By: Gerald L. Maatman, Jr. and Alex S. Oxyer
Seyfarth Synopsis: Incentive awards for class representatives are impermissible, according to a ground-breaking decision last week by the U.S. Court of Appeals for the Eleventh Circuit. Though not an employment case, the decision is a must-read for class action practitioners handling all varieties of workplace class and collective action litigation, such as wage & hour and employment discrimination lawsuits. The decision may diminish the ability of plaintiff’s lawyers to recruit class representatives and may change how practitioners settle class and collective actions.
On September 17, 2020, the Eleventh Circuit reversed in part and vacated in part the approval of a class settlement in a Telephone Consumer Protection Act (“TCPA”) case, determining that “in approving the settlement here, the district court repeated several errors that, while clear to us, have become commonplace in everyday class-action practice.” The errors found by the Eleventh Circuit included, among others, the award of an incentive payment to the named plaintiff. In holding that incentive awards compensating class representatives for their time and rewarding them for bringing a lawsuit are unlawful, the Eleventh Circuit has eliminated a significant incentive for plaintiffs to bring claims as class actions instead of individual suits. The case is Johnson v. NPAS Sols., LLC, No. 18-12344, 2020 WL 5553312 (11th Cir. Sept. 17, 2020).
This case began when the named plaintiff sued NPAS Solutions, LLC in the U.S. District Court for the Southern District of Florida, alleging violations of the TCPA. In his suit, the plaintiff claimed that NPAS, a company that collects medical debts, had used an automatic dialing system to call his cell phone without his consent. Specifically, the plaintiff alleged that NPAS had a practice of calling phone numbers that had originally belonged to consenting debtors but had been reassigned to non-consenting individuals.
Several months after the complaint was filed, the parties reached a class-wide settlement of the claims and moved to certify the class for settlement purposes and obtain approval of the settlement from the district court. The district court preliminarily approved the settlement and certified the class. The district court also appointed the named plaintiff as the class representative and his lawyers as class counsel, and its order stated that the plaintiff 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.” Id. at *2. The district court then set a deadline for class members to opt out of the settlement and to file objections to the settlement. It set a date 18 days after the opt-out/objection deadline as the date by which the parties had to submit their motion for final approval of the settlement and their responses to objections, and by which class counsel had to submit their petition for attorneys’ fees and costs.
The class members were then notified about the settlement and, after the expiration of the objection deadline, no class members opted out and only one objected to the settlement. The objector noted several bases for her objection, including, among others, the district court’s decision to set the objection deadline before the deadline for class counsel to file their attorneys’-fee petition; the amount of the settlement; and the class representative’s incentive award. The district court granted final approval of the settlement over the objections, and the objector appealed the approval to the Eleventh Circuit.
The Eleventh Circuit’s Opinion
On appeal, the Eleventh Circuit considered three separate arguments raised by the objector regarding the approval of the class settlement by the district court, including: (1) that the district court erred when it required class members to file objections to the settlement before the class counsel had filed their fee petition; (2) that the district court’s approval of the $6,000 incentive award was in contravention of U.S. Supreme Court precedent; and (3) that the district court failed to provide sufficient explanation of the settlement approval to allow for meaningful appellate review.
The Eleventh Circuit’s opinion first addressed whether the district court was in error when it required objections to be filed before class counsel was required to file their fee petition. The Eleventh Circuit concluded that Rule 23(h) clearly requires a district court to sequence filings so that class counsel must file and serve their motion for attorneys’ fees before any objection pertaining to fees is due and, accordingly, the district court erred in requiring that objections be filed prior to the fee petition. However, the Eleventh Circuit ultimately found that the error was harmless, as the objector had already lodged a detailed objection to the attorneys’-fee award before class counsel had filed their petition. Accordingly, the potential harm that could have occurred by requiring objections to be filed prior to the fee petition was not present in this case.
The Eleventh Circuit then considered the argument relative to the incentive award granted to the class representative. In the most notable part of the opinion, the Eleventh Circuit overturned the incentive award in light of the Supreme Court holdings in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). The Eleventh Circuit interpreted these more than 135 year old holdings to stand for the proposition 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.” Johnson, 2020 WL 5553312 at *9 (emphasis added). The Eleventh Circuit then opined that “we think that modern-day incentive awards present even more pronounced risks than the salary and expense reimbursements disapproved [by the Supreme Court]. 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).” Id. The Eleventh Circuit found that the incentive award at issue in the case was a combination of “salary” and “bounty” and, accordingly, was not permissible.
Finally, the Eleventh Circuit examined the district court’s order giving final approval of the settlement. Despite the Rule 23 requirement that when awarding “reasonable attorney’s fees and nontaxable costs,” the court “must find the facts and state its legal conclusions under Rule 52(a),” the Eleventh Circuit determined that the district court had failed to articulate its reasoning for approving the attorneys’ fees, incentive award, or litigation costs accorded in the settlement. Id. at *13. In light of this deficiency, the Eleventh Circuit remanded the case back to the district court for additional analysis of the awards.
The Eleventh Circuit’s ruling in Johnson has dealt a significant blow to the plaintiffs’ bar in their efforts to recruit individuals to act as class representatives for class claims. By eliminating the availability of incentive awards to compensate plaintiffs for their time and efforts, the appeal to plaintiffs for bringing claims as a class action instead of a single plaintiff case is diminished. The Eleventh Circuit’s ruling currently cuts against the holdings of the other U.S. federal courts of appeals; however, time will tell whether other circuits will begin adopting the Eleventh Circuit’s interpretation of early Supreme Court precedent that modern-day incentive awards are generally impermissible. Another open issue is whether this concept will take hold in collective actions brought under the Equal Pay Act and Fair Labor Standards Act. While the logic of the Eleventh Circuit’s ruling suggests that the result would be the same, such a development would stand the practicalities of settling class and collective actions on their head. However, practitioners might consider settling class and collective action lawsuits by providing the class representative, or collective action lead plaintiff, with a reasonable supplemental payment in exchange for a release that is broader than the one to which the class or collective agrees in an effort to eliminate the issues raised by the Eleventh Circuit.