How to define a market rate for fees in class action megacases
In a notable 2001 opinion called In the Matter of Synthroid Marketing Litigation, Judge Frank Easterbrook of the 7th Circuit Court of Appeals set out guidelines for trial judges awarding fees to plaintiffs lawyers in class action megacases, defined as those in which the class recovery exceeds $75 million. Easterbrook said there should be no automatic cap on fees, even in these very big cases. Instead, he pointed to the 7th Circuit’s oft-stated preference for fee awards that reflect both the risk borne by class counsel and “the normal rate of compensation in the market at the time.” The 7th Circuit has made it clear that the best way to assure a market rate is for class action lawyers and their clients to reach a fee agreement before the litigation begins, but the 2001 Synthroid opinion didn’t specify exactly how trial judges should approximate an arm’s-length negotiation if there’s no preset deal on fees. In a 2003 follow-up opinion, Easterbrook and his fellow panel members actually set class counsel fees themselves, finding that “a decent estimate of the fee that would have been established in ex ante arms’-length negotiations” was a sliding percentage of recovery that declined as the size of the settlement increased.
Objectors to a flat 27.5 percent fee award of $55 million to Robbins Geller Rudman & Dowd in a $200 million securities class action settlement with Motorola were counting on Judge Easterbrook’s two Synthroid opinions when they asked him and two other 7th Circuit judges to cut Robbins Geller’s fees. That proved a vain hope. In a seven-page opinion Wednesday, Easterbrook and his colleagues upheld U.S. District Judge Amy St. Eve‘s approval of the firm’s $55 million award, despite finding 27.5 percent in fees to be “exceptionally high” in a megacase and expressing concern about the flat percentage structure of the award.
The panel, which also included Judges Ilana Rovner and David Hamilton, said it was assuaged that none of the institutional investors in the class, which hold, in combination, more than 70 percent of the claims in the settlement fund, objected to Robbins Geller’s fees. They’re sophisticated litigants with a fiduciary duty to preserve class assets, the appeals court said. So even though the fee award was “at the outer limit of reasonableness,” it was within St. Eve’s discretion to award it. That finding seemed to me to be in keeping with the 7th Circuit’s customer-oriented preference for class action clients to determine the market rate for their lawyers’ fees, just like clients in other kinds of cases.
But another paragraph in Wednesday’s ruling indicates that the appeals court is also interested in a different perspective on the market: the competition. The opinion cited three empirical studies of class action fee awards in megacases, echoing questions from Easterbrook at oral argument. Those studies all concluded that as the size of the class action recovery increased, the percentage of the settlement awarded to class counsel declined. According to researchers, the median award for settlements between $100 million and $250 million is 10.2 percent – less than half of Robbins Geller’s 27.5 percent in the Motorola case. (The 7th Circuit nevertheless concluded that Robbins Geller’s award was justified by the extremely risky nature of the case, and quoted from an expert report by Cornell professor Charles Silver that emphasized the dim early prospects for the class, the absence of competition to be appointed lead counsel and the hard work by Robbins Geller to uncover previously unknown facts that pushed Motorola into a $200 million deal.)
For the class action bar, what’s more important than Robbins Geller’s great results against Motorola is the appeals court’s interest in empirical evidence of the market for class counsel fees in addition to its traditional reliance on approximating client negotiations. I don’t want to overstate that distinction. Clients are likely to be aware of previous fee awards when they negotiate fee deals, so the sort of evidence the 7th Circuit referenced in the Robbins Geller decision should already be a factor in the hypothetical reconstruction of an arm’s-length negotiation that the appeals court has directed trial courts to undertake. Now, however, Easterbrook and his colleagues have made the significance of competitors’ awards explicit.
John Pentz, who represented objector Edward Falkner in the fee award appeal, told me that objectors and class counsel alike will have to pay heed to the empirical evidence the 7th Circuit referenced in Wednesday’s opinion. If fee requests fall way outside of the middle range, they will have to be explained and justified, Pentz predicted. But not this one. Pentz said his client won’t pursue additional appellate review, considering that Easterbrook is author of all of the court’s major recent opinions on legal fees.
Joseph Daley of Robbins Geller, who argued the appeal for the firm, sent an email statement that the firm is gratified by the 7th Circuit’s recognition of its extraordinary work in the case. He declined additional comment.
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