A common feature in class action settlements is an incentive (or service) award for each named plaintiff—an extra payment above and beyond what they would receive as ordinary class members that is in theory designed to compensate them for the work of being a named plaintiff. A circuit split has developed over whether incentive awards are permissible in federal class action lawsuits.  But the Supreme Court’s guidance on whether these awards are improper will have to await another day, because the Court recently denied the petitions for review in Johnson v. Dickenson, No. 22-389, and Dickenson v. Johnson, No. 22-517.

The Eleventh Circuit’s decision

The certiorari petitions arose out of a case in which a panel of the Eleventh Circuit held that longstanding Supreme Court precedent governing trusts forbids incentive payments. See Johnson v. NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), reh’g denied, 43 F.4th 1138 (2022). In the trust line of cases, the Supreme Court had ruled that trust assets could be used to pay the trustee’s attorneys but not for the trustee’s own time and private personal expenses. See Centr. R.R. & Banking Co. v. Pettus, 113 U.S. 116 (1885); Trustees v. Greenough, 105 U.S. 527 (1882). The Eleventh Circuit panel analogized the named plaintiff in a class action to the trustee and deemed an incentive payment to be akin to a forbidden reimbursement for the trustee’s time and private expenses. Even worse, the panel explained, an incentive award “not only . . . compensate[s] class representatives for their time (i.e., as a salary), but also . . . promote[s] litigation by providing a prize to be won (i.e., as a bounty).” Johnson, 975 F.3d at 1258. The panel thus ruled that the incentive award was improper, and remanded the case to the district court for reconsideration of the settlement and fee award (which also had been challenged on other grounds by an objector).

The circuit split

The Eleventh Circuit’s decision conflicts with decisions by the First, Second, and Ninth Circuits, each of which considered and rejected the argument that Pettus and Greenough forbid incentive awards in class settlements. See Murray v. Grocery Delivery E-Servs. USA Inc., 55 F.4th 340 (1st Cir. 2022); In re Apple Inc. Device Performance Litig., 50 F.4th 769 (9th Cir. 2022); Melito v. Experian Mtkg. Sols., Inc., 923 F.3d 85 (2d Cir. 2019). Moreover, an untold number of courts of appeals decisions have affirmed orders approving class settlements with incentive awards as being fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e).

Notably, however, the Second Circuit recently issued an opinion in which the panel described incentive awards as “at best dubious” in light of the Supreme Court’s decisions in Pettus and Greenough, while noting that the panel was bound by more recent Second Circuit precedent. Fikes Wholesale, Inc. v. HSBC Bank USA, N.A., 62 F.4th 704, 723 (2d Cir. 2023). In that case, the panel criticized an incentive award of $200,000, which was “more than 400 times the average recovery” of absent class members.” Id. at 722. Because the amount of the award was set in part based on time “spent on legislative activities” rather than the litigation itself, the panel vacated the award with directions to recalculate it without considering “time spent lobbying.” Id. at 723.

The Supreme Court denies review

After the Eleventh Circuit denied en banc review in Johnson, both the named plaintiff and the objector sought Supreme Court review. On April 17, 2023, the Court denied both petitions. As is ordinarily the case, the Court did not provide a reason for the denial.

Given this circuit split, the Supreme Court will doubtless be asked again to take up this issue, whether by a disappointed named plaintiff in the Eleventh Circuit or by a disappointed objector in the First, Second, or Ninth Circuits. And calls for the Court’s intervention will become much louder if another circuit sides with the Eleventh Circuit.

In the meantime, parties should be mindful of this issue when negotiating class settlements. In particular, defendants should continue to ensure—as is commonly done—that the enforceability of a settlement does not depend on whether the court approves an incentive award. Please stay tuned, as we’ll report further developments on this issue.