Eleventh Circuit Flatly Bans Incentive Payments to Rule 23 Class Representatives in Settlements

In a startling opinion, Johnson v. NPAS Solutions, LLC, No. 18-12344 (11th Cir. Sept. 17, 2020), a 2-1 panel announces that incentive payments of any kind to Rule 23 class representatives are incompatible with common-fund principles and are therefore banned. The panel vacates a $6000 incentive payment in a Telephone Consumer Protection Act class settlement.

Incentive – also known as service – payments are a ubiquitous feature of most class settlements, an award typically in the thousands or tens of thousands of dollars paid to class representatives to compensate them for their participation in the case. They have been reviewed and approved in countless federal class-action cases. Indeed, the Eleventh Circuit recently reaffirmed the concept of service payments in Muransky v. Godiva Chocolatier, Inc., 905 F. 3d 1200, 1218 (11th Cir. 2018), amended, 922 F. 3d 1175 (11th Cir. 2019), vacated for hearing en banc, 939 F. 3d 1278 (11th Cir. 2019). (Muransky is being heard en banc principally on the issue of whether the plaintiff had Article III standing.)

This panel becomes the first court of appeals to entirely reject such payments. To reach this outcome, the panel reaches back two Gilded Age precedents that it deems controlling, Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). From these decisions, it extracts a principle 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,” and that “the modern-day incentive award for a class representative is roughly analogous to a salary . . . . If anything, we think that modern-day incentive awards present even more pronounced risks than the salary and expense reimbursements disapproved in Greenough. 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).”

“In his brief to us, [class representative] Johnson . . . suggests that he is requesting a bonus for bringing the suit, inasmuch as he has ‘subjected himself to scrutiny from NPAS Solutions, class members, and the public at large,’ ‘successfully brought a class action that provides meaningful cash benefits to thousands of persons,’ and ‘provided an important public service by enforcing consumer protection laws.’ . . . . Whether Johnson’s incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it.”

The panel majority is unimpressed that incentive payments are a common part of the Rule 23 landscape. “[S]o far as we can tell, that state of affairs is a product of inertia and inattention, not adherence to law. The uncomfortable fact is that ‘[t]he judiciary has created these awards out of whole cloth,’ and ‘few courts have paused to consider the legal authority for incentive awards.’ Needless to say, we are not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent.” The panel summarizes: “If the Supreme Court wants to overrule Greenough and Pettus, that’s its prerogative. Likewise, if either the Rules Committee or Congress doesn’t like the result we’ve reached, they are free to amend Rule 23 or to provide for incentive awards by statute. But as matters stand now, we find ourselves constrained to reverse the district court’s approval of Johnson’s $6,000 award.”

Judge Martin dissents, noting that “the majority takes a step that no other court has taken to do away with the incentive for people to bring class actions. 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.”

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