Success irrelevant to fees

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An attorney's "degree of success" is an improper consideration, when awarding fees to class action counsel, the Seventh Circuit held on Oct. 12.

The law firm of Milberg Weiss Bershad & Schulman, LLP, represented the plaintiffs in a securities action against three former executive officers and Marchfirst, Inc., an Internet consulting company.

The corporation, which had filed for bankruptcy shortly before the suit was filed, was not named as a plaintiff. However, the bankruptcy trustee for the corporation alleged breach of contract against the former officers.

After a 16-month mediation, a settlement was finalized, providing $18 million for the class, and $6 million to settle the trustee's claims.

No one objected to the settlement, and the settlement was approved by the district court. Milberg Weiss petitioned for compensation equal to 28 percent of the gross settlement, roughly $5 million.

Milberg Weiss justified the figure using a study by National Economic Research Associates, indicating that the $18 million settlement exceeded the median expected settlement by 50 percent. In addition, Milberg Weiss argued that the quality of its legal services was demonstrated by its ability to secure this amount in spite of the legal and factual complexities presented by the case.

Milberg Weiss further contended that its fee request was fair and reasonable because it represented 88 percent of its cumulative lodestar of $5,693,884 (the equivalent of the firm's hours spent on the case multiplied by its hourly rate), and was lower than fee percentage awards of 33 percent approved by other judges in the district.

Finally, Milberg Weiss noted that it risked nonpayment at the outset of the litigation since its compensation depended on the success of the suit.

The district court first held that the attorney fee must be awarded based on the net settlement amount of $18 million, rather than the gross amount of $24 million (a holding not contested on appeal).

However, the court awarded only 15 percent of the net settlement as attorney fees, or $2.6 million, based on counsel's "degree of success." The court concluded that the small recovery did not justify the requested fee percentage of 28 percent.

Milberg Weiss appealed, and the Seventh Circuit vacated the judgment, in an opinion by Judge Ann Claire Williams.

The court began by noting its standard for attorney fees in class actions, set forth in In re Synthroid Mktg. Litig., 264 F.3d 712, 718 (7th Cir. 2001) — that district courts "do their best to award counsel the market price for legal services, in light of the risk of nonpayment and the normal rate of compensation in the market at the time."

The court concluded that the district court, by employing an analysis centered solely on the results achieved by counsel, used an incorrect approach.

The district court employed a degree of success standard pursuant to Hensley v. Eckerhart, 461 U.S. 424, 436 (1983). However, Hensley involved fee-shifting under 42 U.S.C. 1988, which the Seventh Circuit found inapplicable to class actions, because class actions involve a common fund, whereas, in civil rights actions, attorney fees are paid by the defendant, on top of the plaintiff's award.

The district court also declined to consider the risk of nonpayment that counsel bore in taking he case, reasoning that class actions rarely go to trial, but all settle.

The Seventh Circuit rejected this reason, finding that there is generally some risk of nonpayment, or at least a fee that inadequately reflects the efforts of counsel.

The court concluded, "Because the district court failed to provide for the risk of loss, the possibility exists that Counsel, whose only source of a fee was a contingent one, was undercompensated."

Because the district court's decision was based on the degree of success, without factoring in what value the market would have placed on the services had the fee been arranged at the outset, the court vacated the award, and remanded the case to the district court for further proceedings.