Monday, October 5, 2020

FYI: 11th Cir Holds Class Representative "Incentive Awards" Prohibited by SCOTUS Precedent

The U.S. Court of Appeals for the Eleventh Circuit recently reversed and partially vacated approval of a class representative's incentive award, remanding the case to the trial court to adequately explain its fee award, its denial of a class members' objections, and its approval of the class settlement. 


In so ruling, the Eleventh Circuit concluded that Supreme Court precedent prohibited the award of an incentive payment to a class representative analogous to a salary or payment for "personal services" that has become commonplace in class action practice, pursuant to largely ignored but on-point rulings in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885).


A copy of the opinion is available at:  Link to Opinion


In March 2017, a consumer (the "Class Representative") filed suit on behalf of himself and a putative class of similarly situated individuals against a debt collector (the "Debt Collector") alleging violations of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA") for purportedly using an automatic telephone dialing system to place calls to his cell phone without his consent. 


The trial court preliminarily approved a settlement and certified the class in December 2017, allowing the appointed Class Representative to "petition the Court to receive an amount not to exceed $6,000 as acknowledgment of his role in prosecuting this case on behalf of the class members."  The trial court further set March 19, 2018 as the deadline for class members to opt out of, or file objections to the settlement.


One class member objected (the "Objecting Class Member"), first procedurally challenging the trial court's ruling to set the objection deadline before the deadline for class counsel to file their attorneys'-fee petition, which she contended violated Federal Rule of Civil Procedure 23 and the Due Process Clause.


On the merits, the Objecting Class Member (i) objected to the amount of the settlement, arguing that it should have been higher; (ii) argued that the court should conduct a lodestar calculation in determining reasonable attorneys' fees; and (iii) contended that the Class Representative's $6,000 incentive award both contravened the Supreme Court's rulings in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), and created a conflict of interest between Johnson and other class members.


At a final fairness hearing, the trial court heard arguments from the Objecting Class Member, Class Representative and Debt Collector, and overruled the Objecting Class Member's objections by approving the settlement, creating a non-reversionary $1.432M settlement fund, less deductions for administration costs, attorneys' fees in the amount of in the amount of 30% of the fund (or $429,600),  and  $3,475.52 for class counsel's litigation costs and expenses, and a $6,000 "[i]ncentive [p]ayment" to the Class Representative "as acknowledgment of his role in prosecuting this case on behalf of the [c]lass [m]embers."  The Objecting Class Member appealed.


On appeal, the Eleventh Circuit first considered the Objecting Class Member's procedural argument that the trial court erred when it required class members to file objections to the settlement— including to attorneys' fees—before class counsel had filed their fee petition.


As you may recall, Federal Rule of Civil Procedure Rule 23(h) provides the procedures in which a court may award reasonable attorney's fees and costs in a certified class action, which require that "(1) A claim for an award must be made by motion . . . at a time the court sets. Notice of the motion must be served on all parties and, for motions by class counsel, directed to class members in a reasonable manner" and "(2) A class member, or a party from whom payment is sought, may object to the motion." Fed. R. Civ. P. 23(h).


Here, by providing class counsel a deadline to file their fee petition eighteen days after class members' objections were due, the Objecting Class Member claimed that the trial court prevented her from objecting to the fee request in violation of Rule 23(h) and the Due Process Clause. 


First finding that the trial court's sequencing violated the plain language of Rule 23(h) by requiring class members to object to an award of attorneys' fees before class counsel had filed their fee petition, the Eleventh Circuit was tasked with determining whether or not the error was harmless.  See, e.g., Vista Mktg., LLC v. Burkett, 812 F.3d 954, 979 (11th Cir. 2016) (explaining that "the challenging party must establish that the error affected substantial rights to obtain reversal and a new trial"); see also 28 U.S.C. § 2111 ("On the hearing of any appeal or writ of certiorari in any case, the court shall give judgment after an examination of the record without regard to errors or defects which do not affect the substantial rights of the parties.").


In this instance, the Eleventh Circuit determined that the Rule 23(h) error was harmless because the Objecting Class Member was able to challenge the attorneys' fee award before class counsel filed their fee petition, and did not raise any new arguments at the fairness hearing after having had an opportunity to review the fee petition, and even on appeal, her objections remained essentially the same. 


Thus, because she was not deprived of the opportunity to present additional objections and the procedural error did not "affect[] the outcome of the proceeding," the Eleventh Circuit concluded that while the trial court's violation of Rule 23(h), the error was not harmful.  Keil v. Lopez, 862 F.3d 685, 705 (8th Cir. 2017) (similar Rule 23(h) error was harmless because "there [wa]s no reasonable probability that it affected the outcome of the proceeding and "no reasonable probability that their objections would have resulted in the court awarding a lower fee.").


The Eleventh Circuit next considered the Objecting Class Member's argument that the trial court's approval of the Class Representative's $6,000 incentive award contravened Supreme Court precedent. 


The Eleventh Circuit acknowledged that the cases relied upon by the Objecting Class Member's, Greenough, 105 U.S. 527 (1882), and Pettus, 113 U.S. 116 (1885) are the seminal cases establishing the rule applicable in many class-action cases that attorneys' fees can be paid from a "common fund," but also establish limits on the types of awards that attorneys and litigants may recover from the fund.


The Supreme Court in Greenough upheld the class representative's award of attorneys' fees and litigation expenses but rejected as without legal basis the award for his "personal services and private expenses"—in particular, the yearly salary and reimbursement for the money he spent on railroad fares and hotel bills.  Greenough at 537-38.  Three years later, the Pettus Court confirmed that while a plaintiff suing on behalf of a class can be reimbursed for attorneys' fees and expenses incurred in carrying on the litigation, he or she cannot be paid a salary or be reimbursed for his personal expenses.  Pettus, 113 U.S. at 122 ("the expenses incurred in carrying on the suit and reclaiming the property subject to the trust" is proper, but his "claim to be compensated, out of the fund or property recovered, for his personal services and private expenses" is "unsupported by reason or authority.").


Noting that the cases "seem to have been largely overlooked in modern class-action practice," the Eleventh Circuit's analysis cited several examples where modern-day incentive awards for a class representative is roughly analogous to a salary or payment for "personal services" See, e.g., Chieftain Royalty Co. v. Enervest Energy Institutional Fund XIII-A, L.P., 888 F.3d 455, 468 (10th Cir. 2017) ("[C]ourts regularly give incentive awards to compensate named plaintiffs for the work they performed—their time and effort invested in the case."); Berry v. Schulman, 807 F.3d 600, 613 (4th Cir. 2015) (similar); Sullivan v. DB Invs., Inc., 667 F.3d 273, 333 n.65 (3d Cir. 2011) (similar). 


The Court found that these modern-day awards present a more pronounced risk by not only compensating class representatives for their time (i.e. as a salary), but to promote litigation in providing a prize to be won (i.e. as a bounty).  Matter of Cont'l Ill. Sec. Litig., 962 F.2d 566, 571 (7th Cir. 1992), as amended on denial of (incentive awards are designed "to induce [a class representative] to participate in the suit," and "to make up for financial or reputational risk undertaken in bringing the action" and "to recognize [a class representative's] willingness to act as a private attorney general," Rodriguez v. West Publ'g Corp., 563 F.3d 948, 958–59 (9th Cir. 2009).  See also, e.g., Hadix v. Johnson, 322 F.3d 895, 897 (6th Cir. 2003) (explaining that "applications for incentive awards are scrutinized carefully by courts who sensibly fear that incentive awards may lead named plaintiffs to expect a bounty for bringing suit or to compromise the interest of the class for personal gain").


The Class Representative here claimed entitlement to the $6,000 incentive payment because he "took critical steps to protect the interests of the class, and spent considerable time pursuing their claims" -- e .g., by "frequently communicat[ing] with his counsel," "ke[eping] himself apprised of th[e] matter," "approving drafts before filing," and "respond[ing] to NPAS Solutions' discovery requests" — all of which the Eleventh Circuit deemed as requests for compensation for time spent litigating the case, or his "personal services" and deemed "decidedly objectionable" by the Supreme Court. Greenough, 105 U.S. at 537. 


His argument that the cases were not binding because neither "discusses incentive awards to class representatives, as both pre-date Rule 23 by decades" was rejected because he failed to "engage with the logic of Greenough," which involved an analogous litigation actor and Rule 23 does not reference any incentive awards, service award of contribution awards. 


The Court further rejected the Class Representative's argument that such awards were ubiquitously approved, concluding that it was "not at liberty to sanction a device or practice, however widespread, that is foreclosed by Supreme Court precedent."  Bosse v. Oklahoma, 137 S. Ct. 1, 2 (2016).


The final issue before the Eleventh Circuit was the Objecting Class Member's argument that the trial court did not provide sufficient explanation to enable meaningful appellate review—either in awarding attorneys' fees, in overruling her objections, or in determining that the settlement was fair. 


Rule 23(h)(3) governing class actions require that a trial court "must find the facts and state its legal conclusions under Rule 52(a)" when awarding "reasonable attorney's fees and non-taxable costs."  Although trial courts are provided "ample discretion in awarding fees," its order "must allow meaningful review—the district court must articulate the decisions it made, give principled reasons for those decisions, and show its calculation." In re Home Depot Inc., 931 F.3d 1065, 1088–89 (11th Cir. 2019) (additional citations omitted).


Here, because the trial court did not make the required findings or conclusions, instead merely stating that requests for a fee award, litigation costs and incentive payment were "approved," remand was required under Rule 52 for additional findings on the fees and costs issue.  See, e.g., Compulife Software Inc. v. Newman, 959 F.3d 1288, 1309 (11th Cir. 2020) ("Rule 52 violations require us to vacate and remand for new findings and conclusions because '[w]e are . . . a court of review, not a court of first view.'") (internal citations omitted). 


Remand was similarly appropriate as to the overruling of the Objecting Class Member's objections of the because the trial court did not "set forth on the record a reasoned response to [the] objections" and provide "findings of fact and conclusions of law necessary to support [its] response," instead simply ordering the objection as "OVEDRRULED" without further explanation.  Cotton v. Hinton, 559 F.2d 1326, 1331 (5th Cir. 1977). 


Lastly, the final order approving the settlement fell far short of the precedents required to determine the fairness, adequacy and reasonableness of the settlement.  Leverso v. SouthTrust Bank of Ala., 18 F.3d 1527, 1530 (11th Cir. 1994).  Thus, because the Eleventh Circuit was unable to determine whether the trial court abused its discretion, it was compelled to remand for a fuller explanation of its findings on this issue as well.   In re Corrugated Container Antitrust Litig., 643 F.2d 195, 206-07 (5th Cir. 1981).


Accordingly the trial court's order approving the class-action settlement was reversed in part, vacated in part, and remand for further proceedings consistent with the appellate court's opinion.



Ralph T. Wutscher
Maurice Wutscher LLP
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