Objectors to class action settlements often argue that the proposed settlement is really benefiting the plaintiffs’ lawyers and not the class.  It’s less common to see an argument that a settlement is benefiting the named plaintiffs at the expense of the class they are representing.  The Sixth Circuit recently found such a problem, and reversed the district court’s order approving the settlement because the named plaintiffs were getting too good a deal in comparison with the class members.

In Vassalle v. Midland Funding LLC, 2013 U.S. App. LEXIS 3914 (6th Cir. Feb. 26, 2013), a class action counterclaim brought by debtors alleged that employees of Midland, in connection with debt collection cases, “robo-signed” affidavits attesting to personal knowledge of the amounts of debts owed to Midland, when the affiants did not have personal knowledge of the accounts.  A settlement was reached, under which a common fund of $5.2 million would be created, with attorneys’ fees of up to $1.5 million and the remainder distributed to class members, who would receive at least $10 each (it turned out to be $17.38 each because of a relatively low claims rate).  The four named plaintiffs would receive $2,000 each as an incentive award, as well as forgiveness of their debts (one of which was about $4,500).  Midland also agreed to institute certain procedures for generating affidavits, at least for one year.  Class members would provide a comprehensive release in favor of Midland.  Id. at *6-7.

The district court approved this deal, but the Sixth Circuit struck it down.  The main problem the court of appeals had with it was the provision forgiving the debts of the named plaintiffs.  We don’t know whether that was essential to getting the named plaintiffs to sign onto the deal, or if it was just a throw in benefit.  The court found the deal unfair because “[t]he $17.38 payment [to class members] can only be described as de minimis, especially in comparison to the now-forgiven debt of $4,516.57” of one of the four named plaintiffs.  Id. at *16.  The court also explained that, after the one-year injunction expired, “Midland is free to resume its predatory practices,” and “the injunction offers only prospective relief that likely does not benefit class members at all.”  Id. at *17.  In addition, the court found that the class representatives, whose debts were being forgiven, did not have an interest in protecting the class members’ rights to take advantage of the allegedly false affidavits in court to contest their debts.  In fact, the settlement gave up those rights.  Id. at *20.  The court of appeals also found that the notice to class members violated due process because it did not adequately inform them that, if they did not opt out, they would lose the right to use the alleged falsity of the affidavits to contest their debts.  This was, according to the court, the greatest interest that the class members had.  Id. at *25-26.

So what is the moral of this story for class action lawyers on both sides?  Don’t give the named plaintiff too sweet a deal, at least outside of the context of a reasonable incentive award.  If you do, it might kill your whole deal.  But most courts (as the Sixth Circuit acknowledged) will allow an incentive fee.  So would the Sixth Circuit have approved an incentive fee of say $6,000 per named plaintiff here instead of $2,000?  We don’t know, but incentive fees in that range have been approved in other cases.  If a $6,000 incentive fee were approved, the named plaintiff with $4,500 of debt could have used the $6,000 to pay that debt off and achieve the same outcome, without having the approval order reversed.  But we don’t know sure if the Sixth Circuit would have blessed that.  Of course, if you don’t do a class action settlement and just settle with the named plaintiffs on an individual basis, you can do whatever you want because there is no requirement of court approval.  What large corporate defendant would not pay $4,500 to a named plaintiff to get rid of costly class litigation?  Given how small the relief typically sought by individual named plaintiffs is, it is of course common for individual settlements to exceed what the named plaintiff might receive on his or her small claim.  But, as this new Sixth Circuit decision teaches, you might not have the same flexibility in compensating the named plaintiff as a part of a class settlement. 

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Photo of Wystan Ackerman Wystan Ackerman

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you…

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you have something to say.  For those looking for my detailed law firm bio, click here.  If you want a more light-hearted and hopefully more interesting summary, read on:

People often ask about my unusual first name, Wystan.  It’s pronounced WISS-ten.  It’s not Winston.  There is no “n” in the middle.  It comes from my father’s favorite poet, W.H. (Wystan Hugh) Auden.  I’ve grown to like the fact that because my name is unusual people tend to remember it better, even if they don’t pronounce it right (and there is no need for anyone to use my last name because I’m always the only Wystan).

I grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state.  I’ve always had strong interests in history, politics and baseball.  My heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox).  I think it was my early fascination with Lincoln that drove me to practice law.  I went to high school at The Williams School in New London, Connecticut, where I edited the school newspaper, played baseball, and was primarily responsible for the installation of a flag pole near the school entrance (it seemed like every other school had one but until my class raised the money and bought one at my urging, Williams had no flag pole).  As a high school senior, my interest in history and politics led me to score high enough on a test of those subjects to be chosen as one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified my interest in law and government.  One of my mentors at Williams was of the view that there were far too many lawyers and I should find something more useful to do, but if I really had to be a lawyer there was always room for one more.  I eventually decided to be that “one more.”  I went on to Bowdoin College, where I wrote for the Bowdoin Orient and majored in government, but took a lot of math classes because I found college math interesting and challenging.  I then went to Columbia Law School, where I was lucky enough to be selected as one of the minions who spent their time fastidiously cite-checking and Blue booking hundred-plus-page articles in the Columbia Law Review.  I also interned in the chambers of then-Judge Sonia Sotomayor when she was a relatively new judge on the Second Circuit, my only connection to someone who now has one-ninth of the last word on what constitutes the law of our land.  I graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole, one of the largest Connecticut-based law firms.  At the end of 2008, I was elected a partner at Robinson+Cole.

I’ve worked on class actions since the start of my career at Skadden.  Being in the insurance capital of Hartford, we have a national insurance litigation practice and I was fortunate to have the opportunity to work on some prominent class actions arising from the 2004 hurricanes in Florida and later Hurricane Katrina, including cases involving the applicability of the flood exclusion, statutes known as valued policy laws, and various other issues.  My interest and experience in class actions gradually led me to focus on that area.

In Connecticut courts I’ve defended various kinds of class actions that go beyond insurance, including cases involving products liability, securities, financial services and consumer contracts.

My insurance class action practice usually takes me outside of Connecticut.  I’ve had the pleasure of working on cases in various federal and state courts and collaborating with great lawyers across the country.  While class actions are an increasingly large part of my practice, I don’t do exclusively class action work.  The rest of my practice involves litigating insurance coverage cases, often at the appellate level.  That also frequently takes me outside of Connecticut.  A highlight of my career thus far was working on Standard Fire Ins. Co. v. Knowles, the U.S. Supreme Court’s first Class Action Fairness Act case.  I was Counsel of Record for Standard Fire on the cert petition, and had the pleasure of working with Ted Boutrous on the merits briefing and oral argument.

I started this blog because writing is one of my favorite things to do and I enjoy following developments in class action law, writing about them and engaging in discussion with others who have an in interest in this area.  It’s a welcome break from day-to-day practice, keeps me current, broadens my network and results in some new business.

When I’m not at my desk or flying around the country trying to save insurance companies from the plaintiffs’ bar, or attending a conference on class actions or insurance litigation (for more on those, see the Seminars/Programs page of this blog), I often can be found playing or reading with my young daughter, helping my wife with her real estate and mortgage businesses, reading a book about history or politics, or watching the Boston Red Sox (I managed to find bleacher seats for Game 2 of the 2004 World Series when Curt Schilling pitched with the bloody sock).  When the weather is good I also love to take the ferry to Block Island, Rhode Island and ride a bike or walk the trails there. If you go, I highly recommend the Clay Head Trail.