Last week the Eleventh Circuit shocked the legal world by ruling that incentive payments to named representatives in class actions are improper, striking a $6,000 award to the plaintiff in a Telephone Consumer Protection Act class action . Johnson v. NPAS Solutions, LLC, No. 18-12344, “Slip Op.” (11th Cir. 2020).  

Incentive awards are a special payment to the named plaintiffs in class actions.  Courts began awarding these in the 1980s, and they are commonplace today.  Civil rights and consumer protection class action settlements include incentive awards to the named plaintiffs approximately 90% of the time.  While these awards are typically small compared to the total settlement or judgment amounts – they often range from $1,500 to $20,000 depending on how involved the named plaintiffs were in the case – the incentive award is usually drawn from the common fund or otherwise paid by the defendant as an awardable cost. 

In Johnson, the defendant (a medical debt collector) and the class had agreed to settle the case for $1.432 million (which included a $6,000 payment to the named plaintiff).  Only one person opted out of the class and objected.  Relying on two cases from the 1880s, the panel held “that Supreme Court precedent prohibits incentive awards like the one” awarded to the plaintiff (and the type customary in virtually all class actions). Id. at 18. Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885).

In Greenough, the Supreme Court first held that a plaintiff could seek reimbursement for his  costs, attorney’s fees, and reasonable and necessary expenses in bringing a case on behalf of others 105 U.S. at 537. But, at the same time, the high Court also stated that “there [was] one class of allowances” that was “decidedly objectionable.” — the plaintiff’s “personal services and private expenses.” Id. 

Three years later, in Pettus, the Court again held that a plaintiff representing others in an equity suit could claim “expenses incurred in carrying on the suit and reclaiming the property . . .” 113 U.S. at 122. As in Greenough, the representative plaintiff could not claim his personal compensation out of the common fund recovery. Id.

Relying on  Greenough and Pettus, the Eleventh Circuit concluded that “the modern-day incentive award” was akin to either a salary which is earned or a bounty to be won, both of which were forbidden by two 19th century cases. Slip Op. at 23.

The Eleventh Circuit noted that Rule 23 practice and “inertia” had resulted in incentive awards as being “commonplace in modern class-action litigation,” but added “that doesn’t make them lawful, and it doesn’t free us to ignore Supreme Court precedent forbidding them.” Id. at 25, 28.

In dissent, Judge Martin argued that the 11th Circuits own prior cases required the panel “to determine whether the incentive award [] is fair,” and concluding that the $6,000 award was fair. Id.

This opinion creates a clear circuit split – which the panel recognized – and will be top of mind with every class-action lawyer in the country.  Incentive fees have become boilerplate in insurance class action settlements; some empirical research indicates 90% of consumer class actions contain incentive fee awards, which average slightly more than $4,000 per plaintiff.  The empirical evidence suggests that Judge Martin’s conclusion – that the district court did not abuse its discretion in awarding $6,000 – was in line with common practice.  

While the focus of this blog is typically business insurance, we will continue to monitor this case as it moves ahead for three reasons:  

  1. Insurance companies continue to face class actions against themselves for their own business practices, making this case relevant to them. 
  2. This case has major implications for this blog’s readers; which include many businesses which could face class action litigation. If courts begin to disallow class action incentive fee awards, plaintiffs’ firms will have a harder time finding people who are willing to sign up for the burdens of serving as class representatives (being subject to discovery, depositions, mediations, and court appearances) when the representatives could get the exact same compensation by merely being an unnamed class members.
  3. Finally, we routinely advise clients regarding insurance coverage issues for class actions and are currently representing defendants in nearly a dozen high-stakes class actions.  While Johnson v. NPAS Solutions is technically a decision regarding civil procedure, it has major implications for both policyholders and insurers.   

What’s next?  Plaintiffs and Defendant could petition the Eleventh Circuit for en banc review.  But en banc petitions are granted less than 1% of the time. Because this opinion creates a circuit split, the Supreme Court may grant review.   But if neither en banc review nor certiorari to the Supreme Court are granted, the opinion will stand. In that event, the 11th Circuit will be seen as a less-favorable jurisdiction for class actions, and class action objectors in all other circuits will start citing to Johnson.