First Circuit Ruling Increases Likelihood that Supreme Court Will Address Incentive Awards in Class Action Settlements

Featured Expert Contributor on Civil Justice/Class Actions

Frank Cruz-Alvarez is a Partner with Shook, Hardy & Bacon L.L.P. in the firm’s Miami, FL office, and Britta Stamps Todd is an Associate in the firm’s Houston, TX, office. Mr. Cruz-Alvarez is the WLF Legal Pulse’s Featured Expert Contributor on Civil Justice/Class Actions.

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Incentive awards may appear to be little more than an afterthought in many class action settlements, but they are now poised to take center stage in class action litigation. In late December, the First Circuit became the latest federal appellate court to chime in on incentive payments to named class representatives under Rule 23(e) in its Murray v. Grocery Delivery E-Services USA Inc. opinion. The First Circuit sided with the Second and Ninth Circuits, reiterating that incentive awards are permitted so long as they fit within the bounds of Rule 23(e). On the opposite side is the Eleventh Circuit’s 2020 decision in Johnson v. Dickenson that struck down the concept of modern-day incentive awards. The Supreme Court will soon decide whether to take up the issue, following a recent petition by the named plaintiff from the Eleventh Circuit case.

While the dispute about whether incentive awards are permitted arose relatively recently, the rationale upon which the objector in Murray (as well as the objectors in other circuits that have recently considered the issue) relies is more than 140 years old. Back in 1881—notably, long before the creation of Rule 23 class actions—the Supreme Court held that a court cannot allow a “creditor, suing on behalf of himself and other creditors” to recover “personal services and private expenses” out of a common fund. Internal Imp. Fund Trs. v. Greenough, 105 U.S. 527, 537 (1881); see also Cent. R.R. & Banking Co. v. Pettus, 113 U.S. 116, 122 (1885). Incentive awards aside, Greenough and Pettus are the seminal cases establishing the rule that permits attorneys’ fees in a class action to be paid from a common fund. But do their prohibitions on a salary and personal expense reimbursements for a creditor, suing on behalf of himself and other creditors, extend to modern-day incentive awards for named plaintiffs in all types of class actions?

The First Circuit firmly rejected such an extension in Murray, reasoning that the creditor relationships considered by the Supreme Court in the 1880s are not sufficiently analogous to modern class actions. “Greenough was concerned with a creditor’s relationship vis-à-vis the trustees, not the other creditors.” 2022 WL 17729630 at *10. While certain categories of payments to creditors might “present too great a temptation to parties to intermeddle in the management of valuable property or funds,” Greenough, 105 U.S. at 538, the First Circuit concluded that such temptations either do not exist or can be sufficiently guarded against under Rule 23. Instead of fearing meddling creditors, Rule 23 actually encourages claimants with low-value claims to “vindicate their rights and hold unlawful behavior to account.” Murray, 2022 WL 17729630 at *10. One way of encouraging claimants to pursue such claims is the provision of incentive payments to named plaintiffs who bear the burden of litigation through document collection, depositions, and trial testimony in class actions.

Subtly acknowledging the potential for abuse of incentive awards, the First Circuit pointed out that Rule 23(e)(2)(D) requires a settlement to “treat[] class members equitably relative to each other.” As proof that courts actually enforce this requirement in connection with incentive awards, the First Circuit cited a number of rulings denying or reducing incentive awards based on the circumstances of those cases. In continuing to allow incentive payments to named plaintiffs, the First Circuit directly cited and contradicted the Eleventh Circuit’s Johnson opinion. On top of the recent decisions from the Second Circuit (Hyland v. Navient Corp., __ F.4th __, 2022 WL 4088061 (2d Cir. Sept. 7, 2022)) and Ninth Circuit (In re Apple Inc. Device Performance Litig., __ F.4th __, 2022 WL 4492078 (9th Cir. Sept. 28, 2022)), the Murray decision adds to the reasons the Supreme Court may decide to settle this question.

It is also worth noting that while the First Circuit relied on Rule 23(e)’s requirement that any settlement be “fair, reasonable, and adequate” to affirm the provision of incentive awards, it relied on that same language to vacate the district court’s approval of the class action settlement for other reasons. The underlying facts involved a marketing campaign that allegedly violated the Telephone Consumer Protection Act in three different ways. Because the three claims are entitled to different damages and are subject to different defenses, the First Circuit decided the significant differences among class members created insurmountable fairness issues. Those differences could materially affect the settlement value of the respective claims, meaning the same representatives and counsel could not fairly and adequately represent all settlement class members.

While class action practitioners await the Supreme Court’s decision on the petition from the Eleventh Circuit, objectors will likely latch onto the incentive award issue to hold up approval of class action settlements. The good news for litigants who want to settle a class action in the meantime is that, so far, only the Eleventh Circuit has sided with objectors on this issue.