(Reuters) - A special master appointed by U.S. District Judge Lucy Koh of San Jose to recommend a fair fee for class counsel in the $115 million Anthem data breach settlement succeeded in pleasing no one with a vested interest in the outcome, based on filings Tuesday by lawyers for the class and the objector who first pushed for scrutiny of class counsel’s request for nearly $40 million in fees and expenses.
I’ll explain why both sides believe the special master, retired Santa Clara Superior Court Judge James Kleinberg, made critical mistakes in recommending a fee award of $28.6 million, based on a 10 percent chop off the top of class counsel’s adjusted hourly billings in the case. But more fundamentally, I was struck as I read both sides’ objections to his recommendation that lodestar fee awards are a quagmire for judges.
As you know, most federal judges calculate class action fees as a percentage of the recovery lawyers obtain for the class, sometimes applying multipliers to reward plaintiffs’ lawyers for taking on particularly risky or strenuous cases. Percentage-based fee awards have the advantage of incentivizing efficiency and aligning the interests of lawyers and their clients. They predominate, although many judges also look at lodestar billings as a check on percentage-based fees.
But as I told you last year, there’s been a bit of a recent boom in California federal court for awarding fees based on class counsel’s hourly billings, mostly in megacases in which judges were worried that a percentage-based fee award, even of 10 or 15 percent, would be an unseemly windfall for plaintiffs’ lawyers. Judge Koh, who is overseeing the Anthem case, has used lodestar billings to calculate fee awards in big anti-poaching class actions, 2015’s In re High-Tech Employee Antitrust Litigation (2015 WL 5158730) and 2017’s Nitsch v. Dreamworks Animation (2017 WL 2423161). In both cases, lodestar billings resulted in a smaller award to class counsel than they would have received as a percentage of the recovery for class members.
The Anthem case is different. The hourly fees class counsel said they generated far exceeded the percentage-based fees they could have expected, given that courts typically award fees of less than 20 percent in cases with recoveries of more than $100 million. Plaintiffs’ lawyers said their lodestone fees and costs were nearly $40 million. They requested fees of about $38 million, or 33 percent of the $115 million class recovery. That was an ambitious request. California’s benchmark is 25 percent, $28.8 million in the Anthem case, and judges seldom award even that high a percentage in megacases.
After plaintiffs’ lawyers submitted their fee request, a class member represented by the Competitive Enterprise Institute objected, contending (among other things) that class counsel overcharged for the services of contract lawyers and otherwise overbilled their clients for nearly $9 million in unnecessary or duplicative work. In her order appointing a special master, Judge Koh said she was concerned that the sheer number of lawyers and law firms that billed time in the case – 331 billers across 53 plaintiffs’ firms – meant the class was overcharged “by virtue of the fact that so many billers needed to familiarize themselves with the case and keep abreast of case developments.”
Judge Koh ordered the special master to review the billing records of plaintiffs’ lawyers. Judge Kleinberg said in his April 24 report that he did, along with explanations of the records from class counsel at Altshuler Berzon and Cohen Milstein Sellers & Toll. But he also said he did not review every line item in the records because his goal was “a rough cross check, not auditing perfection.”
The special master decided class counsel had billed the time of contract lawyers at way too high an average rate. He recommended slashing fees for their work from the $6 million lodestar class counsel claimed to $3 million, taking into account his conclusion that contract lawyers should be billed out at a paralegal rate of $156 per hour. Judge Kleinberg said plaintiffs lawyers’ blended rate of $455 per hour was reasonable. But he said class lawyers devoted an apparently unreasonable number of hours to deposition preparation, class certification briefing and settlement negotiations. He blamed the “virtual army” of lawyers on the case.
“How could lead counsel possibly conduct effective oversight of this very large team of lawyers?” Kleinberg wrote. “The special master is not accusing plaintiffs’ counsel of deliberate overbilling. However, every time a new law firm was added to the group, those lawyers had to spend time learning the history, issues and facts being litigated. Thus, the inevitable result of the 53 billing participants presents at least a strong probability of duplication and unreasonable hours.”
He offered three alternatives for determining fees: applying the 25 percent benchmark percentage (and subtracting certain costs) to award $26.75 million; awarding $33.9 million in lodestar fees after adjusting the lodestar for contract lawyers and shifting expenses from the class to their counsel; or lodestar fees of $28.6 million, reflecting Judge Kleinberg’s recommendation of a 10 percent trim for potential overbilling. The special master said that was the maximum haircut he could apply, short discounting specific overcharges, under the 9th U.S. Circuit Court of Appeals’ ruling in 2008’s Moreno v. City of Sacramento (534 F.3d 1106). Kleinberg recommended that Judge Koh pick the discounted lodestar option.
In their response to the special master’s recommendation, class counsel protested his recommended 10 percent haircut as unjustified. Kleinberg himself said their blended rate was fair, plaintiffs lawyers said, which implicitly means class counsel did not overstaff the case with high-cost partners. “Because the blended hourly rate is the total lodestar divided by the total number of hours expended, it reflects the cost of the average hour in the case and captures the extent to which the work was distributed among higher- and lower-cost professionals,” their filing said. “When, as here, the blended hourly rate is well below the median, it shows that counsel distributed work among partners, associates, contract attorneys, and paralegals in an even more cost-effective manner than has been found reasonable in past cases in this district.”
They also repeated previous explanations for why they had to involve so many lawyers from different firms to maximize efficiency in a compressed time frame. (The explanations included an accounting of the hours spent on depositions, class certification and settlement negotiation.) Class counsel instructed other firms not to bill for acquainting themselves with the case and reviewed other firms’ time sheets, cutting hours that seemed duplicative or inefficient. ‘The requested lodestar should be reduced only if the use of multiple firms actually resulted in duplication or inefficiency. That did not occur here,” the filing said. “The key assumption underlying the (special master’s) contrary conclusion is that ‘every time a new law firm was added to the group, those lawyers had to spend time learning the history, issues, and facts being litigated.’ This was incorrect.”
More broadly, class counsel said it wouldn’t make sense for them to have churned the case to generate higher lodestar billings when they didn’t even know, during depositions and class certification briefing, whether the case would even settle, much less whether any settlement would justify the hours they were putting in (or whether their ultimate fee would be based on lodestar billings). “In general, the court should defer to counsel’s professional judgment as to how much time was required for class certification and the merits here,” class counsel said.
There’s merit to that argument. The point of contingency fees is to shift risk from clients to their lawyers. Lawyers in the Anthem case bet their time and expenses on obtaining a result that turned out to be much bigger than any previous data breach settlement. How can a court step in after the bet turned up a winner to second-guess how class counsel played its hand? Especially when, as in this case, the special master did not find specific instances of overbilling but recommended a haircut based on his suspicion that it must have occurred because so many firms were involved.
That brings me to CEI’s response to the special master’s report – and to my aforementioned point that lodestar-based fee awards are a morass for judges. CEI faulted the special master for failing to wade into the billing records to figure out where overbilling occurred. It said his review of the records was “disappointingly superficial,” with no attempt to root out excessive, unnecessary or duplicative billings. “The special master’s rough review failed to determine the propriety of the hours billed and is insufficient to uncover the extent of the duplication and inefficiencies that this court sought,” CEI contended.
Given the lack of specificity in the report, CEI said, Judge Koh should not accept his recommendation of a lodestar-based fee. “To justify a lodestar award, the court would need to rigorously analyze the billing for waste, especially in depositions, settlement, and motion for preliminary approval — categories that the special master recognized to be problematic, but did not address,” CEI said. Judge Kleinberg’s recommended 10 percent trim on the lodestar was not an adequate way to deal with potential overcharging but “a crutch to avoid actually scrutinizing lodestar billing.”
CEI urged Judge Koh to abandon the lodestar method and award class counsel a reasonable percentage of the class recovery. It proposed 15 percent of the net class recovery after nearly $25 million in administrative costs, or a grand total of about $14 million. As a cross-check, CEI undertook its own lodestar analysis, subtracting contract lawyer fees, slashing billable hours of firms outside of the appointed leadership structure and imposing the 10 percent haircut to discourage future bill padding. Its lodestar, after these deductions, came to $20.5 million, which, according to CEI, showed the reasonableness of its proposed $14 million award.
If you’ve been keeping track, I’ve mentioned four different purported lodestar “calculations” of the hourly billing in the Anthem class action, ranging from $20.5 million to $40 million. That’s a pretty gigantic range for what is supposed to be a simple matter of multiplying hourly rates by the number of hours worked – and it’s without even applying a discretionary multiplier to raise or lower the calculation. Lodestars, in other words, are a slippery concept unless fact-finders engage in the line-item examination of billing records that Judge Kleinberg avoided as the Anthem special master.
Judges have immense discretion over fee awards for class action lawyers, thanks to the wisdom of the Federal Rules of Civil Procedure. If they take seriously their fiduciary duty to class members, as Judge Koh quite obviously does, they’re going to award a fee that, in their view, fairly balances the interests of class members and their lawyers.
The Anthem billing dispute shows why it makes more sense for judges to exercise their discretion in selecting a percentage of the class recovery to award as fees than in tinkering with lodestar discounts and multipliers. Hard, high-risk cases justify a higher percentage of fees for plaintiffs’ lawyers – maybe, in rare circumstances, as much as the 33 percent requested by Anthem lawyers. Cases in which lawyers didn’t have to expend much effort and expense warrant a much lower percentage. That’s appropriately up to judges to decide. But let’s stop pretending that lodestar billings are less a matter of discretion.