Class Action: Class Representative Incentive Agreements That Created Conflicting Interests Required New Consideration Of Fee Award To Objectors And Class Counsel

Ninth Circuit Requires Reexamination of Fee Denial to Objector’s Counsel and Fee Award to Class Counsel.

     For the plaintiff class action practitioners out there which follow our blog, the next decision is must reading. Not only does it highlight the fiduciary and ethical duties involved in the process, but counsels that incentive agreements should not be structured in an attorney-client retainer agreement in such a way that they create conflicts between the class representatives and the rest of the class. That is what happened in the next case, with potentially wide-ranging repercussions. Fortunately, it did not tank the class action settlement. However, the situation did require reconsideration of the fee denial to objectors pointing out the issue and the fee award to class counsel caught up in the conflict.

     Rodriguez v. West Publishing, Case Nos. 07-56643 et al. (9^th Cir. Apr. 23, 2009) (for publication) involved the $49 million class action settlement between BAR/BRI class members and West Publishing/Kaplan Inc. Lawyers for the class were set to collect up to $12.25 million in fees (calculated on a lodestar, enhanced by a 1.75 multiplier, up to 25% of the settlement fund). (BLOG OBSERVATION—In the Ninth Circuit, class counsel can be awarded attorney’s fees under either a lodestar or straight percentage of settlement fund approach. Powers v. Eichen, 229 F.3d 1249, 1256 (9^th Cir. 2000).) However, several objectors challenged the settlement on various grounds. Their objections on the incentive agreements to 5 class representatives hit a receptive chord with the Ninth Circuit.

     Five of the seven class representatives had reached upfront retention agreements with their attorneys by which they would be awarded incentive agreements on a sliding scale basis, from a potential floor of $10,000 (if the case settled for $500,000 or more) to a potential ceiling of $75,000 (if the case settled for $10 million or more).

     Circuit Judge Rymer, writing on behalf of a 3-0 panel, decided that these incentive agreements created a conflict, because the class representative’s interests were different from the remainder of the class. Not only was this arrangement not disclosed at the class certification stage, but the representatives’ interests were disjoined from the interests of the class—representatives had a disincentive to go to trial when the settlement reached the $10 million-plus point.

     Fortunately, this conflict did not upset the $49 settlement.

     However, it did require re-exploration of two determinations: (1) denial of attorney’s fees to the objectors’ attorneys raising the conflict issue (after all, they did save $325,000 in incentive payments going to class representatives); and (2) grant of attorney’s fees to class counsel (in light of the ethical concerns arising from the incentive agreements with certain class representatives).

     BLOG UNDERVIEW #1—In our experience, most plaintiff class action practitioners do not enter into any “guaranteed” incentive arrangements. Rather, they usually indicate to putative class representatives that they will apply for incentive payments in the settlement fairness hearing process, but will not represent the amount that will be awarded (given that the district judge must decide the award in the end). Some very high profile class action attorneys at Milberg Weiss got into trouble for making out-of-court “incentive” payments to class representatives.

     BLOG UNDERVIEW #2—Eliot Disner, one of the attorneys spearheading the settlement for plaintiffs and then objecting to the ultimate compromise, recently died before he could see how this decision came down. He died on April 4, 2009 from complications arising from his battle with Lou Gehrig’s disease.