Incentive Award Guidance From Recent Class Actions

by Zelle LLP

Competition Law360 -- September 6, 2013

Class representatives play a vital role in competition and other class actions. They participate in the litigation process as an individual plaintiff would — devoting their time and resources to the case, and undertaking financial or reputational risk — while also serving as fiduciaries to the class. When a case is favorably resolved, thousands or even millions of absent class members can benefit from the class representative’s initiative, risk-taking, and work.

Given these laudable objectives, class representative incentive awards should properly motivate individuals to serve. At the same time, they must not be structured or conditioned so as to improperly influence class representatives to act for their own benefit. Several recent federal court decisions[1] illustrate factors and potential pitfalls practitioners should consider when representing class representatives and seeking incentive awards.

About Class Actions

Class actions are procedural devices that allow one or more representative plaintiffs to prosecute lawsuits on behalf of individuals with similar claims. Typically, each individual’s expected recovery is small, although the aggregate harm to the class can be millions (or sometimes billions) of dollars. Due process requires that class representatives and their counsel protect the interests of absent class members. In order to certify or settle a class action, Rule 23 of the Federal Rules of Civil Procedure requires that class representatives and their counsel demonstrate that they adequately represent the entire class. Moreover, to approve a proposed settlement, the court must also determine it is fair, adequate, and reasonable. These structural protections are critical because the class action judgment will finally resolve the claims of all class members.

Incentive Awards

Incentive awards are fairly typical in class actions. Such awards are discretionary, and are intended to compensate class representatives for “work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general.”[2] Awards are generally sought after a settlement or verdict has been achieved.

Criteria courts have considered in determining whether to make an incentive award include: (1) the risk to the class representative in commencing suit, both financial and otherwise; (2) the notoriety and personal difficulties encountered by the class representative; (3) the amount of time and effort spent by the class representative; (4) the duration of the litigation and; (5) the personal benefit (or lack thereof) enjoyed by the class representative as a result of the litigation.[3]

Inadequacy Pitfalls to Avoid — Four Recent Cases

Four recent appellate cases illustrate the types of incentive awards and related agreements that may destroy adequacy of representation in the class action settlement context. While these cases may not be representative of the body of regularly approved awards, they do provide guidance on incentive award terms and conditions that may cause a settlement to be rejected as unfair, or class representatives (and sometimes class counsel) to be found inadequate.

In Radcliffe v. Experian Information Solutions Inc.,[4] the settlement agreement in a consumer class action conditioned payment of incentive awards on the class representatives’ support of the settlement. The Ninth Circuit reasoned that the prospect of receiving $5,000 each only if they supported the settlement gave the class representatives interests divergent from those of the rest of the class. While representatives should only be concerned with the fairness of the settlement, these representatives had a $5,000 incentive to support the settlement regardless of its fairness. Radcliffe was also concerned with the significant disparity between the $5,000 incentive awards to the representatives and the $26 to $750 awards unnamed class members would receive.

Despite the fact that no actual conflict developed, the Ninth Circuit found the class representatives did not adequately represent the class. Similarly, as soon as the conditional-incentive-awards provision disjoined the interests of the representatives from those of the class, class counsel were engaged in conflicted representation making counsel inadequate and unable to settle the case on behalf of the absent class members. The Ninth Circuit therefore reversed approval of the settlement because neither the class representatives nor class counsel adequately represented the class.

Similarly, in the earlier-decided Rodriguez v. West Publishing Corp.,[5] the Ninth Circuit held that ex ante incentive agreements obligating class counsel to seek incentive awards on a sliding scale created impermissible conflicts of interest among the contacting class representatives, their counsel and absent class members. These agreements delineated four brackets of potential settlement amounts, and obligated class counsel to seek a set incentive award at each level.

At the highest level, a settlement of $10 million or more, class counsel would seek $75,000 for each representative. The Ninth Circuit believed these incentive agreements disjoined the interests of the class from the contingency financial interests of the contracting class representatives. They also gave the appearance of impropriety. The settlement was saved, however, because there were two class representatives, represented by different law firms, who did not have incentive agreements with their counsel and served as adequate representatives to the settlement class.

The Sixth Circuit recently reversed approval of two settlements where the disparity in relief to class representatives versus absent class members made the settlement unfair. First, in Vassalle v. Midland Funding LLC,[6] consumers challenged robo-signing of affidavits in debt-collection actions. The settlement provided class representatives with exoneration of their debt (e.g., forgiveness of a $4,516.57 debt owed by one class representative) to defendants as well as $2,000 each in incentive awards. In contrast, absent class members would be precluded from challenging the false affidavits in the debt collection action actions brought against them, in exchange for what amounted to “de minimis” payments of $17.38.

Further, prospective injunctive relief requiring defendants to change their practices for one year provided class members no relief. The Sixth Circuit found the settlement unfair given the disparity in relief between class representatives and the absent class members. Further, the court found no adequacy of representation because class representatives were motivated to pursue settlement approval to obtain their individual debt forgiveness, while absent class members were not because they would lose their ability to defend their individual collection actions based on the defendants’ false affidavits.

Second, in In re Dry Max Pampers Litigation,[7] the Sixth Circuit followed its reasoning in Vassalle to reverse approval of a consumer settlement involving diapers that allegedly tended to cause severe diaper rash. Class members were to receive $1,000 per affected child, while absent class members only benefited from the reinstatement of a one-box refund program of “dubious” value, and “illusory” benefits from labeling and website changes made by defendant. The Sixth Circuit held that the class representatives were inadequate, reasoning that when the settlement makes class representatives whole (or more than whole) while absent class members do not obtain adequate relief, the representatives are encouraged to compromise the interests of the class for personal gain.

Moreover, the court found the settlement unfair in light of the fee award to class counsel. The court considered the amount of the fee award ($2.73 million), that class counsel had not yet conducted discovery or responded to the pending motion to dismiss, and that the settlement provides “illusory” relief to absent class members, and determined that the settlement gave preferential treatment to class counsel, and only perfunctory relief to absent class members, rendering the settlement unfair.

While Radcliffe and Dry Max Pampers both express concern for how the incentive award amounts compare to the amount class members receive under the settlements, Judge Guy Cole’s dissenting opinion in Dry Max Pampers offers a noteworthy counterpoint. The dissent disagreed with the majority’s adequacy and fairness determinations.

Regarding adequacy, the dissent disagreed with the majority’s conclusion that the named plaintiffs were inadequate representatives because their incentive payments might have made them whole. Where claims are worth little, the dissent reasoned, full recovery may not be enough to motivate individuals to serve as class representatives. The dissent also recognized that the class representatives “spent significant time” with tasks such as fact investigation, reviewing pleadings, and considering settlement terms. Similarly, the dissent found the settlement fair in light of the “little to no” likelihood of success on the merits of the case.

These four recent opinions provide guidance regarding improper incentive awards. Class counsel should not make ex ante agreements with class representatives concerning the amount of incentive awards to be sought. Similarly, incentive agreements should not be conditioned on the class representative’s support of a settlement. Finally, there should be proportionality among the benefits class representatives receive, the benefits absent class members receive, and the fees class counsel receive as a result of a settlement.

Notwithstanding these recent opinions, the overall body of jurisprudence on incentive awards does not suggest systematic abuse. Courts are correct to carefully scrutinize the entire settlement or certification package presented for approval. However, in evaluating whether Rule 23 fairness and adequacy requirements are met, courts must do more than pay lip service to the reality that class representatives must be appropriately compensated so as to incentivize their participation in a vital societal role.

As with any other litigant, class representatives incur opportunity costs through their participation in the litigation, from devoting time to gaining familiarity with the case, to participating in fact investigation, to testifying at depositions or trials. Disallowing class representative incentive awards, or significantly compressing them, eliminates incentive for them to participate and also fails to take into account the additional time, effort, and risk class representatives contribute to vindicate the rights of the entire class.

Litigation Tips on Supporting Incentive Awards

1) Provide quantitative and qualitative means for the court to assess a class representative’s participation in the litigation.

Include a description of the activities class representatives were involved with, such as: staying abreast of the case and major developments, participating in discovery, assisting with factual development, reviewing pleadings, providing testimony, attending hearings or trial, and any related travel.

Also state the duration of the litigation and length of the representative’s involvement. Describe any unusual personal burdens arising from, or efforts required by, the particular case. Class counsel are likely most familiar with the litigation and class representatives’ efforts, and can make representations regarding the work performed and performance of representatives.

2) Demonstrate that settlement benefits of absent class members are proportional to class representatives’ incentive awards.

This could include comparison to incentive awards approved in other cases. When class representatives are slated to receive monetary awards and class members are not, or there is another significant difference in how the two groups are treated, proportionality is particularly important and incentive awards should be justified.

3) Show that the settlement was achieved without collusion.

Counsel and mediators can aver that the parties conducted arm’s-length negotiations free of collusion. Likewise, incentive award amounts should be determined after settlement, and class counsel should not make any agreements, ex ante or otherwise, with representatives concerning amount of, or conditions for, receipt of incentive awards.

--By Christopher T. Micheletti and Heather T. Rankie, Zelle Hofmann Voelbel & Mason LLP

Christopher Micheletti is a partner and Heather Rankie is an associate in Zelle Hofmann's San Francisco office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] While this article focuses on federal law, the authors note that state-court practice does not uniformly endorse incentive awards.

[2] Rodriguez v. West Publishing Corp., 563 F.3d 948, 958–59 (9th Cir. 2009); see also In re U.S. Bancorp Litig., 291 F.3d 1035, 1037–38 (8th Cir. 2002); Cook v. Niedert, 142 F.3d 1004, 1016 (7th Cir. 1998).

[3] Van Vranken v. Atl. Richfield Co., 901 F. Supp. 294, 299 (N.D. Cal. 1995).

[4] 715 F.3d 1157 (9th Cir. 2013).

[5] 563 F.3d 948.

[6] 708 F.3d 747 (6th Cir. 2013).

[7] No. 11-4156, 2013 WL 3957060 (6th Cir. Aug. 2, 2013).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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