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Lemus v. H&R Block

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There is some good and bad in this N.D. California district court decision by Judge Susan Illston approving a settlement of a claims-made class action over employee classifications of tax-season temporary tax preparers.

On the good side, the court based the attorneys' fees on the amount the class actually received, rather than on the hypothetical amount the class could potentially receive but would never try to. Thus, instead of one third of a hypothetical $35 million, class counsel received about 20% of an actual $19.8 million.

On the bad side, the court failed to apply Bluetooth correctly, considering solely the question of "collusion," and not the issue of self-dealing. H&R Block agreed not to oppose an attorney award of $11,833,666 (one third of $35 million plus $166,000), and was willing to put up a minimum of $23.3 million to settle the case. But there was a kicker providing a reversion of approximately half of denied attorneys' fees to the defendant. The clear-sailing and kicker clauses (together with the unreasonable fee request of 49% of class benefit) are per se evidence of self-dealing; class counsel, Marlin & Saltzman and Diversity Law Group, effectively cost their clients $3.5 million through their insistence on these clauses in the hopes of maximizing their own fee. This is not only a reason to reject a settlement out of hand, it should be a reason to find legal malpractice for breach of fiduciary duty. In the absence of public-interest objectors, however, class counsel looks to get away with it.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.