Recently in Attorneys' Fees and Ethics Category

In the Cobell v. Salazar Indian trust class action settlement, class counsel made unrealistic promises to the class about when money from that settlement would be distributed. With over four separate appeals, including one from my client, Kimberly Craven, and post-fairness-hearing motions about whether the lead representative plaintiff, Elouise Cobell, was personally entitled to another $10.5 million from the settlement fund, the money has not yet been distributed, and class members are asking questions, including why there are appeals. Class counsel could simply make the briefing publicly available, or even summarize their arguments against the appeal. Instead, they announced falsely January 20 that the appealing objectors "each believes that you are not entitled to the relief (nor the payment of your trust funds) that has been provided in the settlement agreement," and then provided the addresses and phone numbers of the appellants and invited the hundreds of thousands of class members to contact the objectors. (The allegation is especially ironic, given that it is the class counsel who has defended the settlement approval and their $99 million fee (and $2.5 million in incentive payments to the class representatives) by arguing that class members are not entitled to anything, so anything they get makes the settlement fair, notwithstanding objectors' claims of intra-class conflicts and complaints that the settlement violates Wal-Mart v. Dukes in multiple ways.)

Fortunately for the cause of justice, the appellants are not so easily silenced by such unprecedented intimidation tactics. I'm quoted in two of the stories. [Indian Country Today; AP/WaPo; Lincoln Journal-Star]

Delaware Court of Chancery Chancellor Leo Strine has a reputation for scrutinizing fee awards more closely than most. So it was a surprise when, last month, he approved a $285 million fee award—amounting to $35,000/hour for 8000 hours of work—to attorneys who successfully prosecuted a case against Grupo Mexico over the terms of a transaction with a related entity that eventually resulted in a $2 billion judgment. (The attorneys had sought $428 million; the fee award will be augmented with another $15 million in interest.) [WSJ; Reuters; WSJ Law Blog] As Bainbridge and Frankel note, the opinion seems to be sending a message to attorneys afraid of Delaware's scrutiny of fee awards: stop jurisdiction-shopping elsewhere, as we'll take care of you if you bring a legitimate case here. (Of course that promise isn't going to stop forum-shopping for the frivolous "disclosure" cases that provide no benefit to shareholders in exchange for a quick million-dollar payment to the derivative shareholder counsel.)

In a settlement of antitrust litigation against Sirius XM that paid law firms like Milberg $13 million, the class got only a promise to freeze list prices for five months. The Center for Class Action Fairness argued below that that could hardly be a benefit to the class, since a class member could instead purchase the same service at a substantial discount from list price; the class notice and relief effectively constituted a marketing program for Sirius. Indeed, if Sirius instead emailed class members a coupon for a dollar off of the service, it would be clearly a coupon settlement worth only a dollar/class member. So how can it be worth $180 million, as the court found, when Sirius wasn't even offering the $1 discount coupon? CCAF's objection also addressed the race-based class certification order of the type previously criticized on this site by Professor Michael Krauss. Nevertheless, the district court approved the settlement.

Wednesday, CCAF filed its opening brief on behalf of Nicolas Martin in the appeal of the court's decision approving the settlement.

Wow. Felix Gilette in Business Week:

As Las Vegas's housing supply exploded, so did the competition among lawyers and contractors to represent new homeowner associations in so-called construction-defect lawsuits. It was in this environment, according to plea agreements recently unsealed in an ongoing FBI investigation, that a shadowy outfit cooked up a brazen scheme.

When a new development was nearing completion, the group would buy a couple of units in the community and then transfer partial ownership of the condos to individuals secretly on its payroll, according to court documents. While pretending to be residents of the communities, these "straw buyers" would run for leadership positions on boards of the new homeowner associations. By paying off community managers, hiring private investigators to find dirt on legitimate candidates, and rigging elections, the documents allege, the straw buyers were able to infiltrate boards at several new developments in Las Vegas from 2003 to 2008. Once in control of the boards, the straw buyers would then use their governing positions to steer millions of dollars in construction and legal fees back to their co-conspirators.

And it gets crazier than that. (h/t A.G.)

There has been a lot of coverage of the Federalist Society panel on attorneys' fees in class actions: Isaac @ POL, LNL, ATL. Unfortunately, the coverage often discusses my introductory and Professor Fitzpatrick's introductory remarks, they don't cover my response to the professor, and I'd like to expand on it here.

As an initial matter, Fitzpatrick draws a straw man when he accuses critics of fees to be really wanting to abolish class actions. I've said it before, and I'll say it again: the optimal number of class actions is greater than zero. It's likely smaller than the number of class actions we actually have, but my criticism of rubber-stamping settlements that overpay attorneys is not a backdoor attempt to abolish the class action.

Fitzpatrick defends the $123 million fee award in the Bank of America overdraft litigation, but he does so by accusing me of complaining that the class members got small amounts when there are many class members. Again, this is a straw man. If attorneys collect $10 a class member for four million class members, I have no objection to a multi-million dollar fee award. But what happened in the Bank of America case is that the attorneys took two depositions, litigated for five months, and then settled for nine cents on the dollar—virtually a nuisance settlement merely for bringing the complaint. That's a zero-risk proposition that does not merit an extraordinary payday of several times a multiplier of already-handsome lodestar rates. (Remember that "lodestar" can include as much as $400/hour for paralegals, which is almost entirely pure profit for law-firm partners that haven't lifted a finger.) The $123 million the attorneys are getting is at the expense of their clients, who are getting only $250 million. That's only possible because of a legal cartel: if that litigation had been put out to a market-based bid, the fees would be much closer to ten percent rather than a third.

Moreover, Fitzpatrick justifies all this through the value of "deterrence." But if attorneys' incentives are to bring "big" cases, rather than "high-merit" cases, that completely undermines any deterrence value. Bank of America gets sued because it's big, rather than because it did something wrong. And if Bank of America actually did something wrong, the attorneys willing to settle quick and cheap lets it get away with that—they've still made billions on something the attorneys claim was illegal. Why should the class attorneys make $123 million for enabling that? (Fitzpatrick doesn't mention that he was retained by the class attorneys in that case for several hundred dollars an hour (again, coming out of the class's pockets), though of course they retained him because of his previously-stated views; I don't believe he's defending that outrageous fee solely because he's been paid to do so.) When attorneys can profit from nuisance settlements against deep pockets because they don't have to ensure that their clients actually receive any proceeds, that hurts deterrence, because the good companies are getting taxed by the class action system almost as much as the bad actors are.

Fitzpatrick points to his study showing $5 billion of fees for $33 billion of recovery. But that analysis is flawed in several ways. First, most acknowledge that fees should be smaller for megafund cases, but when you add megafund cases to tiny cases, the effect of the megafund case is to overwhelm the overpayments in the smaller cases. If attorneys collected $4 billion for a $30 billion settlement, that would be too high: it's not 1000 times more difficult to bring a $30 billion case than a $30 million case; meanwhile the other $3 billion from several hundred cases would result in $1 billion of fees, which is also too high. So "only" 15% recovery may well be too high, depending on what the mix of cases looks like.

Second, the study mixes apples and oranges. Securities cases, which make up the larger share of class action settlements, generally have lower percentage fees than consumer-fraud class actions. That's because securities cases are more likely to have sophisticated lead plaintiffs, and better distribution of settlement funds to class members. That ends up supporting my argument more than Fitzpatrick's: securities cases are harder to bring, and are more likely to lose on a motion to dismiss because of higher pleading standards. Yet, with even the minimal constraints provided by the PSLRA, securities attorneys end up getting a much smaller percentage than consumer-class attorneys, showing how much the consumer-class attorneys are getting overpaid. But the securities attorneys are overpaid, too. First, the PSLRA requires fees to be a reasonable percentage of the amount actually paid to the class, but this statutory language is generally ignored by the settling parties and the courts: in the Franklin Templeton Mutual Fund settlement, the attorneys are asking for almost as much money as the amount that will actually be paid to the class, because they include payments to third-parties such as the settlement administrator in their denominator, against the express language of the PSLRA. Second, the PSLRA forbids courts from using the Vaughn Walker method of requiring class counsel to bid for lead-counsel status, but we know from experience that that market constraint results in multiple bids from experienced counsel that are much lower than what class counsel tend to get in securities cases today. So Fitzpatrick's study hides what how much attorneys are being overpaid.

Third, Fitzpatrick's study hides how much attorneys are being overpaid in another way, by exaggerating the denominator. That "$33 billion" figure is fictional: it includes "injunctive relief" that doesn't actually benefit the class. The Fitzpatrick study would count the Blessing v. Sirius XM settlement as worth $180 million, when it actually pays zero to the class. And in securities cases, much of the settlement fund is coming out of the pockets of class members who bought-and-held the defendant's shares: those payments from the right-hand pocket to the left-hand pocket are a loss, not a gain, for shareholders. (Such settlements really raise 23(a)(4) questions when they don't bring in new money from third parties.) But the full amount counts in the denominator, even though it didn't win the class anything.

The cases where the lawyers are abusing the system are not an anomaly. When the Center for Class Action Fairness is deciding whether to take a case, it's almost always deciding between cases where the attorneys are abusing the system a little, or whether they're abusing the system a lot.

The Federalist Society's Litigation Practice Group hosted a panel on "Attorneys Fees in Class Actions" during the 2011 National Lawyers Convention. PointofLaw's own Ted Frank and Manhattan Institute Visiting Scholar Lester Brickman, both participated in the panel.

During his comments Ted Frank explained,

The adjudication of attorneys' fees in class action settlements is one that presents obvious conflicts of interest. The same attorneys that are negotiating benefits for the class are negotiating their own fees. One often suggested solution is a bifurcated settlement negotiation, but that does not solve this problem because attorneys on both sides are rational economic actors with rational expectations. Nobody is unaware in the first part of the negotiations that part two of the negotiations will discuss fees. So everyone knows that every dollar going to the class will be a dollar unavailable to the attorneys later and vice versa. And you can show with game theory that the class will end up getting less in a bifurcated negotiation. The defendants aren't looking after the interests of the class, they just want out as cheaply as possible and they're generally indifferent about who gets the money. So that leaves the courts to police attorneys' fees. Unfortunately, the incentives for the courts are perverse. Approving a settlement that shelters disproportionate attorneys' fees gets a complex time consuming case off of a crowded docket while insisting on fairness requires additional work up front and more work if the settlement gets rejected.

Brian Fitzpatrick of Vanderbilt University Law School responded by arguing a different perspective,

There are basically two reasons why there's a divergence between perception and reality. Reason number one is you know there are some people in society for whom the optimal number of class action cases is zero; businesses. ...But, I don't agree that the optimal number of class actions is zero. Just because it's good for business to get rid of the class action doesn't mean it's good for society. And I think the people with a vested interest in seeing zero class actions have made things sound a little bit worse than they really are when it comes to class action lawyers. ...Secondly, I think this divergence can be explained by the fact that a lot of class action settlements are small stakes settlements where each class member has been injured a small amount and each class member has very little at stake. So what happens, the class action settles, the lawyers get $120 million as they did in this Bank of America settlement that Ted Frank mentioned and each class member gets $30. So that looks bad, the class member gets $30, the lawyer gets $120 million. But the perception there, as bad is as it looks, is not really a substantive comment about whether the settlement is bad. The class members had very little injury to begin with, of course each of them is not going to have as substantial a sum as the class action lawyers are getting. ...In small stakes cases in any event, the purpose really is to deter the defendant. It really matters less who is paid in these small stakes cases. What really matters the most is that the defendant is paying someone.

In a consolidated federal case, a class of Netflix subscribers initiated a lawsuit alleging a price agreement between Netflix and Wal-Mart which allowed Netflix to overcharge customers and manipulate subscription pricing. In a proposed settlement by Wal-Mart scheduled for a final hearing on the merits in March, Netflix subscribers have been offered $27.5 million.

The settlement, covering anyone who subscribed to Netflix at any time between May 19, 2005 and September 2, 2011, would leave $19 million left to pay the class if lawyers are granted their requested 25% (nearly $6.9 million) plus potentially $1.7 million to cover litigation costs. If everyone eligible in this action opts to participate in the settlement, each class member would recover less than $1.00 each.

The full AP report is available here.

Prescription drug maker Merck Sharp & Dohme Corp. filed an action against Kentucky Attorney General Jack Conway challenging the legality and fairness of the arrangement in which a state attorney general hires private attorneys on a contingency fee basis to handle suits on behalf of the state.

Merck's attorneys argue,

Such suits can only be prosecuted by the Kentucky Attorney General and only when penalties would be in the public interest. Nonetheless, Conway has effectively transferred his enforcement authority to private outside counsel. And unlike the Kentucky AG, whose compensation is fixed and independent of success or failure in litigation, the arrangement with the private outside counsel in this case gives them a significant stake in the outcome: the more penalties they pursue, the bigger their potential take.

Conway filed a motion to dismiss responding,

Merck has offered no case law that supports the notion that litigation by outside counsel, directed by a state attorney general, violates a civil defendant's constitutional rights. In fact, such a finding would upend centuries of precedent permitting such arrangements between states and outside counsel.

Unfortunately, as John O'Brien of LegalNewsline.com points out, other companies have unsuccessfully made similar arguments across a wide range of jurisdictions.

In some states however, there has been significant progress made in instituting reform legislatively as Jim Copland of PointofLaw and head of Manhattan Institute's Center for Legal Policy cites in Trial Lawyers Inc.: Attorneys General, a report focused on this very topic.

The U.S. Court of Appeals for the Second Circuit affirmed a district court decision ruling that the Prison Litigation Reform Act, 42 U.S.C. § 1997e(d)(2), capped the maximum award of attorney's fees at 150 percent of plaintiff's $1.00 monetary judgment in a case where a New York State prisoner sued New York Department of Corrections officials alleging that they infringed his rights under the Free Exercise Clause of the First Amendment and sought $99,485.25 in attorney's fees.

The Second Circuit Ruled:

(1) Because the only relief prisoner Shepherd secured on his Free Exercise Clause claim against the defendant prison officials was a monetary judgment, his request for attorney's fees pursuant to 42 U.S.C. § 1988(b) was limited by the PLRA, specifically § 1997e(d)(2), which plainly caps the attorney's fees that must be paid by a losing defendant at 150 percent of the monetary damages.

(2) Shepherd having been awarded a monetary judgment of $1.00, the district court correctly construed § 1997e(d)(2) to cap the fees that could be awarded against defendants at $1.50, against which it had to apply some amount not to exceed 25 percent--in this case, 10 percent, or $0.10--of the monetary judgment, for a total fee award of $1.40.

The case is Shepherd v. Goord, No. 10-4821-pr, slip op. (2d Cir.)

What's the class action attorney to do when they want to recover $4 million in fees, but the defendant is only willing to put up a settlement worth $6 million? Well, it's time to get creative: if you've brought a lawsuit alleging overcharges, construct an entirely imaginary $10 million fund to cover "future overcharges" and call that a $10-million class benefit—though it obviously costs the defendant nothing, since they only have to pay the money if they continue the allegedly wrongful overcharges in the first place, creating a new cause of action. Then shield the fee request by putting it in a separate fund that reverts to the defendant. Then ensure that you don't get any objections by making it inordinately expensive for any member of the national class who isn't local to the courthouse to participate in the fairness hearing. All of this is quite objectionable, and the Center for Class Action Fairness has objected on behalf of two clients. The case is Barber Auto Sales, Inc. v. United Parcel Service Co., Inc., No. 5:06-cv-04686-IPJ (N.D. Ala.).