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California Supreme Court Allows Class Action Fee Awards Based on Settlement Size

August 18, 2016 | Posted in : Contingency Fees / POF, Fee Award, Fee Award Factors, Fee Calculation Method, Fee Expert / Member, Fee Issues on Appeal, Fee Jurisprudence, Hourly Rates

A recent The Recorder story, “Calif. Justices Rebuff Attack on Class Action Attorney Fees,” reports that the California Supreme Court shot down a bid to upend compensation for class action attorneys in ways that could have significantly reduced the amount of fees they receive.  In a unanimous ruling (pdf) by its seven justices, the court said California law permits the doling out of fees to attorneys based on a percentage of the money they recover for the class, rejecting arguments from a class action critic that fees should be tied directly to the hours put into a case.

"We clarify today that when an attorney fee is awarded out of a common fund preserved or recovered by means of litigation," Justice Kathryn Werdegar wrote for the court, "the award is not per se unreasonable merely because it is calculated as a percentage of the common fund."

The case has been closely watched by class action attorneys in California.  A number of legal advocacy groups, including Impact Fund and the Western Center on Law & Poverty, had weighed in as amicus in support of the view that percentage-based fees fairly compensate attorneys and help incentivize litigation on behalf of consumers and workers who can't otherwise afford representation.  The fight arose out of an employment class action against staffing firm Robert Half International.  Kevin Barnes, a Los Angeles solo practitioner who represented the class, negotiated a settlement of $19 million and was granted a fee award of one-third, or $6.3 million.

But he faced pushback from Lawrence Schonbrun, a frequent objector to class action settlements based in Berkeley, who argued that the award was excessive and not supported by documentation.

In arguments before the Supreme Court in May, Schonbrun maintained that attorney fees should never be based on a simple percentage of the recovery.  Instead, he said, attorneys should only be entitled to compensation for the hours they worked and that there should be limits on the "multiplier" premium they receive for especially difficult or complex cases.

Schonbrun found a legal basis for that position in a 1977 California Supreme Court decision, Serrano III, which he characterized as explicitly barring percentage-based fee awards.  But the court rejected that interpretation, noting that the case involved a much different set of facts.

The judgment in Serrano III related to the allocation of funding for public schools, and the attorneys did not propose to draw money out of that pool.  Instead, they were granted a separate award, and the court in that context noted that the time spent on the case was a key factor in determining the appropriate amount.

"In Serrano III, this court simply did not address the question of what methods of calculating a fee award may or should be used when the fee is to be drawn from a common fund created or preserved by the litigation," Werdegar wrote.  "For this reason, the passages quoted cannot fairly be taken as prohibiting the percentage method's use in a common fund case."

Barnes and Michael Rubin of Altschuler Berzon, who argued on behalf of amici, countered that percentage-based fees help create a market for litigation that benefits consumers and private citizens.  Tying fees to hourly billing would not fairly compensate lawyers for taking on difficult work with no guarantee of future payment, they said.

Barnes applauded the decision. "It's good day for the workers of America and a good day for the plaintiffs bar because it allows for a fair and reasonable recovery," he said.

Schonbrun, meanwhile, expressed disappointment.  "I was just hoping that this court would live up to the reputation that it has in being a national trendsetter and trying to create greater justice," he said.  "But I believe they did not live up to that hope."  In oral arguments, Schonbrun had also advocated for the court to impose new safeguards to prevent excessive fee awards.  For example, he called for the appointment of a class "guardian" for any settlements totaling more than $1 million, and allowing that guardian to call an expert witness to scrutinize class counsel's estimate of how much damages would be if a case was carried through to a win.

Werdegar did not address those proposals in the court's decision.  But Justice Goodwin Liu, in a concurring opinion, seemed to see value in those ideas.  "The class guardian would provide counterpoints to class counsel's arguments concerning the risks and difficulty of litigating the case," he wrote.  "Perhaps most importantly, the class guardian or a fee expert retained by the guardian would provide information on prevailing market rates for similar litigation."

Liu also encouraged counsel and judges to address the issue of fees at the beginning of the litigation.  He argued this would set the fee at a level sufficient to incentivize the lawyer to take on the suit, while avoiding inherent conflicts of interest that typically arise at the end between client and attorney—when "every additional dollar for one means a dollar less for the other."