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.
