A common feature of class action settlements, whether in employment actions or otherwise, is the payment of an incentive award to the named plaintiff.  Such payments are frequently approved by courts, but have been criticized as unduly promoting class claims.  Indeed, the 2003 version of CAFA, which passed the House but not the senate, would have characterized such payments as “bounties” and made them unlawful. H.R. 1115, 107th Cong., 2d Sess. (2003).  

In the past, courts in employment class actions have refused to approve settlements in which the named plaintiffs were to receive what they perceived to be a disproportionate share of the relief.  See Holmes v. Continental Can Co., 706 F.2d 1144, 1145 (11th Cir. 1983) (court rejects settlement in employment discrimination action in which lion’s share of monetary relief went to the named plaintiffs); Franks v. Kroger Co., 649 F.2d 1216 (6th Cir. 1981) (a divided Sixth Circuit questions the amount of compensation for the named plaintiff in a sex discrimination class action).  In some cases, courts have held that proposing such terms suggests that the named plaintiffs are inappropriate class representatives under Rule 23(a)(4).  See Lyon v. Arizona, 80 F.R.D. 665 (D. Ariz. 1978).

Two cases decided outside the employment arena demonstrate that this issue still arises and may demonstrate conflicts between the class and the named plaintiffs.  In Vassalle v. Midland Funding LLC, 708 F.3d 747 (6th Cir. 2013), the plaintiffs brought a class action regarding debt collection practices.  The proposed settlement provided for a $5.2 million fund to be created, with an average payment of $17.28 to each class member.  The named plaintiffs, however, also received $2,000 and forgiveness of their underlying debts.  While the district court approved the settlement, the Sixth Circuit reversed, finding that the disproportionate relief implicated both superiority under Rule 23(b)(3) and adequacy of representation.  The court therefore not only rejected the settlement, but held that certifying the class was an abuse of discretion.  Ouch!

The Sixth Circuit is not alone.  In Radcliffe v. Experian Information Solutions, Inc., 715 F.3d 1157 (9th Cir. 2013), the plaintiffs sought to pursue Fair Credit Reporting Act claims against three major credit agencies.  The case settled with each of the 750,000+ class members receiving approximately $26.  The named plaintiffs, however, received incentive awards of $5,000 so long as they did not object to the settlement.  Citing these awards among other issues, the Ninth Circuit reversed the district court’s approval of the settlement with the admonition that “district courts must be vigilant in scrutinizing all incentive awards.”

The Bottom Line: Incentive awards may be common in class action settlements, but if disproportionate or unreasonable can thwart approval or even result in decertification.