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.

Sanctions for failing to investigate insurance under Federal Rule 26

In two recent cases, lawyers have been sanctioned for failing to understand their client’s insurance program. These cases (along with others from the past) illustrate that courts are increasingly placing a burden on defense lawyers to have a basic understanding of insurance and to thoroughly discuss insurance matters with their clients.

North Carolina attorney sanctioned for failing to disclose umbrella policy

Last December, the United States District Court for the Western District of North Carolina sanctioned an insurance defense lawyer with a $1,000 sanction because the Court found that she failed to properly discuss and review the applicable insurance her client had for a claim. Further inquiry would have revealed a $10 million umbrella policy above the first $1 million layer of commercial general liability insurance. Palacino v. Beech Mountain Resort, Inc., 2015 WL 8731779 (W.D.N.C., Dec. 11, 2015).

Under Federal Rule of Civil Procedure 26(a)(1)(A)(iv), a defendant must disclose, relatively early in a case, “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” In this case, the umbrella policy was only disclosed after mediation and after discovery closed. The Court concluded that this was a violation of Rule 26, as “Defendant was legally obligated to disclose both [insurance] policies in its Initial Disclosures, and its failure to do so violated its obligations under the Federal Rules of Civil Procedure and the Court’s Pretrial Order.”

By only disclosing the first $1 million in coverage under the CGL policy – presumably the policy which the attorney was retained under – the attorney neglected to investigate the full range of available insurance and to disclose the $10 million umbrella. The attorney submitted an affidavit stating that, in responding to Rule 26, the Risk Manager for the defendant was asked to provide all applicable insurance policies. However, the Court ruled that this was not enough. It noted that the attorney's affidavit in opposition to sanctions did not state that the attorney "independently verified the completeness of the information provided" or that "additional steps [were taken] to ensure that the information" provided in the Initial Disclosures was complete "or that a reasonably inquiry was made prior to providing the Initial Disclosures." The Court goes on to state that the attorney should have been able to "represent to the Court that she undertook [an] independent inquiry to verify whether the information provided by [the Risk Manager] was complete prior to signing the" Initial Disclosures. However, the Court gave no guidance as to how a retained defense attorney is to show that “a reasonable inquiry [into insurance policies] was made prior to providing the Initial Disclosures” other than asking the Risk Manager – presumably the most knowledgeable employee of the defendant – to provide all insurance policies. Does this require asking other employees of the client? Reaching out to the client's insurance broker? Physically inspecting the client's files?

In addition to the $1,000 sanction against the attorney, the client was also fined $500 for its failure to uncover and disclose the umbrella policy.

Tenth Circuit affirms sanction for failing to disclose D&O policy

In Sun River Energy, Inc. v. Nelson, 800 F.3d 1219 (10th Cir. 2015), decided last September, the Tenth Circuit affirmed an award of sanctions against counsel for failing to disclose the company’s directors and officers (D&O) insurance policy in its initial disclosures.

In that case, the Plaintiff had a "Directors and Officers Liability Insurance Policy including Employment Practices and Securities Claims Coverage" which arguably provided coverage for certain counterclaims which the Defendant may have made. However, by the time the policy was disclosed, any potential coverage under that “claims made” policy had lapsed.

The federal magistrate judge, in issuing the underlying sanction, wrote that counsel never “took a serious look at whether there was applicable insurance” and “exhibited deliberate indifference to the obligation of providing relevant insurance information under Rule 26.”

Importantly to defense counsel, the Tenth Circuit flatly rejected the attorney’s excuse that “counsel need not bother to review the actual terms of an insurance policy . . . before denying the existence of the potential coverage, so long as he believes the existence of coverage would be very unlikely or unusual.” Instead, defense counsel is obligated to review all applicable policies and then provide the information required by Rule 26 when completing Initial Disclosures. Implicit in the Tenth Circuit’s ruling is that the lawyer must have a basic understanding of insurance law and whether certain policies may provide coverage for the claims at issue.

Finally, no discussion of defense counsel’s potential insurance obligations is complete without reference to Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, 827 N.Y.S.2d, 231 (N.Y. Sup. App. Div. 2006). In that New York case, the court held that an attorney could be liable for negligence/malpractice for failing to investigate his client’s insurance coverage for a claim or failing to notify the insurer of a claim. However, the determination of negligence would also turn on “the scope of the agreed representation.” Clarifying the scope of representation - by excluding any obligation to consult on insurance coverage - is thus important to attorneys who do not feel comfortable opining on insurance matters.