The U.S. Court of Appeals for the Ninth Circuit continued its campaign against conflicts of interest in class action agreements, throwing out a $45 million settlement with three credit reporting agencies because the incentive awards to named plaintiffs were contingent on their support for the deal.

The ruling was the latest in which the Ninth Circuit has unraveled a class action settlement over conflicts of interest. The court earlier rejected class action settlements in consumer cases involving Bluetooth headsets, Kellogg’s cereal and the BAR/BRI bar exam preparatory course.

The latest case involves claims that the credit reporting agencies violated the Fair Credit Reporting Act and related California state laws by failing to remove from consumer credit reports certain debts that had been discharged through bankruptcy. The panel found on April 22 that the settlement should not have been approved because,under its provisions, the named plaintiffs had to support the agreement to receive incentive awards.Additionally, the awards, worth up to $5,000 a piece, were significantly more than what other class members were expected to receive.

"These conditional incentive awards caused the interests of the class representatives to diverge from the interests of the class because the settlement agreement told class representatives that they would not receive incentive awards unless they supported the settlement," Judge Ronald Gould wrote. "Because these circumstances created a patent divergence of interests between the named representatives and the class, we conclude that the class representatives and class counsel did not adequately represent the absent class members, and for this reason the district court should not have approved the class-action settlement."

The panel said the plaintiffs’ attorneys who crafted the settlement also suffered a conflict of interest, but that U.S. District Judge David Carter, who approved the deal, should determine how much they should receive in attorney fees. In a blistering concurring opinion, Judge Sam Haddon, sitting by designation from the U.S. District Court in Montana, said the attorneys should receive no fees because of their "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."

"We’re obviously disappointed with the opinion," said Michael Caddell, name partner at Caddell & Chapman in Houston, who argued for the plaintiffs on appeal. "Our clients were never coerced in any way. They supported the settlement from the beginning."

But he said the plaintiffs had no plans to petition the Ninth Circuit for rehearing.

"We’re very pleased with the decision. It vindicates our position, our consistent position, that the settlement here was procured through an ethical violation," said George Carpinello of Boies, Schiller & Flexner’s office in Albany, N.Y., who argued on behalf of the objecting class members and named plaintiffs who had appealed. "And the court made it very clear that the settlement plaintiffs’ counsel had a conflict of interest, which we think disqualifies them from any further participation in the case."

Counsel for the three defendants – Daniel McLoon, a Los Angeles partner at Jones Day, for Experian Information Solutions Inc.; Cindy Hanson, a partner at Kilpatrick Townsend & Stockton in Atlanta for Equifax Information Services LLC; and Julia Strickland, a partner at Stroock & Stroock & Lavan in Los Angeles for TransUnion LLC – did not return calls for comment.

The cases originally were filed in 2005 and 2006, according to the opinion. In August 2008, Carter approved a settlement that provided injunctive relief. In February 2009, both sides reached an agreement that the three defendants would pay $45 million, which included settlement administration costs, attorney fees, incentive awards and various disbursements to 15,000 class members ranging from $150 to $750, based on the damage to their credit ratings. Another group of 755,000 class members received so-called "convenience awards" of about $26 each.

Carter approved the settlement on July 15, 2011, and awarded $11 million to class counsel for the 2009 settlement and nearly $5.7 million for the injunctive agreement.

In reviewing the settlement for conflicts, the panel cited its own 2009 decision in Rodriguez v. W. Pub. Corp. (Rodriguez I), in which the panel remanded a $49 million antitrust settlement involving the BAR/BRI bar examination preparatory course in light of incentive awards that created a "disturbing appearance of impropriety" because they were tied to the settlement. In that case, the class representatives signed retainer agreements that tied their incentive awards to the amount of the settlement, maxing out at $75,000 for $10 million or more.

"Like the agreements in Rodriguez, the conditional incentive awards changed the motivations for the class representatives," Gould wrote. "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. 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."

The panel noted the wide disparity between the $5,000 incentive awards and the $26 to class members.

Many of the same attorneys who had represented objectors to the Rodriguez settlement joined in appealing the credit-agency deal.In comparing the cases, Caddell said, the Ninth Circuit ruling revealed a "disconnect" when it comes to incentive awards. He said $5,000 wasn’t that much when compared to class member awards of up to $750, and especially considering incentive awards granted in other cases like Rodriguez.

"You’re asking someone who wants to pursue a class action to represent potentially millions of people, submit themselves to depositions, submit themselves to a document review and answering interrogatories and discovery, and they’re supposed to at the same time monitor the litigation on behalf of the class and yet apparently they’re not supposed to get compensated for that," he said. "That seems to me to be contrary to the mainstream opinions of the Ninth Circuit, and every other circuit."

He insisted that class representatives who agreed to the settlement did so before the language involving incentive awards was added to the agreement.

Carpinello disagreed, noting the Ninth Circuit’s reference in its opinion to a conversation in which one of the plaintiffs’ attorneys told a class representative that he would "jeopardize the $5,000 [he] would receive" if he did not support the settlement.

"It’s not just that the settlement provisions provided that, but counsel had actively engaged in attempting to induce class representatives to agree to the settlement by dangling the settlement awards in front of them," Carpinello said. Carpinello was brought in to represent attorneys Daniel Wolf, a solo practitioner in Washington, and Charles Juntikka of Charles Juntikka & Associates in New York, after they split with class counsel over the settlement, taking the objecting class representatives with them.

In addressing class counsel, the opinion found that a conflict existed but acknowledged that it may have arisen"late in the course of representation" – not at the start, as in Rodriguez. As a result, the panel remanded the issue of attorney fees to Carter.

Haddon, in his concurring opinion, disagreed, finding that their "actions in orchestrating and advocating the disparate incentive award scenario without any concern for, or even recognition of, the obvious conflicts presented underscore, in my opinion, that class counsel 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."

In addition to Caddell and Cynthia Chapman, name partner at his firm, the other plaintiffs’ attorneys in the litigation were Michael Sobol, a partner at San Francisco’s Lieff Cabraser Heimann & Bernstein; Stuart Rossman, director of litigation, and attorney Charles Delbaum at the National Consumer Law Center in Boston; Leonard Bennett and Matthew Erausquin, founding partners of Consumer Litigation Associates P.C. in Newport News, Va.; Lee Sherman, a partner at Irvine, Calif.-based Callahan, Thompson, Sherman & Caudill; and Mitchell Toups, a solo practitioner in Beaumont, Texas.

Last year, the Ninth Circuit rejected a settlement with Kellogg Co. over consumer claims involving its Frosted Mini-Wheats cereal, citing its "impermissibly high" attorney fees and ambiguous cy pres donations. In 2011, the Ninth Circuit rejected a settlement involving consumer claims over Motorola’s Bluetooth headsets, due to potentially excessive fees and "red flags" in the deal.

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