October 03, 2012 Top Story

Class Counsel Denied $8.5 Million in Fees

"Egregious" conflict of interest leads to forfeiture of attorney fees in class action

Bethany Leigh Rabe

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a lower court’s denial of millions of dollars in fees to plaintiffs’ class action counsel based on an “egregious ethical violation” arising from incentives given to the lead plaintiffs. The Ninth Circuit reversed the lower court’s denial of fees to objectors’ counsel. The decision raises questions concerning whether front-end incentive agreements with lead plaintiffs will be enforceable for law firms prosecuting future class actions.

An Unusual Agreement 

In Rodriguez v. Disner [PDF], a fee dispute arose from a unique incentive arrangement whereby one of the law firms that represented the class (and subsequently merged into another firm) signed “incentive agreements” with five lead plaintiffs. Those arrangements provided that the firm would seek incentive compensation in certain amounts on a sliding scale, depending upon the recovery, with a maximum of $75,000 for recovery greater than or equal to $10 million. More typically, when a class action concludes, class counsel may seek incentive awards for the lead plaintiffs to compensate for work done on behalf of the class or financial/reputational risk.

Attorney Fees Denied 

After the parties agreed to settle the class action for $49 million, counsel applied for incentive awards pursuant to the agreements. A group of objectors argued that the court should reduce counsel’s fee award because the agreements created a conflict of interest and the appearance of impropriety and amounted to improper fee-sharing. When the district court declined to award the incentive amounts but awarded the requested attorney fees, the objectors appealed. The Ninth Circuit agreed that the incentive agreements raised ethical issues and remanded to the district court for a determination of how those issues should affect the requested attorney fees.

On remand, the district court held that the law firm “is not entitled to any fees for its representation in this matter,” although it permitted recoupment of expenses, and on reconsideration, permitted $500,000 in quantum meruit. In affirming, the Ninth Circuit chastised counsel for knowingly and willfully representing conflicting interests in violation of California Rule of Professional Conduct 3-310(C). The court expressed concern that, by offering $75,000 to the lead plaintiffs for recovery of $10 million or more, the incentive agreements would dissuade lead plaintiffs from seeking settlements exceeding $10 million or assuming the risk of trial.

Citing to its previous decision in the case, the court explained that “this was not a case where the conflict of interest developed during the course of litigation or that developed beyond the control or perception of class counsel; rather, it was a conflict that was inserted into the retainer agreement.” The court also considered that counsel “took no steps” to disclose the arrangement to the court and to the class, which it deemed “a violation of [the firm’s] fiduciary duties to the class and duty of candor to the court.”

Avoiding Similar Penalties

The court’s “denial of fees to [the attorneys] was a draconian measure,” says Louis F. Burke, New York City, cochair of the ABA Section of Litigation’s Class Actions & Derivative Suits Committee. Attorneys seeking to avoid such a result might take several steps to mitigate their risk. “I certainly would not make any promises to the class representative,” offers Burke. If a lead plaintiff asks what he is going to get out of being the class representative, Burke explains that “at the end of the case, we can apply for compensation,” but “it’s not a guarantee that you’re going to get it, and it is totally up to the discretion of the court.”

Disclosure is key, advises Professor Brian T. Fitzpatrick, Nashville, ABA member and published author in the field of class action attorney fees. “When something is as unusual as this, it’s probably a good idea to submit it to the court right away at the beginning of the class action,” he offers. “I’m more troubled by the lack of disclosure than I am the arrangement. I think the arrangement might make some sense.”

Can Incentive Agreements Work?

One of the Ninth Circuit’s concerns was that the incentives in the agreement worked to disjoin the lead plaintiffs’ interests from those of the class. Fitzpatrick disagrees, viewing incentive agreements as “a step in the right direction.”

“As it stands now, class members just get a flat fee from participating as representative class members,” he explains. “That gives them no incentive at all to insist upon the lawyers settling for more money. The incentive agreement here actually would have made the representative class members more interested and eager to insist that the lawyers hold out for a bigger number.”

The Role of Objectors 

The Ninth Circuit rewarded the attorneys for certain objectors for bringing to light the incentives provided to the lead representatives. “As a theoretical matter, counsel for objectors is very important, because they will represent class members and they’ll file objection briefs with the district court at the time the settlement’s under consideration, and the district court will consider those things,” explains Fitzpatrick. Both Fitzpatrick and Burke acknowledge that some objectors abuse the privilege, holding up the resolution of cases with frivolous objections in the hope of getting paid to go away.

Fitzpatrick was glad to see the Ninth Circuit reward the objectors in this case, however. “That’s exactly what should have been done,” he says, because the objectors “actually created value for the class here. We need to reward people for taking the time and energy to bring meritorious matters to the court’s attention in class action settlements.”

Bethany Leigh Rabe is an associate editor for Litigation News.

Keywords: class actions; class action settlements; attorney fees

Related Resources

  • Rodriguez v. Disner, Case No. 10-55309 (9th Cir., Aug. 10, 2012).

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