The U.S. Court of Appeals for the Eleventh Circuit recently became the first federal appeals court to explicitly hold that “incentive” or “service” payments for the named plaintiffs in class actions are unlawful. Acknowledging that “hundreds of courts have handled similar settlements,” the court’s decision may have far-reaching consequences nationwide regarding the settlement of class action lawsuits.
Johnson v. NPAS Solutions, LLC
This case came before a three-judge panel of the Eleventh Circuit after a federal district court in Florida approved the settlement of a class action brought under the Telephone Consumer Protection Act. Among other things, the settlement included a $6,000 incentive payment to the named plaintiff. “Service” or “incentive” payments are typically made to the individuals who agree to be the named plaintiffs in class actions. Because the named plaintiffs may be required to participate in discovery and be deposed, incentive payments are in addition to the settlement share that each member of the class receives.
Jenna Dickenson, a class member who received notice of the settlement, objected to the settlement and appealed the district court’s decision.
“Incentive” payments to named plaintiffs are invalid
In the most significant part of its decision, the panel majority said that “Supreme Court precedent prohibits incentive awards like the one earmarked for [the named plaintiff] here.” According to the majority, even though these awards are commonplace, they create a conflict of interest between the named plaintiffs and the class members they represent. The decision did not hinge on the amount. All such payments are prohibited.
The district court had approved a settlement notice and approval schedule that required class members to file any objections to the settlement—including objections pertaining to attorneys’ fees—more than two weeks before class counsel was required to file their fee petition. The Eleventh Circuit panel said that this timeline clearly violated Rule 23(h) of the Federal Rules of Civil Procedure, which requires class counsel seeking attorneys’ fees to file a motion for an award of attorneys’ fees and that the class members may object. In other words, the rule implies that the motion is filed first, followed by any objections from class members. Nonetheless, the court held that the district court’s error was harmless because Ms. Dickenson filed an objection to the yet-to-be-filed fee petition and her objection did not substantially change after the petition was filed.
Finally, the panel also found that the district court failed to “sufficiently explain itself to enable meaningful appellate review,” and by doing so violated the federal rules. The panel acknowledged that courts across the country provide conclusory reasoning for settlement approval, but held that “it is no answer to say ‘that’s just how it’s done.’”
As the dissent notes, the panel majority decision in Johnson clearly “takes [the Eleventh Circuit] out of the mainstream,” as no other federal appellate court has imposed a rule prohibiting incentive awards. The decision will affect the negotiation and settlement of class actions in federal courts in the Eleventh Circuit states of Alabama, Florida, and Georgia, and potentially across the country. Class representatives may be less likely to settle cases without the added enticement of an incentive award and might hold out for a higher recovery for the class as a whole. And plaintiffs’ attorneys may find fewer individuals willing to serve as class representatives without the added financial incentive. The court’s decision is also likely to lead to more scrutiny of class action settlements because the district courts will be required to provide a thorough justification and not mere boilerplate language for their approval decisions.
Finally, because the Johnson decision addresses only class actions, a critical question remains: Will courts apply the Eleventh Circuit’s reasoning to collective actions brought under the Fair Labor Standards Act and to “hybrid” class and collective action cases and settlements?
From a practical perspective, companies settling class actions that include service or incentive payments to named plaintiffs should include language in the settlement agreement providing that, if such payments are struck by the court during the approval process, the settlement will proceed without those payments. And companies attempting to settle potential class actions as single-plaintiff cases may be able to leverage the Johnson decision during negotiations.
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