Rodriguez v. West Publishing Corp.
563 F.3d 948, 2009 U.S. App. LEXIS 8680, 2009 WL 1085270 (2009)
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Rule of Law:
Pre-litigation incentive agreements that tie a class representative's compensation to the total recovery amount create an improper conflict of interest, but the presence of such a conflict does not require a court to reject an otherwise fair settlement if at least one unconflicted, adequate class representative exists.
Facts:
- West Publishing Corp. and Kaplan, Inc. were major players in the test preparation market.
- The class action alleged that BAR/BRI, a West subsidiary, entered into a market division agreement with Kaplan to prevent Kaplan from acquiring a competitor, West Bar Review.
- BAR/BRI subsequently acquired West Bar Review itself in the fall of 1997.
- In 2001, West acquired BAR/BRI.
- Five of the named plaintiffs (Rodriguez, Frailich, Nesci, Brazeal, and Gintz) entered into a retainer agreement with their attorneys that included an 'incentive agreement'.
- This agreement obligated class counsel to seek an award for them on a sliding scale, promising to request a $75,000 payment for each if the total recovery was $10 million or more.
- Two other named plaintiffs who became class representatives, Kari Brewer and Lorraine Rimson, were not party to any incentive agreement and were represented by separate counsel.
Procedural Posture:
- Ryan Rodriguez and others filed an antitrust class action lawsuit against West Publishing Corp. and Kaplan, Inc. in federal district court.
- A related action was consolidated with the case, adding two more named plaintiffs.
- The district court certified a nationwide class of BAR/BRI purchasers under Fed.R.Civ.P. 23(b)(3).
- The U.S. Court of Appeals for the Ninth Circuit declined to allow the defendants' interlocutory appeal of the class certification order.
- The district court denied Kaplan's motion for summary judgment.
- The parties, with a mediator's assistance, reached a $49 million settlement agreement.
- The district court granted preliminary approval of the settlement, and notice was sent to the class.
- After several class members ('Objectors') filed objections, the district court held a final fairness hearing.
- The district court gave final approval to the settlement agreement but denied all incentive awards for the class representatives and denied fees to the Objectors' counsel while granting fees to class counsel.
- The Objectors appealed the district court's approval of the settlement and its attorney fee orders to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Do undisclosed, pre-litigation incentive agreements that tie named plaintiffs' compensation to the total recovery amount create a conflict of interest that renders class representation inadequate and thereby requires a court to reject an otherwise fair settlement?
Opinions:
Majority - Rymer, Circuit Judge
No. While the pre-litigation incentive agreements created an unacceptable conflict of interest between the contracting representatives and the class, their existence did not require the district court to reject the settlement because representation was nonetheless adequate. The adequacy-of-representation requirement is satisfied as long as at least one class representative is adequate, and here, two representatives and their counsel were not conflicted. The court strongly disapproved of the incentive agreements, noting they 'disjoined the contingency financial interests of the contracting representatives from the class' by creating a disincentive to proceed to trial once a certain settlement threshold was met and giving them a distinct interest in a monetary settlement over other remedies. The failure to disclose these agreements at the class certification stage was also improper. However, the presence of two unconflicted representatives, Brewer and Rimson, who were separately represented, was sufficient to satisfy the Rule 23(a)(4) adequacy requirement and rendered the conflict 'harmless.' The court also held that the district court did not abuse its discretion in approving the $49 million settlement by comparing it to an estimate of single damages, reasoning that courts are not obligated to compare settlement amounts to speculative treble damages in every antitrust case.
Analysis:
This decision strongly condemns ex ante incentive agreements in class actions, establishing them as sources of unethical conflicts of interest. However, it sets a pragmatic precedent that such conflicts do not automatically invalidate a class action settlement. By applying a 'harmless error' standard where other, unconflicted representatives adequately protect the class's interests, the court prevents such agreements from becoming an easy tool for objectors to unwind complex settlements. The ruling also affirms broad judicial discretion in evaluating the fairness of antitrust settlements, clarifying that a comparison to single damages is permissible and that courts are not required to anchor their analysis to the speculative possibility of a treble damages award at trial.
