Courts Should Abandon Case Nixing Class Action Rep’s Award

Every class action requires somebody willing to step forward and represent the class. That’s the class representative—an important role in a country that depends so heavily on private class actions, not government regulators, to enforce the law.

A class representative’s duties can be demanding. They can include being grilled for hours at a deposition, revealing sensitive personal information, tracking down old documents—and the list goes on.

They do all this on behalf of the class, even though the representative’s individual claim is often small. So small, in fact, that the claim’s value is typically dwarfed by “opportunity costs”—the benefits, such as wages or leisure, that the class representative’s duties require forgoing.

As compensation for their time and effort, courts will often bestow an additional award—often called a “service award” or “incentive award”—on successful class representatives. These awards can range from several thousand to more than $20,000, but they nearly always compose a tiny fraction (less than 0.1%) of a class-action settlement.

In 2020, the US Court of Appeals for the Eleventh Circuit ruled that these awards to class representatives are unlawful. This put the Eleventh Circuit in conflict with every other federal court of appeals to have addressed the issue. On April 17, the US Supreme Court declined to hear a challenge to the Eleventh Circuit’s decision.

This leaves the circuit split in place, and it could soon grow deeper. Just last month, another court of appeals suggested that it wanted to end payments to class representatives.

Parties Can Agree to Class Rep Awards

But other courts should think twice before outlawing all awards to class representatives. The Eleventh Circuit got this one wrong.

In striking down class-representative awards, the Eleventh Circuit reached back more than 140 years, relying principally on an 1881 Supreme Court decision called Trustees v. Greenough. The Greenough case disapproved a payment that was closely analogous to a class representative’s award, the appeals court said.

Greenough involved what was called an “equity receivership” of an insolvent railroad, which was the nineteenth-century equivalent of a Chapter 11 bankruptcy. As part of the receivership in Greenough, a bondholder of the insolvent railroad pursued his rights and the rights of similarly-situated bondholders. After recovering a considerable amount of money for the bondholders, he then asked the court to pay him $35,000—a whopping $1.3 million in today’s money—for his services.

This was the exorbitant request that the Supreme Court turned down in Greenough and that the Eleventh Circuit analogized to contemporary awards to class representatives. But that analogy doesn’t work.

Start with the fact that nearly all awards to class representatives arise from settlements of class actions, whereas Greenough didn’t involve a settlement agreement. That difference is critical.

Settlement agreements are contracts between private parties. For that reason, the Supreme Court has held, they permit courts to issue remedies they could not otherwise. After all, within broad limits, parties are generally allowed to craft contracts however they choose. And when courts are asked to enforce contracts according to their terms, they do. So if a settlement agreement authorizes an award to a class representative, that alone authorizes a court to make the award. And this would be true even if the Eleventh Circuit were right that Greenough would otherwise prohibit such awards.

Class Reps More Like Trustees

But in fact, the Eleventh Circuit was wrong that Greenough prohibits awards to class representatives. That becomes clear once you actually examine the case’s reasoning. The Supreme Court denied the railroad bondholder’s request for compensation of his personal services because the bondholder was a mere creditor in a corporate reorganization, and not a trustee. This distinction mattered because in the late nineteenth century, as now, trustees were typically entitled to payment for their personal services.

But contemporary class representatives are far more like trustees than they are like creditors in a corporate reorganization. Class representatives, like trustees, are bound by fiduciary duties to the people they represent. Like trustees, they must be appointed to their position.

And, to borrow Greenough’s explanation for why trustees are compensated for their personal services, awards to class representatives are intended “to secure greater activity and diligence” from class representatives and “to induce persons of reliable character and business capacity” to accept the role.

None of this was true for the Greenough bondholder, whose contemporary descendant is the individual Chapter 11 bankruptcy creditor, not the class representative. Individual creditors are under no duty to look out for others’ interests and can often just complicate the process of corporate reorganization.

At some point, the Supreme Court will need to determine whether awards to class representatives are lawful. When it does, it should reject the notion that nineteenth-century cases prohibit awards to contemporary class representatives.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Benjamin Gould is a partner at the law firm Keller Rohrback.

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