Yes, you read that right.

Class action litigation is fueled largely by the availability of often large attorney fee awards. To get a class action case in the first place, however, attorneys bringing them often entice a potential individual plaintiff into the role of class representative with the prospect of a monetary “incentive award,” usually in the thousands of dollars. Indeed, the giving of such awards has become commonplace or even routine. But is it lawful?

Apparently not. In Johnson v. NPAS Solutions LLC, Case No. 18-12344 (11th Cir. Sept. 17, 2020), the court dealt with what it described as a fairly typical settlement of a class action approved by a Florida district court. The case itself involved claimed violations of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, for making automatic telephone calls without the recipient’s consent. The plaintiff contended that the defendant had made such calls to 179,642 telephone numbers and sought relief under the TCPA on behalf of a class.

The case quickly settled, as such cases often do. The defendant agreed to pay a total of $1.43 million to settle all claims. The plaintiff’s attorneys were to receive 30 percent of that amount plus their expenses. The class representative would receive $6,000 as an incentive award and the remaining amounts were to be distributed among the class members who filed claims.

The court saved us from doing all the math. The attorneys were to receive $429,600 plus about $3,500 in expenses. The class representative was promised $6,000 as an incentive award. If every class member had submitted a claim, they all would have received $7.97. Because there was a claims procedure and just fewer than 10,000 individuals filed claims, they each were to get about $79, with those who did not file claims getting nothing.

When notice went out to the class of preliminary approval, one individual objected. She challenged both the attorney fee award and the incentive. The district court approved the settlement in a relatively brief order, and it overruled her objections with little comment. The objector appealed.

As to the attorney fee award, she first noted that the cutoff for objections was two weeks before the plaintiff’s attorneys were to submit their attorney fee petition, depriving her of the detail needed to challenge it meaningfully. The U.S. Court of Appeals for the Eleventh Circuit found that indeed violated due process (itself a significant ruling), but noted that even when given an opportunity to explain how the award was objectionable, she had failed to do so. Still, later in the opinion, the court noted that the district court had failed to set forth its rationale for approving the award, and it remanded for further analysis and findings of fact.

The more interesting part of the decision related to the incentive award to the named plaintiff. The court made no bones about the fact that incentive awards had become a common feature of class action settlements. Indeed, it found that the district court had done nothing that other courts were doing as well.

“We don’t necessarily fault the district court – it handled the class action settlement here in pretty much exactly the same way that hundreds of courts before it have handled similar settlements.”

The Court of Appeals reviewed Supreme Court precedent on the issue of incentive awards, focusing in particular on two older cases, Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). Based on those cases and others, the Eleventh Circuit found that while there was strong support for attorney fee awards in class actions, individual incentive awards were “decidedly objectionable” and invalid. Indeed, they appear to have been created “out of whole cloth” by the judiciary and perpetuated based on the relatively low incentive for objectors to challenge them. As to the fact that such awards were so routinely allowed, the court commented, “[S]o far as we can tell, that state of affairs is a product of inertia and inattention, not adherence to law.”

As the court concluded, “Although it’s true that such awards are commonplace in modern class action litigation, that doesn’t make them lawful, and it doesn’t free us to ignore Supreme Court precedent forbidding them.”

One other aspect of the court’s decision bears noting. The Eleventh Circuit also noted that the incentive awards create a conflict of interest between the purported class representative and the class, which is very likely. A class representative who is all but guaranteed to receive an award of thousands of dollars is likely to be less interested in the best result for the other claimants potentially receiving smaller amounts.

The Johnson case will certainly be of great significance in the Eleventh Circuit, as it removes one incentive to bring class action litigation in the first place. As it gains acceptance across the country, it likely will have a great impact on the volume of class litigation, particularly those cases involving weaker claims where the defendant settles simply to avoid the cost of class litigation.

The bottom line: Incentive awards indeed have incentivized the bringing of class action litigation, but their validity is now in doubt.