The beginning of the end for the Class Reps Incentive Prize? (Part II) | Butler Snow LLP
In Part I of this article, we have examined the problem of incentives to class representatives and the conflict of interest it creates between class representatives and the class they seek to represent. Recently, the United States Court of Appeals for the Eleventh Circuit faced this same problem and ruled that such incentive rewards are ineligible.
The eleventh circuit finds a conflict
In Johnson v NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), the Court of Appeal overturned the district court’s granting of an incentive reward to the group representative, holding that it was a bonus which put the group representative in conflict with the absent group. members. In Johnson, the named plaintiff brought an action against the defendant on his behalf and sought to certify a class of all like-minded individuals. The underlying claim concerned alleged violations of federal law on consumer protection by telephone, which provides that a person can be held liable for using automatic dialing systems to contact people without their prior consent. Each violation of the law results in civil penalties of $ 500.
Shortly after filing the complaint, the named plaintiff reached an interim group settlement with the defendant. Under the terms of the settlement, the defendant would pay a total of $ 1,432,000. Of this amount, Class Counsel would recover 30% contingency fees ($ 429,600) and their litigation costs and expenses ($ 3,475.52). The group representative would receive an incentive bonus of $ 6,000. Absent group members would share the remaining balance pro rata. The Eleventh Circuit found that group members who submitted claims “could receive a whopping $ 79”. The court noted that if all eligible absent class members had submitted claims for their share of the recovery, the per class member recovery would have fallen to less than $ 8.00 per class member.
Before the final group approval, one of the absent group members objected to the settlement, arguing in part that the incentive award to the group representative created a conflict of interest between the group representative and the group. The district court dismissed the objection and certified the group. The Eleventh Circuit reversed itself on the issue of incentive reward as well as other motives.
Perhaps the most interesting feature of the Johnson opinion is the basis of the court for overthrow. The Eleventh Circuit went very far in reporters, citing two US Supreme Court cases (one from 1882 and one from 1885) and found that there was a binding precedent prohibiting the incentive reward.
The cases cited were Trustees c. Greenough, 105 US 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 US116 (1885). The Eleventh Circuit described the cases as “the founding cases establishing the rule – applicable in so many class action cases, including this one – that attorney’s fees can be paid from a” common fund ” . , the two cases “also establish[d] limits on the types of rewards lawyers and litigants can collect from the fund ”and that cases“ seem to have been largely ignored in modern class action practice ”. The rule announced in Greenough was that a representative of the class could recover from the common fund the actual expenses that it incurred in pursuing the class action, including legal fees and litigation costs. However, the group representative could not recover money for his personal services or private expenses. Pettus essentially ruled that not only the group representative could recover the lawyer fees from the mutual fund, but the lawyers in the group could also recover their fees directly from the mutual fund.
Relying on Greenough and Pettus, the Eleventh Circuit concluded that “a plaintiff who sues on behalf of a group may be reimbursed for legal fees and expenses incurred in pursuing the litigation, but he may not receive a salary or be reimbursed for his expenses. Personal expenses. It seems to us that the modern day incentive bonus for a class representative is roughly analogous to a salary – in Greenough’s terms, payment for “personal services”. The Court went on to find that the modern incentive reward is an even more perverse practice because it is not intended only to compensate the group representative for his time, but a bonus or a “prize to be won”. Ultimately, the Johnson the court rejected the incentive reward, judging that “we are not free to sanction a device or a practice, however widespread, which is prohibited by the jurisprudence of the Supreme Court”.
Since Johnson, the practice of giving incentive rewards in the Eleventh Circuit seems to be dead. District courts in other circuits, however, continue to award incentive payments. In particular, the district courts of the Ninth Circuit – arguably the most favorable circuit for class actions – appear to have overturned Johnson as an outlier. Although no court outside the Eleventh Circuit has yet adopted Johnson, defendants and opponents repeatedly raise Johnson and its reasoning as the basis for refusing incentive rewards and / or challenging the merits of the collective settlement. It is probably only a matter of time before a circuit split develops and thus creates a ripe opportunity for the Supreme Court to rule.
The issue of granting incentives to representatives of the group is generally not such an important issue for the defendants. Whether as part of a settlement or following a trial on the merits, the incentive compensation is generally derisory compared to the overall amount awarded to the group (as well as the amount recovered by the lawyers of the group). If a defendant settles a class action lawsuit for $ 5 million, the defendant probably doesn’t care much that the class representative gets $ 5,000. Typically, the defendant is more interested in the total amount of the settlement and the purpose. But the accused should know that Johnson can create a problem to get to the end.
More specifically, defendants should know that opponents now have new ammunition to challenge a collective settlement. After an agreement between the class representative and the defendant, the settlement will be presented to the court for approval. Generally, the court will conditionally certify the class pending settlement and notice will be issued to putative class members regarding the settlement and its terms. At this point, any member of the group can come forward and object to the settlement.
Often, opponents will argue that the interests of absent class members were not adequately represented in reaching a settlement. If the granting of an incentive award does create a conflict of interest between the group representative and the group he seeks to represent, then opponents may have good reason to argue that the group’s settlement cannot take place. In other words, something as small as the Incentive Payout could cause the entire settlement to fail once significant work has been done to reach a settlement and, perhaps more importantly, after the defendant has disclosed the price he is willing to pay to end the litigation.
 Johnson, 975 F.3d at 1250-51.
 See Drazen v. GoDaddy.com, LLC, # CV 1: 19-00563-KD-B, 2020 WL 8254868 (SD Ala. December 23, 2020) (rejection of the request for an incentive reward of $ 5,000 to the class representative).
 See Grace v. Apple, Inc., n ° 17-CV-00551-LHK, 2021 WL 1222193, at * 7 (ND Cal. March 31, 2021) (refusing to follow “Johnson unpublished reading of old Supreme Court decisions ”).