Professional Plaintiffs And Incentive Awards: An Empirical Analysis Of The Judicial Policy Of Paying Plaintiffs To Serve As Class Representatives

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Jones Day
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When class actions settle, the class representatives usually receive an "incentive award" — typically a payment of a few thousand dollars or more, intended to reward them for bringing suit and to encourage.
United States Litigation, Mediation & Arbitration
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Abstract

When class actions settle, the class representatives usually receive an "incentive award" — typically a payment of a few thousand dollars or more, intended to reward them for bringing suit and to encourage additional class action lawsuits. But no statute, rule, or Supreme Court case authorizes incentive awards. Indeed, the most analogous statute and Supreme Court cases deem such payments unlawful. The courts that authorize incentive awards do so on the basis of their own policy choices and senses of equity.

Policy should be made by Congress, not lower courts. And a review of the empirical evidence leads to the conclusion that allowing incentive awards is a poor policy choice. New data shows that incentive awards are not effective in their stated goal of encouraging the filing of class actions; the availability of incentive awards does not have a significant impact on the filing rate. Nor is encouraging more class-action litigation a goal worth pursuing. Data collected from numerous pre-existing studies strongly suggest that the costs will outweigh the limited benefits that would result from an incremental increase in class-action litigation.

Furthermore, the availability of incentive awards misaligns the class representatives' economic incentives by encouraging them to maximize their private award, rather than the benefits to the class as a whole. And since it is class counsel who decide what award to seek for the representatives, the lure of incentive awards increases the power of class counsel over the clients who are supposed to be monitoring them.

The lower courts have taken a wrong turn in choosing a bad policy when they should not be making such policy choices at all.

INTRODUCTION

"Professional plaintiff" was, at one point, an epithet. When reforming securities-law class actions, Congress sought to eliminate "professional plaintiffs" — litigants who were not truly aggrieved, but who, "motivated by the payment of a 'bonus' far in excess of their share of any recovery," were incentivized "to participate in abusive class action litigation."1 Most courts, however, have endorsed the opposite policy. When class actions settle, courts routinely authorize "incentive awards" to be paid from the settlement fund to the class representatives. These awards, empirical studies show, are in fact typically in amounts that are far in excess of the representatives' share of any recovery. Courts make these awards with the express purpose of "encourag[ing] class representatives to participate in class action[s]."2

Most class representatives are not professional plaintiffs in the most literal sense, since it is rare for anyone to make most of their income this way.3 But the prevalence of incentive awards turns litigation into gig work, or a side hustle. And for most courts that have addressed the issue, incentivizing class actions through payments to class representatives is a desired.

outcome:

Rule 23 class actions still require named plaintiffs [class representatives] to bear the brunt of litigation ... which is a burden that could guarantee a net loss for the named plaintiffs unless somehow fairly shifted to those whose interests they advance. In this important respect, incentive payments remove an impediment to bringing meritorious class actions.4

So what is the problem? Why shouldn't we remove "an impediment to bringing meritorious actions?" One problem is that tinkering with the incentives of class representatives does little to increase the filing of class actions suits — but it does incentivize representatives to prioritize their own awards over the interests of the class as a whole. Furthermore, to the extent incentive awards increase class-action filings, non-meritorious cases will increase along with the meritorious ones — and there are a lot of class actions that lack merit. Class-action litigation is at best a mixed blessing. It is only rarely effective at its core function of compensating victims, and the benefits all come with significant societal costs.

Congress has expressed a similar view. As part of its efforts to weed out abusive practices in cases brought under the securities laws, Congress specifically prohibited incentive awards in those types of cases.5

A further problem is that, at least in the view of the Eleventh Circuit, two 19th century Supreme Court cases barred the use of incentive awards. See Johnson v, NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), rehearing en banc denied 43 F.4th 1138 (11th Cir. 2022). These two cases, Greenough and Pettus, held that plaintiffs whose actions created a common fund for the benefit of a class could recover their attorney fees, but could not recover allowances for their personal services.6 But outside the Eleventh Circuit courts have not followed NPAS, deeming Greenough and Pettus irrelevant to modern class-action procedure. Incentive awards therefore remain nearly ubiquitous, outside of securities-law cases.

In authorizing incentive awards, courts have taken any number of wrong turns. They relied on unsupported assertions regarding the effects of their chosen policy, without consulting

Footnotes

1 S. Rep. No. 104-98 at 10 (1995) (Senate report accompanying S. 240, the Private Securities Litigation Reform Act of 1995).

2 Moses v. New York Times Co., 79 F.4th 235, 253 (2d Cir. 2023).

3 See Thomas E. Willging, Laural L. Hooper, and Robert J. Niemic, An Empirical Analysis of Rule 23 to Address the Rulemaking Challenges, 71 N.Y.U. L Rev. 74, 99 (Apr.-May 1996) (finding that there were relatively few "repeat players" who served as representatives in multiple class actions).

4 Murray v. Grocery Delivery E-Services USA Inc., 55 F.4th 340, 353 (1st Cir. 2022).

5 15 U.S.C. §§ 77z-1(a)(4), 78u-4(a)(4). 6 Trustees v. Greenough, 105 U.S. 527 (1881); Central RR & Banking Co. of Ga. v. Pettus, 113 U.S. 116 (1885).

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Professional Plaintiffs And Incentive Awards: An Empirical Analysis Of The Judicial Policy Of Paying Plaintiffs To Serve As Class Representatives

United States Litigation, Mediation & Arbitration
Contributor
Jones Day is a global law firm with more than 2,500 lawyers across five continents. The Firm is distinguished by a singular tradition of client service; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable legal talent across multiple disciplines and jurisdictions; and shared professional values that focus on client needs.
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