Eleventh Circuit Bans Incentive Payments to Lead Plaintiffs in Class Actions

In what appears to be a first, the Eleventh Circuit recently held that federal law prohibits so-called “incentive payments” to class representatives, even as part of an agreed settlement. The court acknowledged that it was forging a new path in Johnson v. NPAS Solutions, LLC, 975 F.3d 1244, 1248–49 (11th Cir. 2020)—identifying errors that it said had “become commonplace in everyday class-action practice” and noting 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.” But the Eleventh Circuit nevertheless held that the district court had “ignored on-point Supreme Court precedent prohibiting such awards” when it approved a settlement that included a $6,000 incentive payment to the lead plaintiff.

Johnson was a class action under the Telephone Consumer Protection Act, 47 U.S.C. § 227. The named plaintiff alleged that the defendant (a collector of medical debts) had unlawfully used an automatic telephone-dialing system to call his cell phone without his consent. The case was certified for settlement purposes, and a single member of the class objected to the settlement on several grounds, including the district court’s decision to set the objection deadline before the deadline for class counsel to file their petition for attorneys’ fees and the class representative’s proposed incentive payment.

In a majority opinion by Judge Kevin Newsom, the Eleventh Circuit first held that Federal Rule of Civil Procedure “23(h)’s plain language requires a district court to sequence filings such that class counsel file and serve their attorneys’-fee motion before any objection pertaining to fees is due.” Setting an objection deadline after the class notice goes out, but before the fee petition itself has been filed, was held insufficient to give potential objectors “full information” and ensure that the fee petition “has been tested by the adversarial process.” That said, the court concluded that the specific error in that regard was harmless on the record.

As for the $6,000 incentive award, Judge Newsom’s opinion relied on Supreme Court precedent dating back to the 19th century on paying attorneys’ fees from a “common fund”: “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.” From that line of authority, the court reasoned that “modern-day incentive awards present even more pronounced risks” 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).” Nor could the court “see why paying an incentive award isn’t tantamount to giving a ‘preferred position’ to a class representative ‘simply by reason of his status’”—in violation of the general principle that named plaintiffs who choose to sue on behalf of a class “‘disclaim[] any right to a preferred position in the settlement’” of their claims.

Judge Newsom was similarly unimpressed by the observation that incentive awards are “routine”: “[S]o far as we can tell, that state of affairs is a product of inertia and inattention, not adherence to law. . . . Needless to say, we are not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent.”

In dissent, Judge Beverly Martin “disagree[d] with the majority’s decision to take away the incentive award,” partly because of “the practical effect of requiring named plaintiffs to incur costs well beyond any benefits they receive from their role in leading the class.” Judge Martin instead would have adhered to the “fairness analysis” undertaken by other courts to determine whether a lead plaintiff’s incentive award is fair to the class as a whole. She also expressed concern that the panel majority had departed from the Eleventh Circuit’s prior precedent and “take[n] our court out of the mainstream.”

The panel opinions in Johnson may not be the end of the matter. On October 22, 2020, the named plaintiff and the objector filed separate petitions for rehearing en banc. The plaintiff argued that the majority’s opinion “effects a sea change in class-action practice” and “opens a conflict with every other circuit.” The objector, for her part, urged the Eleventh Circuit to require common-fund awards of attorneys’ fees to be calculated either on a lodestar basis (limited to actual billings) or as a more “modest” 5% to 10% of the common fund.

Posted by Lee Peifer.

Back to top