In a decision with far-reaching doctrinal and practical effects, the Eleventh Circuit has forbidden incentive payments to class representatives, at least in common-fund cases. Johnson v. NPAS Solutions, LLC, No. 18-12344 (11th Cir. Sept. 17, 2020), attacks part of the soft underbelly of class action practice—namely, the incentive for individuals to undertake the extra burden of seeking to represent a class instead of prosecuting their claims on an individual basis. This surprising case affects the everyday class action practice in the Eleventh Circuit, and it may signal a far-reaching skepticism toward many aspects of class action practice that have come to be taken for granted.
The Unremarkable Background
There is nothing remarkable about the facts in Johnson. It does not stand out among any number of similar Telephone Consumer Protection Act (TCPA) class action settlements, and the Eleventh Circuit acknowledged as much:
The class-action settlement that underlies this appeal is just like so many others that have come before it. And in a way, that’s exactly the problem. We find that, in approving the settlement here, the district court repeated several errors that, while clear to us, have become commonplace in everyday class-action practice.
The parties proposed a nationwide settlement after the pleadings and early motion practice. The settlement was to make just under $1.5 million available to 180,000 class members who made claims. (As it turns out, fewer than 10,000 class members made claims). The sole class representative was to receive $6,000 as an incentive award, and class counsel were to receive 30 percent of the settlement fund available to the class. Substantively, those terms are ordinary, but there was one important scheduling wrinkle: Class counsel’s fee petition was not due until after the objection deadline passed. The settlement did not attract substantial challenges, as nobody opted out and only one objector appeared. The district court overruled her objections, and she appealed. The Eleventh Circuit went with her on three issues—the timing of the fee petition, the incentive payments, and the inadequacy of the district court’s findings.
The Johnson Opinion
No More Incentive Payments
Forbidding incentive payments is the most important of Johnson’s three holdings, so we treat it here in detail. The Eleventh Circuit found that two cases from the 1880s controlled. Those cases are Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). Greenough and Pettus provide that a plaintiff who successfully litigates to create a common fund for the benefit of the plaintiff and others can recover attorney fees and the expenses of litigation from the fund, but the plaintiff may not receive any kind personal salary or merely private expenses.
While neither Greenough or Pettus was a class action, they both involved one litigant conferring a benefit on similarly situated others, and the Eleventh Circuit found that similarity close enough to be controlling. It held that the prohibition on salaries for successful plaintiffs barred incentive payments for class representatives, which served much the same purpose: “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).” Incentive awards are “part salary and part bounty,” but “[w]hether [the] incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it.” The court barred incentive payments, noting “so far as we can tell, the [ubiquity of incentive payments] is a product of inertia and inattention, not adherence to law.”
Justice Martin presented a countervailing perspective in dissent, highlighting what she characterized as the unprecedented nature of the majority’s decision and voicing the practical concern that a bright-line rule against incentive payments would serve to put class representatives in a worse position for asserting their claims, potentially discouraging representative litigation:
For class actions, the class must be represented by a named plaintiff, who incurs costs serving in that role. Those costs may include time and money spent, along with all the slings and arrows that accompany present day litigation. By prohibiting named plaintiffs from receiving incentive awards, the majority opinion will have the practical effect of requiring named plaintiffs to incur costs well beyond any benefits they receive from their role in leading the class. As a result, I expect potential plaintiffs will be less willing to take on the role of class representative in the future.
Justice Martin also voiced the concern that the majority’s decision took the Eleventh Circuit “out of the mainstream” in banning incentive awards and, by avoiding the issue of whether the class representative’s interests were in conflict with those of absent class members, engaged in a flawed analysis.
The court also issued important rulings on two other issues. First, it held that Federal Rule of Civil Procedure 23(h) requires class counsel to submit their fee petition before the objection deadline even if the class notice includes the substance of what the fee petition will request. The Eleventh Circuit found that objectors have the right to object to the petition itself, not just a preview of it. Tellingly, the court noted that the class and the lawyers representing the class are, to a degree, adverse because the lawyers’ interest in getting the biggest fee conflicts with the class’s interest in maximizing recovery.
While Johnson requires lawyers to file fee petitions before the objection deadline, it also found that the error in the district court’s sequence of the deadlines was harmless. Because the class notice gave ultimately accurate details about the substance of the fee petition, the objector was able to attack the substance of the petition using the notice, and the objector’s argument at the final approval hearing (which occurred after the fee petition) mirrored the objector’s arguments before the fee petition.
Second, the Eleventh Circuit renewed its frequent instruction that district courts make detailed findings when addressing such matters as the fairness and adequacy of a settlement, the approval of fees, and the disposition of objections. Rule 23 requires more than merely an ultimate ruling; it requires a record that includes the facts underlying the district court’s exercise of discretion.
Ways Around Johnson?
Johnson was released on a Thursday. By Friday, people were already thinking of ways around it. None of these potential loopholes have been judicially blessed yet, and we mention them as areas in which doctrine may continue to develop.
What About Incentive Payments Outside of a Common Fund?
The Johnson class representative’s incentive payment came out of the relief available to the class. Had the settlement provided that the incentive payment come directly from NPAS instead of passing through the fund, the outcome could have been different. On the one hand, a direct incentive payment has some appeal because the logic of Greenough and Pettus is that a salary reduces the fund: If an incentive does not reduce the fund, then it does not fall within the facts of Greenough and Pettus. But, on the other hand, this potential work-around may exalt form over substance: If a settling defendant is willing to pay a certain amount of money to settle a class action case, it is presumably willing to allocate money to the class instead paying of an incentive award. Because Rule 23(e) requires courts to consider all side agreements in connection with approving a settlement, courts will have jurisdiction to consider such direct incentive payments, and it is not clear how Johnson will apply to them.
What About Paying for a Broader Release?
Another idea is offering a class representative an extra payment in exchange for a broader release. But a little extra quid for a little more quo may run afoul of the procedural rules governing class actions. Courts closely scrutinize every difference in treatment between class representatives and the class, and there are numerous possible pitfalls. The class representative must remain a member of the class, which constrains the release to some degree. Also, such differential treatment would wave a red flag for objectors: If a defendant would agree to pay extra for a broader release, can the other members of the class receive the same release for the same price? If so, defendants may be unwilling to offer that deal to everyone. If not, the disparate treatment might introduce adversity between the class representative and the class, which could undermine the representative’s adequacy or typicality.
There may be ways around the rule against incentive payments, but courts applying Johnson have so far found its bar against such payments to be categorical and absolute. See, e.g., Jairam v. Colourpop Cosmetics, LLC, 2020 WL 5848620, at *7 (S.D. Fla. Oct. 1, 2020) (“[T]he Court will not approve the Service Award for the Plaintiff in light of recent binding circuit precedent.”); Kuhr v. Mayo Clinic Jacksonville, 2020 WL 5912350, at *8 (M.D. Fla. Oct. 6, 2020) (“In light of this binding precedent, the Court must reject any incentive award to Kuhr.”).
At the risk of understatement, we expect Johnson to have a broad impact.
Most basically, barring incentive payments should reduce class action filings in the Eleventh Circuit, though the size of this effect remains to be seen. A class action needs a class representative, and a class representative has less of an incentive to participate without an incentive payment. Signing up potential class representatives in federal court in Florida, Georgia, and Alabama just got harder.
Keeping those class representatives just got harder, too. Defendants facing class actions will likely consider using the “pick-off move” more often––that is, they may offer to settle with the class representative individually by offering more than the maximum recovery available to the class. A class representative with a TCPA claim may be sorely tempted by a $5,000 (or $10,000 or $15,000) offer when the maximum statutory damage award is $1,500 and there is no prospect of an incentive award. As finding willing class representatives becomes difficult, the incentive to settle with them individually rises.
Plaintiffs may also think more strategically about where to bring their claims, and that includes tailoring their claims to stay in state court. Using incentive payments is just the latest in a string of reasons why some class plaintiffs may limit their claims to fall within one of the Class Action Fairness Act’s jurisdictional exceptions.
Objectors can only feel emboldened. As noted above, Johnson’s facts are not remarkable and its incentive award was (in the author’s experience) in the normal range. Seeing an ordinary objection gain such extraordinary traction will likely encourage objectors and litigants to examine if any other areas of everyday class action practice lack direct support in the text of Rule 23 or the Supreme Court cases interpreting it.
Lawyers on both sides of the class action practice are updating their forms and checklists to make sure they have the events leading up to final approval properly sequenced so that the fee petition predates the objection deadline. Those lawyers are also updating their outlines for final approval hearings, as all parties to a settlement have an interest in creating a complete record that includes not only the district court’s ultimate ruling on matters like the fairness of the settlement or the merit of objections, but also the facts underlying those rulings.
Zooming even further out, practitioners should expect a deepening circuit split and, in due time, attempts to bring the issue before the U.S. Supreme Court or Congress for ultimate resolution. At least one court outside of the Eleventh Circuit has already rejected Johnson. See Somogyi v. Freedom Mortg. Corp., 2020 WL 6146875, at *9 (D.N.J. Oct. 20, 2020) (refusing to apply Johnson and stating that “[u]ntil and unless the Supreme Court or Third Circuit bars incentive awards or payments to class plaintiffs, they will be approved by this Court if appropriate under the circumstances”). The Southern District of New York, while noting that the Second Circuit had approved of incentive fees even in light of Pettus and Greenough, urged that “[t]his issue is deserving of congressional attention.” Hart v. BHH, LLC, 2020 WL 5645984, at *5 n.2 (S.D.N.Y. Sept. 22, 2020).
Of course, Johnson is not yet set in stone. The plaintiff has sought en banc review, and the original panel opinion was 2–1. Judge Newsom wrote the majority opinion, and he was joined by Judge Baldock, sitting by designation from the Tenth Circuit. Judge Martin’s dissent on the issue of incentive payments is recounted above. The full Eleventh Circuit may decide to take another look, and the U.S. Supreme Court could likewise find the case important enough to examine.
No matter what happens with Johnson in the future, it is yet another mark along the road of judicial skepticism toward erstwhile established class action practices—especially around issues involving settlements. Coupons, cy pres awards, and now incentive payments have all found themselves in the dock. Congress, the Supreme Court, the Advisory Committee on the Federal Rules of Civil Procedure, and the federal courts generally have all demonstrated a trend toward ever closer scrutiny of class settlements. That trend shows no sign of slowing.
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