A divided 11th Circuit Appellate Court recently ruled that incentive awards in class actions are unlawful. The ruling reverses a district court’s previous approval of a settlement agreement for Johnson v. NPAS Solutions, LLC , including incentive fees for this class action brought under the Telephone Consumer Protection Act. The startling appellate ruling calls into question the common modern practice of awarding class representatives service fees for providing overall class services.
Plaintiff Counsel Incentive Awards as an Accepted Practice
Despite previous Supreme Court rulings that incentives and award fees for class action plaintiff counsel are unlawful, today’s counsel continues to ask for fees—and receive substantial awards. Dating from 1882 and 1885 respectively, the Supreme Court sided firmly against incentive fees in Trustees v. Greenough and Central Railroad & Banking Co. v. Pettus. These verdicts are also echoed by federal class action procedural Rule 23. In the recent majority ruling in Johnson, the 11th circuit cites the 19th-century precedents, calling the modern practice of permitting incentive awards “a product of inertia and inattention, not adherence to law.”
For decades, however, the majority of federal courts condoned incentive awards. The basic idea behind the service awards is to incentivize lawyers to lead class action lawsuits. Representing a class action case can be a complex undertaking for an attorney, however, this role as an advocate for injured or wronged citizens is seen as a vital role for litigators to play.
Limited Precedence in Striking Incentive Fees
Despite the law saying otherwise, courts have largely upheld incentive awards. There is reasoning that class members will approve these fees to compensate legal representatives that provided class-wide services to their benefit. The fees are also a factor in mitigating counsel’s reputational, financial, and lost-opportunity risks. Though there are instances of courts modifying incentive award amounts. For example, the Northern District of California bench approved a settlement with incentive fees in February 2020. The court, however, analyzed the service award and reduced it from $7500 to $5000.
Over the years there have been a smaller number of rulings that struck down service fees. These rulings are typically based on the Rule 23 fairness and adequacy test. For example, in the 2009 decision for Rodriguez v. West Publishing Corp., the 9th Circuit held that the ex-ante incentive awards created impermissible conflicts of interest. The judge found that the structure of the incentive agreement put the class financial interests at odds with the class representatives’ contingency financial interests.
The 11th Circuit’s Overhaul Ruling
In Johnson v. NPAS Solutions, LLC, the 11th Circuit bucked the trend of ruling in favor of class representative incentive awards. The court reversed the district court’s approval of the $6,000 incentive award, stating that “it is prohibited by the Supreme Court’s decisions in Greenough and Pettus.”
The case reached the 11th Circuit after class member Jenna Dickenson appealed the district court approval of the Johnson settlement agreement and incentive fees, even after she objected despite her objection. In the appeal, Dickenson asserts that the settlement amount was not high enough, and argued for a lodestar calculation to determine reasonable attorneys’ fees. The appellant also contended that the Greenough and Pettus Supreme Court rulings banned the $6,000 incentive award in Johnson and created a conflict of interest between class members.
The 11th Circuit ultimately agreed and ruled that only the Supreme Court could overrule its own precedents regarding incentive awards. Further, the court explained an overrule could also come in the form of an amendment to Rule 23 or a congressional enactment.
In its decision, the 11th circuit majority stated that “[T]he district court failed to adequately explain its award of attorneys’ fees, its denial of Dickenson’s objections, or its approval of the settlement.” The court also chastised the district court for giving a “rubber-stamp signoff,” saying settlement approval orders must contain detailed findings and conclusions rather than “rote, boilerplate pronouncements (‘approved,’ ‘overruled,’ etc.).” The appellate court ordered the district court to make the required on-the-record findings and conclusions.
The Impact of the Johnson Ruling
Per the strictest reading of the Johnson ruling, incentive agreements in the 11th circuit are now unlawful. However, given the minority’s strong dissent, the full 11th Circuit Court may take up the issues down the road in this far-reaching divided ruling. A Supreme Court consideration could also be on the horizon given the pervasiveness of modern incentive awards. This will be an interesting legal topic to watch and could have major implications for future class action counsel.