In Moses v. New York Times Co., 2023 WL 5281138 (2d Cir. Aug. 17, 2023), the Second Circuit vacated and remanded the approval of a class action settlement because the district court applied the wrong legal standard in determining that the settlement was fair.  But in doing so, the court reiterated that incentive awards for class action representatives are permissible in the Second Circuit.

Moses was a class action challenge to the New York Times’ alleged practice of automatically renewing subscriptions in violation of California law. The parties reached agreement on a class settlement and sought the district court’s approval.  The settlement included the option of either a pro-rata cash award or access codes for a one-month subscription to the Times; it also included $1.25m in attorneys’ fees and a $5,000 incentive award for the class representative.  The district court found that the settlement was fair, but only after applying a “presumption of fairness” to the agreement because it “was reached in arm’s-length negotiation between experienced, capable counsel.”   Id. at *3. The district court also found that the $1.25m in attorneys’ fees was reasonable and fair based on the face value of the Access Codes (and not their redemption value, which would be required if the Access Codes were “coupons” under CAFA).  Id. 

After an objector appealed, the Second Circuit vacated and remanded. The panel first agreed with the objector that the district court had applied the wrong legal standard. Although the Second Circuit previously applied a presumption of fairness to arm’s-length negotiations, Rule 23(e) was amended in 2018 to list four “primary procedural considerations and substantive qualities that should always matter to the decision whether to approve a settlement proposal.” Id. at *4 (citing Fed. R. Civ. P. 23(e)(2)).  Because one of those four factors is whether the proposal was negotiated at arm’s length, and because the new Rule 23(e)(2) does not suggest that one factor creates a favorable presumption as to the other three, the Second Circuit found that applying a presumption of fairness based on whether the settlement was negotiated at arm’s length is inconsistent with Rule 23(e).  Id. at *4–6.

The Second Circuit also held that the district court’s substantive fairness determination was flawed because it evaluated the proposed attorneys’ fee award and incentive award separately from the overall settlement’s fairness, instead of “in tandem” as required by Rule 23(e)(2).  Id. at *6–7. Compounding this error, the district court determined that the proposed attorneys’ fee award was fair based on the face value of the access codes (and not their redemption value), which was improper because the access codes were coupons under CAFA.  See id. at *13. 

Finally, the appellate court addressed the objector’s contention that incentive awards are per se unlawful based on two Supreme Court cases from the 1880s­.  As we have previously reported, the Eleventh Circuit has accepted this contention and barred incentive awards in class settlements.   But the Second Circuit declined to follow the Eleventh Circuit’s lead.  Rather, the court found that the requirement of Rule 23(e)(2)(D) to approve settlements only if they “treat class members equitably relative to each other” is “harmonious with, and promoted by” the approval of fair and appropriate incentive awards.  2023 WL 5281138, at *13.  And neither Congress nor the Federal Rules Advisory Committee has ever “suggested (let alone imposed) a blanket prohibition on inventive awards,” despite many opportunities to do so.  Id. at *15.

Moses confirms that Parties in the Second Circuit who negotiate arm’s-length settlements can no longer simply rely on a presumption of fairness in seeking approval, though the fact that the settlement was negotiated at arm’s length will still weigh in favor of a positive fairness finding under Rule 23(e)(2).  And while the new rule requires the fairness of incentive and fee awards to be determined in tandem with the overall settlement, fair incentive awards are still permissible.