Class-action lawsuits can be a useful tool for consumers. They can also be abused by unscrupulous lawyers acting in concert with companies they are supposedly suing.

Last Friday, the United States Court of Appeals for the Sixth Circuit found that a lower court abused its discretion in certifying a class action against Pampers related to severe diaper rashes allegedly caused by certain diapers. The lower court had found that a settlement that awarded $1,000 to each named plaintiff, $2.73 million to lawyers, and “worthless injunctive relief” to everyone else in the lawsuit was fair. In reversing the lower court the Sixth Circuit sent a clear message to class action lawyers: Collusive “settlements” are not legal.

When a consumer is harmed by a product, he can always go to court, even if the damage is very small. However, in some cases, lawyers’ fees and court costs make it unattractive to sue. Hence, the Federal Rules of Civil Procedure authorize class actions—large lawsuits designed to spread administrative costs out and allow for litigation of claims that might not otherwise make it into the court system.

Some of the same problems that make it unlikely that an individual will sue a company occasionally make it unlikely that an individual will bring a class-action lawsuit—after all, “named” plaintiffs often have to spend a lot of time and energy on a lawsuit. Hence, enterprising class-action lawyers often promise “incentive” payments to potential plaintiffs. For example, if a certain type of toaster keeps exploding, a lawyer might offer extra money out of the class-action pot to anybody willing to put his or her name on the lawsuit.

Such a practice is common, but the Sixth Circuit noted that “incentive awards may lead named plaintiffs to expect a bounty for bringing suit or to compromise the interest of the class for personal gain.” Courts should scrutinize class-action settlements where incentive payments “make the class representatives whole, or (as here) even more than whole.”

Why? Simple: If 1,000 people are harmed by a certain exploding toaster, it makes no sense to allow five of those people to collect more money than they could collect in a tort action, allow lawyers to get massive fees, and allow the toaster manufacturer to avoid further lawsuits if the cost is that the remaining 995 people get nothing.

In the Pampers case, three groups were happy with the proposed settlement. Pampers was happy because it avoided all future lawsuits related to its diapers over a certain time period. The lawyers were happy because they got $2.73 million without doing very much work. The named plaintiffs were happy because they got $1,000, far more money than a diaper rash is worth. Who got the short shrift? The many consumers who may have had no idea they were involved in a lawsuit.

Such collusive settlements operate on the theory that the lawyers and the companies are on opposite sides in the lawsuit. But as in other “sue and settle” contexts, there appears to be no “case or controversy” when companies and class-action lawyers collude to negotiate away the rights of people not at the table. The legal fiction smells just as bad as the diapers.