of being solely concerned about the adequacy of the settlement for absent class members, 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 court concluded, “The conditional incentive awards 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.”

Because the conditional incentive payments undermined the class representatives’ ability to “fairly and adequately protect the interests of the class,” the court reversed the district court’s approval of the settlement.  The court further concluded that the class representatives’ lack of adequacy also resulted in class counsel being inadequate to represent the class.  The court concluded that “[a]s soon as the conditional-incentive-awards provision divorced the interests of the class representatives from those of the absent class members, class counsel was simultaneously representing clients with conflicting interests.”  Instead of alerting the court to the conflict, “class counsel took the position that a conflict did not even exist.”  The court concluded that class counsel “was not adequate and could not settle the case on behalf of the absent class members.”

Questions

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June D. Coleman or Danielle R. Teeters | 916.321.4500