Geteiltes Berufungsgericht des Elften Bezirks verbietet Anreizprämien für Vertreter von Sammelklagen bei Vergleichen in Sammelklagen

While not authorized by Rule 23, incentive awards to class representatives are a common feature of class action settlements. Nevertheless, a divided Eleventh Circuit panel ruled last Thursday that such payments are strictly prohibited by “on-point Supreme Court precedent” from the 1880s. The decision in Johnson v. NPAS Solutions, LLC, No. 18-12344, 2020 WL 5553312 (11th Cir. Sept. 17, 2020), reversed and vacated a district court order that approved a settlement after the Eleventh Circuit concluded that “the district court repeated several errors that … have become commonplace in everyday class-action practice.”

The Court of Appeals’ first-in-the-nation bar on incentive awards is the most notable aspect of the court’s decision. As other courts have stated, incentive awards are routinely negotiated and approved to compensate class representatives for their work on behalf of a class; to make up for financial or reputational risk in bringing a class action; and, sometimes, to recognize their willingness to act as a private attorney general. A 2006 study cited in the dissent reported that of the incentive awards then sampled, the average award per class representative was $15,992, and the median award was $4,357. More recent commentary suggests that incentive awards usually range between $5,000 and $50,000. The incentive award vacated last week by the Eleventh Circuit was for $6,000.

With this blockbuster decision, the court made clear that commonplace class action practices (like incentive awards) “require[] more than a rubber-stamp signoff.” The court further emphasized that settlement approval orders must contain detailed findings and conclusions that “facilitate appellate review,” rather than “rote, boilerplate pronouncements (‘approved,’ ‘overruled,’ etc.).” This decision is the latest example of the federal appellate courts’ increasing interest in monitoring class action settlements, as Foley’s Consumer Class Defense Counsel blog has covered.

Hintergrund

The named plaintiff in Johnson alleged that the defendant debt collector used an automatic telephone dialing system to call his cell phone without his prior express consent in violation of the Telephone Consumer Protection Act. Eight months after the suit was filed, the parties filed a notice of settlement. A month later, the district court certified a settlement class and granted preliminary approval of the settlement. Under the district court’s schedule, objections to the settlement from absent class members were due about three weeks before class counsel was required to file its fee petition. The notice then sent to class members stated that the named plaintiff would request a $6,000 incentive award, and that class counsel would seek fees of 30% of the $1,432,000 settlement fund.

One absent class member, Jenna Dickenson, objected to the amount of the settlement, the incentive award, and class counsel’s requested fees. After holding a Rule 23(e)(2) fairness hearing, the district court approved the settlement over Dickenson’s objections.  The district court’s seven-page order contained a one-sentence evaluation of the settlement’s fairness. Dickenson appealed.

Die Mehrheitsentscheidung

A two-judge majority of the Eleventh Circuit panel agreed with Dickenson on all three of her objections, vacated the district court’s order, and remanded the case for further proceedings.

First, the court held that Rule 23(h)’s “plain language” requires a district court to require that class counsel submit its final attorneys’ fees motion before any objections to fees are due. The Eleventh Circuit rejected an argument that the discussion of counsel’s anticipated fee request in the class notice was sufficient, reasoning that Rule 23(h) requires that absent class members must be allowed the opportunity to object to the fee motion itself. The court explained that this rule made “good practical sense” by ensuring that absent class members have full information when considering a settlement proposal, and by allowing a district court to fulfill its “fiduciary role” under Rule 23(e) with the benefit of a settlement proposal that “has been fully and fairly vetted.”

Second, Judge Kevin Newsom—writing for himself and Judge Bobby Baldock (a Tenth Circuit judge sitting by designation)—held that the $6,000 incentive award to the class representative violated two 19th-century Supreme Court decisions, Trustees v. Greenough, 105 U.S. 527 (1882) and Central R.R. & Banking Co. v. Pettus, 113 U.S. 116 (1885). The majority interpreted these decisions – which allowed payment of attorneys’ fees from a common fund – as consistent with permitting a class representative to recover attorneys’ fees and litigation expenses in a class action. However, the two 19th-century decisions held that a plaintiff’s requests for “the allowance of a salary” or for reimbursement of “private expenses” incurred in carrying on litigation, from a common fund, are unsupported by “reason or authority.” Based on that holding, the Eleventh Circuit held that class representatives may not recover compensation for “personal services” or “private expenses,” further characterizing the $6,000 incentive award as “part salary and part bounty.” The court then criticized Johnson’s appeal to the widespread “ubiquity” of incentive awards, observing that while incentive awards have become “fairly typical … the state of affairs is a product of inertia and inattention, not adherence to law.” The court said that it considered itself bound by the 1882 and 1885 Supreme Court precedents, which it said “seem to have been largely overlooked in modern class-action practice.” The majority was not dissuaded by the fact that Greenough and Pettus predate the adoption of Rule 23, stating: “Needless to say, we are not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent.”

Finally, the court concluded that the district court failed to sufficiently explain its decision to approve the settlement. The court highlighted Rule 23(h)(3)’s requirement that a court “must find the facts and state its legal conclusions under Rule 52(a).” The Eleventh Circuit stated: “[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. Accordingly, we vacate the district court’s order and remand so that the court can make the required on-the-record findings and conclusions.”

Die Meinungsverschiedenheit

Judge Beverly Martin filed a partial dissent, disagreeing with the majority’s conclusion that the incentive award violated Supreme Court precedent. She reasoned that the majority’s rule “will have the practical effect of requiring named plaintiffs to incur costs well beyond any benefits they receive from their role in leading the class.” The dissent pointed out that, in Frank v. Gaos, 139 S. Ct. 1041 (2019), the Supreme Court acknowledged the inclusion of incentive awards for named plaintiffs in a proposed class action settlement and “did not question the viability of those incentive awards.” Collecting cases from across the federal circuits, Judge Martin noted that courts routinely uphold such awards when they are “fair” and do not “compromise[] the interest of the class for the class representative’s personal gain.”

Mitbringsel

The majority’s 36-page opinion is a stern warning to both lawyers and district courts that they can no longer rely on “the way things have always been done,” at least not in the Eleventh Circuit. The majority’s decision in Johnson will reverberate in class actions throughout the federal courts. As acknowledged by the Eleventh Circuit, incentive awards to class representatives are a common feature of modern class action settlements. And, as highlighted in Judge Martin’s dissent, the bar on such awards may chill individual plaintiffs’ willingness to serve as fiduciaries for absent class members and to pursue class action litigation. This issue is likely to be picked up by future objectors to class action settlements around the country, and should be monitored by both sides of the bar. The opinion further highlights the increasing scrutiny of class action settlements, and is another reminder that district courts must undertake a thorough analysis of any proposed settlement and make findings sufficient to allow appellate review for compliance with the requirements of Rule 23.  

Stay tuned. There is a possibility that this decision could be taken up by the full Eleventh Circuit, or garner the attention of the Supreme Court in its coming terms.