By Kyle V. Miller
The scenario is all too familiar for manufacturers of consumer goods:
Time and time again this scenario repeats itself and necessarily begs the question: Who is supposed to be protecting the interests of the absent class members in these settlements—class counsel who is taking more than 30% of the total recovery (often in the millions) or the class representative recovering many times over what the absent class members are receiving?
Recently, the United States Court of Appeals for the Eleventh Circuit stripped the granting of an incentive award due to the fact that the award—which the Court equated to a “bounty”—created a conflict of interest between the class representative and the class he sought to represent. So far, the district courts outside the Eleventh Circuit have not followed this holding, but the analytical reasoning for refusing such awards is sound. Perhaps even more interesting, the Eleventh Circuit held that binding United States Supreme Court precedent required the disallowance of the incentive award.
Class actions are an exception to the general rule that a plaintiff cannot prosecute the claim of another person. Federal Rule of Civil Procedure 23 (and its state corollaries) are grounded in the premise that when the claims of the named plaintiff are so similar to the claims of numerous others who are not parties to the litigation, the named plaintiff can be allowed to litigate not just his claims but the claims of all other similarly situated people. Let’s put aside for this writing the debate over whether this underlying premise is well-founded [1] and focus instead on one component of the analysis.
Rule 23(a) sets forth four “prerequisites” to class certification. The plaintiff must establish the elements of numerosity, commonality, typicality, and representativeness. Numerosity is merely a question regarding the size of the class. The other three prerequisites all look at the cohesion of the class, the similarities in the claims, and the alignment of the proposed class representative’s interests with the interests of the class. It is with regard to this last issue—the alignment of interests—where the granting of incentive awards undermines the class process.
Rule 23(a)(4) requires that the class representative(s) must be able to adequately represent the absent class members. Specifically, it reads: “One or more members of a class may sue or be sued as representative parties on behalf of all members only if … the representative parties will fairly and adequately protect the interests of the class.” Fed. R. Civ. P. 23(a)(4).
The terms “fairly and adequately” are squishy terms that are necessarily left open for interpretation. While the test may vary slightly from circuit to circuit in the federal system, one point holds true across the board: A class representative will not be deemed to fairly and adequately represent the class when the class representative has a conflict of interest with the class he seeks to represent. [2] This is a good, common sense requirement—the person prosecuting the claim on behalf of the absent class members needs to have their interests fully aligned with those class members; if not, the class representative may be tempted to engage in self-dealing.
The actual or potential conflict of interest between the class representative and the class he seeks to represent has thwarted many potential class actions. [3] While the courts regularly and routinely recognize this requirement and the pitfalls associated with a class representative who has a conflict of interest, a blind spot emerged—the class representative’s incentive award.
In the modern-era of class actions, it is routine for a court to award the class representative an “incentive award” for serving as class counsel. These incentive awards are typically viewed as mundane and to some extent necessary for the class action system to work. Usually the amount that any individual class member recovers in a class action is minimal, and, as the Seventh Circuit recognized, “only a lunatic or a fanatic sues for $30.” [4] Accordingly, the interest of any one class member to sue to recover his own alleged damages is low from the start, let alone attempting to vindicate the rights of thousands of faceless strangers with similar claims.
While the job of class representative is not necessarily an onerous one, the class representative has responsibilities that will consume considerable time—answering written discovery, sitting for a deposition, testifying at trial, etc. The generally accepted view has been that it would only be “fair” to compensate the class representative for his time (i.e., a little extra compensation for his trouble; after all, the absent class members enjoy the fruits of the class representative’s labor).
When a case is taken through the class certification stage and through trial, the granting of an incentive award arguably does not in itself create a conflict of interest. From the filing of the complaint through the final verdict, the class representative’s and the absent class members’ fates were aligned. It is only after the verdict is obtained that the class representative is treated differently. But most class actions are not resolved by trial.
The conflict of interest problem arises when the parties attempt to settle on a class-wide basis. The class representative is supposed to protect the interests of the absent class members. But when the class members are being offered little more than a coupon settlement and the class representative is being offered an incentive award of $1,000, has a conflict been created such that the class representative can no longer fairly and adequately represent the absent class members?
In Part II, we will examine a recent federal appellate court decision that answered this question in the affirmative, finding that an incentive award does create a conflict. We will also examine the implications of that case for defendants who are seeking to settle a class action.
[1] For additional analysis concerning what have been characterized as the “entrepreneurial” features of class actions, please see https://www.butlersnow.com/2021/04/learning-from-the-past-to-combat-the-entrepreneurial-model-of-class-actions/
[2] Valley Drug Co. v. Geneva Pharm., Inc., 350 F.3d 1181 (11th Cir. 2003).
[3] See, e.g., Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 625-28 (1997).
[4] Carnegie v. Household Int’l, Inc., 376 F.3d 656, 661 (7th Cir. 2004).
The scenario is all too familiar for manufacturers of consumer goods:
Time and time again this scenario repeats itself and necessarily begs the question: Who is supposed to be protecting the interests of the absent class members in these settlements—class counsel who is taking more than 30% of the total recovery (often in the millions) or the class representative recovering many times over what the absent class members are receiving?
Recently, the United States Court of Appeals for the Eleventh Circuit stripped the granting of an incentive award due to the fact that the award—which the Court equated to a “bounty”—created a conflict of interest between the class representative and the class he sought to represent. So far, the district courts outside the Eleventh Circuit have not followed this holding, but the analytical reasoning for refusing such awards is sound. Perhaps even more interesting, the Eleventh Circuit held that binding United States Supreme Court precedent required the disallowance of the incentive award.
Class actions are an exception to the general rule that a plaintiff cannot prosecute the claim of another person. Federal Rule of Civil Procedure 23 (and its state corollaries) are grounded in the premise that when the claims of the named plaintiff are so similar to the claims of numerous others who are not parties to the litigation, the named plaintiff can be allowed to litigate not just his claims but the claims of all other similarly situated people. Let’s put aside for this writing the debate over whether this underlying premise is well-founded [1] and focus instead on one component of the analysis.
Rule 23(a) sets forth four “prerequisites” to class certification. The plaintiff must establish the elements of numerosity, commonality, typicality, and representativeness. Numerosity is merely a question regarding the size of the class. The other three prerequisites all look at the cohesion of the class, the similarities in the claims, and the alignment of the proposed class representative’s interests with the interests of the class. It is with regard to this last issue—the alignment of interests—where the granting of incentive awards undermines the class process.
Rule 23(a)(4) requires that the class representative(s) must be able to adequately represent the absent class members. Specifically, it reads: “One or more members of a class may sue or be sued as representative parties on behalf of all members only if … the representative parties will fairly and adequately protect the interests of the class.” Fed. R. Civ. P. 23(a)(4).
The terms “fairly and adequately” are squishy terms that are necessarily left open for interpretation. While the test may vary slightly from circuit to circuit in the federal system, one point holds true across the board: A class representative will not be deemed to fairly and adequately represent the class when the class representative has a conflict of interest with the class he seeks to represent. [2] This is a good, common sense requirement—the person prosecuting the claim on behalf of the absent class members needs to have their interests fully aligned with those class members; if not, the class representative may be tempted to engage in self-dealing.
The actual or potential conflict of interest between the class representative and the class he seeks to represent has thwarted many potential class actions. [3] While the courts regularly and routinely recognize this requirement and the pitfalls associated with a class representative who has a conflict of interest, a blind spot emerged—the class representative’s incentive award.
In the modern-era of class actions, it is routine for a court to award the class representative an “incentive award” for serving as class counsel. These incentive awards are typically viewed as mundane and to some extent necessary for the class action system to work. Usually the amount that any individual class member recovers in a class action is minimal, and, as the Seventh Circuit recognized, “only a lunatic or a fanatic sues for $30.” [4] Accordingly, the interest of any one class member to sue to recover his own alleged damages is low from the start, let alone attempting to vindicate the rights of thousands of faceless strangers with similar claims.
While the job of class representative is not necessarily an onerous one, the class representative has responsibilities that will consume considerable time—answering written discovery, sitting for a deposition, testifying at trial, etc. The generally accepted view has been that it would only be “fair” to compensate the class representative for his time (i.e., a little extra compensation for his trouble; after all, the absent class members enjoy the fruits of the class representative’s labor).
When a case is taken through the class certification stage and through trial, the granting of an incentive award arguably does not in itself create a conflict of interest. From the filing of the complaint through the final verdict, the class representative’s and the absent class members’ fates were aligned. It is only after the verdict is obtained that the class representative is treated differently. But most class actions are not resolved by trial.
The conflict of interest problem arises when the parties attempt to settle on a class-wide basis. The class representative is supposed to protect the interests of the absent class members. But when the class members are being offered little more than a coupon settlement and the class representative is being offered an incentive award of $1,000, has a conflict been created such that the class representative can no longer fairly and adequately represent the absent class members?
In Part II, we will examine a recent federal appellate court decision that answered this question in the affirmative, finding that an incentive award does create a conflict. We will also examine the implications of that case for defendants who are seeking to settle a class action.
[1] For additional analysis concerning what have been characterized as the “entrepreneurial” features of class actions, please see https://www.butlersnow.com/2021/04/learning-from-the-past-to-combat-the-entrepreneurial-model-of-class-actions/
[2] Valley Drug Co. v. Geneva Pharm., Inc., 350 F.3d 1181 (11th Cir. 2003).
[3] See, e.g., Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 625-28 (1997).
[4] Carnegie v. Household Int’l, Inc., 376 F.3d 656, 661 (7th Cir. 2004).
