Challenges to Service Awards in Class-Action Settlements Gain Steam

Most class-action lawyers know about Johnson v. NPAS Solutions., LLC—an Eleventh Circuit panel decision that outlawed service awards to lead plaintiffs in class actions, which “compensate[] a class representative for his time and rewards him for bringing a lawsuit.” 975 F.3d 1244, 1260 (11th Cir. 2020). You’d be forgiven for initially writing off Johnson as an aberration. It overturned decades of longstanding class-action practice based upon two 19th Century Supreme Court cases that pre-date Federal Rule of Civil Procedure 23. The decision has been criticized since its publication (namely by the plaintiffs’ bar). It drew a lengthy dissental signed by four judges after the full Eleventh Circuit denied en banc rehearing. And two other federal appellate courts recently rejected the logic of Johnson and confirmed the legality of service awards to lead plaintiffs. Murray v. Grocery Delivery E-Servs. USA Inc., 55 F.4th 340 (1st Cir. 2022); In re Apple Inc. Device Performance Litig., 50 F.4th 769 (9th Cir. 2022).

But yesterday’s “out there” idea can quickly become today’s cutting-edge legal issue. Last week, the Second Circuit issued its much-anticipated decision in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, --- F. 4th ---, 2023 WL 2506455 (2d Cir. Mar. 15, 2023). This appeal represented the latest chapter of an 18-year-long antitrust suit regarding credit card interchange fees. The parties reached a $5.6 billion settlement of the underlying claims. Objectors popped up, as is typical with a settlement of this size. Among other things, the objectors argued that the service awards to the named plaintiffs—which totaled $900,000—were categorically forbidden by the aforementioned 19th Century Supreme Court cases.

The district court rejected this argument, and a Second Circuit panel affirmed. But only because it had to. Writing for the unanimous court, Judge Dennis Jacobs stated that prior panel precedent foreclosed the objectors’ position. Nonetheless, he made it very clear that the panel thought that “[s]ervice awards are likely impermissible under Supreme Court precedent.” Judge Jacobs took things a step further in a separate concurrence to his own majority opinion, in which he expressed his “accord with the views set forth” in the Eleventh Circuit’s decision in Johnson and criticized prior Second Circuit precedent going the other way. Responding to policy-based objections that eliminating service awards would “do away with the incentive for people to bring class actions,” Judge Jacobs pointed out class representatives are assumed not to undertake their litigation efforts with the expectation of compensation down the road. And, even if that weren’t true, Judge Jacobs observed: “Perhaps class actions that plaintiffs lack incentive to bring are class actions that need not be brought.”  

Meanwhile, multiple petitions that tee up this controversy are working their way through the Supreme Court. The aggrieved lead plaintiff in Johnson petitioned for certiorari in late 2022. The case has gone to conference and been rescheduled three times since mid-January 2023. In all likelihood, the justices are waiting for a full set of briefs in Carson v. Hyland, which challenges one of the earlier Second Circuit decisions that drove the outcome the Payment Card Interchange Fee class action. The opposition brief in Carson was filed on March 10th, so look for this one to go to conference in April.

So what does this all mean? For starters, stay tuned. We may get very meaningful action (i.e., SCOTUS review) on this issue in short order. And even if we don’t, challenges to service awards in class-action settlements likely aren’t going away, particularly in circuits that have not spoken directly to this issue. So be mindful of this issue as you are preparing any class-action settlement…and be prepared to defend any service award in the event your settlement draws an objector.