The Eleventh Circuit Court of Appeals ruled today that “incentive” or “service” awards to lead plaintiffs in Rule 23 class actions are unlawful. It is the first circuit court of appeals to expressly invalidate such awards as a matter of law. (Johnson v. NPAS Solutions, LLC, No. 18-12344, September 17, 2020).

In a suit brought under the Telephone Consumer Protection Act (TCPA), a divided circuit panel struck down a $6,000 award to a lead plaintiff and, for this and other reasons, vacated a federal court’s order approving a proposed $1.432 million settlement. (There were 179,642 potential class members, who would have received only $7.97, but only  9,543 class members who submitted claims, bringing their haul to what could have been “a whopping $79.”)

Supreme Court precedent. The U.S. Supreme Court prohibited the award of incentive payments to plaintiffs more than a century ago, calling this particular fee for services “decidedly objectionable,” the Eleventh Circuit noted (citing Trustees v. Greenough, 105 U.S. 527 (1882), along with Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), issued on the heels of that decision. This controlling precedent precedes Rule 23 by decades, as the plaintiffs pointed out to no avail, in arguing that the decisions were nonbinding here. And these opinions seem to have gone unheeded in the 140 or so years since, the majority acknowledged, conceding that incentive awards are routine features of class settlements today.

“But, so far as we can tell, that state of affairs is a product of inertia and inattention, not adherence to law,” the court said, adding: “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.”

The incentive award in this case is “part fee and part bounty,” according to the majority. Such awards amount to the kind of pay for services disfavored by the Supreme Court. What’s more, such fees are meant “to promote litigation by providing a prize to be won.”

Eleventh Circuit is an outlier. Judge Martin dissented on this point, and noted that the decision “takes our court out of the mainstream.” No other circuit court has barred incentive awards; in fact, “none has even directly addressed its authority to approve incentive awards,” she pointed out. Yet, as the majority countered, the courts appear to have abandoned the inquiry whether there is actually a legal basis for such awards, turning instead to the question whether such awards are fair.

Fee objection before fee petition? The appeals court also was troubled that, in granting preliminary approval to the slapdash settlement (over the objections of the appellant here), the district court effectively required class members to opt out or object to the attorney fee award even before class counsel filed their fee petition. The appeals court found a clear violation of Federal Rule of Civil Procedure 23(h) in setting the objection date prior to the motion for fees.

However, applying the harmless-error doctrine for the first time in the context of Rule 23(h), the court concluded that this error was harmless.

“Boilerplate” approval. In addition, the lower court violated the Federal Rules and circuit precedent more generally by failing to offer a reasoned explanation for its decision to approve the terms of a class settlement and to overrule objections. The appeals court recognized that the district court’s approach to evaluating the settlement was fairly common. Here again, though, as with the court’s approval of the incentive award, it is no answer to say, “That’s just how it’s done.”

“We don’t necessarily fault the district court—it handled the class-action settlement here in pretty much exactly the same way that hundreds of courts before it have handled similar settlements. But familiarity breeds inattention, and it falls to us to correct the errors in the case before us.”

Takeaways. As a practical matter, removing the prospect of service awards for Named Plaintiffs in class actions will impact the resolution of class actions within the Eleventh Circuit, adding further nuance to the negotiation of settlements and the drafting of settlement agreements.

This decision will also further increase judicial scrutiny of class action settlements in the Eleventh Circuit, which is a Circuit that, since its seminal decision in Lynn’s Foods, Inc. v. United States in 1982, has been active in scrutinizing the terms of employment class action settlements, particularly in the area of wage and hour settlements.

A critical question that remains unanswered is whether the majority’s rationale will be applied in the context of collective actions brought under Section 216(b) of the Fair Labor Standards Act (FLSA) or to the settlement of hybrid claims under both Rule 23 and Section 216(b).

It also remains to be seen if other federal circuits will find the Eleventh Circuit’s holding persuasive, and likewise opt to prohibit the use of incentive payments, or whether the Eleventh Circuit has further distanced itself from its sister circuits in closely scrutinizing class action settlement terms.