by Brian Wolfman
Last week, I posted on Greenberg v. Proctor & Gamble, where the 6th circuit threw out a class-action settlement on the ground that (1) it provided virtually nothing of value to the class members while the named representatives got significant "incentive" payments ($1,000 times the number of their diaper-using kids), and the class lawyers received a large fee, and (2) the named representatives were inadequate representatives of the class. The class alleged that certain diapers sold by the defendant caused severe diaper rash.
My earlier post centered on why the 6th circuit thought that the settlement provided almost nothing to the class. This post concerns how the 6th circuit dealt with the bonuses that the settlement would have paid to the named plaintiffs and the relationship between those bonuses and the named plaintiffs' duty to adequately represent the class. (These type of bonuses are often referred to as "incentive" awards.)
What roles do class representatives (or “named plaintiffs”) play in class actions?
In some cases, the named plaintiffs are inactive. They serve because they are people affected by the alleged classwide illegality and thus have standing to assert the class members’ claims as well as their own. But they expend little time or effort on the case. In other cases, though, the named plaintiffs are also experts about the problem(s) in the case, providing on-going advice and consultation to the class lawyers. Often, the named plaintiffs also must expend significant time and effort, such as when they are deposed or must attend court hearings.
Even when they play an active role, from the class lawyer’s perspective, named plaintiffs are (and should be) different from other clients in non-class litigation. Though the lawyers must communicate with the named plaintiffs and listen to them carefully, the lawyers’ duties to the named plaintiffs must take a back seat at times, particularly when a class settlement is proposed.
Let’s say there’s a certified class, and the defendant proposes a classwide settlement. If the class lawyer believes that a settlement offer is a good one for everyone in the class, she should accept it, even if, say, some of the named plaintiffs disagree. Or, the other way around, when a named plaintiff wants to accept a classwide settlement offer that the class lawyer believes is bad for the class, the named plaintiff’s wishes don’t control.
The same is true of the court. A court should listen carefully to the named plaintiffs’ views because they may be a good source of information about the settlement, but the court must decide independently, under Rule 23(e), whether the settlement is fair, reasonable, and adequate. In this regard, it is sometimes said that a court, like the named plaintiffs and their lawyers, must act as a fiduciary for the class.
Again, even though their views cannot always control, named plaintiffs should not be ignored. If the named plaintiffs think a proposed settlement is bad, that may signal that the settlement is, in fact, bad. After all, the named plaintiffs are often the only plaintiffs with knowledge of the case, and sometimes they can act as a check on lawyers who have forgotten about their duties to the class (because, for instance, their interest in attorney fees has clouded their judgment).
That brings me to so-called incentive awards. One concern with incentive awards is that the named plaintiffs’ views may be influenced improperly. If, under a proposed settlement, the class members are slated to receive, say, $10 each, while the named plaintiffs are slated to receive the $10 plus an “incentive” award of $3,000, it’s possible that the named plaintiffs won’t be objective when asked whether they think the proposed settlement is a good deal. (The prospect of an extra award is supposed to incentivize people to handle the rigors of litigation not to sell out the class.)
So, with this in mind, here’s the Sixth Circuit’s discussion of incentive awards in Greenberg v. Proctor & Gamble:
The parties and their counsel negotiated a settlement that awards each of the named plaintiffs $1000 per “affected child,” awards class counsel $2.73 million, and providesthe unnamed class members with nothing but nearly worthless injunctive relief. The agreement treats named plaintiffs differently than other class members. * * *
Named plaintiffs release all of their Pampers-related claims against P&G and receive an “award” of $1000 “per affected child.” (Thus, for example, a named plaintiff with two “affected children” would receive $2000.) Unnamed class members do not receive any award, and benefit only from the labeling and website changes and the one-box refund program (to the extent they have not done so already and have their original receipts and UPC codes). * * *
We briefly address Greenberg’s argument that the named plaintiffs are inadequate representatives of the class under Rule 23(a)(4). … So we consider the alignment of interests and incentives here. They can be summarized as follows: The named plaintiffs (i.e., the class representatives) exercise their Rule 23 rights and receive an award of $1000 per child in return; the unnamed members are barred from exercising those same rights and receive nothing but illusory injunctive relief. Therein lies the conflict. There is no overlap between these deals: they are two separate settlement agreements folded into one. Moreover, there is every reason to think—and again the parties have not attempted to show otherwise—that an award of $1000 per child more than compensates the class representatives for any actual damages they might have incurred as a result of buying Dry Max diapers. And thus, having been promised the award, the class representatives had “no interest in vigorously prosecuting the [interests of] unnamed class members[.]’” [citation omitted]
Class counsel responds that the $1000 per child payments are merely “incentive” awards, and that incentive awards are common in class litigation. But neither point provides much comfort. Our court has never approved the practice of incentive payments to class representatives, though in fairness we have not disapproved the practice either. [citation omitted] Thus, to the extent that incentive awards are common, they are like dandelions on an unmowed lawn—present more by inattention than by design. And we have expressed a “sensibl[e] fear that incentive awards may lead named plaintiffs to expect a bounty for bringing suit or to compromise the interest of the class for personal gain.” Hadix v. Johnson, 322 F.3d 895, 897 (6th Cir. 2003).
We have no occasion in this case to lay down a categorical rule one way or the other as to whether incentive payments are permissible. But we do have occasion to make some observations relevant to our decision here. The propriety of incentive payments is arguably at its height when the award represents a fraction of a class representative’s likely damages; for in that case the class representative is left to recover the remainder of his damages by means of the same mechanisms that unnamed class members must recover theirs. The members’ incentives are thus aligned. But we should be most dubious of incentive payments when they make the class representatives whole, or (as here) even more than whole; for in that case the class representatives have no reason to care whether the mechanisms available to unnamed class members can provide adequate relief. Accord Radcliffe v. Experian Info. Solutions, 715 F.3d 1157, 1161 (9th Cir. 2013) (holding that the “incentive awards significantly exceeded in amount what absent class members could expect upon settlement approval” and thus “created a patent divergence of interests between the named representatives and the class”).
This case falls into the latter scenario. The $1000-per-child payments provided a disincentive for the class members to care about the adequacy of relief afforded unnamed class members, and instead encouraged the class representatives “to compromise the interest of the class for personal gain.” Hadix, 322 F.3d at 897. The result is the settlement agreement in this case. The named plaintiffs are inadequate representatives under Rule 23(a)(4), and the district court abused its discretion in finding the contrary.