Eleventh Circuit Prohibits Representative Incentive Awards in Class Action Settlements

Johnson v. NPAS Solutions, LLC, __ F.3d __, 2020 WL 5553312 (11th Cir. 2020)

In a 2-1 split decision, the Eleventh Circuit ruled that incentive awards—meant to compensate class representative plaintiffs for the time spent litigating a class action—are prohibited by longstanding Supreme Court precedent. This decision marks a significant break from the status quo by disallowing a commonplace class-action practice. It promises to spur additional litigation of the issue of incentive awards nationwide.

In March 2017, Plaintiff Charles Johnson brought a putative class action on behalf of himself of and others similarly situated, alleging violations of the Telephone Consumer Protect Act, 47 U.S.C. § 227. Specifically, Mr. Johnson claimed that defendant NPAS Solutions, Inc. unlawfully made telephone calls to his cell phone using an automatic telephone dialing system without his prior express consent. After preliminary discovery and motions practice, the case proceeded quickly to settlement and certification of the class for settlement purposes. The settlement provided that Mr. Johnson would receive a $6,000 incentive award from the settlement fund as an acknowledgement of his role in prosecuting the case on behalf of all class members. An individual raised an objection to the proposed settlement arguing, among other things, that Johnson’s $6,000 incentive award contravened the Supreme Court’s decisions in Trustees v. Greenough, 105 U.S. 527 (1882) and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), and created a conflict of interest between Johnson and the other class members. The district court overruled the objection, including the specific objection to the incentive award, and approved the settlement. The objector appealed.

On appeal, the Eleventh Circuit reversed the district court’s approval of the $6,000 incentive award and remanded the case to the district court to make other findings consistent with the decision. In its decision, the court analyzed Greenough and Pettus and determined that the prohibitions created in those cases applied to the incentive award paid to the class representative as part of the settlement. According to the court, Greenough and Pettus established limits on the types of awards that attorneys and litigants may recover from a common fund.

In Greenough, the Court disallowed a creditor lead plaintiff from recovering an award for his personal services and private expenses—as opposed to his reasonable attorney’s fees and litigation expenses—in his prosecution of a case that benefitted similarly situated bondholders. To the Court, paying a salary and private expenses to a creditor would improperly incentivize parties to intermeddle in the management of valuable property and funds in which they have only the interest of a creditor.

Pettus was decided three years later, and recognized for the first time that attorneys, as distinct from lead plaintiffs, had a claim for fees payable out of a common fund. As in Greenough, though, Pettus reiterated that a class representative’s claim to be compensated out of a common fund for personal services and private expenses was prohibited.

With these cases as a backdrop, the Eleventh Circuit found that modern day incentive awards are roughly analogous to a salary, paid to a class representative for personal services. But the court reasoned that incentive awards present even more pronounced risks than the salary and private expenses considered in Greenough because they promote litigation by providing a prize to be won. In this way, incentive awards act as part salary and part bounty. To the court, “[w]hether Johnson’s incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it.”

The court rejected the contention that incentive awards cannot be prohibited because they are routine and ubiquitous in class actions. It noted that incentive awards had been created by the courts out of whole cloth, and few courts had considered the legal authority for them: “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 prohibiting them.”

In her concurrence and dissent, Judge Martin disagreed with the reversal of the incentive award. To Judge Martin, the elimination of the incentive award was improper and would have a chilling effect on class-action litigation because it would require named plaintiffs to “incur costs well beyond any benefits they receive for their role in leading the class.” The dissent stated that the majority erred because it did not undertake the analysis required by Holmes v. Continental Can Co., 706 F.2d 1144 (11th Cir. 1983), to determine whether the incentive award to Mr. Johnson was fair. To Judge Martin, the majority should not have rejected the incentive award outright; rather, it should have undertaken the Holmes analysis to determine whether the award created a conflict between Mr. Johnson and the other class members.

To date, no other circuit court has held that incentive awards are prohibited by Greenough and Pettus. No doubt, the Johnson case will spur other circuits to consider the issue and may well lead to a circuit split requiring the intervention of and a decision by the Supreme Court.