Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

 In the Northern District of California, Judge William Alsup keeps a standing order informing attorneys of how he will evaluate any proposed class action settlements. Now, one of his fellow judges has joined him. While Tijero v. Aaron Bros., Inc., 2012 U.S. Dist. LEXIS 183238 (N.D. Cal. Jan. 2, 2013) is neither a standing order nor a direct explanation of all the factors Judge Saundra Brown Armstrong might consider in a class action settlement--in fact, it appeared to be a bog-standard FLSA wage-and-hour case--it bears the distinction of being one of the few opinions to deny even preliminary approval to a proposed settlement.  And it did so without a single objection being filed. As a result, it does provide some valuable object lessons for attorneys looking for obvious pitfalls to avoid. Among those pitfalls:

Make sure the class members are the last ones to get paid. When a settlement is at hand, there are a lot of parties with their hands out, including the plaintiffs' attorneys (who may want to be paid first), named plaintiffs (who may want incentive payments), and claims administrators. So. much like a minimum wage paycheck, the award for the class member can get eaten up long before it reaches the allegedly wronged party. In this case:

After deducting attorneys' fees in the amount of $266,666.66 (which represents 33% of the common fund), costs in the amount of $30,000, incentive award payments to Plaintiffs in the collective amount of $10,000, claims administration fees in the amount of $68,000, and a PAGA penalty in the amount of $10,000, the net settlement amount, reflecting the amount available to pay claims made by class members, is projected to be $415,333.34. Based on the data provided by Defendant in connection with the mediation, class members were employed approximately 269,941 weeks for the period May 7, 2004 3 through the date of the mediation session. Assuming a total of 269,941 weeks and a net settlement fund of $415,333.34, the average net payout would equate to approximately $1.54 per week.

(Emphasis added, internal citations omitted.)  Leaving so little for the class members is a surefire way to make sure that the settlement attracts objectors or sua sponte criticism.

Make no effort to meet your Rule 23 burden. Sure, in practice class settlements are usually certified more frequently than adversarial class actions. (This is one reason why defense attorneys get so annoyed at the citation of settlement opinions to bolster a tenuous certification motion.) But the court is still expecting the parties to make it look like they put in the effort. In this case, the court continually stressed that the plaintiffs provided no facts and no details about commonality, typicality, or adequacy. As a result, the court refused to certify a class for settlement.

Shoot for an overly broad release. Defendants often want the broadest release they can get away with, as value for their settlement money. But shooting for a release that is too broad will attract the same kind of scrutiny as not paying the class members. In this case, in exchange for their $1.54 per week, the absent class members would have released not just their opt-out wage act claims, but their opt-in FLSA collective action claims. That was more than the court could stomach.

Offer no chance to object. It's no secret that most plaintiffs and defense attorneys don't like class action objectors.  So it probably made sense to both sides in this case to provide only 30 days to object to the settlement or opt out. But the Ninth Circuit has already held that objectors have a due process interest in contesting fee motions.  So minimizing the chances of getting an objection in is likely to raise red flags.

The takeaway here is one that I have reiterated for several years now. Trying to settle on the cheap gets expensive very quickly. For defendants, a settlement that actually pays something to the class members is more likely to be approved, even if it is less attractive to plaintiffs' counsel.

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Mass torts have long been a problem for the American judicial system. Today, it's Vioxx, the BP oil spill, and Chinese drywall. Fifteen years ago, it was asbestos, Agent Orange, and silicone gel breast implants. Back in the 1980s and 1990s, when mass torts first threatened to overwhelm crowded dockets in various jurisdictions, the courts carefully considered whether to use class actions as a means of resolving thousands of similar tort claims.

And, at that time, Columbia University law professor (and recent Daily Show guest) John Coffee wrote an in-depth examination of the various problems and conflicts of interest that arose when courts tried to use Rule 23 to solve the mass tort problem: Class Wars: The Dilemma of the Mass Tort Class Action.

Professor Coffee began by providing an excellent working definition of a mass tort:

Mass tort litigation is characterized by several unique features: (1) a predictable evolutionary cycle during which the value and volume of individual claims starts low and then spirals upward; (2) high case interdependency so that litigated outcomes in any mass tort area quickly impact on the settlement value of other pending cases in that same field; (3) a highly concentrated plaintiffs' bar, in which individual practitioners control exceptionally large inventories of cases, sometimes totaling in the tens of thousands; and (4) a capacity to place logistical pressure on individual courts that is simply unequalled by any other form of civil litigation.

Over time, courts have progressively held that mass torts are not well-suited for class-action treatment, particularly not in the form of "settlement classes" (that is, class actions filed specifically to enforce a pre-existing settlement agreement between plaintiffs and defendants). And Professor Coffee spends much of the article discussing the difficulties that arise from doing so. The portions of his discussion that remain most relevant have to do with the conflicts of interest that arise from aggregated settlements.

On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs. Not only have the interests of these subclasses clearly conflicted, but the class counsel has explicitly traded off the interests of subclasses against each other, obtaining substantial compensation for one subclass in return for a waiver of cash compensation by anoth- er. In such multiparty negotiations between the defendants and different subclasses of plaintiffs, even the well-meaning plaintiffs' attorney shifts inevitably from the role of an advocate and adviser for clients to the role of a philosopher king, dispensing largess among his client subjects.

While the specific cases may have changed, the fundamental dilemma remains the same, however, whether it is a class action or just a series of consolidated tort cases. Any resolution of mass torts has to accommodate (1) the plaintiffs' desire for redress of some kind, (2) the defendant's desire for global peace, and (3) the plaintiffs' attorneys' desire for fees.

And Professor Coffee discusses a number of issues that still resonate. While the explicit development of "settlement classes" has waned, defendants will still take advantage of filed class actions to try to achieve releases of larger issues through a classwide settlement. And Coffee's descriptions of inventory settlements and settling future claims are both still relevant today.

So what can modern defendants take from this article? The most useful portions have to do with objection-proofing possible settlements:

• Negotiate down attorneys' fees. It makes sense to negotiate on fees more closely than defendants have done in the past. While it doesn't matter as much to the defendant who gets paid (from a fiscal, not emotional, standpoint), courts care. And courts are beginning to eye "clear-sailing" and quick-pay provisions with greater suspicion.
• Try to give the class some cash benefit. Courts have long been suspicious of non-monetary benefits. And they're expressing their concerns more openly.
• Make sure subgroups are separately represented. In a discussion that seems especially prescient today, Professor Coffee notes that "On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs." A defendant interested in a global settlement of certain complaints could do worse than to insist that subclasses receive separate counsel. (Among other advantages, counsel who are both zealous and ethical can help the defendant reduce payments for true nuisance claims.)

Be advised, the advice to be gleaned from Professor Coffee's article, particularly in light of current settlement case law, doesn't make for easy or cheap class settlements. But as I've said for some time now, for defendants, settling on the cheap can get really expensive.

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I don't usually say whether I think a class-action opinion is good or not.  For one thing, this blog has been about strategy rather than policy.  For another, I'm a practicing attorney, and I'd rather not try to second-guess judges who have to sort through layers of contentious briefing in order to decide issues in class actions.

But I'm going to make an exception for an opinion I just ran across by Judge Alsup of the Northern District of California.  This is a good settlement opinion; moreso for the fact that it has been issued before the parties have made a settlement proposal.  To highlight just three of the areas Judge Alsup warns both parties about before they've entered negotiations:

On adequacy of representation:

Is the plaintiff an adequate representative with standing? Is plaintiff motivated to and qualified to act on behalf of those he or she seeks to represent? Are there shortcomings in the plaintiff that would be advanced to defeat a class certification motion? What is the litigation history, criminal history, and relationship to plaintiff's counsel? In an employment case, how long did the plaintiff work for the employer? The opinion of the lead plaintiff as to the fairness of the settlement to absent class members must be provided to the Court, along with an opinion by counsel. Adequacy of counsel is not a substitute for adequacy of the representative.

On expansion of the class:

Typically, defendants vigorously oppose class certification and/or argue for a narrow class. In settling, however, defendants often seek to expand the class, either geographically (i.e., nationwide) or claim-wise (including claims not in the complaint) or person-wise (e.g., multiple new categories). Such expansions will be viewed with suspicion. If an expansion is to occur it must come with an adequate plaintiff and one with standing to represent the add-on scope and with an amended complaint, not to mention due diligence as to the expanded scope. The settlement dollars must be sufficient to cover the old scope plus the new scope. Personal and subject-matter jurisdiction over the new individuals to be compromised by the class judgment must be shown.

On incentive payments to class members:

If the proposed settlement by itself is not good enough for the named plaintiff, why should it be good enough for absent class members similarly situated? Class litigation proceeded well for many decades before the advent of requests for "incentive payments," which too often are simply ways to make a collusive or poor settlement palatable to the named plaintiff. A request for an incentive payment is a red flag.

What makes this such a good opinion?  It's clearly written, and provides real guidance on thorny issues that actually come up in settlement negotiations.  But most importantly, it shows that Judge Alsup thinks hard and clearly about the strategic incentives both plaintiffs and defendants face when settling a class action.  For all of the appellate opinions out there discussing the various factors that can spring from Rule 23(e)'s requirement that settlements be "fair, reasonable, and adequate," this may be the single best opinion I have read on classwide settlement.   I usually hope my clients don't have to end up in court litigating a class action, but if they do, they could do a lot worse than Judge Alsup.

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 Still fighting a virus and a heavy schedule, so my apologies for providing only a brief post this week.  

So let me point you to a working paper from the American Antitrust Institute, titled Indirect Purchaser Class Action Settlements.  The paper was prepared by plaintiffs' lawyers, and is

intended to respond to the contentions made by corporate interests that indirect purchaser antitrust actions benefitted only plaintiffs’ attorneys and resulted in, at best, cy pres recoveries for the indirect benefit of the class members.

While the paper may have been written to rebut "corporate interests" (presumably critics of class actions), it does provide a case-by-case inventory of settlements in indirect purchaser class actions. That inventory may be useful for any number of purposes, including valuing upcoming settlements and determining the amount of fees class-action attorneys tend to receive.  

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 For plaintiffs' counsel, one of the most important questions in a class-action settlement is how they will get paid. In McDaniel v. County of Schenectady, the Second Circuit explicitly compared the various methods of determining attorneys' fees in class actions. McDaniel was a civil-rights case challenging strip-search policies for pretrial detainees. Approves settlement of the class action. The lower court approved the settlement, but awarded less in fees than the plaintiffs would have wanted. The analysis provides a good discussion of the advantages and disadvantages of both lodestar and percentage fees.

The case took three years of "vigorous" litigation, and approximately 1000 hours of plaintiff time. (Does this seem like a lot? It's six months of billing for a single defense associate, but for many smaller-firm practitioners, it may be close to an uninterrupted year of work.) At that point, the parties were ready to settle. The district court approved the settlement, but used a lodestar method to calculate attorneys' fees instead of a percentage of the common fund. The plaintiffs appealed.

The Second Circuit began by noting that

Although we have acknowledged that "the trend in this Circuit is toward the percentage method," it remains the law in this Circuit that courts "may award attorneys' fees in common fund cases under either the 'lodestar' method or the 'percentage of the fund' method."

So it looked at the differences between lodestar and percentage of fund.

The lodestar method is not perfect. It creates an incentive for attorneys to bill as many hours as possible, to do unnecessary work, and for these reasons also can create a disincentive to early settlement. Under certain conditions, moreover, lodestar awards can create the near opposite incentive, encouraging attorneys to settle before trial even when it is not in their clients' best interest. While under the lodestar method lawyers share the "downside" risk of trial (i.e., the possibility of an adverse judgment, and hence no fee), they do not share in the potential economic "upside" (i.e., fees as a percentage of a large common fund), especially since trial requires comparatively fewer hours than the process of trial preparation.

(Emphasis added, internal citations omitted.) That said, the court also found problems with awarding a percentage fund:

As we indicated in Goldberger, this Circuit's adoption of the lodestar method was precipitated by the perception that percentage fees "tended to yield too little for the client-class, and an unjustified 'golden harvest of fees' for the lawyer." Particularly in cases that result in a very large monetary award, the percentage method holds the potential to result in attorneys' fees many times greater than those that would have been earned under the lodestar of hourly rate multiplied by hours worked. The principal analytical flaw in Appellants' argument for a presumptive percentage award as a "benchmark" in common fund cases lies in the assumption that there is substantial contingency risk in every common fund case that would justify such a multiplier.

Moreover, although the percentage method has the advantage of aligning the interests of plaintiffs and their attorneys more fully by allowing the latter to share in both the upside and downside risk of litigation, it can create perverse incentives of its own, potentially encouraging counsel to settle a case prematurely once their opportunity costs begin to rise.

(Emphasis added, internal citations and quotations omitted.) It's interesting that neither fee award seems to align the interests of the class with the interests of the lawyers. While some might argue that aligning those interests shouldn't matter, others view this inability to align incentives as one of the central struggles in class-action practice. 

Ultimately, the Second Circuit affirmed the district court's use of the lodestar method. So how is this case useful for defense counsel? Aside from providing a balanced critique of percentage-of-fund fees (which can be more expensive for defendants), it lays out very clearly the advantages and disadvantages of the different methods of calculating attorneys' fees in class-action settlements.

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One of the larger points of contention in class-action settlements is the size of the attorneys' fees. Indeed, with a few exceptions, no one defends the size of attorneys fees, and the most heated criticisms decry the size of the fees compared to the recovery the class actually receives. Which is what makes a recent case from the Ninth Circuit, In re Mercury Interactive Corp. Securities Litigation, so surprising: it turns out that Rule 23 already has one simple, often-ignored measure for limiting the amount of fees class counsel can charge.

The Mercury case arose after public disclosures that Mercury's then-CEO, CFO, and General Counsel had participated in a scheme to backdate stock options. (Backdating, for those who remember the bull market, is a practice of revising the date that individuals were granted stock options to allow for the largest possible profit on the stock. In other words, someone who was backdating options would revise the grant date to reflect the lowest possible stock price. When the grantee exercised the option, he'd pay a lower price for valuable stock.)

Like with many (but not all) securities class actions, this one settled quickly. As part of the settlement approval process, the district court held a fairness hearing, and provided a deadline for objections. However, the court set the deadline for objections before the plaintiffs' counsel's fee application deadline. That, as one might guess, presented a problem for the objectors: without seeing the details of plaintiffs' fee proposal, it was extremely difficult for them to evaluate whether it was properly justified.

One of the objectors, the New York State Teachers' Retirement System, nonetheless tried to challenge plaintiffs' fees, submitting a generalized objection to the anticipated 25% contingency fee. The district court approved the fee anyway, stating in part that:

[The objectors] do not object to any line item of work that was done, but rather they simply believe that the amount of the contingency fee should be 18 percent rather than 25 percent.

Teachers appealed, arguing that, in approving plaintiffs' fees, the district court had violated Rule 23(h). Rule 23(h), which governs awards of fees and taxable costs, provides that:

In a certified class action, the court may award reasonable attorney's fees and nontaxable costs that are authorized by law or by the parties' agreement. The following procedures apply:

(1) A claim for an award must be made by motion under Rule 54(d)(2), subject to the provisions of this subdivision (h), at a time the court sets. Notice of the motion must be served on all parties and, for motions by class counsel, directed to class members in a reasonable manner.
(2) A class member, or a party from whom payment is sought, may object to the motion.
(3) The court may hold a hearing and must find the facts and state its legal conclusions under Rule 52(a).
(4) The court may refer issues related to the amount of the award to a special master or a magistrate judge, as provided in Rule 54(d)(2)(D).

The Ninth Circuit reversed, holding that the district court had abused its discretion by violating Rule 23(h). In fact, it went even further, stating that

the practice borders on a denial of due process because it deprives objecting class members of a full and fair opportunity to contest class counsel's fee motion.

Why would this rise to the level of a due process violation?  As the Ninth Circuit pointed out

During the fee-setting stage of common fund class action suits such as this one, plaintiffs' counsel, otherwise a fiduciary for the class, becomes a claimant against the fund created for the benefit of the class. This shift puts plaintiffs' counsel's understandable interest in getting paid the most for its work representing the class at odds with the class' interest in securing the largest possible recovery for its members.

(Internal quotations omitted.) As a result, by requiring plaintiffs to submit a fee request before objections are due, Rule 23(h) provides an important check on plaintiffs' counsel at exactly the moment their interests diverge from those of the class.

Allowing class members an opportunity thoroughly to examine counsel's fee motion, inquire into the bases for various charges and ensure that they are adequately documented and supported is essential for the protection of the rights of class members. It also ensures that the district court, acting as a fiduciary for the class, is presented with adequate, and adequately-tested, information to evaluate the reasonableness of a proposed fee.

This may seem like an obvious point, one that hardly requires an entire blog post. But a number of trained lawyers have missed it over the years, and not just the lawyers and courts that have made submitting objections before fee requests "a common practice." When Professor Brian Fitzpatrick defended "quick-pay" provisions--and when I critiqued that defense--neither of us took into account the obvious problem; quick-pay provisions (which pay plaintiffs' counsel before the settlement has been approved) clearly violate the procedure dictated by Rule 23(h).

So what's the takeaway for this case? Always read the rules. Rule 23 exists to enable class actions, but also to ensure that, at all times, absent class members are adequately protected. And those protections often exist to rein in the excesses of plaintiffs' counsel.

EDITED AT 11:30 AM TO ADD:

Ted Frank, of the Center for Class Action Fairness, has commented to point out that the majority of quick-pay provisions allow payment after approval, but before appeals have been exhausted, which means that they would not facially violate Rule 23(h).  And I should note that Professor Fitzpatrick accurately described the timing of payment in his article.  The takeaway from this?  Bloggers should reread old posts if they're going to revisit them later; especially if it turns out they were right the first time.

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 Brian Fitzpatrick (of "Objector Blackmail" fame) has published another article in the University of Pennsylvania Law Review asking the provocative question: are class-action lawyers paid too little? His provocative answer: yes they are. According to Fitzpatrick, in small-stakes class actions, lawyers should collect a 100% contingency fee. What's his justification? An argument he refers to as "insurance-deterrence theory." Fitzpatrick assumes that any money that goes to class-action lawyers serves a deterrence function, because not only does it cost the defendant money, it also funds further opposition to corporate wrongdoing. (Fitzpatrick is not the only person to make this kind of argument; many plaintiffs' lawyers and academics argue that class actions primarily serve as a public deterrent to corporate wrongdoing.) He also assumes that, if a harm is too small for a class member to reasonably buy insurance to prevent, then that money is better spent on the "deterrence" of paying the class lawyer than the "insurance" of compensating the class member.

Fitzpatrick dismisses most arguments to cap fees (for example, that class actions exist to compensate class members rather than enrich lawyers, or that giving plaintiffs' lawyers further incentives to file questionable cases might lead to further abuse) as "political." However, even leaving aside these arguments, Fitzpatrick's argument runs afoul of the basic structure of Rule 23.

• 100% fees make inadequate settlements. Rule 23(e) requires a settlement to be "fair, reasonable, and adequate."  One way the court measures these criteria is by determining whether a proposed settlement represents good value to the proposed class.  A class settlement that provided the members with nothing, and the lawyers with everything would be unlikely to pass this test. (It also would not pass the settlement-approval requirements of the Class Action Fairness Act. If courts are legally required to scrutinize settlements that give class members only coupons, then they certainly can't rubber-stamp settlements that give the lawyers everything and the class nothing.)
• 100% fees require inadequate class representatives. Fitzpatrick's proposal is also flawed because there is no reasonable class member that would willingly agree to forgo any possibility of recovery so that her counsel could be paid more. In essence, Fitzpatricks proposal relies on a class representative that would be willing to say "I understand I was defrauded for $100, but instead of getting that money back, I'd rather you just gave it all to my lawyer. And I'm confident everyone else like me will feel the same way." For many courts, that kind of statement would serve as evidence that the class representative was not sufficiently independent of her counsel. 
• 100% fees indicate inadequate class counsel. Under Rule 23(g), "Class counsel must fairly and adequately represent the interests of the class." That means that they must watch out for the class's best interest, not their own. From that standpoint, a 100% fee clearly does not look out for the best interests of the proposed class instead of the lawyers.

One has to admire Fitzpatrick's chutzpah; agree or not, he's made a bold proposal. But he's completely ignored the existing Rule 23 requirements to get there. As it turns out, Fitzpatrick's proposal is inadequate, in every sense of the word.

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Back in 2001, Bruce G. Murphy, a California attorney, contacted the San Diego office of then-firm Milberg Weiss. He claimed to have several clients who had bought stock in Tut Systems, a technology company that had announced it was not going to meet its earning estimates for the fourth quarter of 2000. Murphy, who had provided clients for Milberg’s securities class actions before, wanted to know if the firm wished to pursue the case and pay him his customary 10% referral fee.

Four years later, Lerach Coughlin (which had broken off from Milberg) settled a securities class action against Tut Systems. But Lerach did not pay Murphy.

Murphy filed an application for attorneys’ fees in the trial court, claiming that he was contractually entitled to fees for referring clients. The trial court rejected the application. So Murphy appealed the application to the Ninth Circuit, which tersely rejected his arguments. In re Tut Systems, Inc. Securities Litigation,No. 07-16282, 2009 WL 725104 (9th Cir. Mar. 19, 2009)

So what's remarkable about the case? It provides another glimpse into how cases are brought, and the structure of class-action plaintiffs' consortia. Most opinions relating to class actions operate under the legal fiction that class actions, like other litigation, involve an injured plaintiff who seeks out a lawyer and then sues the defendant. In many ways, that fiction is a useful one -- it allows courts to focus on the legal issues of the case, instead of constantly refereeing disputes defendants might raise about whether the class counsel are really acting in their putative client's best interests. (The court will ultimately decide that issue when it decides whether to certify the class.)

But that fiction is not always accurate. Class actions rarely arise from an injured plaintiff seeking out counsel. Instead, counsel finds the basis for a class-action suit, and then searches for clients. And, as Tut Systems fee dispute illustrates, there are different kinds of counsel in the class-action ecosystem. One kind is the Referrer: counsel who may not have much Rule 23 or subject-matter expertise, but who -- for whatever reason -- are good at finding clients. Referrers may have contractual arrangements with counsel who specialize in securities class actions to provide them with possible clients. Despite Bill Lerach's famous pronouncement that class-action litigation requires no clients, clients are essential to a class-action lawsuit. But, as In re Tut Systems indicates, the Referrer faces a number of risks -- simply finding a client and figuring out whether they have a claim may not be enough to eventually earn fees. And, as this case implies, given the intense competition among plaintiffs’ firms, the Referrer may not be able to rely on any contract with the ultimate Class Counsel to collect fees, either.

What’s the lesson here for defendants? The plaintiffs’ side of the case is rarely monolithic. While often the infighting among plaintiffs’ firms won’t affect the defense, it is important to know when disputes may challenge the resolution of a case.

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