Sixth Circuit Affirms Substantial Reduction in Class Action Attorneys’ Fees Award

Near the top of a list of things a General Counsel never wants to hear is that his or her company has been named as a defendant in a purported class action lawsuit.  No longer is the class action the occasional occurrence it used to be.  Indeed, the question of whether the harm or injury suffered by a single individual or entity can be alleged as a common experience to other potentially damaged persons is now a frequent assessment of the plaintiffs' bar, regardless of the nature of the case.  Against this backdrop, a myriad of new considerations arise as companies wrestle with how best to manage or respond to class action litigation.  Of course, a bottom line question for any business is "what is this going to cost?"

Indeed, one of the significant challenges presented by class litigation is how to value the exposure and gauge the pros and cons of resolving the case short of trial.  A recent opinion from the United States Court of Appeals for the Sixth Circuit (Van Horn v. Nationwide Property and Casualty, Case No. 10‑3643) reminds us that this calculus (a) is not limited solely to substantive exposure, and (b) can be fluid right through final settlement approvals.  Aside from the negotiations relating to the merits of plaintiff's claimed damages, which are, of course, a function of any lawsuit, a major consideration in valuing class action settlement options involves the demand for payment of the attorneys' fees of class counsel.  Unlike in most litigation, where the amount of attorneys' fees that plaintiff's counsel take from a settlement remains a subject between attorney and client, in class actions the court is involved in reviewing and approving the entire settlement, including the requested recompense to class counsel.  As a consequence, the amount of class counsel's attorneys' fees and costs are an important element of the settlement process, negotiated after the close of substantive settlement discussions.

Routinely, class settlements involve three components:  1) substantive claim resolution; 2) class notice and administration costs; and 3) attorneys' fees of class counsel.  Ultimately, this last element often has substantial variability depending on the jurisdiction and perspective of the judicial officer tasked with weighing approval of the class settlement in the fairness hearing.  The trial court's determination is then subject to an abuse of discretion standard, if appealed.

While courts around the country take different approaches to evaluating the appropriateness of attorneys' fees in class actions, the Sixth Circuit recently considered the issue in Van Horn, a case from the Northern District of Ohio.  In a straightforward seven-page opinion issued on August 26, 2011, Chief Judge Batchelder (writing for a unanimous panel) affirmed the district court's massive 46% reduction in the amount of attorneys' fees payable to class counsel below the amount requested.  This case involved class allegations that defendants "failed to provide [plaintiffs] with the full rental car benefits required under their insurance policies."  Op., p. 2.  The settlement agreement agreed to by the parties called for creation of a common fund, and "awarded each class member a maximum of $199.44 (approximately 50% of the average class member's damages)."  Id.[1] Class counsel requested $5,873,716.02 in attorneys' fees, however, the district court approved only $3,179,107.20.  Id.

The Court of Appeals discussed the two primary methods for calculating class action attorneys' fees:  (1) lodestar (plus any appropriate multiplier), and (2) percentage-of-the-fund, and then determined that in this case, the district court's substantial discounting of the fees requested was within the district court's discretion.  The Sixth Circuit took into account several considerations, including the market rate in the venue sufficient to encourage competent representation.  In response to appellant's contention that class counsel included out-of-town counsel with "a national reputation for expertise in [the subject area of the] litigation", the Court opined that "[p]roof that [a firm] has a national reputation for expertise in [a specific] kind of litigation does not constitute proof that [its] expertise was necessary in this present phase of the present litigation."  Id. at 4‑5 (quoting Hadix v. Johnson, 65 F.3d 532, 535 (Sixth Cir. 1995)).

Further, the Sixth Circuit affirmed the district court's downward adjustment of class counsel's proposed lodestar of a +1.78 multiplier to a 1.2 multiplier, a reduction of 32.5% from the requested multiplier.  Citing to the twelve-factor test of multiplier/lodestar calculation first pronounced in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (Fifth Cir. 1974)[2], the Court found that the district court's decision to reduce the multiplier was well within its discretion to determine that the lodestar amount adequately compensated the work of class counsel, and a small 0.2 multiplier was warranted in recognition of the "contingent nature of the case and the complexity of the class action."  Op., p. 6.

This case is instructive as it provides a window on how the Sixth Circuit views its responsibility to consider attorney fee awards by (and the discretion due to) district courts as district judges examine the fairness and reasonableness of class action settlements.  Further, it demonstrates the considerable flexibility accorded federal trial judges to adjust fee awards sought by class counsel.

For litigants defending class actions, it is important to negotiate the fee component (whether as a portion of a common fund or stand-alone) against a worst-case or perhaps, more accurately, a highest cost perspective.  Invariably, the fee negotiations begin with class counsel sponsoring a number well beyond reason, knowing that defendant will contest the request, and ultimately, a court will assess the reasonableness of an agreed-upon fee amount, frequently resulting in a further downward adjustment.  Class defendants must work to drive the fee number you are willing to pay as part of the settlement as low as you can and then make sure the written settlement document plainly and clearly reflects defendant's obligation to pay the fee award up to but not exceeding the negotiated cap amount.  That amount then becomes the ceiling on attorneys' fees that you must pay under the settlement agreement, affording the class defendant the certainty of a maximum settlement obligation.

Most class counsel, in return, will demand to negotiate agreement from defense counsel not to challenge their fee request at the fairness or reasonableness hearing (at the amount you agreed you would pay, if the court so approved).  Regardless, you either end up with the court approving the amount requested by class counsel (which you have already agreed to pay if approved by the court) or some lesser amount (as in Van Horn) ensuring either the expected amount of fees or providing a discount or a windfall from the anticipated class attorneys' fees.

While a 46% fee reduction is a rarity, the uptick in class action litigation has resulted in a much greater volume of class settlements, with trial judges applying a wide variety of experiences in weighing the request for class counsel attorneys' fees.  There are many instructive cases where courts have employed the Johnson factors to "right-size" the fees provided to class counsel.  Van Horn adds clarity to that body of law for Sixth Circuit class litigants and counsel and, arguably, signals to district judges in the Sixth Circuit, a significant degree of flexibility in giving class settlements, and particularly, fee amounts, a long hard look.