(Reuters) - The 9th U.S. Circuit Court of Appeals set important precedent in relatively unmapped territory in its ruling Tuesday in In re Volkswagen ‘Clean Diesel’ Litigation. Judges Milan Smith and Jacqueline Nguyen and Judge Jane Restani of the U.S. Court of International Trade, sitting by designation, refused to approve fees for lawyers who represented individual clients with claims against VW but who were not part of the leadership team designated by court-appointed class counsel Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein.
The 9th Circuit affirmed the determination of the VW trial judge, U.S. District Judge Charles Breyer of San Francisco, that firms outside of the Lieff-approved team did not perform work that benefitted the class as a whole. The appeals court, in an opinion written by Judge Smith, looked anew at assertions by 18 plaintiffs’ firms that contended their early work on the clean diesel case – including screening clients, filing suits and quick motions to preserve evidence – positioned the consolidated case for its eventual $10 billion settlement and that their post-settlement advice to their clients was a service to the class. The 9th Circuit said Judge Breyer did not abuse his discretion when he found that those efforts may have helped the firms’ individual clients but did not help the class.
“Appellants point to nothing in the 13,000-page record that indicates that the work they performed on behalf of their individual clients, either before or after appointment of class counsel, informed the settlement or otherwise benefited the class,” the 9th Circuit said. “We are sympathetic to appellants, and have no doubt that many of them dutifully and conscientiously represented their clients. This is not necessarily a case where latecomers attempt to divide spoils that they did not procure. But Appellants’ efforts do not entitle them to compensation from the MDL, when the record indicates that they did not perform work that benefited the class.”
The appellate ruling means plaintiffs’ lawyers rebuffed by Judge Breyer cannot share in the $175 million in fees awarded to Lieff Cabraser and dozens of other firms whose work Lieff authorized. Nor can they force Volkswagen to pay their fees under the settlement agreement. As the 9th Circuit noted, lawyers shut out of the fees in the class action still have a right to seek fees from their clients based on the contingency contracts clients entered. (Judge Breyer had initially enjoined plaintiffs’ lawyers from filing liens against their clients’ recovery but later lifted the injunction.)
Bruce Nagel of Nagel Rice led the appeal for the firms protesting Judge Breyer’s denial of fees to firms outside of the Lieff Cabraser circle. In an email, he said he plans to file a petition for en banc rehearing. The 9th Circuit decision highlights the intraclass conflict judges create when they award fees to only some of the lawyers who represent class members. Clients of Lieff Cabraser and other firms that will share in the $175 million awarded by Judge Breyer will end up better off than fellow class members whose individual lawyers enforce contingency fee agreements. (Nagel declined to say whether his firm is demanding contingency fees from its VW clients but said he knows that other firms are.)
“A handful of firms were awarded several thousand dollars an hour for filing complaints after other firms filed and the 9th Circuit never addressed why the identical work of different firms is both very valuable if the firm is later selected to run the case and at the same time worthless if your firm is not selected,” Nagel said via email. “This is a terrible decision.”
As you might expect, VW and Lieff Cabraser had rather a different view of the 9th Circuit opinion. In an email comment, lead counsel Elizabeth Cabraser said the 9th Circuit “recognized the efforts of the plaintiffs’ steering committee and dozens of other firms that were appropriately compensated for their approved work to help achieve one of the largest and most successful consumer class action settlements ever.” VW counsel Sharon Nelles of Sullivan & Cromwell, who argued the fee issue at the 9th Circuit, said in an email, “We are pleased that the 9th Circuit recognized not only that the court-approved class action settlement agreement between Volkswagen and the (plaintiffs’ steering committee) sets the terms for any payment of counsel fees, but also the critically important efforts of Judge Breyer in managing this massive MDL.”
Nelles’ last point emphasizes the subtle but crucial subtext of the 9th Circuit ruling. Yes, it’s important that the appeals court clearly held that plaintiffs’ firms won’t be paid by the class (or defendants) if they haven’t done work that benefits the class, a principle the 3rd Circuit previously articulated in 2005’s In re Cendant Securities Litigation (404 F.3d 173). But it’s just as important, if not more so, that the 9th Circuit took pains to endorse Judge Breyer’s management of the giant case, including the pre-trial orders in which the trial judge set the rules for which plaintiffs’ firms would be entitled to fees.
MDL judges, as you know, have tremendous case management leeway, although once the VW case settled as a class action, Rule 23 constraints kicked in. The 9th Circuit described some of Judge Breyer’s key pre-trial orders, including the orders in which he appointed Cabraser as lead counsel and other firms as part of a plaintiffs’ steering committee and the order in which the judge outlined a fee protocol that cut off firms working for individual clients. Those orders were the foundation of the trial judge’s decision to deny fees to Nagel Rice and dozens of other firms working outside of the ambit of the plaintiffs’ steering committee.
And by finding that Judge Breyer did not abuse his discretion in that decision, the appellate court implicitly agreed that the trial judge had the authority to decide up front how he planned to handle back end fee awards. Indeed, the 9th Circuit hailed Breyer for asserting his control: “We commend the district court’s efforts to successfully manage a massive and potentially ungainly MDL, and conclude that the court did not abuse its discretion when it determined that appellants were not entitled to compensation.”
Fees in sprawling MDLs, especially those that begin as consolidated individual suits and end up being settled as class actions, are a tough issue for MDL judges. We’ve seen judges in recent high-profile cases, such as the NFL concussion litigation and the Syngenta GMO litigation, attempt to balance the equities between class members, class counsel and lawyers for individual clients. Inevitably, those decisions leave someone unhappy, so appellate courts are going to be called upon to decide how much discretion trial judges should have – and at what stage in the case that authority should be exerted.
In the 9th Circuit, the VW ruling makes clear that MDL judges can set the rules early. That’s a boon to future defendants and to plaintiffs’ lawyers appointed to lead cases. Cabraser said as much in her emailed comment on the ruling, which noted that the 9th Circuit “commends and affirms the case management authority and discretion of the district court.”
If you’re one of the lawyers frequently chosen to lead MDLs, like Cabraser, it’s great to know that judges in the 9th Circuit can vest you early on with the authority to decide which of your fellow plaintiffs’ lawyers will be paid as part of an eventual settlement. If you’re outside of that charmed circle, like Nagel in the VW case, the 9th Circuit decision is a long-term threat.