(Reuters) - It’s always notable when a federal judge presiding over a big class action slashes a fee request by millions of dollars - but I think there’s another story lurking beneath the dollar signs in an opinion issued Tuesday by U.S. District Judge Lucy Koh of San Jose.
Three plaintiffs’ firms that obtained nearly $170 million for artists and engineers whose job prospects suffered under an alleged no-poaching agreement among animation studios asked Judge Koh to award them $31.5 million for squeezing a $150 million settlement from Disney and Dreamworks. The judge instead granted them $13.8 million. She previously awarded $4.7 million in fees for a smaller classwide settlement, bringing the total fees for plaintiffs’ lawyers from Cohen Milstein Sellers & Toll, Hagens Berman Sobol Shapiro and Susman Godfrey to about $18.5 million.
Notably, Judge Koh’s award was based not on the recovery the firms won for class members but on their hourly billings. The firms wanted the judge to grant them 21 percent of the class recovery, which, they argued, is less than the 25 percent benchmark established by the U.S. Court of Appeals for the 9th Circuit. Judge Koh, however, applied the alternative lodestar approach.
The plaintiffs’ firms, she said, billed $9.3 million in the animation case, and deserve double that lodestar because of the risk they bore and the results they obtained. That’s how Judge Koh arrived at a total fee award of about $18.5 million.
Lodestar fee awards in class actions, as you probably know, are an exception. For several decades, most judges have defaulted to the alternative method of calculating plaintiffs’ lawyers’ fees as a percentage of the common fund for class members. The California Supreme Court, in a 2016 ruling that confirmed courts in the state can use the percentage method to calculate fees, spelled out that method’s advantages: “relative ease of calculation, alignment of incentives between counsel and the class, a better approximation of market conditions in a contingency case and the encouragement it provides counsel to seek an early settlement and avoid unnecessarily prolonging the litigation.”
But the state high court and the 9th Circuit also permit judges to use the lodestar method. Judge Koh, for instance, awarded lodestar-based fees in a previous no-poaching class action. Another California federal judge, U.S. District Judge William Alsup of San Francisco, used the lodestar method to calculate fees in a $200 million class action against Wells Fargo in 2015.
And, most dramatically, U.S. District Judge Charles Breyer of San Francisco opted for a lodestar fee award in the dealer wing of the clean diesel litigation against Volkswagen. Plaintiffs’ lawyers in that case had asked for $28.6 million, which was a tiny percentage – 2.4 percent - of the dealers’ billion-dollar recovery. Judge Breyer, however, said fees based on the recovery “would overcompensate” class counsel. He awarded about $3 million, double the plaintiffs’ lodestar billings of $1.5 million.
If you’re counting, that’s three highly regarded California federal judges in four recent outsized class actions who have concluded that it makes more sense to base fees on the hours plaintiffs’ lawyers worked instead of the results they obtained. Are we seeing the beginning of a pendulum swing away from percentage-based fee awards in mega class actions?
I emailed plaintiffs’ lawyers in the animation case to ask. Steven Berman of Hagen Berman – who was also class counsel in the VW dealers’ case in which Judge Breyer granted only $3 million of the requested $28.6 million in fees – said in an email that he still doesn’t think lodestar-based fees will make a comeback.
“These were cases where judges thought the risk was reduced such that a percentage yielded a windfall,” Berman’s email said, suggesting that unique facts, not overarching policy, led Judges Koh and Breyer to use lodestar calculations.
Berman, for one, isn’t hoping for a broad return of lodestar fee awards. “The effect of these rulings,” he said, is to encourage lawyers “to bill like crazy” and to discourage them from taking risky cases.
I agree with him on both points, but I also suspect the recent cluster of lodestar fee awards is more than a coincidence. Windfall has become a judicial dirty word. If plaintiffs’ lawyers are smart, they’ll start adjusting fee requests accordingly.