Earlier this week, the U.S. Court of Appeals for the Ninth Circuit reversed approval of a $45 million class action settlement that had been reached with three credit reporting agencies in Radcliffe v. Experian Information Solutions Inc. The court held that the settlement, by conditioning the payments of “incentive awards” to the class representatives on their support for the settlement, created a conflict of interest between the class representatives and absent class members. This rendered the class representatives and class counsel inadequate and the settlement unacceptable, the court ruled.
The Ninth Circuit's decision is the latest in a line of recent rulings overturning class action settlements on conflict of interest and other grounds. Courts and class member objectors are subjecting such settlements to greater scrutiny. This means parties and their attorneys who enter into such agreements must be careful to ensure that the terms will appear fair, reasonable, and adequate upon review.
Radcliffe consolidated multiple lawsuits filed against Experian Information Solutions, Inc., TransUnion LLC, and Equifax Information Services LLC. The plaintiffs are all consumers who have been through bankruptcy. They allege that the credit reporting agencies violated the Fair Credit Reporting Act and its California state law counterpart by failing to remove from plaintiffs' credit reports certain debts that were discharged in bankruptcy.
Ultimately, the parties reached a settlement providing for injunctive and monetary relief. The monetary settlement created a common fund of $45 million. Class representatives would receive “incentive awards” of up to $5,000 each, but only if they supported the settlement. This was significantly higher than what other class members would receive. Class members who had sustained actual damages were to receive awards of between $150 and $750, depending on the nature of their injuries. The remaining class members were to be paid roughly $26 each.
On appeal, the Ninth Circuit focused on “whether class representatives and class counsel are adequate where the settlement agreement conditions payment of incentive awards on the class representatives' support for the settlement.” Looking at its prior decisions, the court acknowledged that “[a]lthough we have approved incentive awards for class representatives in some cases, we have told district courts to scrutinize carefully the awards so that they do not undermine the adequacy of the class representatives.” The danger of incentive awards, the court explained, was that they could encourage class representatives "to accept suboptimal settlements at the expense of the class members whose interests they are appointed to guard."
Examining the incentive awards in Radcliffe, the court identified two problematic features putting the class representatives in conflict with the absent class members. The court noted principally that the “settlement agreement explicitly conditions the incentive awards on the class representatives' support for the settlement.” The awards, the court explained, "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 court also noted the "significant disparity" between the incentive awards and the payments to be received by absent class members. It questioned "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.” The court concluded that, "as a result of the conditional incentive payments," the class representatives had "divergent interests" from those of absent class members and were unable to "fairly and adequately protect the interests of the class."
The court also concluded that the conditional incentive awards rendered class counsel inadequate. The court reasoned that class counsel "has a fiduciary duty to the class as a whole," and that counsel had a duty to alert the district court to the presence of a conflict "[a]s soon as the conditional-incentive-awards provision divorced the interests of the class representatives from those of the absent class members," which counsel failed to do. The court stated that class counsel's "[c]onflicted representation" was another "independent ground for reversing the settlement … ."
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Copyright © 2013 by Ballard Spahr LLP.
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