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Last week, the U.S. Court of Appeals for the Second Circuit issued a decision that highlights a growing disagreement among federal appellate courts as to whether class action settlements may include a cash incentive award to named plaintiffs for serving as class representatives. This deepening debate creates uncertainty as to whether incentive awards will continue to be available in many parts of the country and increases the likelihood that the Supreme Court will accept one of two pending petitions asking the Court for a ruling on this issue.

The drama leading up to last week’s decision did not begin in the Second Circuit. Instead, the Eleventh Circuit was the first to interrupt a long period during which incentive awards were a standard and accepted part of a class action settlement. In 2020, a three-judge panel of the Eleventh Circuit decided Johnson v. NPAS Sols., LLC (Johnson), holding that incentive awards are impermissible under two rather old Supreme Court precedents that prohibited representative plaintiffs from receiving payment for personal services and private expenses, 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). In Johnson, the Eleventh Circuitheld that it must apply these cases to reverse a $6,000 award to the named plaintiff in a class action settlement. Last August, the Eleventh Circuit denied a petition to reconsider that decision.

Then, in September, the Ninth Circuit decided In re Apple Inc. Device Performance Litigation,disagreeing with the Eleventh Circuit’s Johnson ruling. In doing so, the Ninth Circuit became the first federal appellate court to join federal district courts within the Second, Seventh and Eighth circuits in holding that Greenough and Pettus do not categorically bar incentive awards in class actions, which did not exist in their present form when those two Supreme Court cases were decided.

The First Circuit followed suit in December, similarly upholding incentive awards in Murray v. Grocery Delivery E-Services, Inc. The First Circuit panel explained that its decision followed “the collective wisdom of courts over the past several decades that have permitted these sorts of incentive payments, rather than create a categorical rule that refuses to consider the facts of each case.”

 The discord among courts crescendoed last week with the Second Circuit’s decision in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation (Payment Card). The panel agreed with the Eleventh Circuit that “[s]ervice awards are likely impermissible under Supreme Court precedent.” Nonetheless, the panel considered itself bound to follow two recent Second Circuit precedents that held incentive awards are permissible under Greenough and Pettus, ordering the incentive award at issue reduced, not removed, from the challenged settlement agreement.

Unsurprisingly, there are currently two petitions pending asking the Supreme Court to resolve this question. Last week’s Second Circuitdecision, signaling that federal judges in at least one other circuit are increasingly skeptical of incentive awards, may increase the chances that the Supreme Court considers the propriety of incentive awards to class representatives in class actions. 

For now, incentive awards remain available to class representatives except in federal courts within the Eleventh Circuit’s jurisdiction (Alabama, Florida and Georgia). But Payment Card suggests the list of exceptions may expand.

The unanswered questions are legion. How widespread is judicial skepticism of incentive awards? Will other circuits follow the Second in viewing awards with greater scrutiny? Will other circuits follow the Eleventh in banning incentive awards? Will the Supreme Court step in, and how? For the time being, will class action plaintiffs avoid federal courts that have expressed hostility toward incentive awards? Would a Supreme Court ban on incentive awards merely channel class action litigation to state courts, where the federal ban would not affect practice under state rules of civil procedure?

BakerHostetler’s Class Action Lawsuit Defense team will track developments in this area and study their practical effects to continue providing the most informed strategies and advice.