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Class Action Countermeasures Discussions of the Strategic Considerations Involved In Class Action Defense

Incentive Awards Explained – Espenscheid v. DirectSat USA, LLC

Posted in Settlement

Today’s case, Espenscheid v. DirectSat USA, LLC (7th Cir. 2012) is a little tricky, procedurally. Three plaintiffs filed an FLSA class action (and collective action) against DirectSat USA, LLC. The Northern District of Illinois originally certified a class, but then decertified it, at which point the plaintiffs each settled on an individual basis.

Now, here’s the tricky part. Having settled the case, they appealed the decertification.

But wait, you ask. How could they do that? They settled their claims!

The plaintiffs’ response: the settlement agreement reserved their right to appeal. Of course, they would still face a standing problem. Since their claims had been settled, they no longer had a stake in the case. So how did they justify their standing?

By pointing to a provision in the settlement agreement that said that they would seek incentive awards if the class were certified.

As Judge Posner describes the incentive awards in his opinion:

It is true that class actions are almost always the brainchild of lawyers who specialize in bringing such actions. But they still have to find someone who is a member of the prospective class to agree to be named as plaintiff, because a suit cannot be brought without a plaintiff. And a class action plaintiff assumes a risk; should the suit fail, he may find himself liable for the defendant’s costs or even, if the suit is held to have been frivolous, for the defendant’s attorneys’ fees. The incentive reward is designed to compensate him for bearing these risk, as well as for as any time he spent sitting for depositions and otherwise participating in the litigation as any plaintiff must do. The plaintiff’s duties are not onerous and the risk of incurring liability is small; a defendant is unlikely to seek a judgment against an individual of modest means (and how often are wealthy people the named plaintiffs in class action suits?). The incentive award therefore usually is modest–the median award is only $4,000 per class representative.

(Emphases added, internal citations omitted.) So, would that chance to receive a payment of a few thousand dollars be enough to justify the appeal? According to Judge Posner, yes:

It should have been enough. The prospect of such an award is akin to a damages payment agreed in a settlement to be contingent on the outcome of the appeal; and the prospect of such a payment, though probabilistic rather than certain, suffices to confer standing.

Of course, as he also pointed out, having standing to pursue an appeal and being an adequate representative of a class are two entirely different things.

It’s true that having settled he will no longer have a stake in any damages that may be awarded to the class. And that will cast doubt on his adequacy to represent the class members, his interest in the case no longer being perfectly aligned with theirs.

In other words, since the named plaintiffs would only be in the case for their incentive awards, they would really only have an incentive to settle, and only on terms that allowed them their awards. This would align their interests with their lawyers’ rather than the class’s. And this is the reason why incentive awards can prove so problematic: they tend to align the interests of the named plaintiffs with their lawyers.

So what’s the takeaway for defense lawyers? Make sure you check into whether the plaintiff is seeking an incentive award. (Many defense lawyers already ask this in deposition.) If they are, it may provide the basis for an argument about adequacy of representation.