Last week the Ninth Circuit issued a decision reversing the district court’s approval of a class action settlement, based on a provision in the agreement that, as interpreted by the court, required the class representatives to support the proposed settlement in order to qualify for receiving an incentive award.  The court concluded that this presented a conflict of interest that rendered the class representatives inadequate representatives of the class.  The court also suggested that a $5,000 incentive award was too large in light of the relief being provided to class members.  The key point I see here is that parties settling class actions, particularly in the Ninth Circuit, will need to proceed very cautiously with incentive awards.  Even awards of a type that have been commonly approved in prior cases potentially could be called into question in light of this decision.

In Radcliffe v. Experian Information Solutions, Inc., 2013 U.S. App. LEXIS 7932 (9th Cir. Apr. 22, 2013), the plaintiffs alleged that the three major credit bureaus improperly issued credit reports that included negative entries for debts that had been discharged in bankruptcy.  A settlement was reached under which class members who could demonstrate that they were denied employment or denied credit could receive payments ranging from $150 to $750.  Other class members who could not demonstrate such harm, but affirmed that they qualified as class members, would receive payments ultimately calculated at $26.  Some of the named plaintiffs, however, withdrew as class representatives and, together with other objectors, opposed approval of this proposed settlement.  The district court approved the settlement, but the Ninth Circuit reversed.

The provision in the settlement agreement that the Ninth Circuit focused on provided for incentive awards “to each of the Named Plaintiffs serving as class representatives in support of the Settlement, [with] each such award not to exceed $5,000.00.”  Id. at *7 (emphasis added).  The Ninth Circuit interpreted the words “in support of the Settlement” as indicating that incentive awards would be provided only to those named plaintiffs who supported approval of the settlement.  The court rejected an argument that this language in the agreement was simply describing those named plaintiffs who were in fact supporting the settlement.  The court explained that this provision in the agreement required reversal of the approval of the settlement because it created an impermissible conflict of interest:

With 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. . . . [T]he conditional incentive awards changed the motivations for the class representatives. Instead of being solely concerned about the adequacy of the settlement for the 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 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.

Id. at *15-16.

The court also suggested that the $5,000 award may have been too high for this case:

Although the conditional incentive awards themselves are sufficient to invalidate this settlement, the significant disparity between the incentive awards and the payments to the rest of the class members further exacerbated the conflict of interest caused by the conditional incentive awards. As the district court below noted, “[c]oncerns over potential conflicts may be especially pressing where, as here, the proposed service fees greatly exceed the payments to absent class members.” White, 803 F. Supp. 2d at 1112. There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards. Under the agreement, if the class representatives had concerns about the settlement’s fairness, they could either remain silent and accept the $5,000 awards or object to the settlement and risk getting as little as $26 if the district court approved the settlement over their objections. The conditional incentive awards at issue here, like the disproportionately large awards in Staton, fatally alter the calculus for the class representatives, pushing them to be “more concerned with maximizing [their own gain] than with judging the adequacy of the settlement as it applies to class members at large.” Staton, 327 F.3d at 977.

Id. at *16-17 (emphasis added).  It is unclear whether, if the incentive awards were not “conditional,” the Ninth Circuit would have disapproved them because of their size.  In addition, one member of the panel would have disqualified class counsel from receiving any fees on remand because they had a conflict of interest (an issue the majority left up to the district court).  Id. at *28-29 (Haddon, D.J., concurring).

I see this decision as potentially significant for two reasons.  First, in a typical class action settlement, it is ordinarily the case that an incentive award to a class representative is only going to be paid if the settlement is approved.  Settlement agreements typically provide that they are invalid if not approved, and thus defendants have no obligation to pay an incentive award in a failed settlement.  A class representative thus typically has at least an implicit (if not explicit) incentive to support the settlement, because he or she will not receive the proposed incentive award if the settlement is not approved.  The Ninth Circuit’s decision seems to ignore this reality.  Presumably the Ninth Circuit would not have a problem with the implicit incentive, or would they really want defendants to agree to pay the incentive award in every proposed settlement even if the settlement is not approved?  That would seem odd, and I wonder whether any defendants would agree to that.  Second, an incentive award of $5,000 is not unusual at all, and, given the nature of nearly all class actions, such an award is almost always going to be much larger than what individual class members receive in the settlement.  Do the Ninth Circuit’s comments about this incentive award effectively portend the end of incentive awards in that circuit?  Or is this decision limited to the “conditional” nature of the award?