Courts Closely Scrutinize Attorney Fees Awards in Claims Made Settlement
By Ashley Vinson and Teresa Wang
The 1998 Private Securities Litigation Reform Act (PSLRA) and the 2005 Class Action Fairness Act (CAFA) are intended to curb perceived abuses with class actions. Among other changes, both statutes add provisions that require a direct connection between attorney fee awards and the value of the class recovery.
The PSLRA includes a provision requiring that “[t]otal attorney fees and expenses awarded by the court to counsel for the plaintiff class” in securities class actions “not exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class.” 15 U.S.C.A. §78u-4 (1998). CAFA adds a provision requiring that “the portion of any attorney’s fee award to class counsel” in consumer class actions attributable to a recovery of coupons “be based on the value to class members of the coupons that are redeemed.” 28 U.S.C. § 1712(a) (2005).
The PSLRA and CAFA only apply to settlements in securities class actions and class actions providing for coupon-based recoveries, respectively. The trend, however, is for courts and arbitrators across the country to use their authority under Fed. R. Civ. P. 23(h) to determine “reasonable attorney fees” in certified class actions—both upon judgment and settlement—as a mechanism to require a nexus between attorney fees and class awards in other contexts.
Negotiated Fee Awards Present Potential Downside
One problem presented by settlements of class actions that award attorney fees disproportionate to the actual benefit of the class is “decoupling.” As Justice Sandra Day O’Connor stated in a decade-old denial of certiorari in Int’l Precious Metals Corp. v. Waters, disproportionate fee awards “decouple” the interests of the class from that of their counsel. This permits defendants to entice class counsel to settle and could encourage the filing of needless lawsuits.
Judge Richard Posner echoed Justice O’Connor’s concerns in an October 2008 opinion of the Seventh Circuit, calling the potential for abuse in negotiated fee awards one the biggest “downsides” of the class action device. Judge Posner noted that class members often have a minimal stake in the potential recovery and thus have little incentive to monitor class counsel to ensure that counsel are serving their best interests. Thorogood v. Sears, Roebuck and Co. On the other hand, a defendant’s only interest is in minimizing their total exposure. Thus, according to Judge Posner, “they are willing to trade small damages for high attorneys fees.” This leads to the potential for class counsel to procure settlements that provide little real value to the class with huge payouts for themselves.
Over a decade ago, Justice O’Connor urged the Supreme Court to address whether or not “there must be some rational connection between the fee award and the amount of the actual distribution to the class.” Although the Supreme Court has yet to answer O’Connor’s plea, other courts across the country have.
Many courts have found the potential for abuse is most pronounced in cases involving “claims-made” settlements, where a class member’s recovery is dependent on the class member actively making a claim for a piece of the recovery pie. One Massachusetts district court explained in the TJX security breach case that this is the result of “two interrelated realities” of class action litigation: first, only a fraction of any given class is likely to claim the benefits provided for in a settlement; second, attorneys on both sides know that this is true. See In re TJX Co. Retail Security Breach Litig., The court in TJX notedthat “only a fraction of any given class is likely to claim the benefits provided for in a settlement. Indeed, ‘[i]t is not unusual for only 10 or 15 percent of the class members to bother filing claims,’ and ‘[w]hen settlements require class members to file statements or proofs of claim in order to receive their share . . . response rates are often very small, and rarely exceed 50 percent.’”
The district court in TJX called the class action vehicle broken, and offered that “tying the award of attorney fees to claims made by class members is one step that judges can take toward repair.” Id. at 406. And so they have, in quite creative ways.
Evolving Approaches to Fee Awards in Claims-Made Settlements
One approach courts use is to defer calculation of the fee award until after claims process is completed. In Yeagley v. Wells Fargo & Co., No. 05-03403-CEB, (N.D.Cal. Jan.18, 2008), a California district court, echoing Justice O’Connor’s concerns, recognized that “[c]ommon sense dictates that a reasonable fee in a class action settlement is a fee that takes into account the actual results obtained.” Terming class counsel’s total potential value of the settlement “pure fantasy,” the district court awarded a fee equal to 25 percent of the “common fund,” which the court defined as the value conferred on the class members who had actually made claims. Id. at *7-8.
Other courts have continued to use the lodestar method to assess fees when faced with uncertainties in the valuing of the settlement before claims are actually made. In Parker v. Time Warner Entertainment Co., a New York district court found the lodestar approach, even where it was lower than negotiated fee, provided a reasonable fee where it was 30.85 percent of the estimated settlement value. Recognizing that “it would be unseemly for the rewards to Class Counsel to exceed those to Class Members,” and the actual damages suffered by the class were nearly worthless, the district court based the attorney fee award on an “estimated settlement value” that was the sum of the court’s estimation of the value of benefits conferred on the class, administrative costs, cy pres relief, expenses, incentive award, and attorney fees.
Another approach courts use is to combine deferral with the lodestar method. In Fleury v. Richemont North America, Inc., No. 05-4525-EMC (N.D. Cal. Aug. 8, 2008), another California district court appliedthe lodestar method in lieu of the percentage method because the settlement value could not yet be determined. In declining to use the percentage method, the district court recognized that it could not assume the settlement value would be equal to the total potential value of all claims. In applying the lodestar method, the court deferred enhancing the lodestar by way of a multiplier until it could review the true results obtained (i.e., the number of claims actually redeemed).
As evidenced by just these few examples, courts across the country have used their authority under Rule 23(h) to heavily scrutinize fee agreements negotiated by class action lawyers and creatively readjust fee awards in claims-made settlements in an effort to serve the best interests of the class.
Editor's Note: Class action settlements and related topics will be explored at the upcoming 13th Annual National Institute on Class Actions in San Francisco (October 30) and Washington, D.C. (November 20).
Keywords: Litigation, class actions, attorney fees, settlement, Class Actions Fairness Act, Private Securities Litigation Reform Act