Split deepens on incentive awards for class representatives

The James R. Browning U.S. Court of Appeals Building, home of the 9th U.S. Circuit Court of Appeals, is pictured in San Francisco, California February 7, 2017. REUTERS/Noah Berger

(Reuters) - The 9th U.S. Circuit Court of Appeals just made it clear that the U.S. Supreme Court will have to decide whether lead plaintiffs in class actions are entitled to a nominal fee for their work on behalf of the class.

On Wednesday, a three-judge 9th Circuit panel ruled emphatically in In re Apple Inc Device Performance Litigation that incentive awards for lead plaintiffs are not categorically prohibited by a pair of 19th century Supreme Court decisions disallowing payments to representative plaintiffs for their personal time and expenses. That holding is squarely at odds with the 11th Circuit’s 2020 decision in Johnson v. NPAS Solutions, LLC, which concluded that class action service awards for lead plaintiffs are barred by Supreme Court precedent in 1881’s Trustees v. Greenough and 1885’s Central Railroad v. Pettus.

The 11th Circuit opted in August not to rehear the NPAS case en banc, despite a dissent in which Judge Jill Pryor insisted that the elimination of incentive awards “will have a very real and detrimental impact on class actions in this circuit, an impact that will be felt not least by the most vulnerable plaintiffs such as consumers and small businesses.”

The plaintiffs' firm that unsuccessfully sought en banc review at the 11th Circuit, Keller Postman, told me earlier this month that it is planning to ask the Supreme Court to review the NPAS decision, although no petition has yet been filed.

Even before the 9th Circuit’s Apple decision, appellate circuits were split on the significance of the Greenough and Pettus decisions in modern-day class actions. Earlier this month, you may recall, the 2nd Circuit declined to adopt the 11th Circuit’s reasoning in its Sept. 7 decision in Hyland v. Navient Corporation.

The Navient panel said it was bound by the 2nd Circuit’s previous -- albeit cursory -- holding in 2019’s Melito v. Experian Marketing Solutions, Inc that the ancient Supreme Court decisions in Greenough and Pettus were “inapposite.”

The lawyer who has pioneered the theory that those two decisions preclude incentive awards, objectors’ counsel Eric Isaacson, has since filed a petition for the en banc 2nd Circuit to take up the issue, arguing that the panel in the Navient case failed to grapple with the 11th Circuit’s interpretation of Greenough and Pettus.

Isaacson told me when the Navient panel issued its ruling that it was premature to speculate about whether the Supreme Court would have to resolve the split because of the possibility that the 2nd Circuit would agree to reconsider its precedent en banc.

But the new 9th Circuit decision leaves no doubt that the panel – Judges Jacqueline Nguyen, John Owens and Ryan Nelson – disagrees with the 11th Circuit’s interpretation of Greenough and Pettus. What’s more, the 9th Circuit panel seemed to go out of its way to address the issue of incentive awards, even though Apple’s lawyers at Gibson, Dunn & Crutcher and class counsel from Cotchett, Pitre & McCarthy and Kaplan Fox & Kilsheimer did not substantively address the 11th Circuit’s precedent in their appellate briefing.

In the Apple appeal, which challenged a $310 million settlement of allegations that Apple secretly “throttled” the performance of certain iPhone operating systems in order to minimize phones from shutting off unexpectedly, objectors represented by John Pentz, Kendrick Jan and Jan Westfall urged the 9th Circuit to adopt the 11th Circuit’s prohibition on incentive awards.

The objectors argued that the two 19th century Supreme Court decisions clearly bar representative plaintiffs from recovering compensation beyond their legal fees. Those rulings long pre-date modern class actions, the objectors’ brief said, but the now-routine practice of awarding incentive fees to name plaintiffs has never been reconciled with Greenough and Pettus precedent.

“These two seminal cases have been ignored by modern courts when rationalizing awards to lead plaintiffs, whether as a bounty for obtaining a settlement, or compensation for hours spent on litigation tasks or exposure to reputational risk,” the objectors argued. “None of these rationales can surmount the constraints established by Greenough and Pettus.”

The 9th Circuit panel disagreed, holding that reasonable incentive awards are permissible under the common fund doctrine, which allows representative plaintiffs to pay their lawyers from a class-wide settlement fund. Class representatives are not entitled to big payouts, the 9th Circuit said, because such a “special reward” or a “salary” might create a conflict between the name plaintiffs and other class members. In the Greenough case, for instance, the award struck down by the Supreme Court would have amounted to nearly a half-million dollars a year. But that’s a far cry, the 9th Circuit said, from the modest $1,500 payments to most of the lead plaintiffs in the Apple case.”

“The point is that incentive awards cannot categorically be rejected or approved,” Nguyen wrote for the unanimous panel. “So long as they are reasonable, they can be awarded.” (The court nevertheless vacated the Apple incentive awards, as well as the entire settlement and an $80 million fee award, for reconsideration by the trial court under a more exacting standard of review.)

Objectors’ counsel Pentz told me by email that he would welcome Supreme Court guidance on incentive awards. If the federal rules governing class actions allow for such payouts, he said, “It is up to the Supreme Court to say so, and not the district courts from the 1970s who are cited in the Jill Pryor dissent” in the NPAS case, Pentz said. (The Supreme Court mentioned such awards glancingly in a footnote in its 2018 ruling in China Agritech, Inc v. Resh but did not analyze their propriety in light of Greenough and Pettus precedent.)

Even Isaacson, the objectors’ lawyer who has petitioned the 2nd Circuit to look en banc at incentive awards, agreed via email that the odds of Supreme Court review have increased with the 9th Circuit decision, although he insisted that the panel’s discussion of such awards was not well-reasoned.

I suspect he will get to make that point to the Supreme Court sooner than later.

Read more:

Apple's $310 mln iPhone throttling settlement must be reconsidered - court

Coming soon to the Supreme Court: Can class reps receive incentive awards?

Class action plaintiffs want full 11th Circuit to review ban on incentive awards

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.