Defendants negotiating class action settlements should be careful when agreeing to reward named plaintiffs more than the rest of a class, especially when plaintiffs try to get creative. “Incentive” rewards are common in class cases, of course. Yet, according to the Ninth Circuit this week in Radcliffe v. Experian Information Solutions Inc., settlements with “incentive rewards” for named class members will be rejected – and plaintiffs’ counsel may in fact breach ethical duties – where such awards are explicitly conditioned upon their acceptance of the settlement. Defendants should keep this ruling in mind when assenting to a class action settlement with incentive awards so as to avoid the costly and time-consuming chore of having to renegotiate a proposed settlement.

Plaintiffs in Radcliffe sued credit report companies Experian, TransUnion, and Equifax under the Fair Credit Reporting Act and its California counterparts for issuing improper consumer credit reports. All three agencies allegedly provided reports showing that plaintiffs were delinquent in making payments on debts that were discharged in bankruptcy proceedings, and, for a smaller subset of plaintiffs, the agencies purportedly failed adequately to investigate these errors following their discovery. The district court eventually approved a monetary settlement awarding up to $5,000 to “each of the Named Plaintiffs serving as class representatives in support of the Settlement,” while only providing about $26 to each of the remaining 755,000 unnamed class members. Under the agreement, if the class representatives had reservations about the settlement’s fairness, they could thus either remain silent and accept $5,000 or object and risk getting about $26 if the court approved the settlement over their objections.

Incentive awards to named plaintiffs are not uncommon. Nonetheless, the Ninth Circuit reversed the settlement and remanded the case, finding that the conditional incentive award here was “not at all typical” and caused the interests of the class representatives to diverge from the interests of the rest of the class. Radcliffe, at 19. This made the named plaintiffs unable to represent the absent members adequately as required under Fed. R. Civ. P. 23(a)(4). Id. at 18. “Further exacerbat[ing]” the situation was the “significant disparity” between the incentive awards and the payments to the rest of the class, which heightened the conflict of interest and, under Ninth Circuit precedent, could have provided independent grounds to invalidate the settlement. Id. at 17-18.

In a lesson to plaintiffs’ counsel everywhere, the Radcliffe court further found that the conditional awards provision created such a significant conflict of interest between the class representatives and the other class members that plaintiffs’ counsel breached an ethical fiduciary duty either to obtain a waiver for the conflict or to alert the district court of the situation. It remanded the issue to the district court to determine whether the conflict should affect attorneys’ fees, and the concurring opinion further called for the disqualification of class counsel from any fee award.

Although the proposed settlement may be an outlier for its explicit conditioning of awards upon the acceptance of the settlement, the Ninth Circuit repeatedly stressed its takeaway message to lower courts evaluating class action settlements: they must be vigilant in scrutinizing all incentive awards to make sure they do not destroy the adequacy of class representation. Defendants in class actions should be mindful of this message, as district courts – at least in the Ninth Circuit – may now be extra cautious in approving settlements that appear too favorable to class representatives.