It is not atypical for class actions to be brought seeking damages that can be characterized as nominal in nature. An oftentimes powerful incentive for potential class representatives to put their names on a putative class action is the promise of an incentive payment or award, paid to the class representative out of a class settlement fund purportedly to compensate the named plaintiff for work done on behalf of a class and assumption of those risks that come along with naming yourself in a lawsuit. However, the Eleventh Circuit Court of Appeals in Johnson v. NPAS Sols., LLC, No. 18-12344 (11th Cir. Sept. 17, 2020) has effectively nixed this practice, applying Supreme Court precedent from the 1880s to reverse what has become a routine practice in the class action settlement context, as well as increasing the scrutiny applied to attorneys' fees awards.
This case arose when class representative Charles Johnson ("Johnson") brought suit against NPAS Solutions, LLC ("NPAS") on behalf of both himself and a putative class alleging violations of the Telephone Consumer Protection Act (the "TCPA") in a federal district court in Florida. Less than eight months after the suit was filed, the parties reached a $1,432,000 million settlement, which the district court preliminarily approved, certifying the class for settlement purposes, appointing Johnson as the class representative, appointing Johnson's lawyers as class counsel, and stating that Johnson could "petition the Court to receive an amount not to exceed $6,000 as acknowledgment of his role in prosecuting this case on behalf of the class members."
Only one class member, Jenna Dickenson ("Dickenson") objected to the settlement, objecting to the amount of the settlement, the method of calculating attorneys' fees, and contended that Johnson's $6,000 incentive award both contravened the Supreme Court's decisions in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), and created a conflict of interest between Johnson and other class members. The district court overruled Dickenson's objections after holding a hearing on the matter, but did not provide a detailed explanation as to its reasoning in overruling those objections, and approved the settlement. Dickenson appealed the ruling to the Eleventh Circuit.
The Eleventh Circuit found three errors with the district court's ruling. First, it found error in the timing of deadlines set by the trial court, as it required class members to file a settlement objection prior to the deadline for class counsel to file their fee petition. Second, it found the court's boilerplate pronouncements on class members' objections insufficient to explain its class-related decisions under the federal rules. Third, and most notably, the Eleventh Circuit disagreed with the district court's decision to award the class representative a $6,000 incentive payment as "acknowledgment of his role in prosecuting th[e] case on behalf of the [c]lass [m]embers."
Regarding the incentive payments, the Eleventh Circuit agreed with Dickenson that Supreme Court precedent in Greenough and Pettus in fact prohibits incentive awards like the one earmarked for Johnson. The Court explained that Greenough and Pettus established the rule that attorneys' fees can be paid from a "common fund," but also established limits on the types of awards that attorneys and litigants may recover from the fund. Specifically, the Eleventh Circuit recognized that in Greenbough, the Supreme Court upheld the class representative's award of attorneys' fees and litigation expenses but rejected as without legal basis the award for his "personal services and private expenses"—in particular, the yearly salary and reimbursement for the money he spent during the case. Similarly, in Pettus, the Supreme Court explained that a class representative's claim for "the expenses incurred in carrying on the suit and reclaiming the property subject to the trust" was proper, while his "claim to be compensated, out of the fund or property recovered, for his personal services and private expenses" was "unsupported by reason or authority."
The Eleventh Circuit applied these holdings in Greenbough and Pettus to hold 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 stated that the incentive award is analogous to a salary. The Eleventh Circuit observed that such 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)," and as such, were improper for this additional reason. In so holding, the Eleventh Circuit recognized that "[t]he 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." Unsurprisingly, Johnson argued that such incentive payments are routine, but the Court rejected such argument, stating that "familiarity breeds inattention, and it falls to us to correct the errors in the case before us."
This is not the first time incentive awards have garnered scrutiny by the courts. Certain other federal appeals court have cast doubt upon the availability of incentive awards for lead plaintiff when that incentive is provided prior to settlement on the grounds that it may create adequacy issues where the named plaintiff's interests are no longer aligned with the class directly, or where incentive agreements created a conflict of interest between class counsel and the class representatives who entered into the agreements, on one hand, and the remaining members of the class, on the other hand. See, e.g., Espenscheid, et al. v. DirectSat, LLC et al., Case No. 12-1943 (7th Cir., August 6, 2012); Rodriguez v. Disner, 688 F.3d 645, 656 (9th Cir. 2012). However, these same courts recognized their acceptance of incentive awards paid to named plaintiffs in the settlement context, recognizing that "a class action plaintiff assumes a risk; should the suit fail, he may find himself liable for the defendant's costs or even, if the suit is held to have been frivolous, for the defendant's attorneys' fees . . . as well as for as any time he spent sitting for depositions and otherwise participating in the litigation as any plaintiff must do." Espenscheid, Case No. 12-1943 (7th Cir., August 6, 2012).
However, now that the Eleventh Circuit has resurfaced the decisions from Greenbough and Pettus, it is all but certain that the class action defense bar will seek to advance these arguments accepted in Johnson in other federal courts, as taking away incentive payments for named class representatives offers an effective tool to stem the proliferation of class actions.
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