In a surprising move, the U.S. Court of Appeals for the Eleventh Circuit recently held that so-called “incentive awards”—payments of a few thousand dollars to the named plaintiffs in class actions for their service as class representatives—are improper. These awards are ubiquitous in modern class action settlements, but the decision in Johnson v. NPAS Solutions, LLC, No. 18-12344 (11th Cir. Sept. 17, 2020) may signal the beginning of the end of that practice.
In Johnson, the Eleventh Circuit considered an objection to a classwide settlement of claims under the Telephone Consumer Protection Act. The settlement provided a $1.4 million settlement fund, 30 percent of which was earmarked for plaintiffs’ counsel and, consistent with modern practice, $6,000 of which would be paid to the named plaintiff as an incentive award. The objector said the incentive award violated two U.S. Supreme Court cases from the 1800s: Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885).
The Eleventh Circuit agreed. Greenough and Pettus, the court held, “establish limits on the types of awards that attorneys and litigants may recover” from a common settlement fund. Although class representatives “can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation,” Greenough and Pettus prohibit them from being “paid a salary” or from recovering their “personal expenses” from the settlement fund. Greenough and Pettus were decided well before the class action as we know it was invented, but the court found incentive awards to be “roughly analogous” to the payment of “personal expenses” that Greenough and Pettus rejected. As a result, the Eleventh Circuit held, incentive awards are improper.
Although incentive awards are “routine” in class action settlements, the court brushed aside concerns that its decision disturbs settled practice. The court observed that the “uncomfortable fact is that the judiciary has created these awards out of whole cloth and few courts have paused to consider the legal authority for incentive awards.” Although the court found authority for these awards lacking, it suggested several possible solutions: The Supreme Court could overrule Greenough and Pettus; the Rules Committee could amend Rule 23 to provide for class incentive awards; or Congress could provide for such awards by statute. But until a solution is implemented, the court found itself “constrained to reverse the district court’s approval” of the incentive award.
The Eleventh Circuit’s ruling may have at least two effects on class actions. First, in the Eleventh Circuit (and elsewhere if the rule spreads), it may slow the pace of class action litigation. The prospect of incentive awards is one reason people agree to serve as class representatives; without them, fewer people may be willing to take on that role. Second, any class action settlement that contains an incentive award will garner increased scrutiny even outside the Eleventh Circuit, with objectors raising the same arguments that proved successful in Johnson. Some settling parties in other circuits may even forgo incentive awards for fear of attracting objectors.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP