This week, an Eleventh Circuit panel, in a 2-1 decision, reversed the approval of an incentive payment to the named plaintiff, calling the payment an unauthorized bounty. The case involved a Telephone Consumer Protection Act (TCPA) class action settlement that the majority characterized as being “just like so many others that have come before it.” But this familiarity was “exactly the problem.” According to the court, the district court “repeated several errors that, while clear to us, have become commonplace in everyday class-action practice,” most notably, the unauthorized approval of a class representative incentive payment.
The settlement recovery for the class was $1.432 million. Thirty percent (or $429,600) was allocated for attorney’s fees. Moreover, the settlement authorized a $6,000 incentive payment to the named plaintiff. 9,543 class members made claims. The settlement was reached less than eight months after the lawsuit was filed. Only one class member objected – and when the objection was overruled, appealed. As the court noted, there was nothing out of the ordinary about this class settlement. So what drew the Eleventh Circuit’s ire?
First, the district court set a settlement schedule that required class members to file their objections – including objections to attorney’s fees – more than two weeks before class counsel filed a fee petition. According to the appellate court, this violated the “plain terms” of Rule 23(h), which states that a class member “may object to the motion” for fees. In other words, the plain text of the rule requires the fee petition to be filed before the deadline for objections so that class members legitimately can object to the request. It is not enough that the notice may have already notified class members of the percentage of fees. Only the fee motion includes the details of hours and expenses and the rationale for the request. Having reached that conclusion, however, the court then ruled that the error was harmless.
In addition, the district court’s approval order made no real findings, but instead offered only “rote, boilerplate pronouncements” that failed to actually explain the decision and hampered appellate review. The law “requires more than a rubber-stamp signoff.”
Perhaps what really upset the Eleventh Circuit panel was the paltry recovery for class members. If all class members had made claims, each class member stood to receive only $7.97. Because only 9,543 class members made claims, however, each “happily” stood to receive $79.
Contrast this amount with the $6,000 incentive payment. In its most consequential ruling, the court held that the district court erred in awarding the class representatives an incentive payment which “ignored on-point” Supreme Court precedent prohibiting such awards. What were these “on-point” cases? Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), both of which were issued long before Rule 23 was modernized in 1966. In Greenough, the Court allowed certain common fund expenses and attorney’s fees to a bondholder who sued a trustee for wasting trust assets, but disallowed allowances for “personal services” and “private expenses,” that is, an annual salary and hotel bills, as “decidedly objectionable.” In Pettus, the Court reaffirmed that under an early sort of common fund analysis, “personal services and private expenses” were not reimbursable. Although the Second Circuit had found these cases factually inapposite, the Eleventh Circuit considered the modern-day class representative incentive fee to be analogous to the salary deemed a prohibited personal service in Greenough. It is “part salary and part bounty.”
But what about the fact that Rule 23 post-dated these Supreme Court cases? This was irrelevant because Rule 23 says nothing about incentive fees, and thus fails to speak to the continuing vitality of these cases. The fact that incentive fees are ubiquitous also didn’t sway the court. The “uncomfortable fact,” according to the panel, is that the judiciary created these awards “out of whole cloth.”
The majority stated, in language that is sure to be repeated by objectors in subsequent cases, “We don’t necessarily fault the district court – it handled the class-action settlement here in pretty much exactly the same way that hundreds of courts before it have handled similar settlements. But familiarity breeds inattention, and it falls to us to correct the errors in the case before us.” And so it did, firing a shot across the bow of class action lawyers that is sure to draw substantial attention.
Judge Martin dissented, disagreeing with the majority’s decision to strike the incentive awards. She believed the decision removed an incentive for plaintiffs to bring class actions.
What does this mean going forward? At a minimum, this decision counsels class action litigants to structure settlements so that objectors are able to review a fee petition prior to the objection/opt-out deadline. In addition, parties should be prepared to address hard questions by district judges at fairness hearings about the fairness of class settlements. Do not plan on skating by on platitudes, at least in the Eleventh Circuit.
As for incentive fees? We don’t think for a minute that the doubt cast on the customary practice of awarding such fees to named plaintiffs will deter plaintiff’s lawyers from finding clients to file class action lawsuits. Nor do we doubt the ingenuity of plaintiff’s counsel in attempting to find ways to recast incentive payments in other perhaps more palatable forms, such as “expense reimbursements.” And we don’t doubt that inventive objectors will respond by challenging such recast payments. And so it goes. The Supreme Court at some point will have to weigh in on whether its 1882 and 1885 decisions are roughly analogous to modern class representative incentive fees, as the Eleventh Circuit here believed, or factually inapposite, as the Second Circuit previously ruled.
Johnson v. NPAS Solutions, LLC, No. 18-12344 (11th Cir. Sept. 17, 2020).