Incentive Awards to Class Action Plaintiffs: An Empirical Study
42 Pages Posted: 13 Dec 2005
Date Written: December 7, 2005
Incentive awards to representative plaintiffs in class action cases have been the focus of recent law reform efforts and generated inconsistent case law. But little is known about such awards. This study of 374 opinions from 1993 to 2002 finds that awards were granted in about 28% of settled class actions. Rate of awards varied by case category as follows: consumer credit actions 59%, employment discrimination cases 46%, antitrust cases 35%, securities cases 24% (before the PSLRA limited awards), corporate and mass tort actions, less than 10%. The decision to grant an incentive award was associated with increased awards of attorney costs and expenses (our proxy for representative plaintiff costs) in relation to median class member recoveries and with the case being in federal court. When given, incentive awards constituted, on average, 0.16% of the class recovery, with a median of 0.02%. Award levels varied by case category. Employment discrimination cases had large incentive awards compared to other categories. Award size was associated with the case's costs and expenses, the class recovery amount, the median recovery per class member, the case's risk, and the presence of objection to the settlement. Awards exhibited a scaling effect; their percentage of the class recovery decreased as the class recovery increased. We examine the data in light of four hypotheses about the function of incentive awards: (1) reimbursing class representatives for non-pecuniary litigation costs; (2) rewarding class representatives for superior service; (3) facilitating self-interested behavior by class counsel; and (4) achieving proportionality between awards and other outcomes in the case. We find support for the reimbursement and proportionality hypotheses and weaker support for the attorney self-interest and reward-for-service hypotheses. We find little evidence of systematic abuse in incentive awards. Given the modest frequency and size of awards, and their possible benefits, case-by-case adjudication may be more appropriate than fixed legislative or judicial rules banning awards.
Keywords: class actions, litigation, securities, tort
JEL Classification: K10, K13, K41
Suggested Citation: Suggested Citation