In Arkansas Teacher Retirement System v. State Street Corporation, — F.4th —-, 2022 WL 391450 (1st Cir. Feb. 9, 2022), the First Circuit Court of Appeals upheld a district court’s sanction of law firm Lieff Cabraser Heimann & Bernstein LLP (“Lieff Cabraser”) related to class action attorney’s fees.
Lieff Cabraser, along with several other firms, represented a class of investors in a challenge to charges imposed on foreign exchange products. After years of litigation and mediation, the parties reached a settlement of $300 million. Relying on representations made by class counsel, the district court awarded class counsel almost $75 million—roughly 25% of the total settlement.
However, after it discovered several “problematic” representations made by class counsel, the district court vacated its initial award and reduced it to $60 million or 20% of the total recovery. One such representation related to double-counting hours billed by contract attorneys; Lieff Cabraser stated the amount of such double-counting was “negligible,” but records showed that the total double counting by plaintiff’s counsel to be over $4 million. Particularly troubling to the district court was class counsel’s misrepresentation of a study (“Study”) regarding typical fees awarded in similar cases. As such, the district court formally sanctioned Lieff Cabraser under Federal Rule of Civil Procedure 11(b).
Lieff Cabraser appealed, raising three challenges to the district court’s finding that it violated FRCP 11 by mispresenting the Study. The First Circuit granted an amicus’s request to defend the district court’s ruling. That amicus was Hamilton Lincoln Law Institute, which was represented by Theodore H. Frank and M. Frank Bednarz. Mr. Frank is well-known for challenging class action settlements and attorney’s fee awards.
The First Circuit rejected Lieff Cabraser’s arguments and affirmed the sanction.
First, the First Circuit rejected Lieff Cabraser’s argument that the district court imposed the sanction “without proper notice or an adequate opportunity to respond.” Reviewing the record, the First Circuit found that the district court repeatedly gave “notice of the basis for a possible sanction and a fair opportunity to show why there should be no sanction.”
Second, Lieff Cabraser argued that it could not be liable for any misrepresentations contained within the fee memorandum (in which the discussion of the Study was included) because it did not sign the memorandum. The First Circuit swiftly rejected this argument too. Lieff Cabraser allowed its name on the signature page of the challenged memorandum, and it “advocated that the court do as urged” in the memorandum. Thus, it was immaterial, the Court reasoned, that Lieff Cabraser’s “penned signature” did not itself appear.
Third, Lieff Cabraser argued that the memorandum was not substantively misleading. In the memorandum, class counsel claimed that a 25% award was “right in line” with the Study’s findings. However, the memorandum neglected to mention that the Study “found an inverse relationship between fee percentages and settlement amount.” The memorandum also failed to highlight that, in settlements between $250 million and $500 million, the “mean fee award was 17.8% and the median award was 19.5%.” Notably, Lieff Cabraser hired the author of the study, law professor Brian T. Fitzpatrick, to submit a declaration in support of its position. Even this did not sway the First Circuit: it found nonetheless that “the fee memorandum painted a materially misleading picture.” Particularly important to the First Circuit was the fact that “the allegedly misleading statement concerning the [Study] was made ex parte, with the distinct possibility that no adversary would ever offer any meaningful opposition” because “[t]he defendant, having bought peace, had no dog in the hunt for fees.” The First Circuit explained that in such a situation, “[t]he applicable rules of ethics called for an elevated level of candor.”
The First Circuit’s decision in Arkansas Teacher Retirement System is another recent example of courts’ willingness to examine attorney’s fees closely in class action settlements.