Monday, May 29, 2023 | Back issues
Courthouse News Service Courthouse News Service

Incentive Awards Upend Credit Reporting Deal

(CN) - Fat incentive awards to the named plaintiffs in a class action against credit-reporting agencies tainted a $45 million settlement, the 9th Circuit ruled Monday.

The federal appeals court in Pasadena refused to put an end to eight years of wrangling over allegations that Experian Information Solutions, Equifax Information Services, and Trans Union routinely reported debts discharged in bankruptcy and refused to investigate disputes over the status of such debts. Several plaintiffs sued the companies in 2005 and 2006 for violating federal credit-reporting laws, and the cases were consolidated as a proposed class action in the Central District of California.

A 2008 settlement ordered the credit agencies to change their policies and procedures, and the parties later agreed to a $45 million award - $15 million from each of the defendants. The agreement was to give actual damages to about 15,000 class members.

Those who lost out on employment because of an inaccurate credit report would get $750; those who couldn't get a mortgage or a lease would receive $500; and those denied car loans or credit would get $150. About 755,000 other class members would receive a "convenience award" of $26 each.

The agreement also includes an "incentive award, to each of the named plaintiffs serving as class representatives in support of the settlement ... not to exceed $5,000."

It also, of course, allowed for attorneys' fees and costs, which ultimately reached about $16 million, according to the ruling.

U.S. District Judge David Carter approved the settlement in 2011, but several objectors challenged the move and took the issue to the 9th Circuit.

During oral arguments before the appellate court last month, the attorney for the objectors, George Carpinello with Boies, Schiller & Flexner of Albany, N.Y., argued that the incentive awards had created a fatal conflict of interest. In defense, Michael Caddell, with Caddell & Chapman of Houston, said that the incentives merely rewarded those few plaintiffs who had been deeply involved in the case from the start, and were not intended to influence or coerce the plaintiffs into going along with the settlement.

A three-judge panel agreed with the objectors in a unanimous reversal on Monday, with one judge calling for the disqualification of the class's attorneys.

"The conditional incentive awards changed the motivations for the class representatives," Judge Ronald Gould wrote for the panel.

"Instead of being solely concerned about the adequacy of the settlement for the absent class members, the class representatives now had a $5,000 incentive to support the settlement regardless of its fairness and a promise of no reward if they opposed the settlement," he added.

"The conditional incentive awards removed a critical check on the fairness of the class-action settlement, which rests on the unbiased judgment of class representatives similarly situated to absent class members."

In a concurrence, U.S. District Judge Sam Haddon, who sat on the panel by designation from the District of Montana, wrote that the class's lawyers were "singularly committed to doing whatever was expedient to hold together an offer of settlement that might yield, as it did, an allowance of over $16 million in lawyers' fees."

"Such adherence to self-interest, coupled with the obvious fundamental disregard of responsibilities to all class members - members who had little or no real voice or influence in the process - should not find favor or be rewarded at any level," he wrote. "Although within the discretion of the district court in the first instance, I conclude that class counsel should be disqualified from participation in any fee award ultimately approved by the district court upon resolution of the case on the merits."

Class council Mike Caddell, of Caddell & Chapman in Houston, said the ruling shows how judges "really just don't like incentive awards at all."

Though the settlement had allowed for incentive awards of up to $5,000 for the four class representatives, the trial judge lowered the figure to $3,000, he added.

This payment should not have derailed what would have been the second largest fair-credit reporting award in history, Caddell said.

"There was really not an issue as to an actual conflict," Caddell said. "This is just a question of appearance."

He said that the class representatives had already approved the settlement before the incentive award even came up, adding that the amounts here are quite small when compared with other incentive payments that have passed the 9th Circuit's scrutiny.

"They [the judges] haven't given us any real guidance," he said.

Caddell added that this case has inspired a change in the way his firm handles incentive awards, which he called "service awards."

In his most recent settlement cases, Caddell has included a service award that has no ties to a representatives' approval.

Class co-council Michael Sobol, of Lieff Cabraser Heimann & Bernstein in San Francisco, also voiced his disappointment with the ruling Monday.

"We still believe the settlement agreement did not condition any service award to the class members upon their approval of the settlement, and therefore presented no conflict of interest, as indeed the District Court which has presided over the case since 2005 determined in its detailed and comprehensive findings," Sobol said in an email. "The Ninth Circuit today found no fault with the reasonableness of the settlement terms, and we remain optimistic that upon remand, consistent with the opinion today, we will gain approval of the substantive settlement terms and deliver its substantial benefits to the class."

He added that "the potential monetary benefits come on the heels of the historic injunctive relief approved earlier in the case which requires, for the first time, that the credit bureaus reconcile conflicting information in consumers' credit histories."

Read the Top 8

Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.