District Court Approval of Antitrust Class Action Settlement did not Require Reversal due to Conflict of Interest with Certain Class Representatives because Other Class Representatives did not Share Conflict so Error was Harmless Ninth Circuit Holds
Plaintiffs filed a class action against West Publishing and Kaplan alleging antitrust violations; the class action complaint asserted that individuals who purchased BAR/BRI courses from defendants to prepare for bar examinations paid more than they should have because of defendants’ anticompetitive conduct. Rodriguez v. West Publishing Corp., 563 F.3d 948 (9th Cir. 2009) [Slip Opn., at 4743, 4752-53]. An amended class action complaint was filed adding additional named plaintiffs, who had been plaintiffs in a related class action entitled Brewer v. West Publishing. Id., at 4752. The class action sought more than $300 million in damages, id., at 4753-54. Eventually, the district court certified the litigation as a class action, id., at 4754. The court appointed all of the named plaintiffs as class representatives, and appointed class counsel, id., at 4752. The parties entered into settlement discussions and signed an agreement that called for defendants to pay $49 million in settlement; three of the class representatives (“the Class Representative Objectors”) objected to the proposed class action settlement and refused to sign it. Id., at 4755. The district court gave preliminary approval of the settlement over the objection of the Class Representative Objectors, id., at 4755-56. The Class Representatives were to receive $25,000 as incentive awards, but the Class Representative Objectors were to receive $75,000 as incentive awards. Id., at 4756. In the end, 54 objections were filed to the proposed class action settlement, id. The plaintiffs in the original Rodriguez class action complaint had a fee agreement with a prior law firm that contained a graduated incentive award, and some of those plaintiffs agreed to reduce their incentive award to $25,000, but the Class Representative Objectors did not. Id., at 4756-57. Ultimately, the district court approved the class action settlement (though it denied incentive awards in their entirety), and six groups of objectors appealed. Id., at 4757. “Their principal objection relates to incentive agreements that were entered into at the onset of litigation between class counsel and five named plaintiffs who became class representatives.” Id., at 4750. They objected also to the district court’s reliance on an estimate of single damages, rather than treble damages, in finding the $49 million payment to be fair, reasonable and adequate. Id. The Ninth Circuit affirmed the settlement.
The Ninth Circuit noted that “Much of the appeal turns on the presence — and nondisclosure to the class — of the incentive agreements.” Rodriguez, at 4758. The Court explained that while such awards are “fairly typical in class action cases,” id., providing for incentives in a fee agreement is “quite different” because only the district court can determine the appropriate award, but the fee agreements in this case “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,” id., at 4758-59. The Circuit Court held that this conflict should have been disclosed at the class action certification stage, not at the time for approval of a proposed class action settlement. Id., at 4759. If the potential conflict had been disclosed timely, then “the district court would certainly have considered its effect in determining whether the conflicted plaintiffs…could adequately represent the class. “ Id. As the Ninth Circuit explained at page 4759, “An absence of material conflicts of interest between the named plaintiffs and their counsel with other class members is central to adequacy and, in turn, to due process for absent members of the class.” (Citation omitted.)
The district court recognized this problem, holding that the incentive award agreements “were inappropriate and contrary to public policy for a number of reasons: they obligate class counsel to request an arbitrary award not reflective of the amount of work done, or the risks undertaken, or the time spent on the litigation; they create at least the appearance of impropriety; they violate the California Rules of Professional Conduct prohibiting fee-sharing with clients and among lawyers; and they encourage figure-head cases and bounty payments by potential class counsel.” Rodriguez, at 4759-60. Moreover, by tying the size of the award to a settlement value, “the effect was to make the contracting class representatives’ interests actually different from the class’s interests in settling a case instead of trying it to verdict, seeking injunctive relief, and insisting on compensation greater than $10 million.” Id., at 4760. And the failure to disclose the incentive agreement to the district court and to the class “violated the contracting representatives’ fiduciary duties to the class and duty of candor to the court.” Id. The Ninth Circuit agreed with the district court’s analysis, holding that the incentive agreements gave the named plaintiffs an incentive to focus on a monetary award “as distinguished from other remedies,” and that “once the threshold cash settlement was met, the agreements created a disincentive to go to trial; going to trial would put their $75,000 at risk in return for only a marginal individual gain even if the verdict were significantly greater than the settlement.” Id. Nonetheless, the district court did not err in approving the class action settlement because two of the class representatives did not have incentive agreements and the adequacy-of-representation test is met so long as a single class representative is adequate. Id., at 4762. Accordingly, on the facts of this case, the conflict of interest was harmless, id., at 4763. And for the same reasons, the settlement notice sent to the class was not fatally defective for failing to disclose the conflict of interest. See id., at 4764-66. However, despite the ethical issues created by the incentive agreements, the Ninth Circuit agreed that the district court erred in denying incentive awards in their entirety because it found the lower court’s conclusion that the named plaintiffs “did not add anything” to be “clearly erroneous.” Id., at 4766. The Circuit Court therefore remanded the matter “for the district court to reconsider the extent to which Objectors added value that increased the fund or substantially benefitted the class members, and to award attorney’s fees accordingly.” Id.
We do not discuss in detail the Ninth Circuit’s analysis of whether the district court was required to consider treble damages rather than single damages in determining whether the $49 million payment was fair, reasonable and adequate. See Rodriguez, at 4766-4771. In essence, the Circuit Court did not set forth a bright-line rule as to whether treble damages must always, or never, be considered in determining the reasonableness of a class action settlement of an antitrust case, concluding that in this case “the negotiated amount is fair and reasonable no matter how you slice it” because of the discrepancy between the valuations provided by plaintiff and defense experts and because “the settlement amount represents approximately ten percent of the class’s estimate of its own trebled damages and more than twice that estimated by [defendants].” Id., at 4770.
Finally, the Ninth Circuit agreed with objectors that the attorney fee award to class counsel must be reexamined because the district court failed to consider “the effect on the award of attorney’s fees of the conflict of interest that resulted from the incentive agreements.” Rodriguez, at 4774. Specifically, California law holds that “‘[s]Simultaneous representation of clients with conflicting interests (and without written informed consent) is an automatic ethics violation in California and grounds for disqualification,’” id. (citations omitted), and that “‘[a]n attorney may claim fees only for services provided before the conflict arose and the ethical breach occurred,’” id., at 4774-75 (citation omitted). The Ninth Circuit stressed that it was “express[ing] no opinion on the impact of these principles on the fees request in this case, but it is apparent that they are, at least, implicated.” Id., at 4775. Accordingly, the Court remanded the matter to the district court to consider “the effect, if any, of the conflict arising out of the incentive agreements on the request by class counsel for an attorney’s fee award.” Id.
NOTE: The Ninth Circuit observed that “If allowed, ex ante incentive agreements could tempt potential plaintiffs to sell their lawsuits to attorneys who are the highest bidders, and vice-versa.” Rodriguez, at 4760.