NEW YORK (Reuters)—A federal appeals court voided a class action settlement in a case brought by freelance writers who accused publishers of reprinting their works in online databases without permission.

The 2nd U.S. Circuit Court of Appeals in New York said the settlement, calling for payments of as much as $18 million, was unfair because it shortchanged authors who did not register copyrights in their works. These authors represented more than 99% of the claims covered by the 2005 settlement.

Wednesday's 2-1 decision followed a unanimous March 2010 U.S. Supreme Court decision in Reed Elsevier vs. Muchnick that resurrected a possible settlement, which the 2nd Circuit earlier threw out on the grounds that it lacked jurisdiction.

Publishers in the lawsuit included Reed Elsevier, New York Times Co., News Corp.'s Dow Jones & Co., Thomson Reuters Corp. and Knight Ridder, which was bought by McClatchy Co. in 2006.

The settlement, reached through mediation, came four years after the Supreme Court in 2001 said publishers violate copyright law when they reproduce freelance works electronically without first obtaining permission from copyright owners.

A group of 10 authors objected. They contended that authors who had not registered their works could see their recoveries unfairly reduced, and that the settlement freed publishers from potential litigation over too many claims.

Writing for the appeals court majority, Circuit Judge John Walker said a lower court judge erred in combining this group of authors with other groups, who could recover more on their claims, into a single settlement.

"Although all class members share an interest in maximizing the collective recovery," Judge Walker wrote, "their interests diverge as to the distribution of that recovery because each category of claim is of different strength and therefore commands a different settlement value."

He said the "simplest and most logical approach" might be to create classes for each type of claim, with different lawyers for each class. The 2nd Circuit returned the case to the U.S. District Court in Manhattan for further proceedings.

Circuit Judge Chester Straub dissented in part, finding that class action certification was proper.

Lawyers for the objecting authors, the other authors and the publishers did not respond to requests for comment.

One of the mediators in the 2005 settlement was Kenneth Feinberg, who oversees a $20 billion fund that BP P.L.C. set up for victims of last year's Gulf of Mexico oil spill.

Jonathan Tasini, the lead plaintiff in the 2001 Supreme Court case, in April sued AOL Inc. and The Huffington Post, saying they failed to pay bloggers for their work.

The case is In re: Literary Works in Electronic Databases Copyright Litigation, 2nd U.S. Circuit Court of Appeals, No. 05-5943.