The Beginning of the End for the Class Representative Incentive Award? (Part II)

Butler Snow LLP

Butler Snow LLP

In Part I of this post, we examined the problem with incentive awards to class representatives and the conflict of interest that it creates between class representatives and the class they seek to represent. Recently, the United States Court of Appeals for the Eleventh Circuit was presented with this very problem and held that such incentive awards are impermissible.

The Eleventh Circuit Finds a Conflict

In Johnson v. NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), the Court of Appeals reversed the District Court’s granting of an incentive award to the class representative, finding that it was akin to a bounty which put the class representative in conflict with the absent class members. In Johnson, the named plaintiff filed suit against the defendant on behalf of himself and sought to certify a class of all similarly situated individuals. The underlying claim involved alleged violations of the federal Telephone Consumer Protection Act, which provides that a person can be held liable for using automatic dialing systems to contact individuals without their prior consent. Each violation of the act carries civil penalties of $500.

Shortly after filing suit, the named plaintiff reached a tentative class settlement with the defendant. Per the terms of the settlement, the defendant would pay a total of $1,432,000. From that amount, class counsel would recover a 30% contingency fee ($429,600) and its litigation costs and expenses ($3,475.52). The class representative would receive an incentive award of $6,000. The absent class members would divide the remaining balance pro rata. The Eleventh Circuit found that the class members who submitted claims “stand to receive a whopping $79.” The court noted that if all eligible absent class members had submitted claims for their share of the recovery, the per class member recovery would have fallen to less than $8.00 per class member.[1]

Prior to final approval of the class, one of the absent class members objected to the settlement, arguing in part that the incentive award to the class representative created a conflict of interest between the class representative and the class. The District Court overruled the objection and certified the class. The Eleventh Circuit reversed on the issue of the incentive award as well as other grounds.

Perhaps the most interesting feature of the Johnson opinion is the court’s basis for the reversal. The Eleventh Circuit reached way back into the reporters, citing two United States Supreme Court cases (one from 1882 and the other from 1885) and found that there was binding precedent prohibiting the incentive award.

The cases cited were Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). The Eleventh Circuit described the cases as being “the seminal cases establishing the rule—applicable in so many class-action cases, including this one—that attorneys’ fees can be paid from a ‘common fund.’” But, according to the Court, both cases also “establishe[d] limits on the types of awards that attorneys and litigants may recover from the fund” and that the cases “seem to have been largely overlooked in modern class-action practice.” The rule announced in Greenough was that a class representative can recover from the common fund the actual expenses he incurred in prosecuting the class action, including attorneys’ fees and litigation expenses.  The class representative could not, however, recover money for his personal services or private expenses. Pettus essentially held that not only could the class representative recover attorneys’ fees from the common fund, but class counsel could also recover their fees directly from the common fund.

In reliance on Greenough and Pettus, the Eleventh Circuit concluded that “A plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses. It 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.’” The Court went on to find that the modern incentive award is an even more perverse practice because it is not intended only to compensate the class representative for his time, but also to act as a form of a bounty or a “prize to be won.” Ultimately, the Johnson court disallowed the incentive award, holding that “we are not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent.”

Since Johnson, the practice of granting incentive awards in the Eleventh Circuit appears to be dead.[2] District courts in other circuits are continuing to grant incentive awards, however. Most notably, the district courts in the Ninth Circuit—arguably the most favorable circuit to class actions—appear to have written-off Johnson as an outlier.[3] While no court outside of the Eleventh Circuit has yet adopted Johnson, defendants and objectors are repeatedly raising Johnson and its reasoning as a basis to deny incentive awards and/or to challenge the propriety of the class settlement. It is likely only a matter of time before a circuit split will develop and thus create a ripe opportunity for the Supreme Court to weigh in.

So Now What

The issue of granting incentive awards to class representatives is usually not that large of an issue to defendants. Whether in settlement or following a trial on the merits, the incentive award usually pales in comparison to the aggregate amount awarded to the class (as well as the amount recovered by class counsel). If a defendant settles a class action for $5 million, the defendant likely does not care much that the class representative is getting $5,000. Typically, the defendant is most interested in the total settlement amount and achieving finality. But defendants need to be aware that Johnson may create a problem in getting to finality.

Specifically, defendants need to be aware that objectors now have new ammunition to challenge a class settlement. After a deal is reached between the class representative and the defendant, the settlement will be brought to the court for approval. Typically, the court will conditionally certify the class pending the settlement and notice will issue to the putative class members regarding the settlement and its terms. At that point, any class member can show up and object to the settlement.

Often, objectors will argue that the absent class members’ interests have not been adequately represented in arriving at the settlement. If the granting of an incentive award indeed creates a conflict of interest between the class representative and the class he seeks to represent, then objectors may have good grounds to argue that the class settlement cannot proceed. In other words, something as small as the incentive award payment could scuttle the entire settlement after significant work has been done to reach settlement and, perhaps more importantly, after the defendant has disclosed the price it is willing to pay to end the litigation.

[1] Johnson, 975 F.3d at 1250-51.

[2] See Drazen v., LLC, No. CV 1:19-00563-KD-B, 2020 WL 8254868 (S.D. Ala. Dec. 23, 2020) (rejecting request for $5,000 incentive award to the class representative).

[3] See Grace v. Apple, Inc., No. 17-CV-00551-LHK, 2021 WL 1222193, at *7 (N.D. Cal. Mar. 31, 2021) (declining to follow “Johnson’s novel reading of old Supreme Court decisions”).

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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