Scrutiny of the Bounty:
Incentive Awards for
Plaintiffs in Class Litigation
(Reprint of original article
that appeared in the
Illinois Bar Journal, June 1990)

I. Introduction

    One of the more interesting recent developments in class litigation has been the rise of incentive awards to the named plaintiffs, either as part of an agreed settlement or by court order after an overall class judgement.

    Traditionally, class representatives have received no more that their own proportionate share of the class recovery. Named class representatives normally are entitled to reimbursement of expenses, but no compensation for their services. Many commentators have said that awarding class representatives anything more than their proportionate amount of the class recovery creates an unacceptable conflict between the class and representatives, who seek more for themselves, possibly at the class expense, and might justify disqualifying plaintiffs from certification as class representatives.

A. Why Compensate the Representative?

    The plaintiff's role in these cases is to protect the interest of the class and foot the bill for litigation. However, the public policy favoring private civil litigation as a means to promote certain important social values often fails to provide adequate compensation or incentive for plaintiffs to take on this burden simply on principal. The representative assumes substantial risk, not just losing the time and costs of litigation, but also of retaliation or collateral notoriety. Retiree pensioners bringing ERISA or other action against pension fund trustees may fear retribution against their pension checks. In one securities fraud class action, the plaintiff maintained the suit "in the face of public threats by defendants designed to intimidate him and cause him to drop it, including a threat of a $5 million counter suit."1

    In general, class representatives are entitled to reimbursement for expenses if the suit is successful, but not compensation for their services.2 In addition, the named plaintiff is a party to the litigation and not a witness, and so can not be compensated for witness fees or travel expenses incurred in giving a deposition during discovery.3

    Plaintiff-oriented attorneys have thus sought to create some incentive for potential plaintiffs to fuel the class action engine, since plaintiffs are clearly a necessary component.

B. Consultant Compensation

   Some cases have approved compensating plaintiffs where they act as "important consultants" to class counsel in major antitrust or shareholder class and derivative litigation.4 But the compensable consultant plaintiff is rare indeed. Most representative plaintiffs act solely as litigants, with limited capacity to help beyond offering testimony or other evidence.

II. Statutory Bounties

    Federal statutes explicitly grant bounties for finders, initiators, and others who inform and take action for the benefit of the sovereign (the so-called "qui tam" actions) or for taxpayers at large.

    The federal qui tam statute explicitly provides for a "bounty" of up to 25 percent of the proceeds recovered in civil actions under the Federal False Claims Act.5 The claimant must have filed suit; a mere informant is not eligible.6   Also, Federal customs laws provide for awards of up to 25 percent of the recovery ( but not to exceed $25,000) to persons who detect and seize any vessel, vehicle merchandise, or baggage subject to forfeiture under the customs laws.7

III. Case Decisions

    Courts have approved awards in a variety of cases, generally without any statutory authority. All of the cases involve either class or derivative litigation. Most are contained in decisions confirming a settlement rather than an award over objection. But the premise of each one is to reward those who made a commitment and took a risk that ultimately benefited a class.

A. Awards in Particular Substantive Contexts

   Courts have approved incentive awards in pension cases.9  In securities cases these wards have become routine.10  The federal courts generally recognize that allowing such incentive payments furthers the goals of the private right of action laws and antifraud provisions, even without any explicit statutory provisions, in the belief that "the effectiveness of the securities laws may depend in large measure on the application of the class action device..."11   Courts have also given incentive awards to plaintiffs in employment and pension cases, as well as in employment discrimination,12    prisoners rights,13  consumer protection, 14  and antitrust 15  cases.

B. Limitations and Controls on Incentive Awards

   The awards are not rubberstamped. Particularly for settlements, courts scrutinize the entire agreement to determine whether the named plaintiff has been "bought off" at class expense. Regardless of how it is articulated, the standard seems to be whether the overall class settlement is fair, and whether the additional reward is relatively small. In Women's Committee v. Natl. Broadcasting Co.,16  Judge MacMahon expressed concern that representative premium settlements may be the product of collusion, but then applied a Title VII settlement in which $200,000 in incentives were divided among sixteen named plaintiffs and their organization:

In our view, when representative plaintiffs make what amounts to a separate peace with defendants, grave problems of collusion are raised. Plaintiffs in class actions undertake to represent not only themselves, but all members of the class, in a fiduciary capacity, and are obligated to do so fairly and adequately, and with due regard for the rights of those class members not present to negotiate themselves. But when named plaintiffs are willing to sign a consent decree granting them all or virtually all --71% for example-- of what they seek, a serious question arises as to whether the interests of the class have been relegated to the back seat. Under such circumstances, the court must be especially wary of approving the settlement, in view of its role under Rule 23(e) as guardian of the right of absent class members.17

    The court found no rule requiring individual plaintiffs to share on exactly the same terms as other class members, and concluded that individual plaintiffs "may be 'rewarded' for bringing and successfully concluding a lawsuit under Title VII."18

    The court went further, noting the national policy of encouraging plaintiffs to bring private actions to further the policies of the act, and then applied a six-factor test which convinced it to lay aside doubts about awarding class representatives different settlement terms from those of the class overall.

    First, the parts of the settlement awarded to the entire class afforded "significant monetary and injunctive relief sought in the complaint," and which if standing alone would have merited the court's approval.19  Second, the likelihood of collusion was minimized by the presence in the case of the EEOC, which intervened in the public interest and fully endorsed the consent decree as proposed, including the separate award.

    Third, no other class members appeared in the suit and no objectors appeared at the hearing on the settlement (although two did object by letter). Fourth, the settlement did not preclude women who had already filed claims from pursuing them independently. Thus anyone else who had felt strongly enough to do something on her own could pursue the matter. Fifth, the court found that the plaintiffs (active employees of the defendant) had "instituted significant obligations, perhaps at some risk to job security and goodwill with co-workers, resulting in broad ranging benefits to the class."20  Finally, the court noted the general policy favoring amicable settlement and added that cooperation and voluntary compliance are especially favored in Title VII cases.21

    In practice, the last factor would nearly always weigh against litigation to the bitter end; consequently, the factors essentially reduce to five. while this approach seems reasonable, it has been followed more in spirit than in practice. The cases approving incentives generally do so on a general, overall finding of fairness.

C. Courts Rejecting or Qualifying Incentive Awards

   A few courts have rejected the concept entirely. In In Re Gould Securities Litigation,22  the court approved a settlement totally $10 million, awarded fees of approximately $2 million, but denied plaintiffs' requests for five incentive awards of $5,000 to $8,000 as prohibited preferred of class representatives:

By bringing an action as a class action, a named plaintiff disclaims any right to preferred treatment in settlement. That disclaimer applies even though the named plaintiff undertook extra responsibilities during the litigation.

Though the Seventh Circuit has not addressed the issue of incentive fees directly, it has indicated that disparate treatment in the form of favoritism to named plaintiffs is a sign that the settlement is unfair....

Because the plaintiffs chose to be treated as class members, we deny any preferred treatment through an incentive award. To decide otherwise borders on permitting a lay plaintiff to share in the attorneys' fees. The real danger is a potentially undesirable precedent where every named plaintiff would expect a "fee" or "bounty" for the use of his or her name to create a class action. It is not difficult to envision a scenario, certainly not in this case and with these lawyers, of prospective named plaintiffs becoming involved in a bidding war (with the ante spiraling upward for their "services") with prospective class counsel.23

    In Weseley v. Spear Leeds & Kellogg,24  the district judge rejected the request for a $5,000 award to the named plaintiff in a case against a New York Stock Exchange specialist for manipulation of prices on Black Monday in October of 1987. From the settlement of $2.5 million, the court approved attorneys' fees of $575,000 (23 percent of the fund) but refused to grant the plaintiff, an ophthalmologist, a special award of $5,000 requested to compensate him for his time and inconvenience of serving as a class representative. The court first made the dubious distinction that the plaintiff was not a lawyer, contrasting the case with Genden v. Merrill Lynch,25  where the plaintiff rendered "consultative services" for the class during the course of the litigation. Then the judge rejected the concept essentially per se:

Although it is laudable that plaintiff undertook to prosecute this litigation, the court perceives no circumstances warranting a special award. A class representative is a fiduciary to the class. If class representatives expect routinely to receive special awards in addition to their share of the recovery, they may be tempted to accept suboptimal settlements at the expense of the class members whose interests they are appointed to guard.26

    This conclusion ignores both real disincentives to plaintiffs to bring these actions in the first place and ignores the anti-collusion protection inherent in requiring that these awards be either granted or approved by the court.

    Despite these rulings, however, most courts have approved the concept of incentive awards where rejection was necessary to achieve fairness for the class. However, the incentive award is rarely the only problem; it is usually just one of the factors reviewed by the court in rejecting an overall settlement package.

   In Plummer v. Chemical Bank,27   the second circuit court held that the district court had not abused its discretion in denying approval for a settlement, with incentives, of an employment discrimination class action, but held that the parties should be given leave to amplify the record in specified areas. The court noted that class settlements are subject to abuse because of the limited control of class members.28

    In Lyon v. Arizona,29  the district court rejected a settlement which would produce hard cash for $265,085 in attorneys' fees, backpay for only the named plaintiffs (who were class counsel's wife and father-in-law), but only injunctive future relief for the unnamed class members. Added to this were a host of other defects to the class action, including counsel's never seeking certification (after more than three years), counsel's familiar relationship with the representatives, and in a settlement granting his wife cash benefits not afforded to the rest of the class, counsel's having sought to negotiate settlement prior to seeking certification (contrary to the plan laid out by section 1.46 of the Manual for Complex Litigation), and negotiating fees while negotiating the claims of unnamed class members.30

    While any of these items alone might not have killed the settlement, the court found a conflict of interest between uncertified and unnamed class and counsel and his relatives.31

    in Holmes v. Continental Can Co.,32   a Title VII case alleging race and sex discrimination in job assignments, the eleventh circuit court of appeals overturned the district court's approval of a settlement which allocated half of the $3,775 back pay to eight named plaintiffs and the other half in various proportions to the remaining 118 class members. Thirty-nine class members objected to the manner of its allocation, although apparently no one objected to the total settlement amount.

    Reviewing the district judge's approval of the settlement on an abuse of discretion standard, "in the light most favorable to the lower court's approval of the settlement,"33  and to be "overturned only upon a clear showing of abuse of discretion,"34   the court found no support in the record to overcome the "facial unfairness" of the settlement.35  The court stated that a settlement which explicitly provides preferential treatment for the named plaintiffs creates a heavy burden on its proponents to document its fairness:36

Although there is no rule that settlements benefit all class members equally, a disparate distribution favoring the named plaintiffs requires careful judicial scrutiny into whether the settlement allocation is fair to the absent members of the class. Courts have refused to approve settlement on the ground that a disparity in benefits evidenced either substantive unfairness or inadequate representation.... The inference of unfairness may be rebutted by a factual showing that the higher allocations to certain parties rationally based on legitimate considerations. Settlements entailing disproportionately greater benefits to named parties are proper only when the totality of circumstances combine to dispel the "cloud of collusion which such a settlement suggests"37

    While counsel generally deferred to counsel's opinion in the case and implies that a few objectors might not be fatal, the large number of objectors required reversal and remand for further proceedings.38   Nor did it help that the individual claims of some of the named plaintiffs receiving disproportionate award.39  The appellate bench found that the only solution to the problem was to permit an opt-out procedure for the objectors, even though the procedure is generally not available in cases certified under (b)(2) of Federal Rule 23.40

    Originally decided prior to Holmes, the sixth circuit rejected a settlement with incentives, then changed its mind.41 The settlement of an employment discrimination suit provided for backpay awards and attorneys' fees for two named plaintiffs plus additional attorneys' fees, with the other class members merely afforded a procedure for making similar claims. The court initially believed that the settlement imposed a greater burden upon the unnamed class members than already existed under law and believed the "preferred positions of the named plaintiffs should have signaled the district court of potential inequities in the proposed settlement."42  Surprisingly, the named plaintiffs were not given notice of the appeal.43  When the named plaintiffs asked for and received a rehearing, they were able to satisfy the court of appeals that the settlement's agreed claim procedure created presumptions of the employer's discrimination against class members. It was enough that the settlement the plaintiffs and others in a better position then they would have been in individual actions, and the court changed its mind and approved the settlement.44

    Later in League of Martin v. City of Milwaukee,45  there were objections lodged by 108 class members, but the court still approved a consent order under which class members with prior charges of discrimination received special relief in the settlement.46

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1. In Re First Jersey Securities, Inc. Securities Litigation, _F Supp_, MDL #681 (ED Pa June 23, 1989) order of Welner D.J., awarding $25,000 to the named plaintiff whose efforts in the face of such intimidation "benefited thousands of First Jersey customers ..and the public investor in general."
2. Newburg, Attorney Fee Awards (1986) at § 2.24.
3. Heverly v. Lewis, 99 FRD 135, (D Nev 1983).
4. Boqosian v. Gulf Oil Corp., 621 F Supp 27 (ED Pa 1985) ($25,000 to each of two class representatives for valuable consultative assistance to plaintiff's counsel). Also see AAMCO Automatic Transmissions v. Taylor, 82 FRD 405, 409-411 (ED Pa 1979), and Genden v. Merrill Lynch, 700 F Supp 208 (SDNY 1988).
5. 31 USC §§ 3730(c)(1) and (2).
6. United States ex. rel Bayarsky v. Brooks, 110 F Supp 175 (DNJ 1953), aff'd 210 f2d 257 (3rd Cir 1954).
7. 19 USC § 1618.
8. HR 5103, 96th Congress, 1st Sess (1979). The  proposal provided for two types of lawsuits in lieu of FRCP Rule 23(b)(3) class actions, to promote cooperation between private litigants and the government in seeking redress for "class-wide" grievances. One of the proposed procedures provided for government prosecution of alleged federal violations by a private party. Where the government obtained recovery in such cases, the proposed law provided for an incentive payment up to $10,000 to the private party who initiated the litigation by uncovering the violation and reporting it to the government. The Department of Justice, in arguing for the proposed "incentive fee", stated as follows:
A major purpose of the procedure is to create incentives that run not only to attorneys and encourage action by injured persons, those best able to detect violations. An active, informed citizenry is the best means to assure that there is widespread compliance with the law without the creation of a massive new bureaucracy. At present, persons with small injuries have little incentive to contribute to litigation on their behalf.
Bill Commentary, U.S. Department of Justice, Office of Improvements in the Administration of Justice, July 24, 1979, p. 40 (Footnotes omitted).
9. For example, Judge Moren awarded $25,000 to the survivor of the lead plaintiff for the significant reforms accomplished for the pension participants in Daniel v. Local 705. ND III ED, Docket 74 C 2865, Moran, J. (Oct 7, 1987). Also see Ryan v. Chicago, Cook County Illinois Circuit Court, February 15, 1989, Docket No. 83 ch 390, a state court derivative action by pension participants to recover $20 million in earnings for their municipal pension funds on pension tax levies diverted by the city. The court, after six years of litigation, awarded a total of $25,000 ($10,000 to the lead plaintiff, $2,000 - $10,000 each among five individuals).
10. For example, in Basile v. Merrill Lynch P.F. & S., 640 F Supp 697, 702 (SD Ohio 1986) the court created a $948,000 separate cash fund for the named plaintiffs and intervening plaintiffs from a $12.6 million settlement.
In GNC Shareholder Litigation, 668 F Supp 450, 451 (WD Pa 1987), the court awarded incentive payments totaling $9,000 to three plaintiffs in litigation which took two years and produced $2 million for the class.
Other district courts have not hesitated to make awards to named plaintiffs who have greatly benefited a class. See Trustee of the Florence Katz Trust v. La Petite Academy, Inc., _F Supp_ (ED Pa 1989);In re New York Shoes Securities Litigation, _F Supp_ (ED Pa 1989), awarding $4,000 incentive awards each to two named plaintiffs. Both cases reported at 12 Class Action Reports 539 (1989).
11. Kahan v. Rosenstiel, 424 F2d 161, 169 (3rd Cir 1970). Indeed, in Bleznak v. C.G. S. Scientific Corporation, 387 F Supp 1184 (ED Pa 1974), the court declared that the "concept of private attorney acting as a 'private attorney general' is vital to the continued enforcement and effectiveness of the Securities Acts." See also Basile v. Merrill Lynch P.F. & S., 640 F Supp 697, 702 (SD Ohio 1986).
12. Thornton v. East Texas Motor Freight, 497 F2d 416, 420 (6th Cir 1974). See also Bryan v. Pittsburgh Plate Glass Co., (PPG Industries, Inc.), 59 FRD 616, 617 (WS Pa 1973).
13. In Re Jackson Lockdown/MCO Cases, 107 FRD 703 (ED Mich 1985).
14. Troncelliti v. Minolta Corp., 666 F Supp 750, 752 (CD Md 1987); Beech Nut Apple Juice Litigation, Master File 86-6608 (ED Pa 1987); In Re Dun & Bradstreet Credit Services Customer Litigation, 1990 US Dist LEXIS 3337 (SD Ohio WD February 23, 1990).
15. Bogosian v. Gulf Oil Corp, 621 F Supp 27 (ED Pa 1986); In Re Franklin Container Corp., No. 77-3204 (ED Pa Order of October 26, 1987) Reported in Newberg, Attorney Fees, 1989 Supp at 18.
16. 76 FRD 173 (SD NY 1977).
17. Id at 180. $30,000 was distributed to the organization and $170,000 distributed among 16 individuals in amounts ranging from $1,336 to $35, 174, averaging $11,000, amounting to 71% of their backpay claims, compared to the $540,000 backpay lump sum distributed in $500 and $1,000 amounts to other women, plus a $860,000 affirmative action fund, plus prospective hiring and employment reforms.
18. Id at 181, citing Thornton v. East Tex. Mot. Frt., 497 F2d 416 (6th Cir 1974).
19. Id at 181.
20. Id at 182.
21. Id.
22. 727 F Supp 1201, 1208-9 (ND ILL ED 1989).
23. Id at 1209 (citations omitted). This analysis is probably wrong on two counts. First, the cited decisions were all court approvals of class settlements as fair to the class over one or more named plaintiff's objection that he or she did not get more. Second, the feared "bidding war" would not ethically arise since the attorneys could agree to submit a request for incentive award, but could not offer "bonuses for signing" any more in class actions than in personal injury tort cases.
24. 711 F Supp 713, 720 (ED NY 1989).
25. 700 F Supp 208 (SD NY 1988).
26. Weseley, 711 F Supp at 720.
27. 668 F2d 654 (2d Cir 1982).
28. Id at 658 (Citing Pettway v. American Cast Iron Pipe Co., 576 F2d 1157, 1169 (5th Cir) cert. den, 459 US 1115 (1978).
29. 80 FRD 665 (D Ariz. 1978).
30. See also Prandini v. National Tea Co., 557 F2d 1015 (3rd Cir 1977).
31. 80 FRD at 669. See also companion case, Munoz v. Arizona State University, 80 FRD 670, 672 (D Ariz 1978), where the court applied the same reasoning to reject the settlement and deny certification.
32. 706 F2d 1144 (11th Cir 1983).
33. Id at 1145.
34. Id at 1147.
35. Id at 1148.
36. Id at 1147.
37. Id at 1148. (citations omitted).
38. Id at 1151.
39. Id at 1151, n.6.
40. Id at 1156.
41. Franks v. Kroger Co., 649 F2d 1216 (6th Cir 1981), vacated 670 F2d (6th Cir 1982).
42. 649 F2d at 1226.
43. 670 F2d at 72.
44. Id.
45. 588 F Supp 1004 (ED Wis 1984), a Title VII case challenged the promotion, transfer, and assignment procedures of the Milwaukee Police Department under both Title VII of the Civil Rights Act of 1964, 42 USC § 2000 and the State and Local Fiscal Assistance Act, 31 USC § 112.
46. 588 F Supp at 1024

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