California Supreme Court OKs class action fees based on settlement size

August 11, 2016

A footnote in the 1977 California Supreme Court decision in Serrano v. Priest created four decades of nagging doubt about the proper method for California state judges to calculate fee awards for class action lawyers. Serrano III, as the ruling is known, could be read to require judges to award fees based plaintiffs’ lawyers’ hourly billings – and not on the size of the recovery the lawyers obtained for class members.

The lodestar method of setting fees, as you know, is vastly less popular than fee awards as a percentage of class recovery. Lodestar-based fees in class actions have generally been in decline since the 1980s, when a task force of experts appointed by the 3rd U.S. Circuit Court of Appeals concluded that, on balance, percentage-based fees more fairly balance the interests of class members and their lawyers. Every federal circuit now either mandates or allows class action fee awards based on the size of the class settlement fund (as do most state courts that have looked at the issue). No court requires use of the lodestar method.

On Thursday, in its hotly anticipated ruling in Laffitte v. Robert Half International, the California Supreme Court dispelled any doubts that California state courts are included in the overwhelming majority that allows percentage-based class action fee awards.

“We clarify today that when an attorney fee is awarded out of a common fund preserved or recovered by means of litigation, the award is not per se unreasonable merely because it is calculated as a percentage of the common fund,” the Supreme Court said in a unanimous opinion written by Justice Kathryn Werdegar. “When class action litigation establishes a monetary fund for the benefit of the class members, and the trial court in its equitable powers awards class counsel a fee out of that fund, the court may determine the amount of a reasonable fee by choosing an appropriate percentage of the fund created. The recognized advantages of the percentage method – including relative ease of calculation, alignment of incentives between counsel and the class, a better approximation of market conditions in a contingency case, and the encouragement it provides counsel to seek an early settlement and avoid unnecessarily prolonging the litigation – convince us the percentage method is a valuable tool that should not be denied our trial courts.”

The state justices also said that California trial judges can look to lodestar billings as a cross-check against disproportionate percentage-based fees. That policy also aligns California with other state and federal courts.

The appeal in the Robert Half case was brought by an objector to a $19 million wage-and-hour settlement with the company for which plaintiffs’ lawyers were awarded $6.3 million in fees. The objector’s lawyer, Lawrence Schonbrun, persuaded the California Supreme Court to hear his argument that under the court’s Serrano III precedent, the lower courts abused their discretion in calculating the fee as a percentage of the class action common fund. (Schonbrun made lots of other arguments in his briefs, which contend that abuses by the class action bar are eroding public confidence in the court system; the Supreme Court’s main opinion addressed only the fee methodology issue.)

Thursday’s decision explained by the 1977 Serrano III ruling does not govern fee awards in class actions. Serrano involved fees for public interest lawyers who won a challenge to the state’s system for financing public schools. Those lawyers were acting as private attorneys general, the Supreme Court said in the Robert Half decision, and the benefit they obtained was not a monetary fund. So, although the Supreme Court said in Serrano that the trial judge correctly considered plaintiffs’ lawyers’ lodestar billings to calculate a fee award, that language does not require courts awarding fees in class actions to use the lodestar methodology.

“In Serrano III, this court simply did not address the question of what methods of calculating a fee award may or should be used when the fee is to be drawn from a common fund created or preserved by the litigation,” the Supreme Court said Thursday. “For this reason, the passages quoted cannot fairly be taken as prohibiting the percentage method’s use in a common fund case.”

And besides, the justices said, prevailing opinion on the fairest way to compensate class action lawyers has changed since 1977. The decision sketches the history of class action fee calculations, dividing the timeline into three eras. The most recent, which began in the mid-1980s, restored percentage-based fees after a ten-year ascendance for lodestar-based fee awards. The theory was and remains that fees based on a percentage of the settlement fund provide the most effective incentive for class lawyers to litigate efficiently.

The latest trend, according to the California court, has been to calculate fees under both the percentage and lodestar methods to assure their reasonableness. That’s the approach the state justices okayed in Thursday’s opinion. “A lodestar cross-check  provides a mechanism for bringing an objective measure of the work performed into the calculation of a reasonable attorney fee,” the court said. “If a comparison between the percentage and lodestar calculations produces an imputed multiplier far outside the normal range, indicating that the percentage fee will reward counsel for their services at an extraordinary rate even accounting for the factors customarily used to enhance a lodestar fee, the trial court will have reason to reexamine its choice of a percentage.”

The California Supreme Court was careful to point out that its ruling applies only to class actions in which the class obtains a dedicated fund, not to “claims made” settlements or settlement funds that revert to defendants if class members do not claim all the money.

I should mention the 10-page concurrence by Justice Goodwin Liu, previously a litigator at O’Melveny & Myers. Liu discussed some of the broader class action concerns Schonbrun raised in briefs in the Robert Half case. He had two concrete suggestions “to promote accuracy, transparency, and public confidence in the awarding of attorneys’ fees in class action litigation.” First: Class representatives should, whenever possible, negotiate fees with class counsel when the lawyers are hired instead of waiting until after there is a settlement. That’s already happening in securities litigation involving sophisticated investors, Liu said, and scholarship shows pre-set fee arrangements reduce fee requests.

And second: In very large cases, Liu recommended, judges should make use of class guardians to act as devil’s advocates. “The class guardian would provide counterpoints to class counsel’s arguments concerning the risks and difficulty of litigating the case,” he said. “Perhaps most importantly, the class guardian or a fee expert retained by the guardian would provide information on prevailing market rates for similar litigation. The appointment of a guardian and a full-dress adversarial process would cost money (from the common fund) and time. But these costs, which would serve to enhance the accuracy and legitimacy of fee awards, would pale in comparison to the significant amounts of money to be divided between plaintiffs and counsel in high-value cases.”

Those are interesting ideas. Maybe Justice Liu will launch a fourth era of class action fee award history, in which plaintiffs’ lawyers apply for fees based on the size of the settlement, judges conduct lodestar cross-checks and, from time to time, class counsel defend their requests in adversarial proceedings. Someday, I’m sure, we’ll figure the whole thing out.

Objector counsel Schonbrun said in a press release that the California Supreme Court chose not to accept the opportunity of this case to make landmark class action law and return “millions, indeed over the course of time, billions, of dollars” to class members. “Apparently, concerns about overpayment of attorneys’ fees through the use of the percentage method is a vestige of a bygone era,” he said.

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