On September 17, 2020, in a unexpected challenge to conventional class and collective action practice, the Eleventh Circuit held that settlement incentive awards, which compensate and reward class representatives for bringing and litigating the class actions, are prohibited by U.S. Supreme Court precedent. The dissent immediately recognized that the court’s ruling takes the Eleventh Circuit out of the mainstream on this issue and would disincentivize litigants from acting as a class representatives. This ruling could also serve as an obstacle to parties who seek to reach class-wide settlements.
The case, Johnson v. NPAS Solutions, LLC, No. 18-12344 (11th Cir. Sept. 17, 2020), involved a seemingly run-of-the-mill class action under the Telephone Consumer Protection Act (TCPA). The parties reached a non-reversionary class-wide settlement. Of the gross settlement amount of $1,432,000.00, 30 percent was allocated to attorneys’ fees and $6,000.00 to the named plaintiff as a proposed incentive award. Following preliminary approval and notice, the district court overruled the objections of the single objector, which included a challenge to the incentive award on the grounds that it was improper and it created a conflict between the named plaintiff and the class he sought to represent.
The objector appealed and the circuit court vacated the incentive award, relying entirely on two U.S. Supreme Court cases from the 1880s — Trustees v. Greenough, 105 U.S. 527 (1882) and Central Railroad & Banking v. Pettus, 113 U.S. 116 (1885). According to the majority, those cases stand for the proposition 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.”
The majority not only analogized that type of salary or personal reimbursement to modern-day incentives, it opined that “incentive awards present even more pronounced risks” because they are intended to promote litigation by “providing a prize to be won (i.e., as a bounty).” The majority reasoned that the type of incentive sought by the lead plaintiff, despite their current ubiquity, is part salary and part bounty and is, therefore, prohibited by the long-standing pronouncements of Greenough and Pettus.
The dissent noted that incentives like the one sought by the class representative are involved in nearly every class action settlement in the modern era and that no other circuit had taken this approach. Nor was the dissent moved by the majority’s reliance on two “decisions from the 1880’s that do not reflect the current views of the Supreme Court or other circuits,” arguing that the majority’s opinion failed to determine whether such an incentive actually created a conflict of interest between the named plaintiff and the absent class members.
Given the degree to which this decision threatens one of the common elements of class settlements, we anticipate that the parties will seek further review in the Eleventh Circuit or the Supreme Court. As always, we will continue to monitor this issue.