Friday, April 25, 2014

FYI: 9th Cir Reverses Class Settlement Approval Due to Improper Incentive Awards to Named Plaintiffs

Saturday, April 27, 2013

Reversing the lower court, the U.S. Court of Appeals for the Ninth Circuit recently ruled that approval of a class action settlement of claims against credit reporting agencies under the federal Fair Credit Reporting Act was improper, where a settlement agreement conditioned payment of large "incentive awards" on class representatives' support for the settlement but paid class members relatively very little, thereby creating a conflict of interest between the named representatives and absent class members.   

The Court also reversed the lower court's award of attorneys' fees and costs, reasoning that, with the inclusion of the conditional incentive awards provision in the settlement agreement, class counsel was improperly simultaneously representing clients with conflicting interests.


Plaintiffs, consumers who had filed for bankruptcy protection, ("Consumers"), filed class-action law suits against a number of credit reporting agencies ("CRAs"), alleging that the CRAs erroneously issued consumer credit reports showing delinquent payments on debts that had been discharged in bankruptcy and that the CRAs failed to investigate the alleged reporting errors after Consumers notified them of the errors. 

Consumers claimed that the CRAs violated the federal Fair Credit Reporting Act and California law by failing to use reasonable procedures to assure accuracy in reporting debts discharged in bankruptcy, and to conduct a reasonable re-investigation to determine whether the disputed information was inaccurate.  See 15  U.S.C. § 1681i(a); Cal. Civ. Code §§ 1785.14(b), 1785.16; Cal. Bus. & Prof. Code § 17200.

The lower court consolidated the lawsuits.  After first reaching a settlement for injunctive relief, which the lower court approved, the parties reached a settlement agreement for monetary relief (the "Settlement").  Specifically, the Settlement created a fund of $45 million contributed by the CRAs and to be distributed, first, to pay "actual-damage awards" to class members who demonstrated that they were actually harmed by the CRAs conduct, followed by smaller payments to class members who were not denied employment, a mortgage, a housing rental, or credit.  About 15,000 Consumers claimed actual damage awards. 

Secondly, the Settlement provided "incentive awards" for class representatives and class counsel as payment for their service to the class in bringing the lawsuit.  Class representatives would receive up to $5,000 and class counsel would receive attorney fees and costs out of the Settlement fund.  

Finally, the balance of the fund was to go to claimants attesting that they qualified as class members and were thus entitled to receive "convenience awards" amounting to about $26 each.

The lower court preliminarily approved the Settlement and provisionally certified the class.   Later holding fairness hearings on the Settlement, the lower court determined that the Settlement was fair, reasonable and adequate, despite objections from certain "Objecting Plaintiffs," consisting of both former class representatives and class members.  The lower court granted final approval of the Settlement, and awarded attorneys' fees and costs to class counsel.  The Objecting Plaintiffs appealed.

The Ninth Circuit reversed, concluding that the lower court abused its discretion in approving the Settlement where the class representatives and class counsel did not adequately represent the interests of the class.

As you may recall, class representatives and class counsel must adequately represent the interests of absent class members.  See Fed. R. Civ. P.  23(a)(4), 23(g)(1)(B). 

In considering Objecting Plaintiffs' argument that the Settlement created a conflict of interest between the class representatives and the class by providing for incentive awards to those named plaintiffs who supported the Settlement, the Ninth Circuit observed that although incentive awards may be proper in certain circumstances, such awards should not become routine practice.  See, e.g., Staton v. Boeing Co., 327 F.3d 938, 977 (9th Cir. 2003; Rodriguez v. W. Pub. Corp., 563 F.3d 948 (9th Cir. 2009)(Rodriguez I); Rodriguez v. Disner, 688 F.3d 645 (9th Cir. 2012)(Rodriguez II).   In so doing, the Court pointed out that incentive awards to class representatives may lead them to accept suboptimal settlements at the expense of the class members, but that where a class representative supports a settlement and is treated equally by the settlement there is a high likelihood that the settlement is in the interests of the class as a whole.  

However, the Ninth Circuit explained that, in this case, the class representatives were provided with special incentives to encourage them to support the Settlement, which awards were hugely disproportionate to the other class members' recovery.   Thus, rejecting the named plaintiffs' various arguments, including the assertions that the Settlement should be approved because such awards are typical and common in class actions and that there was no actual conflict of interest with the class, the Court noted in part that the atypical conditional-incentive-awards provision in the Settlement made the interests of the class representatives actually different than the interests of the rest of the class and therefore undermined the adequacy of the class representatives to represent the interests of the class. 

The Court also pointed out that the incentive awards were not available to those named plaintiffs who did not support the Settlement and who accordingly ran the risk of getting as little as $26, making the Settlement even more egregious. 

Finally, the Ninth Circuit also reversed the award of attorneys' fees and costs, concluding that because class counsel owed a fiduciary duty to the class as a whole, once the conditional-incentive-awards provision divorced the interests of the class representatives from those of absent class members, class counsel was simultaneously representing clients with conflicting interests.  In so ruling, the Court noted that the conflict developed late in the course of representation and opined that the timing of the origin of the conflict may affect any attorneys' fees awards on remand.



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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