General Publications June 25, 2015

“9 Reasons Class Counsel Get Their Fee Requests Denied,” Law360, June 25, 2015.

Extracted from Law360

What do Scrooge McDuck, Montgomery Burns and plaintiff class action attorneys have in common? They can sometimes be a tad greedy.

Now, class actions certainly serve their purpose, and plaintiffs’ attorneys take on significant risk when prosecuting class claims, but when it comes time to negotiate the settlement of a class action, some plaintiffs’ attorneys take Gordon Gekko’s advice in the movie Wall Street a little too literally. This is something courts do not appreciate.

When counsel appear to be putting their own interest in collecting a large fee award in front of the interests of the class members, courts are likely to say try again. Several recent examples of such scenarios highlight the top reasons why courts are likely to reject a proposed settlement quicker than Trading Places’ Randolph and Mortimer Duke found themselves in the poorhouse.

Red Bull Class Counsel Have Their Wings Clipped on Fee Bid

In two false advertising class actions filed against Red Bull GmbH that had been consolidated in New York, U.S. District Judge Katherine Polk Failla approved a settlement agreement requiring Red Bull to compensate class members to the tune of $13 million. Those class members alleged they had been misled by Red Bull’s marketing statements asserting that Red Bull has benefits superior to coffee. But Judge Failla approved the settlement only after lopping $1.4 million off of the fee award requested by class counsel.

Class counsel sought $4.75 million in fees, despite the short life of the case (in which no discovery was taken) and despite a settlement value that Red Bull’s counsel characterized as a “nuisance settlement” meant to be a “gift” to consumers. Judge Failla likewise described the value of the class claims as “somewhat marginal” and noted that class counsel’s fee bid sought “an awful lot of money given what’s happened in this case.” Judge Failla made clear that her preference was to divert the dollars she cut from counsel’s fees to the class members’ compensation, but she was unable to do so because the two terms were not linked to each other in the settlement agreement.

Lesson 1: Class Counsel’s Fees Must Be Reasonably Correlated to Value They Obtained for Settling Class Members

Fee Request in Hyundai/Kia MDL Slashed in Half

After announcing in November 2012 that the fuel economy estimates for over 900,000 of their cars were overstated due to deviations from U.S. Environmental Protection Agency-approved testing protocols, Hyundai Motor Co. and Kia Motors Corp. were hit with a barrage of lawsuits. These were later condensed into the multidistrict litigation matter, In re: Hyundai and Kia Fuel Economy Litigation, pending in the Central District of California. The parties won preliminary approval of the settlement of dozens of the MDL-consolidated class actions in August 2014.

In May 2015, U.S. District Judge George H. Wu addressed the fee award component of the settlement, calling the $6 million enhanced fee award requested by one of the plaintiff firms “absurd” and chopping it down to $2.85 million. This still amounted to a 1.55 multiplier (rather than the triple multiplier counsel requested), which was more than the 1.22 multiplier applied to the fees of another plaintiff firm in the case, which received a $2.7 million award. Judge Wu noted that a triple multiplier would have given plaintiffs’ counsel an effective rate of $1,980 an hour, which is what Judge Wu found to be absurd.

Lesson 2: Any Fee Multiplier Class Counsel Requests Should Not Result in Unusually High Loadstar Rate

U.S. Circuit Judge Alex Kozinski Takes a Rake to Nissan Leaf Settlement

In the suit brought by owners of Nissan Motor Co. Ltd.'s Leaf over their electric cars’ allegedly defective battery packs, it was not the presiding California federal judge to whom the proposed settlement was presented who got up in arms; it was Chief Circuit Judge Kozinski and his wife, acting as objecting class members who tore into what they called a “sweetheart deal” for class counsel. The notion that a pre-certification settlement of a class action looks like a collusive deal between class counsel and defense counsel, to the detriment of the class, is a common theme in the filings of objectors.

In mid-2013, less than a year after the action was filed, an initial settlement of the class action was reached pursuant to which Nissan would improve the warranty protection for Leaf owners who experienced loss in battery capacity. Judge Kozinski felt class counsel inappropriately forsook discovery of Nissan’s documentation of the defect issues when presented with a settlement that gave counsel a $1.9 million slice of the pie. His objections to the proposed settlement also focused on class counsel’s estimation of the settlement’s value to the class members, calling the $38 million valuation a worthless fiction based on wholly unrealistic assumptions about the number of Leaf battery packs that Nissan would ever repair or replace. He also argued that Nissan improved its warranty protection in response to customer outrage, not anything class counsel did.

Class counsel met with Judge Kozinski in mediation to resolve his concerns, and nearly a year after the first proposed settlement, submitted a new version to the court in May 2015. The revised settlement increases the consideration Nissan would provide to class members, but adds nothing to counsel’s fee request, despite a year and a half of additional work. This apparently resolved Judge Kozinski’s concerns with the valuation of the settlement and its relation to the fee request, as he withdrew his objections to the revised agreement. U.S. Circuit Judge A. Wallace Tashima will decide the fate of the new deal.

Lessons 3 and 4: Value of Settlement to Class Members Must Be Realistically Calculated When It Is the Basis for Class Counsel’s Fee Request — Hints of Collusion Should Be Avoided

U.S. Circuit Judge Richard Posner’s Triumvirate of District Court Reversals

In the Seventh Circuit, Judge Posner reversed district court approvals of three different class action settlements in 2014, each time highlighting a significant fault in the methodology used to calculate class counsel’s fees. In Eubank v. Pella Corp., 753 F.3d 718, Judge Posner described the settlement of class claims concerning defective windows as “scandalous.” One of his concerns was that counsel had inflated the value of class relief in order to justify a higher fee award. Instead of the $90 million value counsel assigned (without the benefit of an independent valuation), Judge Posner concluded that the total relief to the class was worth no more than $8.5 million. Using this revised value, Judge Posner concluded that class counsel’s request for $11 million in fees was equal to 56 percent of the settlement value, and was therefore excessive.

Lesson 5: When a Fee Request Is Premised Upon the Value of the Settlement to the Class Members, the Methodology Used for that Valuation Must Be Legitimate

In Redman v. RadioShack Corp., 768 F.3d 622, a class action alleging violations of the Fair and Accurate Credit Transactions Act, the $4.1 million settlement agreement provided for $830,000 worth of coupons to claimants, $2.2 million in administrative costs and $1 million in attorneys’ fees. Judge Posner first reasoned that, because administration costs provide no direct benefit to class members, they may not be included in the valuation of the settlement. He further critiqued the settlement because no attempt had been made to determine the actual value of the coupons to class members.

Echoing his analysis in the Pella case, the court held that the ratio of the fee request to even the potentially overstated value of the settlement to the class was inherently unreasonable. He recommended that the fee award should be reduced with an equal increase in the value issued to class members. Finally, Judge Posner warned against the appearance of collusion created by “clear sailing clauses” whereby defense counsel agree not to contest class counsel’s fee request.

Lessons 6, 7 and 8: Administrative Costs Should Not Be Included in a Calculation of the Settlement’s Value to Class Members, Anything Exceeding a 50-50 Ratio of the Settlement Value to the Fee Award Is Likely to Be Deemed Unreasonable and “Clear Sailing” Clauses Should Be Avoided

In the Pearson v. NBTY Inc., 772 F.3d 778, matter, the district court approved a $5.63 million settlement of a false labeling class action concerning glucosamine pills. The settlement provided for $865,284 to class members, $1.13 million to cy pres, $1.5 million to administration costs and almost $2 million to class counsel’s fees.

Again, Judge Posner criticized the valuation of the settlement. He noted that the 30,000 or so claimants who would receive compensation represented only 0.25 percent of the entire class and that the relevant measure of benefit to the class must look at the value to the entire class, not the maximum potential payment any one class member could receive. Looking at the ratio of requested fees to the actual value of the claim, Judge Posner concluded that class counsel’s fee request was “outlandish” and should generally not exceed a third of the total value of the settlement.

Lesson 9: When Valuing a Settlement’s Benefit to Class Members, It Is the Value to the Entire Class That Matters, Not Just Those Who Ultimately Receive Compensation

If class counsel seek a larger fee award than the trial court will allow, that’s class counsel’s problem, right? Well, in many instances, the significant delays created by a series of unsuccessful motions to approve a class settlement will translate to higher legal bills for the defendant. Perhaps the delay in carrying out the settlement terms will offset this cost, or there are other reasons why the defendant is perfectly happy with the delays caused by class counsel’s overreaching. But where the parties’ interests in quickly resolving a class action are aligned, class counsel and defense counsel alike should avoid the pitfalls exemplified in the foregoing cases as surely as they would flee Mr. Burns’s estate when he releases his hounds.

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