Are we at the beginning of a trend of federal appellate
takedowns for class action lawyers? We've already seen a lot
more appellate scrutiny of cy pres awards in the last 18 months.
Fee awards may be next on the agenda. Earlier this month, the
9th Circuit Court of Appeals struck down a $2 million award to
the lawyers in a false advertising settlement against Kellogg.
And Friday, in a much bigger blow, a three-judge panel of the
1st Circuit said that a Boston federal judge erred when he
awarded $30 million in fees in a class action against Volkswagen
and Audi over engine defects. The appeals court ordered the trial judge to try again, starting from the lawyers' hourly rate
total of $7.7 million.
The issue before the 1st Circuit was whether U.S. District
Judge Joseph Tauro improperly used a federal-law standard in
awarding fees based on the size of the settlement, rather than
looking to state law and using an hourly rate. The settlement
itself, in which the defendants agreed to pay certain costs of
Audi and Volkswagen owners whose engines suffered sludge
buildup, didn't call for particular attorneys' fees for
plaintiffs' lawyers from Berger & Montague, Peter J McNulty Law
Firm and Irwin & Boesen, nor did it specify the methodology
class counsel should use to request fees.
With that opening, the plaintiffs' firms argued that the
court should apply a federal-law standard for calculating class
action fees. They requested an award of $37 million, based on
their expert's assessment that the value of the settlement
topped $400 million. Defense counsel at Sugarman, Rogers,
Barshak & Cohen, Reminger & Reminger, and Herzfeld & Rubin
countered that the settlement was actually worth less than $50
million, and, moreover, class counsel's fees should be based on
New Jersey's fee-shifting statute, since the only claims in the
case were state consumer protection laws. The appropriate state
law requires fee awards to be based on hourly billings, the
defense argued.
Tauro adopted the recommendations of the special master in
the case and awarded $30 million as a percentage of the
settlement value. As a check on that number, the judge
calculated an hourly rate total. He reduced the 23,191 hours
plaintiffs' lawyers reportedly spent on the case by one-third to
eliminate unnecessary time. He multiplied the hours by a blended
hourly rate of $500 to arrive at a lodestar base of $7.7
million. The judge then applied a multiplier of 2.5 to account
for the risk and difficulty of the litigation. Tauro said his
lodestar total of $19 million justified the $30 million fee
award.
Volkswagen and Audi took the rare step of appealing the fee
award -- which comes on top of the class settlement -- to the
1st Circuit. (The defendants also brought in Kenneth Geller of
Mayer Brown to lead the appeal.) That was a smart move: The
appellate panel of Chief Judge Sandra Lynch and judges Bruce
Selya and Michael Boudin seemed almost as offended as Volkswagen
and Audi by the plaintiffs' lawyers fees.
Tauro's first mistake, according to the panel, was applying
federal law to derive a fee award in a case that involved no
federal claims. The plaintiffs had argued that the federal rules
of civil procedure grant federal judges the power to set class
action fees; the appeals court disagreed. "Rule 23(h) does not
provide a free-floating grant of authority to apply federal law
to award attorneys' fees in class actions," Lynch's opinion
said. "Rather it allows the federal court to make fee awards
where they 'are authorized by law or by the parties'
agreement,'" she wrote. "The basis for the award here is the
agreement itself, a contract under state law, and not federal
law."
The 1st Circuit went on to analyze which state's laws should
govern the fee award calculation, and decided that under the
particulars of this case, the honor goes to Massachusetts. Two
approaches are permissible in Massachusetts, the court said: a
straight lodestar or a looser "multiple factor" test that takes
into account the size and significance of the case. The
appellate panel ordered Tauro to decide on remand which method
should apply, but said in any event that the $30 million award
"cannot stand." It also tossed Tauro's 2.5 multiplier, which the
1st Circuit said "was not based on Massachusetts law nor
justified by the record."
It seems clear that the 1st Circuit will not tolerate fees
in this case of much more than the hourly rate total of $7.7
million, considering that at the end of the opinion it warned
that any enhancement should take into account the actual claims
against the defendant, which, according to Audi and Volkswagen,
are less than $11 million. A $7.7 million fee would be a $22.3
milli o n haircut for the plaintiffs' lawyers.
Michael Bogdanow of Meehan, Boyle, Black & Bogdanow, who
argued for class counsel at the 1st Circuit, said he expects the
final award to be more than $7.7 million because the appeals
court agreed to add in fees from other lawyers in the case and
didn't rule out a multiplier. "The decision is not as one-sided
as it appears," he said, noting that the 1st Circuit rejected
defense arguments that it didn't agree to pay class counsel's
fees and that New Jersey's law should guide the calculation.
Massachusetts permits much more flexibility in fee awards than
New Jersey, Bogdanow said, and plaintiffs plan to put on "a lot
of new evidence" on the value of the settlement when the fee
issue goes back to Tauro on remand.
(Reporting by Alison Frankel)
(This blog post has been updated to include comments from
counsel to the plaintiffs' lawyers.)
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