December 17, 2020 Practice Points

Class Action Incentive Awards Face an Uncertain Future from the Courts

Practitioners should be aware of newly developing case law disapproving of incentive awards for class action plaintiffs.

By Nicholas M. Cassidy

Over the past 30 years, trial courts have routinely approved incentive awards for class action plaintiffs. But these awards face increasing scrutiny after the Eleventh Circuit recently struck one down for violating Supreme Court precedent. Before recruiting a class representative, practitioners should understand that an incentive award may not be available and factor this into how they handle the case.

Litigation Issues

For years, federal trial courts have routinely permitted incentive awards for class action plaintiffs. See Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 958 (9th Cir. 2009). Such awards are discretionary and are “intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general.” Id. at 958–59; see also Cont’l Ill. Sec. Litig., 962 F.2d 566, 571 (7th Cir. 1992) (incentive awards may be necessary to induce someone to act as class representative).

Case law shows that objections to incentive awards are commonly asserted; for instance, some objectors contend that incentive awards create problems when they are agreed to at the beginning of the litigation or where they are conditioned on the class representative’s support for a settlement. In such instances, incentive awards raise concerns that the class representative might “compromise the interest of the class for personal gain.” Berry v. Schulman, 807 F.3d 600, 613 (4th Cir. 2015); see also Gortat v. Capala Bros., 949 F. Supp. 2d 374, 378–79 (E.D.N.Y. 2013) (rejecting incentive awards for named plaintiffs where amounts requested were unreasonably high). Others argue it is unfair for class representatives to receive incentives while unnamed class members receive “only perfunctory relief.” See Vassalle v. Midland Funding LLC, 708 F.3d 747, 755 (6th Cir. 2013).

Despite these types of objections, courts have generally been inclined to approve incentive awards. That is, until this past September, when in Johnson v. NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), the Eleventh Circuit somewhat surprisingly struck down a $6,000 “incentive payment” awarded to the class representative from the settlement fund. In striking down the incentive payment, the court relied on two Supreme Court cases from the late nineteenth century, Trustees v. Greenough, 105 U.S. 527 (1882) and Central Railroad & Banking Company v. Pettus, 113 U.S. 116 (1885), developing what may be a new line of case law to be applied in the class action context.

The Supreme Court’s decision in Greenough is particularly instructive. There, a bondholder of the Florida Railroad Company sued the trustees of the Internal Improvement Fund of Florida, arguing that the trustees were “wasting and destroying the fund by selling at nominal prices land that had been earmarked to service the bonds.” The bondholder prevailed and thereby “secured and saved” a large amount of the trust fund. The bondholder then petitioned the court for “an allowance out of the [trust] fund” to cover “his expenses and services.” A special master recommended the fund reimburse him for attorney fees and litigation costs and “personal services and expenditures.”

On appeal, the Supreme Court upheld the award of attorney fees and litigation costs, but voided the award for “personal services and expenditures,” concluding that in the case of a creditor, “the allowance of a salary for [his] time and . . . [his] private expenses in carrying on litigation would present too great a temptation to parties to intermeddle in the management of valuable property or funds in which they have only the interest of creditors.” Three years later in Pettus, the Court affirmed the result in Greenough.

The Eleventh Circuit has now extended the reasoning of Greenough to the class action arena. In the Eleventh Circuit’s view, the $6,000 incentive payment to the class representative in Johnson was for “personal services” in that it was both a “salary” (as it compensated the representative for his time) and a “bounty” (designed to induce the representative to participate in the suit).  Accordingly, the Circuit Court concluded the incentive payment was prohibited by the century-old holdings of Greenough and Pettus and reversed, declining any compensation to the class representative.

Takeaways

Though Johnson only binds federal district courts in the Eleventh Circuit (Florida, Georgia, and Alabama), it could be examined if not adopted by other jurisdictions as well. Accordingly, class action practitioners in state and federal courts should:

  • Understand that challenges to incentive awards are likely to increase;
  • Advise potential class representatives that an award for time and personal expenditures may not be available and foresee that potential objections may come at the time the parties seek court approval of a settlement;
  • Keep an eye out for opinions further addressing this doctrine as applied in the class action context that may bind the courts in which they practice (for instance, at least one district court in the 3rd Circuit already declined to follow the 11th Circuit’s lead; see Somogyi v. Freedom Mortgage Corp., No. CV 17-6546 (RMB/JS), 2020 WL 6146875, at *1 (D.N.J. Oct. 20, 2020) (“Until 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.”); and
  • Watch for the Federal Rules Committee or Congress to provide for incentive awards in Rule 23 or by statute.

Nicholas M. Cassidy is an associate with Polsinelli PC in Denver, Colorado.


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