Supreme Court to hear arguments in captive insurance case on December 1

Last Wednesday, the Supreme Court released its December arguments calendar. Included on the calendar was CIC Services v. IRS, a case we first blogged about in 2016.  Since then, our firm has been involved as counsel for an amicus party, the district court dismissed the case, the Sixth Circuit affirmed in a 2-1 decision, and the Supreme Court has granted certiorari.  The issue that the Supreme Court will hear oral arguments on December 1st is:

• Whether the Anti-Injunction Act, which prohibits lawsuits to stop the assessment or collection of taxes, also bans challenge to reporting and information-gathering mandates imposed by the Internal Revenue Service, when the violation of those mandates carries tax penalties.

The case has generated significant amicus attention at the high court, with a dozen amicus briefs being filed (10 in favor of CIC Services, two in favor of the IRS).  It remains to be seen whether the passing of Justice Ginsburg will result in an alteration of the oral argument calendar. 

Incentive fee awards for class plaintiffs struck down by 11th Circuit

 

Last week the Eleventh Circuit shocked the legal world by ruling that incentive payments to named representatives in class actions are improper, striking a $6,000 award to the plaintiff in a Telephone Consumer Protection Act class action . Johnson v. NPAS Solutions, LLC, No. 18-12344, “Slip Op.” (11th Cir. 2020).  

Incentive awards are a special payment to the named plaintiffs in class actions.  Courts began awarding these in the 1980s, and they are commonplace today.  Civil rights and consumer protection class action settlements include incentive awards to the named plaintiffs approximately 90% of the time.  While these awards are typically small compared to the total settlement or judgment amounts – they often range from $1,500 to $20,000 depending on how involved the named plaintiffs were in the case – the incentive award is usually drawn from the common fund or otherwise paid by the defendant as an awardable cost. 

In Johnson, the defendant (a medical debt collector) and the class had agreed to settle the case for $1.432 million (which included a $6,000 payment to the named plaintiff).  Only one person opted out of the class and objected.  Relying on two cases from the 1880s, the panel held “that Supreme Court precedent prohibits incentive awards like the one” awarded to the plaintiff (and the type customary in virtually all class actions). Id. at 18. Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885).

In Greenough, the Supreme Court first held that a plaintiff could seek reimbursement for his  costs, attorney’s fees, and reasonable and necessary expenses in bringing a case on behalf of others 105 U.S. at 537. But, at the same time, the high Court also stated that “there [was] one class of allowances” that was “decidedly objectionable.” -- the plaintiff’s “personal services and private expenses.” Id. 

Three years later, in Pettus, the Court again held that a plaintiff representing others in an equity suit could claim “expenses incurred in carrying on the suit and reclaiming the property . . .” 113 U.S. at 122. As in Greenough, the representative plaintiff could not claim his personal compensation out of the common fund recovery. Id.

Relying on  Greenough and Pettus, the Eleventh Circuit concluded that “the modern-day incentive award” was akin to either a salary which is earned or a bounty to be won, both of which were forbidden by two 19^th century cases. Slip Op. at 23.

The Eleventh Circuit noted that Rule 23 practice and “inertia” had resulted in incentive awards as being “commonplace in modern class-action litigation,” but added “that doesn’t make them lawful, and it doesn’t free us to ignore Supreme Court precedent forbidding them.” Id. at 25, 28.

In dissent, Judge Martin argued that the 11th Circuits own prior cases required the panel “to determine whether the incentive award [] is fair,” and concluding that the $6,000 award was fair. Id.

This opinion creates a clear circuit split – which the panel recognized – and will be top of mind with every class-action lawyer in the country.  Incentive fees have become boilerplate in insurance class action settlements; some empirical research indicates 90% of consumer class actions contain incentive fee awards, which average slightly more than $4,000 per plaintiff.  The empirical evidence suggests that Judge Martin's conclusion - that the district court did not abuse its discretion in awarding $6,000 - was in line with common practice.  

While the focus of this blog is typically business insurance, we will continue to monitor this case as it moves ahead for three reasons:  

1. Insurance companies continue to face class actions against themselves for their own business practices, making this case relevant to them. 
2. This case has major implications for this blog's readers; which include many businesses which could face class action litigation. If courts begin to disallow class action incentive fee awards, plaintiffs' firms will have a harder time finding people who are willing to sign up for the burdens of serving as class representatives (being subject to discovery, depositions, mediations, and court appearances) when the representatives could get the exact same compensation by merely being an unnamed class members.
3. Finally, we routinely advise clients regarding insurance coverage issues for class actions and are currently representing defendants in nearly a dozen high-stakes class actions.  While Johnson v. NPAS Solutions is technically a decision regarding civil procedure, it has major implications for both policyholders and insurers.   

What’s next?  Plaintiffs and Defendant could petition the Eleventh Circuit for en banc review.  But en banc petitions are granted less than 1% of the time. Because this opinion creates a circuit split, the Supreme Court may grant review.   But if neither en banc review nor certiorari to the Supreme Court are granted, the opinion will stand. In that event, the 11^th Circuit will be seen as a less-favorable jurisdiction for class actions, and class action objectors in all other circuits will start citing to Johnson.

North Carolina Court of Appeals revisits uninsured and underinsured motorist coverage

The North Carolina Court of Appeals recently issued an unpublished opinion on UIM and UM automobile insurance coverage.  Unpublished opinions, under North Carolina Rule of Appellate Procedure 30(e)(3), do "not constitute controlling legal authority" and citation to such opinions "is disfavored." 

In Bacon v. Universal Insurance Co., authored by Judge Mark Davis, the Court of Appeals held that even though the plaintiff had a commercial auto insurance policy with $1,000,000 in coverage limits, he was not entitled to $1 million (much less the treble damages for unfair claims handling practices) of uninsured or underinsured motorist coverage following an accident for the following reasons.

First, the record on appeal revealed that the Plaintiff had been informed by his insurer that UM and UIM coverage was available to him and the limits would be set equal to the highest limits for bodily injury liability coverage under the policy unless he elected different limits.  The Plaintiff chose to purchase UM coverage of $50,000 per person and $100,000 per accident, as revealed on various insurance documents which he signed. 

Second, the UM endorsement at issue in this case defined "uninsured motor vehicle" to include underinsured, as well as completely uninsured, vehicles. 

Third, the driver which hit the Plaintiff had insurance coverage, which tendered $50,000 to the Plaintiff for his injuries.  Pursuant to the terms of the UM endorsement and N.C.G.S. 20-279.21(Financial Responsibility Act), that driver who hit the Plaintiff was not underinsured, and thus the Plaintiff was not entitled to UIM benefits from his own insurer. 

After finding that Universal's denial of coverage was proper and supported by North Carolina insurance law, the Court then deemed arguments regarding unfair trade practices or bad faith to be abandoned on appeal, as such arguments wholly related to the assertions that Universal failed to honor its obligations under the insurance policy. 

The Court opinion is a mix of a review of the factual record, and the application of the canons of statutory construction to North Carolina's Financial Responsibility Act.  Importantly, the case demonstrates the importance of record keeping and documenting the policyholder's election of UM/UIM limits which were above the statutory minimum but significantly lower than the maximum allowable. 

Further, as a matter of insurance law, the Court notes that it had to look beyond the declarations page of the policy:

While the declarations page is silent as to the amount of UIM coverage available to Plaintiff under the Policy, the Act, which is “written into every automobile liability policy as a matter of law,” Hendrickson, 119 N.C. App. at 449, 459 S.E.2d at 278 (citation, quotation marks, and brackets omitted), mandates that Plaintiff be entitled to receive UIM coverage limits “equal to the limits of uninsured motorist bodily injury coverage purchased pursuant to subdivision (3) of this subsection,” N.C. Gen. Stat. § 20-279.21(b)(4). We therefore conclude that the Policy provides Plaintiff with $50,000 — rather than $1,000,000 — in UIM coverage.

"Shadow insurance" captive life insurer class actions to be "heard in tandem" by Second Circuit

Yesterday, the Second Circuit issued an Order in Maria Del Carmen Robainas v. Metropolitan Life Insurance Co., 15-3504 (Dkt. 46) that the three pending XXX/AXXX life insurer class actions would be heard "in tandem."

Previously, as we reported last week, the Plaintiffs-Appellants in three cases (which were all dismissed for lack of standing at the District Court level), filed unopposed motions to consolidate the three appeals.

The three cases are:

• Yale v. AXA Equitable Life Insurance Co. No. 15-2665,
• Robainas v. Metropolitan Life Ins. Co. No. 15-3504, and
• Yarbrough v. AXA Equitable Life Ins. Co., No. 15-3553.

Under Federal Rule of Appellate Procedure 3(b)(2), separate cases can be joined or consolidated on appeal "[w]hen the parties have filed separate timely notices of appeal." This rule of appellate procedure does not give any guidance to a court as to the proper reasons for consolidation on appeal. The Advisory Committee note states that "In consolidating appeals the separate appeals do not merge into one. The parties do not proceed as a single appellant."

After denying the unopposed motion to consolidate, the Second Circuit explained that "the appeals will be heard in tandem." Thus, each appeal will remain a separate appeal, the parties will comply with the briefing requirements under the Yale, No. 15-2665 case. Both 'sides' of the case, can elect to file a single brief addressing all three appeals, and a single copy of that brief and its relevant appendix would then be filed in the other two cases. Finally, the Clerk's office will set all three cases for argument before a single three-judge panel.

By rejecting consolidation, each Plaintiff-Appellant is allowed to rely on unique differences in the pleading (the Complaint) in his or her case. The factual record for each appeal will be unique to that case. If the cases were consolidated under Federal Rule of Appellate Procedure 3, then the record/Joint Appendix would be unified. However, the Court's ruling that the cases will be heard in tandem allows for uniform consideration of the common issue(s) of law, while allowing the factual/pleading portion of each case to be independent.

Also noteworthy about the Order is that the Plaintiffs-Appellents' opening brief(s) "are due thirty days after the Supreme Court issues a decision in Spokeo, Inc. v. Robins, 742 F.3d 409 (9th Cir. 2014), cert. granted, 135 S. Ct. 1892 (U.S. April 27, 2015)(No. 13-1339).

Spokeo was argued on November 2, 2015. As a recent article by Lee Epstein, William Landes, and Judge Richard Posner, published in the Duke Law Review notes, the Supreme Court usually issues a decision within three months of oral argument, occasionally will a case take up to six months to be decided, and practically all opinions are released by the following June when the Court closes for its summer recess. The Best For Last: The Timing of U.S. Supreme Court Decisions, 64 D.L.J. 991, 993 n 5 (2015). So, it's likely that we will see the Spokeo opinion released in early February, at which point the opening briefs in these appeals will be due one month later. This briefing schedule gives both Appellants and Appellees plenty of time to find amicus party assistance if they desire.  At the absolute latest, the Spokeo opinion should be public by late June 2016 (which is the conclusion of the Supreme Court's October 2014 term).