Ninth Circuit Reverses Class Action Settlement Due to Conflict of Interest Caused by Incentive Awards | Practical Law

Ninth Circuit Reverses Class Action Settlement Due to Conflict of Interest Caused by Incentive Awards | Practical Law

In Radcliffe v. Experian Information Solutions, Inc., the US Court of Appeals for the Ninth Circuit reversed a class action settlement agreement, finding that the class representatives and class counsel did not adequately represent absent class members because the agreement conditioned the named plaintiffs' incentive awards on their support of the settlement.

Ninth Circuit Reverses Class Action Settlement Due to Conflict of Interest Caused by Incentive Awards

by PLC Litigation
Published on 07 May 2013 • USA (National/Federal)
In Radcliffe v. Experian Information Solutions, Inc., the US Court of Appeals for the Ninth Circuit reversed a class action settlement agreement, finding that the class representatives and class counsel did not adequately represent absent class members because the agreement conditioned the named plaintiffs' incentive awards on their support of the settlement.
On April 22, 2013, the US Court of Appeals for the Ninth Circuit issued an opinion in Radcliffe v. Experian Infomation Solutions, Inc., reversing the district court's approval of a class action settlement. The Ninth Circuit held that:
  • The class representatives did not adequately represent absent class members because the settlement agreement's incentive awards for class representatives were conditioned on their support of the settlement and significantly exceeded the amount absent class members would get in the settlement.
  • The class counsel did not adequately represent the class because a conflict of interest arose when counsel simultaneously represented clients with divergent interests:
    • the class representatives who were incentivized to accept the settlement regardless of its fairness to absent class members; and
    • the absent class members themselves.
The plaintiffs sued several credit agencies under the Fair Credit Reporting Act, alleging that the credit agencies issued credit reports with negative entries for debts the plaintiffs had already discharged during bankruptcy. The parties reached a settlement for injunctive relief in 2008, and in 2009 the parties reached a settlement agreement for monetary relief. The monetary settlement was the subject of this appeal.
Under the monetary settlement, the settlement fund would have been distributed as follows:
  • An incentive award of up to $5,000 for each class representative that supported the settlement, meaning, among other things, that the class representatives who objected to the settlement on the grounds that it was unfair to the absent class members would not be eligible for the incentive award.
  • The settlement fund would have paid "actual-damage" awards to class members who demonstrated that they were actually harmed by the defendants' conduct, with:
    • $750 to class members denied employment;
    • $500 to class members denied a mortgage or housing rental; and
    • $150 to class members denied credit or auto loans.
  • The remainder of the fund would have been distributed to the rest of the class as "convenience awards." Each claimant would have received about $26.
The district court approved the settlement agreement and several plaintiffs appealed. At issue on appeal was the settlement agreement's "incentive award" provision. Specifically, the Ninth Circuit considered whether class representatives and class counsel adequately represented the class when the class representatives' incentive award was conditioned on their not objecting to the fairness or adequacy of the settlement before its approval in the district court.
The Ninth Circuit held that they did not. Under the agreement, if class representatives had concerns about the settlement's fairness, they could either remain silent and accept the $5,000 reward or object to the settlement and risk getting as little as $26 if the district court approved the settlement over their objections. These divergent interests, the court reasoned, undermined the class representatives ability to fairly and adequately protect the interests of the absent class members. Accordingly, the court held that the class representatives that would have received an incentive award if they did not object to the fairness of the settlement did not adequately represent the interests of the class, as required by FRCP 23(a)(4).
The Ninth Circuit also held that class counsel was inadequate because a conflict of interest arose when counsel simultaneously represented clients with divergent interests, in this case the class representatives who would have received an incentive award in exchange for not objecting to the fairness of the award and the absent class members who would not. Accordingly, the Ninth Circuit reversed the district court's approval of the settlement.
Court documents: