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Posts Tagged ‘incentive award’

Last July, in an entry titled Incentive Awards Ok, but Not Incentive Agreements, I commented on the Ninth Circuit Court of Appeals’ decision in Rodriguez v. West Publishing Corp.   In Rodriguez, the Ninth Circuit panel condemned the use incentive agreements in class actions.  The incentive agreements were engagement agreements between the law firm and the named class representatives that called for the attorneys to seek successively higher incentive payments to the class representatives in the event of class settlements or verdicts in successively higher dollar amounts.  As the court in Rodriguez  noted, incentive agreements are to be distinguished from incentive awards, which if reasonable in amount are widely accepted as compensation for the named plaintiff’s assistance with and risk assumed in prosecuting the case.  The incentive agreements at issue in Rodriguez had not been disclosed prior to preliminary approval of the settlement or notice to the class.  As noted in the July entry, the Ninth Circuit nonetheless upheld approval of the settlement as fair and reasonable, but remanded to the trial court for further proceedings regarding the requests by plaintiffs’ counsel for an award of attorney’s fees.

Earlier this month, the trial court entered a final order on attorney’s fees and costs requested by attorneys for the representative plaintiffs and objectors.  The court held that in light of the Ninth Circuit’s opinion, and under California law, one of the firms representing the plaintiffs, McGuire Woods, had forfeited any right to recover attorney’s fees because it had performed the legal services on behalf of different clients, the class and the class representatives, that had a conflict of interest.  As a result, the firm will receive no attorney’s fees at all, as compared to the $15 million that the firm had requested for its part in obtaining the $49 million settlement for the benefit of the class.  The court awarded approximately $1.5 million each in attorney’s fees to two additional firms that it concluded were not involved in the conflict of interest.

Ashby Jones of the WSJ Law Blog, has authored a comprehensive article discussing the recent trial court decision and the history of the case, entitled The Class Gets $49 Million, But the Lawyers Get Nothing.

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In an opinion entered in April in Rodriguez v. West Publishing Corp., the U.S. Court of Appeals for the Ninth Circuit stated its disapproval of the practice of plaintiffs’ counsel entering into incentive agreements with putative class representatives, which required their attorneys to seek successively higher payment in the event of class settlements in successively higher dollar amounts.  The court described the problem as follows:

Incentive awards are fairly typical in class action cases. See 4 William B. Rubenstein et al., Newberg on Class Actions§ 11:38 (4th ed. 2008); Theodore Eisenberg & Geoffrey P. Miller, Incentive Awards to Class Action Plaintiffs:  An Empirical Study, 53 U.C.L.A. L. Rev. 1303 (2006) (finding twenty-eight percent of settled class actions between 1993 and 2002 included an incentive award to class representatives). Such awards are discretionary, see In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 463 (9th Cir. 2000), and are intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general. Awards are generally sought after a settlement or verdict has been achieved.

The incentive agreements entered into as part of the initial retention of counsel in this case, however, are quite different. Although they only bound counsel to apply for an award, thus leaving the decision whether actually to make one to the district judge, these agreements tied the promised request to the ultimate recovery and in so doing, put class counsel and the contracting class representatives into a conflict position from day one.

The court went on to approve the settlement, which called for the creation of a $49 million settlement fund to compensate a class consisting of aspiring lawyers who paid for  BAR/BRI bar review courses from August 1997 through July 31, 2006.  The court reasoned that although the incentive agreements were improper, there were two settlement class representatives who had not been parties to the agreements.  However, the court remanded for a reconsideration of the attorneys fees to be awarded to the class counsel who had negotiated the incentive agreements and the possibility of an award to counsel for objectors who successfully objected to the incentive fee agreements.

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