In a decision with potentially far-reaching consequences for class actions, a divided panel of the U.S. Court of Appeals for the Eleventh Circuit held that the ubiquitous practice of awarding a class representative an “incentive” payment as part of a class action settlement is impermissible. Johnson v. NPAS Solutions, Inc., No. 18-12344, ___ F.3d ____, 2020 WL 5553312 (11th Cir. Sept. 17, 2020).

The Eleventh Circuit acknowledged that the district court had “handled the class-action settlement here in pretty much exactly the same way that hundreds of courts before it have handled similar settlements.” The Eleventh Circuit ruled, however, that the district court had “ignored on-point Supreme Court precedent prohibiting such awards.” That Supreme Court precedent consists of two decisions from the 1880s in a non-class action context.

The ruling will certainly be challenged. The decision marks the first time a federal court of appeals has ruled that incentive awards are categorically improper. Class counsel have announced their intention to seek en banc review from the Eleventh Circuit.

Some observers are predicting that if the decision holds up, it will spell doom for class actions, particularly consumer class actions. Without incentive awards, they argue, few persons with small-dollar claims would bring an expensive and time-consuming class lawsuit. Indeed, the dissent argued that the majority had taken “a step that no other court has taken to do away with the incentive for people to bring class actions.” Other observers are even suggesting the possibility of early Supreme Court intervention. The decision creates a circuit split with the Second Circuit; deepening the circuit split is the fact that the second member of the majority was a Tenth Circuit judge sitting by designation.

The Eleventh Circuit’s decision will continue to generate controversy until the Supreme Court or Congress resolves the issue. Even if the panel decision is vacated en banc, courts and litigants across the country will have to grapple with the issues raised by the majority and dissenting opinions. Class action litigators on both sides should continue to monitor this issue closely.

The District Court Proceedings

The class settlement involved claims under the Telephone Consumer Protection Act, 47 U.S.C. § 227. The defendant was a debt collector that used an “autodialer” to call telephone numbers that originally belonged to consenting debtors, but been reassigned to consumers who had not consented to such calls. Eight months after the suit was filed, the parties reached a $1.4 million settlement, with a proposed $6,000 incentive award to the class representative.

The lone objector claimed that the incentive award was contrary to Trustees v. Greenough, 105 U.S. 527 (1881), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), and created a conflict of interest between the class representative and other class members. The district court overruled the objection and approved the settlement.

The Eleventh Circuit’s Decision

The Eleventh Circuit reversed, holding that the incentive award was prohibited by the Supreme Court’s decisions in Greenough and Pettus. According to the Eleventh Circuit, these “seminal cases” have been “largely overlooked in modern class-action practice.” The court held that the cases “establish[ed] the rule—applicable in so many class-action cases, including this one—that attorneys’ fees can be paid from a ‘common fund,’ ” but that the named plaintiff cannot be paid for “personal services and private expenses.”

Greenough was an action by a bondholder who successfully sued trustees of a fund on behalf of himself and other bondholders. The Supreme Court upheld the plaintiff’s award of attorneys’ fees and litigation expenses because he had carried “the whole burden of this litigation.” The Court, however, rejected an award for the plaintiff’s “personal services and private expenses”—there, his yearly salary and reimbursement for money he spent on railroad fares and hotel bills—because such an award “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.” A few years later, Pettus recognized that attorneys (as opposed to plaintiffs) are entitled to fees based on a percentage of the common fund.

The Eleventh Circuit extended the rationale of Greenough and Pettus to the class action context: “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. It seems to us that the modern-day incentive award for a class representative is roughly analogous to a salary—in Greenough’s terms, payment for ‘personal services.’ ”

In fact, the Eleventh Circuit concluded that the class context presents an even more compelling reason to deny such payments. According to the court, class representatives should not receive “preferred treatment,” and incentive awards are “part salary and part bounty” for bringing a class lawsuit: “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).” The court disagreed with the only other Court of Appeals to address the issue—the Second Circuit, which distinguished Greenough and Pettus as “inapposite” and presenting different “factual settings.” Melito v. Experian Mktg. Sol’ns, Inc., 923 F.3d 85, 96 (2d Cir.), cert. denied sub nom. Bowes v. Melito, 140 S. Ct. 677 (2019).

Finally, the court rejected the plaintiff’s “appeals to ubiquity” of incentive awards. The court acknowledged that incentive awards are “routine” in class actions, but concluded: “Although it’s true that such awards are commonplace in modern class-action litigation, that doesn’t make them lawful, and it doesn’t free us to ignore Supreme Court precedent forbidding them.”

The Dissent

The dissent took issue with the majority’s reliance on Greenough and Pettus: “The majority’s decision . . . takes our court out of the mainstream. To date, none of our sister circuit courts have imposed a rule prohibiting incentive awards. Indeed, none has even directly addressed its authority to approve incentive awards. But upon deciding to undertake this issue here, the majority skips any analysis about our modern authority to approve these awards. It goes straight to decisions from the 1880s that do not reflect the current views of the Supreme Court or other circuits.” According to the dissent, the majority should have determined whether the incentive award was “fair” under the circumstances and whether it created a conflict between the plaintiff and absent class members.

The dissent also expressed concern that banning incentive awards “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,” with the result that they will be “less willing to take on the role of class representative in the future.”