** The California Supreme Court endorses the Percentage of Common Fund Approach for Class Action Settlements **
In a decision that consumer class action lawyers have been on pins and needles awaiting, the California Supreme Court just issued its opinion in Lafitte v. Robert Half Int’l Inc, Cal., No. S222996 (Aug. 11, 2016) regarding the proper way to determine attorney fee awards in common fund cases. The Court concluded that the percentage of the fund method favored by plaintiffs’ class action lawyers (and, frankly, defense attorneys who settle consumer class actions by agreeing to a common fund) is alive and well.
For the past several years, objectors to class action settlements in California have become increasingly vocal with their criticism of this prevalent class action settlement device that creates a fund to compensate class members and pay class counsel (and sometimes claims administration costs as well). In consumer fraud actions, after compensation to the class has been negotiated, additional money is placed in the common fund to compensate class counsel for their work on the case – typically 25% of the entire fund amount. Critics of the percentage of the common fund approach argue that it incentivizes plaintiffs’ counsel to put their interests ahead of class members (see e.g., Smith, Adam, The Wealth of Nations (1776)) and settle cases quickly in an amount that may not fully compensate class members in order to avoid otherwise needless effort in obtaining their fee.
Lafitte was a wage and hour case against Robert Half, the well-known staffing company. The parties preliminarily settled the lawsuit by establishing a $19 million settlement fund that included a “clear sailing” provision for attorney fees of $6,333,333 – 33% of the common fund. (Because courts must rule on the reasonableness of fees, a plaintiff and defendant settling a class action cannot agree on the plaintiff’s attorney’s fee award. Instead, the defendant will sometimes agree that it will not oppose a specific fee award – giving plaintiff’s counsel “clear sailing” toward their requested fee.)
One of the class members in Lafitte thought the $6+ million award was a bit rich and believed it was not sufficiently justified or substantiated by class counsel, who relied primarily on the fact that 33% was within the range of typical class action settlement awards (20%-50%). The class member filed an objection to that effect citing Serrano v. Priest (1977) 20 Cal.3d 25 (“Serrano III”) for the proposition that fee awards must be calculated on the basis of time spent by the attorneys on the case plus a multiplier. The Los Angeles Superior Court denied the class member’s objection determining that a percentage of the common fund was the correct approach but double-checking it against the reasonable fee class counsel would have charged if it was a billable hour case – the “lodestar.” The court analyzed plaintiff’s counsel’s billing records and concluded that the lodestar was between $2,968,620 and $3,118,620. The gap between the lodestar amount and the $6,333,333 percentage fee was closed by applying a multiplier of between 2.03 and 2.13. Why apply a multiplier? To compensate class counsel “for the novelty and difficulty of the questions involved, (2) the skill displayed in presenting them, (3) the extent to which the nature of the litigation precluded other employment by the attorneys, (4) the contingent nature of the fee award.” Ketchum v. Moses, 24 Cal.4th 1122, 1132 (2001) (citing Serrano III).
Viewing the “double check” methodology with Pope’s “jaundiced eye,” one might conclude that – because the multiplier is completely subjective – a court can always engineer a proposed percentage fee award in a class action settlement with the lodestar analysis. This is precisely what the objector argued. Any student of algebra can solve this simple equation where the contingent fee award and lodestar fee are known:
contingent fee award = lodestar fee x multiplier
In Lafitte, the California Supreme Court charted the birth, death and resurrection of the common fund percentage approach for attorney fee awards throughout legal history — at least from 1966 when Federal Rule of Civil Procedure 23 was amended so as to usher in the modern class action. The Court also carefully analyzed the pros and cons of each approach. For those keeping score: Lodestar Method – Pros: (1) better accountability from class counsel for case handling, (2) encourages class counsel to pursue marginal increases in class recovery; Cons: (1) discourages early settlement, (2) consumes judicial resources in reviewing class counsel’s timesheets; Percentage Method – Pros: (1) easy to calculate, (2) creates reasonable expectations for class counsel in terms of recovery, (3) encourages early settlement; Cons: (1) encourages class counsel to settle too early for a reduced amount, (2) may create a windfall when the common fund is very large. After this detailed analysis, the Court concluded, “[W]e clarify today that use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion.” Moreover, “[T]rial courts have discretion to conduct a lodestar cross-check on a percentage fee . . . [but]; they also retain the discretion to forgo a lodestar cross-check and use other means to evaluate the reasonableness of a requested percentage fee.” The Lafitte Court acknowledged that Serrano III may have caused confusion on the issue, but limited Serrano III’s lodestar requirement to cases involving enforcement of statutes with fee-shifting provisions – for example, where prosecution of the case “has resulted in the enforcement of an important right affecting the public interest.” Cal. Code Civ. Proc. §1021.5.
Before California consumer class action lawyers fire up their calculators, however, a few words of warning are in order. First and foremost, the Lafitte Court did not dispense with the fundamental requirement that the fee award be reasonable. While the Court’s opinion does not require a lodestar double check, it does mandate that the trial court use some means to evaluate the reasonableness of the fee. Interestingly, the Court shied away from endorsing the “sliding scale” approach sometimes employed in class action settlements to promote reasonableness where the fee percentage decreases as the settlement increases in amount: “[W]e do not mean to endorse the use of a sliding percentage scale. That issue is not before us and is not without controversy.” In addition, the California Supreme Court made clear that its ruling does not inform whether and how a contingent fee can be applied where there is no common fund – i.e., where class counsel argues for a “’constructive common fund’ created by the defendant‘s agreement to pay claims made by class members and, separately, to pay class counsel a reasonable fee as determined by the court.”
Most importantly for counsel who settle consumer class actions, the Court stated that its decision does not apply to a case where “a settlement agreement establishes a fund but provides that portions not distributed in claims revert to the defendant or be distributed to a third party or the state, making the fund‘s value to the class depend on how many claims are made and allowed.” Because it is often the case that the common fund settlement amount in a consumer class action includes more money (even minus class counsel fees and administration costs) than is needed to compensate class members’ claims, such settlements often include cy pres provisions requiring that left-over money not claimed by class members (or eaten up by fees and costs) be donated to a specific charity. Cy pres provisions are employed to: (1) convince the court deciding whether to approve the settlement that the amount is “real” in that the defendant isn’t getting any of it back; and (2) establish a concrete settlement number on which to apply the attorney fee percentage. The Lafitte Court grounded its decision to approve the percentage of fund method on the basis that “the percentage of the fund method more accurately reflects the results achieved.” But if cash in the settlement fund ends up going to a charity – no matter how worthy the cause – does this amount “reflect the results achieved” for the class? No doubt, given the ever-increasing use of cy pres provisions in consumer class actions, we will almost certainly learn the answer to this question in the very near future.