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

The U.S. Supreme Court, in Washington, U.S., May 12, 2022. REUTERS/Kevin Lamarque

(Reuters) - One U.S. appeals court this week cemented its split with another on an issue that crops up repeatedly in class action litigation: Can courts award incentive payments to plaintiffs who serve as class representatives?

On Wednesday, in Hyland v. Navient Corporation, the 2nd U.S. Circuit Court of Appeals affirmed a trial court’s approval of a $2.25 million class action settlement that requires the student loan servicer to fund a new nonprofit to advise public service workers, including teachers and law enforcement officers, about federal debt forgiveness programs for public servants.

The appellate decision, as I’ll explain, is interesting for a lot of reasons. But the opinion’s justification of $15,000 incentive awards for the plaintiffs who served as class representatives comes at a particularly opportune moment for the class action bar.

That’s because plaintiffs' lawyers from Keller Postman are working on a petition for U.S. Supreme Court review of the 11th U.S. Circuit Court of Appeal’s 2020 ruling in Johnson v. NPAS Solutions, LLC, which concluded that incentive awards for class representatives are barred by a pair of 19th century Supreme Court decisions disallowing payments to representative plaintiffs for their personal time and expenses.

Those ancient decisions -- 1881's Trustees v. Greenough and 1885’s Central Railroad v. Pettus -- predated class actions, but the 11th Circuit panel nevertheless concluded, in a 2-1 split decision, that under the Supreme Court’s reasoning, “a plaintiff suing on behalf of a class can be reimbursed for attorneys' fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses."

Last month, the en banc 11th Circuit voted against rehearing the controversial 2020 decision, despite an onslaught of amicus briefs from public interest groups and class action scholars. In a dissent from the denial of en banc review, Judge Jill Pryor, joined by three other 11th Circuit judges, warned 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.”

Ashley Keller of Keller Postman, who represented name plaintiff Charles Johnson in his unsuccessful bid for rehearing, confirmed to me on Thursday that the firm intends to file a Supreme Court petition arguing that the 11th Circuit stands alone among appellate courts in prohibiting incentive awards.

Only the 2nd Circuit, however, has explicitly considered and rejected the rationale that such awards countermand the Supreme Court’s 140-year-old decisions in Greenough and Pettus. (The 10th Circuit declined in 2017’s Chieftain Royalty Company v. Enervest Energy Institutional Fund to dig into the merits of the argument, holding that an objector failed to raise it in the trial court.) The 2nd Circuit first addressed the Greenough/Pettus argument – quite cursorily -- in 2019’s Melito v. Experian Marketing Solutions, Inc, which predated the 11th Circuit’s NPAS decision. In Melito, the appeals court simply said that Greenough and Pettus were “inapposite” because neither offered “factual settings akin to those” in the Experian class action.

Wednesday’s 2nd Circuit decision in the Navient case provided a more robust discussion of the Supreme Court’s holding in Greenough, noting that Greenough was decided decades before the federal rule establishing class action procedures. The lawyer who pioneered the theory that Greenough and Pettus preclude incentive awards, objectors’ counsel Eric Isaacson, nevertheless argued at the 2nd Circuit in the Navient case that those old rulings broadly stand for the proposition that representative plaintiffs are not entitled to compensation for their service.

“We are not persuaded,” wrote Judge Raymond Lohier for a panel that also included Judges Robert Sack and William Nardini.

Isaacson told me by email that he actually read the 2nd Circuit's Navient opinion as an invitation for him to seek en banc review on the incentive award issue. The panel, Isaacson said, noted that it was bound by the 2nd Circuit's holding in the 2019 Melito case. But Lohier, in Isaacson's reading, did not actually say that the Navient panel agreed with the Melito panel's conclusion.

"Neither the Melito opinion nor the Navient opinion provides any analysis to explain how Greenough and Pettus are factually distinguishable in any way that might warrant departure from binding Supreme Court precedent," Isaacson said.

The 2nd Circuit also rejected a challenge to the Navient settlement from the Hamilton Lincoln Law Institute, which argued that the $2.25 million Navient will pay to create a nonprofit to counsel public service workers about their student loan debts should have been distributed to class members. (As you surely recall, the Hamilton Lincoln group has asked the Supreme Court to review the propriety of cy pres-only class action settlements.) The appeals court said the cy pres payment in the Navient case was never intended as damages to individual class members, but was akin to injunctive relief in a case in which the class was certified only for injunctive purposes.

Hamilton Lincoln’s Anna St. John said by email that the nonprofit, which will provide information to “anyone and everyone,” is not a benefit for the class. “This is another example of the abusive use of cy pres to support causes favored by the attorneys,” St. John said.

Class counsel from Selendy Gay Elsberg referred my query to the American Federation of Teachers, which spent about $6 million to fund the Navient class action. AFT said in a statement that the 2nd Circuit ruling will help public service workers “realize the promise and intent” of debt relief programs.

Interestingly, the trial judge, U.S. District Judge Denise Cote of Manhattan, declined to award fees to Selendy Gay after learning that the AFT was funding the litigation. Cote said at a fairness hearing in February 2021 that the $500,000 fee requested by class counsel would instead be added to the cy pres fund for the new nonprofit.

Objectors raised concerns that the AFT’s involvement might have compromised Selendy Gay’s representation of the class. In Wednesday’s opinion, the 2nd Circuit said there was no evidence to support those suppositions. The appeals court instead cited Cote’s comment that the AFT’s commitment to the case was “nothing but admirable” and that the union’s “generosity” stood to benefit “all public service employees.”

Read more:

Google, class counsel to SCOTUS: Don’t waste your time on cy pres-only deals

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

'Dramatic' 11th Circuit decision will disrupt business-as-usual in class actions

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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.