Large incentive awards continue to jeopardize class action settlements.  We wrote on February 14 about recent cases in which Circuit Courts rejected settlements due to disproportionate incentive awards.  A recent case from the Central District of California reflects that lower courts are taking a close look at such awards and the relationship of the size of the incentive awards to the payments received by other class members. Wallace v. Countrywide Home Loans, Inc., Case No. 8:08-1463-JLS (MLGx) (Apr. 14, 2014).

This particular case involves the seemingly never-ending wage and hour litigation against Countrywide Home Loans contending that its mortgage officers were misclassified as exempt.  We’ll spare you the convoluted procedural history, but this was actually at least the fourth case on the issue (filed in 2008) with the first case having been filed back in 2005.  If a child, this litigation would now be in the third grade.

Exhausted by nearly a decade of litigation, the parties settled California law wage and hour claims on behalf of a class of over 4,000 employees.  Recovery for the class members was capped at $1,500 per employee (for a maximum total of a little over $6 million).  The plaintiffs’ attorneys were claiming fees and expenses of a little less than $4 million. The total settlement was $10.5 million.

The plaintiffs’ attorneys’ fees and expenses amounted to 40% of the total.  That should have raised eyebrows but drew no mention in the opinion.  Either the court was familiar with the litigation and did not view the amount as excessive after so many years, or the record reflected the expenditure of hours to support the award.

The primary problem with the settlement turned out to be that the three named plaintiffs were to receive incentive awards of $50,000 each.  Jackpot!

One can only guess at what possessed the parties to provide for awards of such magnitude.  Sure, the awards combined were less than 2% of the settlement, but nothing in the record suggested why each named plaintiff deserved basically a year’s salary, or over over 30 times what the other class members were to receive.   Just last year, the Ninth Circuit rejected an incentive award of just a tenth of that. Radcliffe v. Experian Information Solutions, Inc., 715 F.3d 1157 (9th Cir. 2013).

The court was troubled not only by the amount, but by the fact that one of the class representatives receiving an award was not even a member of the settlement class (although he had been a class member).   The court found no special reason why the plaintiffs would be entitled to such an award as they did little more than run-of-the-mill tasks such as communicating with counsel, reviewing documents, and attending mediation. As the judge noted in her opinion:  “The Court cannot approve a Settlement Agreement that so seriously jeopardizes the adequacy of the Lead Plaintiffs to represent the absent class members in settling their claims.”

The court also had issues with the class definition, which carved out putative class members with offers of judgment or settlements in the other lawsuits.  The fact of carve-outs was not an issue, but in some cases the court found that they were overbroad.

The court ultimately directed the parties to change the problematic terms and, if they wished to continue, to resubmit the agreement.  In that regard, the plaintiffs were fortunate.  Just last year, in Vassalle v. Midland Funding LLC, 708 F.3d 747 (6th Cir. 2013), the Sixth Circuit actually instructed the district court to decertify a class because the disproportionate proposed incentives demonstrated a lack of adequacy of representation.

The Bottom Line:  Courts are more closely examining proposed incentive payments to named plaintiffs.