Incentive Awards in The Era of Neo-Textualism
POMERANTZ MONITOR | NOVEMBER DECEMBER 2020
A class representative or lead plaintiff who invests time and effort in a case by retaining and monitoring counsel, actively participating in the discovery and settlement processes, and approving settlement offers on behalf and with the consent of a group of similarly-situated individuals, is entitled to a reasonable incentive award as compensation.
Until recently, the principle’s application to federal class actions suits was uncontroversial and unremarkable, even though Rule 23 of the Federal Rules of Civil Procedure does not expressly provide for incentive awards.
But on September 17, a three-judge panel sitting for the U.S. Court of Appeals for the Eleventh Circuit sent shockwaves through the federal plaintiffs’ bar when it held to the contrary. In Johnson v. NPAS Solutions, LLC, the Court held that class representatives “can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he [or she] cannot be paid a salary or be reimbursed for his [or her] personal expenses.” In the Court’s view, “the modern day incentive award for a class representative is roughly analogous to a salary” and thus is not recoverable from the settlement fund. The Court acknowledged that such awards are typically granted in class actions, but reasoned that the practice’s routineness “is a product of inertia and inattention, not adherence to law.” Looking past cases decided in this century and in the last, the Court concluded that Trustees v. Greenough and Central R.R. & Banking Co. v. Pettus, both decided in the 1880s and which have no application to statutory class actions, prohibit incentive awards that compensate class representatives for their time.
The Johnson Court’s reasoning—which harkens to the nineteenth century—wholly ignores the equitable and logistical principles that underlie class action litigation: to permit one member of a group of similarly-situated plaintiffs to stand in the stead of each such plaintiff, to avoid duplicitous litigations and divergent outcomes, and to conserve judicial and financial resources. The Johnson Court likewise failed to engage with the argument that a class representative “serves as a fiduciary to advance and protect the interests of those whom he [or she] purports to represent,” as determined in Kline v. Wolf .
By analogy to the American law of trusts—whose genesis is also from the nineteenth century—a class representative, as a fiduciary (a trustee), should be compensated for offering time and resources to secure a common fund (a trust) for the benefit of the class (beneficiaries). In Barney v. Saunders, the court held, in 1853, that “it is considered just and reasonable that a trustee should receive a fair compensation for his [or her] services; and in most cases it is guaged [sic] by a certain per centage on the amount of the estate.” As Justice Story wrote 102 years ago:
Nor can any one expect any trustee to devote his time and services to a very watchful care of the interests of others when there is no remuneration for his services, and there must often be a positive loss to himself in withdrawing from his own concerns some of his own valuable time. . . . The policy of the law ought to be such as to induce honorable men, without a sacrifice of their private interests, to accept the office, and to take away the temptation to abuse the trust for mere selfish purposes, as the only indemnity for services of an important and anxious character.
The same equitable principle should just as readily apply to class action litigation: where an individual plaintiff undertakes risks and incurs reasonable expenses to create a common fund, on behalf and for the benefit of an entire class of similarly-situated individuals, she acts as a trustee for the whole class and is entitled to reasonable remuneration.
While Johnson establishes a troubling landmark for several reasons, all is not lost for securities class action plaintiffs. Indeed, the Court limited Johnson’s holding, explaining that if “Congress doesn’t like the result we’ve reached, they are free to amend Rule 23 or to provide for incentive awards by statute.” Counsel for securities plaintiffs, taking the Court at its word, will observe that Congress has provided for such incentive awards in the Private Securities Litigation Reform Act (“PSLRA”), which provides:
The share of any final judgment or of any settlement that is awarded to a representative party serving on behalf of a class shall be equal, on a per share basis, to the portion of the final judgment or settlement awarded to all other members of the class. Nothing in this paragraph shall be construed to limit the award of reasonable costs and expenses (including lost wages) directly relating to the representation of the class to any representative party serving on behalf of a class.
By its text, then, the PSLRA expressly contemplates—and approves of—recovery by a securities lead plaintiff or class representative an “award of reasonable costs and expenses” incurred in his or her fiduciary role to the class.
Over the past four years, the federal judiciary has embraced— and likely will continue to adopt—originalist principles when deciding legal and equitable questions, and textualist views when deciding statutory questions. Such a drastic shift in judicial philosophy will doubtless have profound consequences for federal securities litigators and their clients, as longstanding interpretations may well be tested and challenged over the coming decades.
Still, the plain text of the federal securities laws—remedial statutes by their context and purpose—is squarely on the side of our clients, the investing public. This new era presents a challenge, but also an exciting opportunity to present reimagined and innovative arguments on behalf of defrauded investors, and to set new legal precedents that will carry forward Congress’s objectives for the public good.