Are Incentive Payments the New Fly in the Ointment?

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For years, class action settlements typically have included incentive payments to named plaintiffs. The payments usually represent a very small percentage of the overall settlement payout, and are designed to compensate named plaintiffs for their time and trouble in service to the class. By way of a simple hypothetical, a million dollar settlement might include an incentive payment of $5,000 to a named plaintiff, in addition to that person’s share of the payment to the class. Class counsel invariably request incentive payments as a component of the overall settlement, defendants generally agree to them, class members rarely object to them, and courts typically approve them. Because incentive awards tend to be such a small percentage of the settlement,  usually dwarfed by the fees and costs class counsel request, the settling parties and the court spend very little time on them. After all, the thinking goes, named plaintiffs did have to do some work in representing the class, so it is only fair that they get compensated.

Unless, that is, you practice in the 11th Circuit. On September 17th, a divided panel of that court held that incentive payments in class action settlements are unlawful in light of two Supreme Court decisions from the 1880s (you read that right!) involving common funds. In those cases, the Court held that creditors who successfully pursued claims benefiting other creditors could recover from the common funds amounts to reimburse them for the legal fees and litigation expenses they incurred, but not for their “personal services and private expenses,” such as travel and hotel expenses.  Finding a close resemblance between the disallowed fees in the Supreme Court cases and incentive fees in class action settlements, the majority held that it was constrained to disallow the incentive payments.

The majority in Johnson v. NPAS Solutions, LLC, described an incentive award as both a “salary” designed to reimburse plaintiffs for their time and efforts and a “bounty” designed to induce plaintiffs to participate in the lawsuit. And, “[w]hether Johnson’s incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it.”

In support of the award, the plaintiff argued that the Supreme Court cases weren’t binding because they did not involve class actions and were decided decades before there was a Rule 23. In rejecting this argument, the panel held that, even though the procedural context was different, the logic of the Supreme Court decisions applied, and also pointed out that Rule 23 says nothing about incentive awards.

Plaintiff also argued that incentive awards are ubiquitous, and therefore the early precedents must not prohibit them. The panel agreed with the premise of this argument, but not with its conclusion. It held that it was “not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent.”

The majority’s decision sparked a vigorous dissent. The dissent’s concern was that, without incentive awards, named plaintiffs would be forced “to incur costs well beyond any benefits they receive from their role in leading the class,” and therefore would  “be less willing to take on the role of class representative in the future.” The dissenting judge observed that incentive awards are routine in class actions, and suggested that the only appropriate inquiry should be on an award’s fairness, not on whether incentive awards are lawful. That, after all, has been the approach of other Circuits, none of which have questioned the lawfulness of incentive awards.

What does this surprising new decision mean for class action settlements? For cases outside the 11th Circuit, probably not much. Class counsel will continue to ask for incentive awards, defense counsel will continue to agree to them, and most courts likely will continue to award them, even in cases where the awards draw objections. Within the 11th Circuit, however, the decision has plaintiff class action lawyers understandably concerned. The dissenting judge is likely correct that the prospect of recovering incentive awards serves as an effective inducement to allegedly injured parties to seek to represent a class. If incentive awards are unlawful, it stands to reason that it will be more difficult for plaintiffs’ counsel to recruit willing parties to the class representative role. And, where there are no class representatives, there are no class actions. For the time being, at least, this minor feature of many class action settlements that parties, counsel, and judges have until now taken for granted may well deter future class action filings and sow confusion in the negotiation and approval of class action settlements, at least in courts where the decision represents binding precedent.

The final word on incentive awards of course has not been written. The settling parties in Johnson will likely seek and may well obtain en banc review. And, since the case involves an admittedly ubiquitous practice about which the circuits are, at least arguably, split, involving the application of Supreme Court precedents in a context that did not exist when those cases were decided, the prospect of Supreme Court review if the decision stands is not out of the question.