11th Circuit Forbids Incentive Payments

Bradley Arant Boult Cummings LLP

You need to read Johnson v. NPAS Solutions, LLC. This recent decision from the 11th Circuit fundamentally changes the rules of obtaining approval for class action settlements.

Johnson’s introduction emphasizes that the 11th Circuit is shaking up the way class actions are settled and that the court knows it: “The class-action settlement that underlies this appeal is just like so many others that have come before it. And in a way, that’s exactly the problem. We find that, in approving the settlement here, the district court repeated several errors that, while clear to us, have become commonplace in everyday class-action practice.” In the pages that follow, the 2-to-1 majority opinion categorically forbids class-representative incentive payments, establishes a mandatory sequence for fee petitions, and reinforces standards regarding the approving court’s findings and conclusions.

Johnson looks like an ordinary TCPA class settlement. After the complaint, some motion practice, and a little discovery, the parties proposed a nationwide class settlement offering just under $1.5 million to about 180,000 class members on a claims-made basis. Fewer than 10,000 class members submitted claims, but the claims rate was a respectable 5.3%. The settlement provided a $6,000 incentive award to the class representative. Class counsel were to receive 30% of the settlement fund available to the class, but, critically, their fee petition was not due until after the objection deadline passed. Nobody opted out, but there was one objector. The district court overruled her objections, and she appealed. The 11th Circuit went with her on three issues (we address them in order, but the second is the most important).

Deadlines

The 11th Circuit interpreted Federal Rule of Civil Procedure 23(h) to require class counsel to submit the fee petition before any objection to fees is due. It is not enough, the court ruled, that the class notice included details about what the fee petition would ultimately request. The objectors have the right to object to the petition itself. In this regard, the court noted that a degree of adversity sneaks between the class and the lawyers representing it, as the lawyers’ interest to maximize fees conflicts with the class’ interest to maximize recovery to the class.

While the court set a bright-line rule requiring fee petitions to come before an objection deadline, it found that the district court’s failure to sequence the deadlines in this manner resulted in harmless error. The objector relied on the notice to substantiate her objection, and the ultimate fee petition aligned with the notice. Moreover, the objector appeared at the final approval hearing to challenge the substance of the fee petition. She made no new arguments at the hearing and made no new arguments on appeal. Thus, the error was harmless.

No More Class Representative Incentive Payments

If you had “Court of Appeals prohibits class representative incentive payments by relying on Supreme Court cases from 1882 and 1885” on your 2020 bingo card, come forward and collect your prize. The 11th Circuit has apparently categorically barred them for over 100 years.

The cases on which it relied are Trustees v. Greenough, 105 U.S. 527 (1882) and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). They establish a general rule that a plaintiff who successfully litigates to create a common fund for the benefit of the plaintiff and others can recover an attorney’s fee from the fund — but may not recover any kind of personal salary.

While these Supreme Court cases are not class-action cases, they are cases where one plaintiff’s work benefits others beyond the named plaintiff, which the 11th Circuit found was close enough to be controlling. It held that the prohibition on salaries for successful plaintiffs barred incentive payments for class representatives, which served much the same purpose: “Incentive awards are intended not only to compensate class representatives for their time (i.e., as a salary), but also to promote litigation by providing a prize to be won (i.e., as a bounty).” The court found incentive awards to be “part salary and part[ ] bounty;” but “[w]hether [the] incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it.”

The court had no qualms about barring these common payments, noting “so far as we can tell, the [ubiquity of incentive payments] is a product of inertia and inattention, not adherence to law.”

Required Findings

Lastly, the 11th Circuit reiterated the long-standing requirements that district courts make detailed findings when addressing such matters as the fairness and adequacy of a settlement, the approval of fees, and the disposition of objections. It is not enough merely to dispose of the issues. The 11th Circuit requires a record that substantiates the reasons for the district court’s decision to exercise its discretion to approve a settlement or fee petition.

*          *          *

So, What’s Next?

  • Initially, we would expect a petition for en banc rehearing and a flurry of amicus briefs, followed by a petition for certiorari, and maybe a push to have Congress or the Rules Committee authorize incentive awards of some level.
  • Practitioners should update their checklists and forms, as the old timetable for the sequence of events may no longer pass muster, and that 10-year-old standard proposed order may be too bare-bones to make the findings that are required.
  • Further litigation about incentive awards also seems likely. In Johnson, the incentive award came from the common fund and thus reduced the relief available to the class (even if only a little bit). Whether parties may provide an incentive payment that does not come from the common fund remains to be seen. Some federal statutes, for instance, include statutory incentive payments for class representatives.

Johnson signals that the skepticism about class actions that has featured prominently in Supreme Court jurisprudence since Wal-Mart v. Dukes has come to the 11th Circuit. The court could have easily characterized the practice of incentive awards as “long-standing precedent” or “established practice,” but it selected a pejorative term instead: “inertia.” And that inertia came from, in the court’s view, “inattention” to the controlling standards. The skepticism of Johnson invites parties to be bold in calling for the reassessment of all aspects of class-action practice that are not drawn directly from the text of Rule 23 or controlling cases interpreting it.

Lastly, Johnson sidesteps an issue we have watched closely: the interaction between Rule 23 and the Due Process Clause. Most of the Federal Rules of Civil Procedure soar high above any due-process concerns. It is hard to imagine, for instance, a litigant claiming that the Constitution forbids changing the presumptive time limit for depositions to six hours instead of seven or requires a particular form for motions for summary judgment. But Rule 23 is different. Because it allows courts to adjudicate the rights of absent parties, Rule 23 swoops much closer to the Constitutional ground. One can easily imagine that changing the rules for adequacy or class notice could violate due process. Here, the objector argued that the district court’s decision to set her objection deadline before the fee petition violated the Due Process Clause even if it did not violate Rule 23(h). The 11th Circuit responded by noting that Rule 23(h) was not quite sitting on rock bottom yet, as the notice required by that rule is more than what the Due Process Clause requires. But the issue remains an intriguing one for litigants to consider raising.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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