11th Circuit Forbids Incentive PaymentsYou need to read Johnson v. NPAS Solutions, LLC. This recent decision from the 11th Circuit fundamentally changes the rules of obtaining approval for class action settlements.

Johnson’s introduction emphasizes that the 11th Circuit is shaking up the way class actions are settled and that the court knows it: “The class-action settlement that underlies this appeal is just like so many others that have come before it. And in a way, that’s exactly the problem. We find that, in approving the settlement here, the district court repeated several errors that, while clear to us, have become commonplace in everyday class-action practice.” In the pages that follow, the 2-to-1 majority opinion categorically forbids class-representative incentive payments, establishes a mandatory sequence for fee petitions, and reinforces standards regarding the approving court’s findings and conclusions.

Johnson looks like an ordinary TCPA class settlement. After the complaint, some motion practice, and a little discovery, the parties proposed a nationwide class settlement offering just under $1.5 million to about 180,000 class members on a claims-made basis. Fewer than 10,000 class members submitted claims, but the claims rate was a respectable 5.3%. The settlement provided a $6,000 incentive award to the class representative. Class counsel were to receive 30% of the settlement fund available to the class, but, critically, their fee petition was not due until after the objection deadline passed. Nobody opted out, but there was one objector. The district court overruled her objections, and she appealed. The 11th Circuit went with her on three issues (we address them in order, but the second is the most important).

Deadlines

The 11th Circuit interpreted Federal Rule of Civil Procedure 23(h) to require class counsel to submit the fee petition before any objection to fees is due. It is not enough, the court ruled, that the class notice included details about what the fee petition would ultimately request. The objectors have the right to object to the petition itself. In this regard, the court noted that a degree of adversity sneaks between the class and the lawyers representing it, as the lawyers’ interest to maximize fees conflicts with the class’ interest to maximize recovery to the class.

While the court set a bright-line rule requiring fee petitions to come before an objection deadline, it found that the district court’s failure to sequence the deadlines in this manner resulted in harmless error. The objector relied on the notice to substantiate her objection, and the ultimate fee petition aligned with the notice. Moreover, the objector appeared at the final approval hearing to challenge the substance of the fee petition. She made no new arguments at the hearing and made no new arguments on appeal. Thus, the error was harmless.

No More Class Representative Incentive Payments

If you had “Court of Appeals prohibits class representative incentive payments by relying on Supreme Court cases from 1882 and 1885” on your 2020 bingo card, come forward and collect your prize. The 11th Circuit has apparently categorically barred them for over 100 years.

The cases on which it relied are Trustees v. Greenough, 105 U.S. 527 (1882) and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885). They establish a general rule that a plaintiff who successfully litigates to create a common fund for the benefit of the plaintiff and others can recover an attorney’s fee from the fund — but may not recover any kind of personal salary.

While these Supreme Court cases are not class-action cases, they are cases where one plaintiff’s work benefits others beyond the named plaintiff, which the 11th Circuit found was close enough to be controlling. It held that the prohibition on salaries for successful plaintiffs barred incentive payments for class representatives, which served much the same purpose: “Incentive awards are intended not only to compensate class representatives for their time (i.e., as a salary), but also to promote litigation by providing a prize to be won (i.e., as a bounty).” The court found incentive awards to be “part salary and part[ ] bounty;” but “[w]hether [the] incentive award constitutes a salary, a bounty, or both, we think it clear that Supreme Court precedent prohibits it.”

The court had no qualms about barring these common payments, noting “so far as we can tell, the [ubiquity of incentive payments] is a product of inertia and inattention, not adherence to law.”

Required Findings

Lastly, the 11th Circuit reiterated the long-standing requirements that district courts make detailed findings when addressing such matters as the fairness and adequacy of a settlement, the approval of fees, and the disposition of objections. It is not enough merely to dispose of the issues. The 11th Circuit requires a record that substantiates the reasons for the district court’s decision to exercise its discretion to approve a settlement or fee petition.

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So, What’s Next?

  • Initially, we would expect a petition for en banc rehearing and a flurry of amicus briefs, followed by a petition for certiorari, and maybe a push to have Congress or the Rules Committee authorize incentive awards of some level.
  • Practitioners should update their checklists and forms, as the old timetable for the sequence of events may no longer pass muster, and that 10-year-old standard proposed order may be too bare-bones to make the findings that are required.
  • Further litigation about incentive awards also seems likely. In Johnson, the incentive award came from the common fund and thus reduced the relief available to the class (even if only a little bit). Whether parties may provide an incentive payment that does not come from the common fund remains to be seen. Some federal statutes, for instance, include statutory incentive payments for class representatives.

Johnson signals that the skepticism about class actions that has featured prominently in Supreme Court jurisprudence since Wal-Mart v. Dukes has come to the 11th Circuit. The court could have easily characterized the practice of incentive awards as “long-standing precedent” or “established practice,” but it selected a pejorative term instead: “inertia.” And that inertia came from, in the court’s view, “inattention” to the controlling standards. The skepticism of Johnson invites parties to be bold in calling for the reassessment of all aspects of class-action practice that are not drawn directly from the text of Rule 23 or controlling cases interpreting it.

Lastly, Johnson sidesteps an issue we have watched closely: the interaction between Rule 23 and the Due Process Clause. Most of the Federal Rules of Civil Procedure soar high above any due-process concerns. It is hard to imagine, for instance, a litigant claiming that the Constitution forbids changing the presumptive time limit for depositions to six hours instead of seven or requires a particular form for motions for summary judgment. But Rule 23 is different. Because it allows courts to adjudicate the rights of absent parties, Rule 23 swoops much closer to the Constitutional ground. One can easily imagine that changing the rules for adequacy or class notice could violate due process. Here, the objector argued that the district court’s decision to set her objection deadline before the fee petition violated the Due Process Clause even if it did not violate Rule 23(h). The 11th Circuit responded by noting that Rule 23(h) was not quite sitting on rock bottom yet, as the notice required by that rule is more than what the Due Process Clause requires. But the issue remains an intriguing one for litigants to consider raising.

“Hipster Antitrust” Movement Takes Center Stage in CongressOn Wednesday, July 29, 2020, the House Judiciary Committee’s antitrust subcommittee held a widely publicized hearing in which representatives questioned CEOs from Amazon, Apple, Facebook and Google about allegedly anticompetitive business practices. This hearing had its genesis in a 2017 Yale Law Journal article by Lina Khan, which gave rise to what became known informally as the “hipster antitrust” movement. (Not coincidentally, Khan is advising Rep. David Cicilline, the chairman of the Antitrust Subcommittee, and she sat near him during the hearing.)

Since the Reagan administration, the development of antitrust law has focused on consumer welfare – typically indicated by low prices – to determine whether competition had been harmed unlawfully. This development was based on then-professor (and later judge) Robert Bork’s influential book, The Antitrust Paradox, and the libertarian “Chicago school” of economics. If prices stay low and customers are happy, then courts are typically reluctant to find any antitrust violation. If the complaining party was a competitor whose business was harmed, it is often met with the response that the antitrust laws exist to protect competition, not individual competitors.

More recently, scholars such as Khan have argued that this historical view is too narrow, and they advocate for a broader focus on market structure and the power and influence large tech companies wield. They argue that, rather than merely analyzing whether corporate actions result in lower consumer prices, the law should recognize that the excessive concentration of economic power in a handful of large companies is inherently bad, because it exacerbates other ills, such as income inequality and labor abuses, and gives undue political influence to too few people. Khan’s article was specifically about Amazon, a company that famously offers low prices on a wide variety of consumer goods and that has for the most part been well-liked by customers, but which, she argued, exerts a dangerous amount of power to effectively control the online retail economy.

The view that companies should not be too big or too powerful is not new; the “hipster” label is a pejorative term based on the movement’s embrace of the views of older scholars, most notably Justice Louis Brandeis, who wrote in the 1930s about the “curse of bigness.” However, this view is not currently the law. No major antitrust opinions or government enforcement actions this century have been based on the notion that antitrust law prohibits mere “bigness.”

At this point it is impossible to tell whether Congress will actually take any meaningful action to change the law, and the upcoming elections could impact political appetites to make such a change. At various points the “Big Tech” hearing devolved into political venting and grandstanding, with several representatives routinely interrupting the CEOs’ answers to make their own scripted pronouncements. But the hearing was nonetheless a shot across the bow of those firms, signaling that they are being scrutinized more closely than they previously realized. (This may or may not cause those firms to voluntarily alter their practices.) There does appear to be considerable sentiment among both liberals and conservatives that something should be done to check the power of these large companies, and representatives on both sides of the aisle remarked that this was an issue that had unusually high bipartisan support.

It is unlikely that companies such as Google or Facebook would be “broken up” entirely, in part because, despite their faults, they are so popular among their users. But it is possible that certain aspects of their businesses could be spun off or regulated. Congressional action, if any, could take several forms. One possibility is legislation to supplement or amend the existing federal antitrust laws. For example, prior to 2004, some courts recognized “monopoly leveraging” – i.e., using lawfully obtained monopoly power in one market to confer a competitive leg up to gain market share in another market – as a basis to establish liability under Section 2 of the Sherman Act, which prohibits unlawful monopolization and attempts to monopolize. The U.S. Supreme Court effectively foreclosed that theory in Verizon Communications v. Trinko, and although there is respected economic scholarship to support the court’s reasoning, not everyone agrees. Congress theoretically could pass legislation to resurrect the monopoly leveraging theory. This may conceivably prevent a large tech company with a monopoly in one market (say online retail sales or social messaging or mobile phones or online search engines) to obtain significant market power in another market (say consumer data). We could also see legislation aimed at political censorship on social media platforms such as Facebook. These are just a couple of examples that Congress could target with specific legislation.

Alternatively, proposed legislation could be vague and generalized, such as providing that courts should consider other indicia of economic power and market dominance besides the ability and willingness to raise consumer prices. In other words, Congress could mandate that courts reject the Bork view and adopt the Brandeis/“hipster” view. This would effectively require courts to start over and figure things out on their own, much as they have done historically based on the rather spare language of the Sherman Act and developments in economic scholarship.

Rather than new legislation, there could simply be heightened pressure to enforce existing law to punish perceived violations. Certain alleged practices, such as pricing below cost to drive out a competitor or force it to merge, are covered by existing antitrust law, and the Department of Justice already has the tools to bring legal action to prevent those practices.

In sum, it remains to be seen whether anything meaningful comes from the hearing. But it did at least demonstrate the bipartisan support for the so-called “hipster antitrust” concerns that certain tech companies have gotten too big and too powerful, and that existing antitrust law may not be sufficiently equipped to address those concerns.

D.C. Circuit Avoids Decisive Ruling on Personal Jurisdiction in Class ActionsWe have repeatedly mentioned the long-awaited decision in Molock v. Whole Foods Market Group, Inc. from the District of Columbia Circuit. While we hoped this opinion would finally provide some circuit-level clarity about how the Supreme Court’s Bristol-Myers Squibb decision applies in the class action context, the court instead largely dodged this issue. There are good and useful aspects to the decision though, and it leaves open the door to applying Bristol-Myers to class action claims. However, the wait for a definitive ruling continues.

A quick refresher on the facts: Molock arose from Whole Foods’ alleged manipulation of its incentive-based bonus program. Current and former employees sued in the District Court for the District of Columbia and brought various state law claims. Importantly, the employees sought to represent a putative class of “past and present employees of Whole Foods” — regardless of where the employees lived. Whole Foods sought to dismiss on multiple grounds, including lack of personal jurisdiction, the denial of which was the subject of this interlocutory appeal.

In a 2-1 split opinion, the D.C. Circuit determined that deciding whether Bristol-Myers applies to class action claims would be premature because the putative class members are not yet parties to the action. As a decision to dismiss putative class members before class certification under Rule 23 would be, in its view, “purely advisory,” the court affirmed the district court’s denial of Whole Foods’ motion to dismiss and remanded the case for further proceedings.

Don’t miss the dissent. Senior Circuit Judge Laurence Silberman criticized the majority’s decision to avoid addressing the Bristol-Myers issue. As he points out, the challenge was not the court’s jurisdiction over the putative class members but was rather a challenge on the named plaintiffs’ entitlement to bring those claims on behalf of putative class members. Judge Silberman explained why Bristol-Myers should apply before class certification at the Rule 12 phase. Any impact on the plaintiffs’ ability to bring class action claims would not be so overwhelming because the claims could still be brought where corporations are subject to general jurisdiction (here, by “driving 110 miles down the road and filing this class action in Wilmington”).

Even though this is not the landmark circuit-level opinion we hoped it would be, there are still important takeaways from Molock.

First, waiting to apply Bristol-Myers until class certification is not our preferred result because it has the potential to impose expansive discovery costs. Judge Silberman pointed out the danger of the majority’s approach as it relates to extensive class discovery. To illustrate, the Molock plaintiffs intend to take discovery of payroll records from more than 200 Whole Foods stores, with the potential to expand the class and add nearly 300 other stores. Compared to the five D.C. stores that would be at issue otherwise, Judge Silberman acknowledged the extreme difference in scope and cost. The majority brushed off this concern because, in their view, “concerns about discovery costs must yield to Supreme Court precedent” and district courts have wide-ranging discretion to limit overly burdensome requests. We see no principled reason to impose the burden of class-wide discovery costs when there are no facts that could support subjecting the defendant to nationwide jurisdiction in a forum.

Second, while Molock is not all good for class defendants, neither is it all bad. If the D.C. Circuit thought that Bristol-Myers could not apply to class actions, it easily could have said so. By not addressing the question, the majority signaled a willingness to apply the same personal jurisdiction rules to class actions as apply in non-representative cases. Indeed, by deferring questions of personal jurisdiction to class certification, the court treated absent class members the same way it treats putative class representatives. If that result bears out, Bristol-Myers applies to class actions.

Finally, the dissent effectively outlines potential arguments for companies to make going forward. Beyond just the negative effects of expansive discovery, Judge Silberman repeatedly pointed out the fallacies in many arguments against applying Bristol-Myers in the class action context. This dissent thus provided a roadmap for arguments that may convince other judges and justices in the future. For now, companies facing class exposure will almost certainly continue to assess the need to move to dismiss under Rule 12(b)(2) at the outset of a case and maintain that objection all the way through class certification.

Shortly, we will examine how the Seventh Circuit, in a decision released the same day as Molock, addressed the application of Bristol-Myers to class actions.