The authors conclude that judges have both the discretionary power and the tools to analyze applications and rein in unreasonable fee requests. Courts can, and should, balance the interests of the class with their responsibility to assure that attorneys are reasonably compensated.
I. Introduction
Recently, some high-profile class actions have generated attorneys’ fee awards in the tens of millions of dollars. The propriety of these awards has sparked an intense public debate. Legal commentators have argued that excessive fees are the product of several developments, including: conflicts between the interests of counsel and their clients; failure of the class to serve as a check on plaintiffs’ counsel; inordinate time pressure on federal courts; and, occasionally, collusive arrangements between plaintiffs’ and defendants’ counsel.1
Those proposing change contend that the prospect of lucrative fee awards has encouraged attorneys to initiate meritless and costly class litigation that unduly burdens businesses and the courts.2 Some have even suggested amending Federal Rule of Civil Procedure 23, which governs class actions, so that it addresses attorneys’ fees directly.3 Class litigation proponents respond that such lawsuits promote much-needed pecuniary recoveries for consumers and victims of mass torts, and help police the behavior of corporate defendants.4
One district court in the Southern District of New York sought to control attorneys’ fees by requiring several law firms to bid against each other when vying for the lucrative position of lead counsel, instead of selecting the firm that filed the action first.5 The case involved alleged price-fixing by Christie’s and Sotheby’s. Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York permitted the bidding to prevent the process of selecting lead counsel from turning into a politicized contest to secure a large fee award from the settlement or recovery intended to benefit the class.6
Less than a year earlier, the Rand Institute for Civil Justice published the results of a three-year study, which found that inflated attorneys’ fees stem, in part, from insufficient judicial scrutiny of fee awards. The Rand Institute proposed that courts link attorneys’ fees to actual recovery by the class instead of the theoretical value of a settlement.7
Federal courts are obviously at the center of this controversy. They enjoy broad discretion when awarding attorneys’ fees in class actions. The only limitation is an overarching standard of "reasonableness," regardless of the type of case, the nature of the recovery, or the method of calculating the fee.8
This article will explore the theoretical underpinnings of attorneys’ fees in class actions, describe how they influence federal courts’ evaluations of fee applications, and suggest how courts and counsel can both work towards achieving a proper balance between just compensation for counsel and preserving the recovery for the class members.
II. Legal Bases for Recovery of Attorneys’ Fees
From "time immemorial," litigants in the United States have been expected to pay their own expenses, including attorneys’ fees, to prosecute or defend an action. This obligation is known as the "American Rule."9 In federal class actions, however, counsel frequently obtain payment pursuant to certain statutory and common law exceptions to the American Rule.
The nonstatutory "common fund" theory provides that, where litigation creates, increases, or preserves a fund to compensate the class members for a common injury, class counsel may take a reasonable fee from that fund, as determined by the court.10 This doctrine draws on the courts’ historic equitable power to "permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover the costs, including his attorneys’ fees, from the fund or property or directly from the other parties enjoying the benefit."11 It is intended to prevent unjust enrichment of the class beneficiaries by requiring them to contribute to the cost of the litigation.12 The common fund doctrine also extends to situations where a substantial nonpecuniary benefit is conferred on the members of a class through, for example, injunctive or declaratory relief.13
The "substantial benefit" theory is another nonstatutory exception to the American Rule, and is a variant of the "common fund" doctrine. It permits the recovery of attorneys’ fees when a litigant proceeding in a representative capacity obtains a "substantial" pecuniary or nonpecuniary benefit. The court may exercise its equitable discretion to compel those receiving the benefit to contribute to the cost of its production by paying a share of counsel’s fees.14 Like the common fund theory, the substantial benefit doctrine seeks to prevent unjust enrichment of the beneficiary at the expense of counsel.
A third exception to the American Rule, the private attorney general theory, seeks to encourage socially useful litigation furthering congressional or national policies by awarding attorneys’ fees to those who obtain benefits for a broad class of citizens through legal action.15 The doctrine applies in federal class actions only where recovery of fees by the prevailing party is authorized by statute. Fee-shifting provisions enacted by Congress provide for attorneys’ fees to the prevailing party in litigation advancing important public policies such as enforcing civil rights laws.16
The Supreme Court has held, however, that awarding attorneys’ fees under the private attorney general theory absent Congressional statutory authority is not permitted because it would exceed the equitable powers of the courts. Such awards would favor some plaintiffs over others, and actively promote or retard specific policies by allowing attorneys’ fees depending on the sympathies of individual courts.17 This would constitute an unacceptable intrusion by the judiciary into the province of the legislative branch.18
III. ‘Percentage of Recovery’ and ‘Lodestar’ Methods
Federal courts generally have relied on two approaches when evaluating requests for attorneys’ fees in class litigation. One approach determines the fee based on a percentage of the total recovery obtained by the class. The other calculates the fee as the product of a reasonable hourly rate multiplied by the number of hours spent litigating the action (the "lodestar" figure).
For much of the Twentieth Century, the percentage approach prevailed, but awards totaling 20–30 percent created the perception that attorneys were reaping an improper "golden harvest of fees."19 Courts in the Second Circuit and elsewhere thus gravitated to the lodestar method to try to rein in the harvest. But the lodestar method presented problems of its own, including an implicit incentive for attorneys to avoid settlement in order to perpetuate fee-generating activity, as well as imposing an undue burden on the courts to scrutinize Byzantine line-item fee audits.20
In 1985, the Third Circuit commissioned a task force to analyze the attorneys’ fee issue. The Task Force recommended returning to the percentage method in common fund cases, an approach adopted in In re General Motors and by numerous other circuits.21
In any event, most federal courts may apply either the percentage or the lodestar method in common fund cases.22
Only the District of Columbia and Eleventh Circuits require the exclusive use of the percentage method in common fund cases.23 The District of Columbia Circuit expressed concern that using the lodestar approach in common fund cases is inefficient because it encourages attorneys to invest the maximum possible number of hours, funnel work to the most expensive attorneys, and avoid early settlements that would cut off the accrual of fees.24 The percentage approach also more closely matches the manner in which most attorneys are compensated for common fund cases; it results in less delay in distributing the award to the class, and it is far more efficient because the court need not engage in the "cumbersome, enervating, and often surrealistic process of preparing and evaluating fee petitions."25
Even where one method of calculating class action attorneys’ fees is preferred or required, federal courts are encouraged to use the alternative method to double-check the reasonableness of the fee.26
And, regardless of which method is used, a court may only award an amount that is "reasonable" under the circumstances.27 District courts thus must support attorneys’ fee awards with a "reasoned and documented explication." Otherwise, appellate courts reviewing for an abuse of discretion face a much more difficult task.28
A. Percentage Method
The percentage method bases the size of the award on a percentage of the recovery sufficient to provide the attorneys with a reasonable fee.29 Federal courts have freely embraced the percentage method in "common fund" cases, where a settlement or award creates a large pool of money for distribution to the class.30 Courts apportion the fund between the class and counsel so as to reward counsel for its success and penalize it for its failures.31
Some circuits rely on 25 percent as the benchmark for a reasonable fee, but this benchmark is not applied arbitrarily, and there is no necessary correlation between any particular percentage and a reasonable fee.32 Assigning a percentage without reference to the circumstances of a particular case "would be like picking a number out of thin air."33 Some circuits have pointedly questioned the idea of a benchmark as perpetuating inappropriate "largesse" in favor of the prevailing attorneys.34
Although the percentage method aims to arrive at a reasonable fee, its application often creates an unintended and unfair result: Class members sacrifice a large share of their recovery as attorneys’ fees under an arguably arbitrary percentage figure. It might be unclear what fees plaintiffs would agree to pay in an efficient legal market, having engaged in arms-length negotiations with counsel.35 Plaintiffs may not be fully informed, or at a distinct disadvantage in negotiating counsel’s fees.36 In either case, plaintiffs who would not otherwise acquiesce to a 25 percent benchmark, especially where they have obtained a multimillion-dollar settlement, may unwittingly pay their attorneys a disproportionate amount for the services rendered.37 Most unsavory of all, "the same dynamic creates incentives for collusion" between class counsel and defendant’s counsel — "the temptation for lawyers to agree to less than an optimal settlement ‘in exchange for red-carpet treatment on fees.’"38
When courts rely on the percentage method, the fee award must incorporate "traditional criteria in determining a reasonable common fund fee."39 Several factors affect the calculation and may influence a court’s decision to increase or decrease the award. These are: (1) the complexity and duration of the litigation; (2) the skill and efficiency of the attorneys involved; (3) the size of the fund created and the number of persons benefited; (4) the amount of time devoted to the case by plaintiffs’ counsel; (5) the presence or absence of substantial objections by the members of the class to the settlement terms and/or fees requested by counsel; (6) the risk of nonpayment; and (7) awards in similar cases.40
These factors are not applied mechanically.41 Each case is different; some factors may outweigh others, and the court’s primary responsibility is to explain why a particular award is made.42 In the exercise of its discretion, the court should articulate its reasons for selecting the percentage for the fee award, identify the factors upon which it relied, and explain how each factor affected its selection of the percentage figure.43
Federal courts typically treat the factors as follows:
1. Complexity and Duration of the Litigation
Greater complexity and duration will cut more strongly in favor of awarding the requested percentage, and this is the first factor courts typically consider.44 A class action will likely be deemed complex when it involves a conceptually challenging body of substantive law, particularly if counsel lack the benefit of guidance from applicable precedent.45
Extensive motion practice, review of voluminous discovery, and the prospect of a long trial also are considered in looking at the requested award.46
2. Skill and Efficiency of Attorneys Involved
This factor is typically measured by "the quality of the result achieved, the difficulties faced, the speed and efficiency of recovery, the standing, experience and expertise of the counsel, the skill and professionalism with which counsel prosecuted the case and the performance and quality of opposing counsel."47 Courts view a large recovery as the prime indication that a favorable result has been achieved, and will thus be inclined to grant the requested fee award.48
The quality of counsel’s lawyering skills and written work is also extremely important; attorneys who submit documents of "superb quality," and who are "very diligent in preparing filings in a timely manner under tight deadlines" are much more likely to recover the fees they request.49 This factor may overlap with the court’s consideration of the complexity of the litigation, especially where counsel is highly skilled in the area of law at issue.50
Courts also note whether counsel conducted the litigation in a professional manner, and typically refer back to laudatory contemporaneous observations made on the record when approving a fee award.51
3. Size of Fund Created and Number of Beneficiaries
Where the settlement fund is extremely large and stands to benefit a wide circle of beneficiaries, a smaller percentage is appropriate, especially when each class member stands to recover only a small amount. The reason for this inverse relationship is that the increase in the recovery is "merely a factor in the size of the class, and has no direct relationship to the efforts of counsel."52
4. Time Devoted to the Case by Plaintiffs’ Counsel
Under this factor, the court examines the time spent by counsel on the litigation, but does not consider counsel’s hourly fee. The greater counsel’s time commitment, the more likely the court is to approve the requested award.53
5. Objections by Class Members
Where few or no class members object to the proposed percentage fee, the court is more likely to approve it.54 In addition, some courts appear to evaluate the objections on a qualitative basis, determining whether they have merit.55
6. Risk of Nonpayment
The greater the risk of nonpayment, the more likely the court will be to grant the requested fee award. In Cullen, the risk of nonpayment was considered "acute" where the defendant’s contribution to the settlement amount was the maximum it could pay without violating Department of Education financial responsibility regulations under Title IV.56 Moreover, the defendant’s insurers had multiple defenses to coverage, and there was a risk that the policy would run out before a trial could be completed.57
7. Awards in Similar Cases and Likely Private Fee Negotiations
The court is more likely to affirm counsel’s requested fee if it is comparable to a percentage likely to have been awarded in a similar action, or negotiated between private parties in a similar case.58
B. Lodestar Method
The lodestar analysis begins with a simple calculation — multiplying the number of hours reasonably devoted to the case by a reasonable hourly rate.59 In arriving at an hourly rate, the court may also consider the geographical area, the nature of the services provided, and the experience of the attorneys.60
1. Application of the Lodestar Method
Federal courts generally use the lodestar method in statutory fee-shifting cases. It insures that the prevailing attorneys receive reasonable compensation where the litigation furthers important public policies, but does not produce a large pecuniary benefit for the class.61 For example, employment, civil rights and other class actions may effect important social change through injunctive relief, but such relief or settlement may "evade precise evaluation"; there simply may be no accurate way to gauge its monetary value.62 In this context, the percentage method would provide inadequate compensation for the attorneys’ efforts.63
Federal courts also favor the lodestar method in common fund cases where the size of the recovery inflates a percentage award of attorneys’ fees out of proportion to what is reasonable.64 This is because an extraordinarily large common fund magnifies "beyond all reasonable limits the margin of error inherent in the percentage fee award," which is merely intended as an approximation of contingency plus effort.65
2. Use of Lodestar Multipliers
Federal courts often apply an enhancement, or "multiplier," in order to adjust the lodestar figure upward or downward to reflect reasonable compensation based on the circumstances of a particular case.66 The Supreme Court has held, however, that federal courts may not use "multipliers" in statutory fee-shifting cases, because this duplicates factors already subsumed into the lodestar.67
The court may adjust the lodestar by applying a multiplier based on "less objective factors," such as the risk of the litigation and the performance of the attorneys.68
Although some circuits have enumerated long lists of factors bearing on the lodestar multiplier, many are identical to the factors used with the percentage of the recovery approach, including the duration and complexity of the case, the quality of the representation and the results obtained, the experience of counsel, and awards in similar cases. District courts within the Fifth Circuit may apply a multiplier to adjust the lodestar upward or downward based upon a review of twelve factors.69 The factors include: (1) time and labor required; (2) novelty and difficulty of the issues; (3) skill required to perform the services properly; (4) preclusion of other employment; (5) the customary fee; (6) whether fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) amount involved and the results obtained; (9) experience, reputation, and ability of the attorneys; (10) undesirability of the case; (11) nature and length of the professional relationship with the client; and (12) awards in similar cases.70 The lodestar multiplier is applied using only those factors not already incorporated by the lodestar, however.71
The Third Circuit has observed that discretionary lodestar multipliers are "not susceptible to objective calculation," and that "application of a multiplier is justified by the facts of a particular case."72 Still, a few factors play an especially prominent role in the lodestar multiplier analysis.
a. Risk Multiplier
In Goldberger, the Second Circuit suggested that counsel must demonstrate either that a substantial and unusual risk was involved, or that they attained a truly remarkable achievement of advocacy in order to qualify for a lodestar multiplier. Eschewing a mechanical application of lodestar multiplier factors, the Second Circuit stressed that, while counsel did overcome some hurdles in achieving a settlement, "risk falls along a spectrum, and should be accounted for accordingly."73 In Goldberger, the contingency risk was low because the case stemmed from the infamous "junk bond" fraud perpetrated by the Drexel Burnham Lambert group, "one of the most notorious frauds of the 1980’s."74 The federal government’s prior criminal action against Drexel and one of its principals, Michael Milken, forged a path for counsel and "dramatically increased their chance of success."75 Neither did the case hinge on a novel legal theory, nor was there any substantial risk of nonpayment, as Milken was obviously a "deep-pocket defendant."76
In In re Washington Power, the Ninth Circuit found the district court erred in failing to award a risk multiplier, despite repeatedly acknowledging the acute risks of representing the class.77 The record did not support the district court’s finding that class counsel opted to represent the class without any expectancy that their fee would be enhanced if they were successful; in fact, "uncontroverted affidavits" submitted by class counsel were to the contrary.78
b. Quality Multiplier
In Goldberger, the Second Circuit likewise affirmed the district court’s refusal to award quality or results multiplier. The class members’ "commendable" $54 million recovery was dwarfed by market losses of $90 million caused by Drexel’s fraud. The large recovery was as much an indication of the large number of class members as it was an indication of the quality of representation, and the considerable spade work done by the government in the criminal prosecution preceding the class action "helped enormously" by enabling counsel to scour the records of those proceedings for guidance.79
In In re Washington Power, the Ninth Circuit similarly found that the district court properly denied counsel a results multiplier, while acknowledging the outstanding result obtained.80 Although the $687 million settlement was enormous, so were the losses suffered by the class — nearly $1.47 billion.81 The mere size of the settlement did not mean, "ipso facto, that it [was] an extraordinary result," and the use of an "extraordinary success" standard developed in statutory fee cases was permissible in the common fund case before the court.82
c. Actual Benefit to the Class
In Strong, the Fifth Circuit affirmed the district court’s decision not to apply a lodestar multiplier where the district court engaged in a qualitative analysis of the benefit conferred on the class rather than a formulaic application of lodestar factors. The trial court refused to award class counsel an additional $1.5 million where $4.5 million had already been awarded by other federal courts in the same action.83 The trial court found counsel had been adequately compensated by the funds already received, and concluded no lodestar multiplier was warranted. The court examined the 12 factors set forth in Johnson, but based its decision "on its examination of the benefits obtained for the class."84
The district court was not impressed by counsel’s argument that the value of nonmonetary benefits inuring to the class justified additional fees. Neither were the court’s concerns assuaged by the fact that class members submitted credit requests totaling only $1.7 million, which was a small fraction of the $64 million plaintiffs’ counsel claimed it obtained for the class.85 Based on these facts, the district court concluded, and the Fifth Circuit affirmed, that a multiplier was not only inappropriate, but the award might even warrant reduction "in light of the insignificant benefit to the class members."86
IV. Class Counsel Bears Fee Request Proof Burden
Counsel bears the burden to establish the factual basis supporting the award in both percentage and lodestar cases.87 Thus, a defendant who is motivated to contest the fee application in a fee-shifting case should emphasize that the burden rests with class counsel to establish the factual basis for the requested fee.88
In reviewing the fee request itself, defense counsel should: look at class counsel’s evidence justifying its hourly rate; scrutinize the number of hours spent on particular tasks; note any instances of duplicative or frivolous billing; note inconsistencies within affidavits and declarations, and contradictions between statements of co-counsel; review class counsel’s enumeration of expenses, especially if some appear frivolous; and request that counsel produce contemporaneous time records.89
As Graveley and Garza reflect, in both common fund and fee-shifting cases, courts prefer fee applications that provide sufficient documentation of the hours spent litigating an action. In Gunter, the Third Circuit thus noted approvingly that the fee application "included all information necessary" to permit the district court to perform the lodestar cross-checking task.90 Class counsel submitted extensive briefing and affidavits setting forth the hours spent on the litigation, listing the hours each lawyer, paralegal, and law clerk worked on the case, and provided documentation supporting the proposed hourly billing rates.91 Counsel was not required to submit actual time records, which were voluminous; rather, it was "consonant" with Third Circuit practice to offer the records for review at the court’s pleasure.92
In Hanlon, the Ninth Circuit also affirmed a $5.2 million fee award where class counsel presented affidavits to the district court justifying their fees based on their work on multiple individual state class actions, which had been consolidated into the Hanlon action.93
Similarly, in Maywalt v. Parker & Parsley Petroleum Co., the court found sufficient affidavits and exhibits including contemporaneous records of time spent by identified attorneys, paralegals, and other staff on specific tasks related to defending a settlement in district and appellate courts.94
In contrast, in In re Boesky Securities Litigation, the joint declaration in support of attorneys’ fee application seeking $25 million in attorneys’ fees "provided none of the information needed" by the district court to discharge its duties in determining fee award and in reimbursing expenses.95 The declaration did not indicate to whom the proposed fee would be distributed, or in what amount each attorney would share in the award.96 Counsel provided no contemporaneous time records beyond a summary listing of total hours worked and lodestar claimed by each firm involved in the litigation.97 Counsels’ claimed expenses were also rejected for inadequate documentation; the court lacked a narrative account explaining why various expenses incurred and how they were justified under the circumstances.98
No matter what showing is made, moreover, when counsel obtains a particularly large recovery, courts view a fee request based on a simple percentage with heightened skepticism.99 In Goldberger, the district court declined to accept the initial report and recommendation of the special master, who recommended approving counsel’s fee request for 25 percent of the total recovery, or $13.5 million.100 The special master revised the report to base the fee on the lodestar method, and reduced for various charges he found excessive. The court accepted the revised recommendation, but further reduced the lodestar figure, citing numerous instances where co-counsel submitted conflicting records of the time and place of various meetings and phone conferences.
Counsel who artificially inflate their fee applications with duplicative and superfluous charges also are likely to attract the attention of defense counsel and the displeasure of the court. In Mokover v. Neco Enterprises Inc., counsel’s suggested lodestar fee was so far out of proportion as to be "essentially useless" to the court’s lodestar calculation, except to establish that true lodestar was far less than plaintiffs suggested.101 The Rhode Island plaintiff offered no explanation of why it was represented by two New York law firms.102 Counsel’s time records reflected waste and inefficiency, excessive jury preparation, endless conferences with co-counsel, and full-rate charges for "brainstorming" during litigation-related travel.103 Counsel’s billing records reflected superfluous and duplicative effort, but were incomplete, and complicated the labor of reducing the number of hours charged to achieve an equitable fee.104 In the court’s view, "Hercules’ challenge of cleansing the Augean Stables pales by comparison with the task presented."105
V. Conclusion
Federal courts have at their disposal the discretionary power to rein in increasingly unreasonable attorneys’ fee awards. The analytical framework currently in place requires them to scrutinize fee requests and provide reasoned explanations for granting or denying fee requests in both common fund and fee-shifting cases. Whether by invoking the seven-factor percentage of the benefit review, or employing the more intuitive lodestar multiplier analysis, courts can balance the need to assure counsel is adequately