Nearly two years after it issued its initial decision in Johnson v. NPAS Sols., LLC, in which it held incentive awards for class representatives to be per se unlawful, the United States Court of Appeals for the Eleventh Circuit denied a petition for rehearing en banc, on Aug. 3, 2022. In choosing not to revisit its decision, the court confirmed that class representative incentive awards are prohibited as a matter of law within its jurisdiction – federal district courts in Alabama, Georgia and Florida.
As a refresher, in Johnson, the plaintiff filed a lawsuit on behalf of himself and a putative class against a debt collection agency (NPAS) alleging violations of the Telephone Consumer Protection Act. Eventually, the parties agreed to settle the case on a classwide basis. Based on the terms of the settlement agreement, NPAS would pay $1.432 million into a settlement fund for participating class members – approximately $80 per class member after attorneys fees and costs. The settlement also provided $6,000 from the fund to named plaintiff Mr. Johnson for serving as class representative. Despite the fact that incentive awards for named plaintiffs are commonplace in the class settlement context, a single class member objected to the settlement, arguing, in part, that Supreme Court precedent prohibited the district court from approving the agreed-upon incentive award to Johnson. The district court overruled the objection and approved the settlement.
On appeal, the Eleventh Circuit reversed the incentive award portion of the district court’s order, finding that the $6,000 incentive award was akin to a “salary and a bounty,” which were explicitly prohibited by very old Supreme Court case law in Internal Imp. Fund Trustees v. Greenough, 105 U.S. 527 (1881) (Greenough) and Cent. R.R. & Banking Co. v. Pettus, 113 U.S. 116 (1885) (Pettus). While the court acknowledged the ubiquitous nature of these types of incentive awards, it ultimately determined that precedent must rule the day.
Although it’s true that such awards are commonplace in modern class-action litigation, that doesn’t make them lawful, and it doesn’t free us to ignore Supreme Court precedent forbidding them. If the Supreme Court wants to overrule Greenough and Pettus, that’s its prerogative. Likewise, if either the Rules Committee or Congress doesn’t like the result we’ve reached, they are free to amend Rule 23 or to provide for incentive awards by statute. But as matters stand now, we find ourselves constrained to reverse the district court’s approval of Johnson’s $6,000 award.
With incentive awards now clearly barred in the Eleventh Circuit, it remains to be seen whether other federal courts will follow suit and adopt similar incentive award prohibitions, or if a circuit split will begin to form. While no federal court outside the Eleventh Circuit has adopted Johnson, numerous district courts in the Second, Seventh, Eighth and Ninth circuits have either explicitly rejected or declined to follow Johnson’s reasoning.
It will be interesting to see whether the Supreme Court, Congress or the Federal Rules Committee accepts the Johnson court’s invitation to overhaul the rules surrounding incentive awards. Even more interesting will be the practical impact (if any) of this ban on class actions in the Eleventh Circuit; will plaintiffs still bring class actions without the possibility of additional compensation? Will this ban make it easier or more difficult to settle class actions on an individual basis? Although attorneys and legal scholars can speculate about its effect, it likely will take months (or years) to determine the full impact this incentive ban will have on class action litigation moving forward.
At BakerHostetler, we will continue to monitor how Johnson is received by other jurisdictions and will analyze the real-world consequences this ban will have for our clients in any jurisdiction.