Eleventh Circuit Panel Finds Class Action Incentive Payment Improper

On September 17, 2020, in a potentially groundbreaking decision that could have huge implications for the future of class actions, a split panel of the Eleventh Circuit held that incentive payments given to a named plaintiff in a class action are improper. See Johnson v. NPAS Solutions, LLC, No. 18-12344, “Slip Op.” (11th Cir. 2020).

Judge Newsom writing for the majority of him and Judge Baldock—a Tenth Circuit judge sitting by designation—held “that Supreme Court precedent prohibits incentive awards like the one” awarded in this case. Id. at 18. Specifically, the panel noted that Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885) “establish[ed] limits on the types of awards that attorneys and litigants may recover from the [common] fund.” Id.

In Greenough, the Supreme Court held that the plaintiff could be reimbursed for “reasonable costs, counsel fees, charge, and expenses incurred in the fair prosecution of the suit, and in reclaiming and rescuing the trust fund [at issue in the case].” 105 U.S. at 537. The Court, however, also held that “there [was] one class of allowances” that was “decidedly objectionable.” Id. Those, according to the Court, are the plaintiff’s “personal services and private expenses.” Id. The Court continued that the allowance of such expenses “would present too great a temptation to parties to intermeddle in the management of valuable property or funds in which they have only the interest of creditors.” Id. at 538.

Similarly, three years ago, the Supreme Court confirmed this approach in Pettus. In Pettus, the Court once again held that a class representative could claim “expenses incurred in carrying on the suit and reclaiming the property subject to the trust.” 113 U.S. at 122. The class representative could not, however, “claim to be compensated, out of the fund or property recovered, for his personal services and private expenses” as such claim was “unsupported by reason or authority.” Id.

Taking the “clear” principle of Greenough and Pettus, the Eleventh Circuit panel stated that “[i]t seems to us that the modern-day incentive award for a class representative is roughly analogous to a salary—in Greenough’s terms, payment for ‘personal services.’” Slip Op. at 23. Indeed, the panel continued:

If anything, we think that modern-day incentive awards present even more pronounced risks than the salary and expense reimbursements disapproved in Greenough. 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).

Id.

As the panel concluded, “[w]hether Johnson’s incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it. . . . 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.” Id. at 25, 28.

In dissent, Judge Martin argued that Holmes v. Continental Can. Co., 706 F.2d 1144 (11th Cir. 1983) required the panel “to determine whether the incentive award [] is fair. Slip Op. at 37. That is, [the panel was] charged with deciding whether the award creates a conflict between [the named plaintiff] and other class members[.]” Id at 38. Judge Martin did “not believe the District Court abused its discretion in finding that the $6,000 award is fair.” Id.

This panel’s decision will be an important development to monitor. If class action incentive payments are improper, class action plaintiffs’ attorneys will likely have a more difficult time finding class representatives that are willing to provide their “personal services” for the benefit of the class without any hope of additional compensation. Without such “bounty,” as the panel described it, class counsel will have to find other ways to “sell” the class action mechanism to potential named plaintiffs.

In the end, one thing is certain: this is not the last word on this issue. It is possible that the Eleventh Circuit could take the Johnson decision en banc. It is equally possible that the Supreme Court could seek review of this decision given this panel’s decision is the first of its kind and creates a circuit split with the Second Circuit’s Melito v. Experian Mktg. Sols., Inc., 923 F.3d 85, decision that found Greenough and Pettus “inapposite.” The fact that Judge Newsom, who clerked for the Supreme Court, is a longtime member of the Federalist Society, and is on President Trump’s short-list for a future Supreme Court nomination, authored the decision will likely lead the Supreme Court to pay particularly close attention to a certiorari petition in this case. In addition, objectors will continue to raise this issue to different District Courts and Courts of Appeal across the United States to see if it gains traction. It would not be surprising to see a plethora of otherwise garden-variety class action settlements held up by objectors’ challenges and subsequent appeals. Indeed, if this issue is raised in the Tenth Circuit, the objector will likely note that the Tenth Circuit’s own Judge Baldock joined in the decision in Johnson to declare incentive fees to class representatives as improper. Those who litigate class actions should follow this issue closely going forward as it could have a far-reaching effect on class action settlements.

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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