As the Eleventh Circuit observed in the landmark decision, Johnson v. NPAA Sols., LLC, 975 F.3d 1244 (11th Cir. 2020), class incentive awards are commonplace in modern class action litigation. Indeed, the large majority of class settlements involve class representative incentive awards, and no appellate court has ever previously deemed them to be systemically improper. Yet, on September 17, 2020, the Eleventh Circuit broadly condemned the use of incentive awards in class litigation, concluding that they are prohibited by binding Supreme Court precedent. In reaching this decision, the Eleventh Circuit observed that the commonplace use of incentive awards is simply “a product of inertia and inattention, not adherence to the law,” and it faulted the judiciary for failing to pause to consider the legal propriety of these awards. Likening the practice of incentive awards to “dandelions on an unmowed lawn-present more by inattention than by design,” the Eleventh Circuit concluded that the common-place nature of class incentive awards “doesn’t make them lawful.”
Notably, however, the Supreme Court precedent to which the Eleventh Circuit cited is centuries old. In particular, the Eleventh Circuit relied on the Supreme Court opinions in Trustees v. Greenough, 105 U.S. 527 (1882) and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885)—opinions that were published decades before Rule 23. In Greenough, the Supreme Court held that a creditor who had initiated litigation on behalf of himself and other similar situated bondholders could be compensated from the common fund for the attorneys’ fees and litigation expenses he incurred in bringing the suit, but could not be compensated for what the Court described as “personal services and private expenses.” The Court reasoned that the allowance of a salary for the creditor’s time and expenses in bringing the litigation would “present too great a temptation to intermeddle in the management of valuable property or funds” and that “such an allowance has neither reason nor authority for its support.” Three years later, the Supreme Court in Pettus confirmed the decision in Greenhough, against finding that a representative plaintiff could not be compensated for “his personal services and private expenses” from the common fund.
Based on the decisions in Greenough and Pettus, the Eleventh Circuit reasoned that a plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses but cannot be “paid a salary or be reimbursed for his personal expenses.” The court went on to reason that the “modern-day incentive award” for class representatives is analogous to a salary, or in Greenough’s terms, payment for “personal services.” The court further noted that modern-day incentive awards present even more risks than the reimbursement disapproved of in Greenough because they 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)”.
In reaching its decision, the Eleventh Circuit rejected the plaintiff’s argument that the Greenough and Pettus decisions pre-dated Rule 23 and were not directed to class representatives. The Eleventh Circuit reasoned that Rule 23 has nothing to say about incentive awards and, therefore, the fact that it post-dates Greenough and Pettus is irrelevant. The Eleventh Circuit also rejected the plaintiff’s argument that incentive awards are routine in class actions, finding that it was “not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent.”
Of course, the Johnson decision only governs class actions in the Eleventh Circuit—which may very well deter future filings in this circuit in the short term. However, the decision is also likely to spur similar challenges in courts across the country. Whether other appellate courts, or even the Supreme Court, will reach the same decision is impossible to predict. However, it is important for litigants—both plaintiffs and defendants alike—to be aware of the Johnson decision and the potential implications it could have on the future of class actions and class settlements. Indeed, if class incentive awards are broadly condemned nationwide, it could alter the very landscape of class action litigation. This is especially true for low-value consumer class claims, where class representatives have little to gain for their participation in such suits absent the vehicle of the class incentive award. Only time will tell, however, the impact that the Johnson decision will ultimately have on class litigation.