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.