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New Class Action Guidelines Address Attorney Fee Issues in N.D. Cal.

November 7, 2018

A recent The Recorder story by Amanda Bronstad, “New Class Action Guidelines in Northern District of California Prompt Commendation and Concerns,” reports that the Northern District of California’s new procedural guidance for class action settlements is among the most detailed in the nation, prompting welcome relief to critics but raising fresh concerns for some practitioners.  The guidance, announced on Nov. 1, comes as little surprise to lawyers who practice in the Northern District of California, which is home to numerous consumer class actions and judges who have spoken out about reforms.  The guidance also mimics proposed changes to the Federal Rules 23 of Civil Procedure.

But the Northern District’s guidance seeks to implement some of the most far-reaching revisions in the country.  Many lawyers said it creates transparency that’s been long needed in the class action process.  “It’s a good first step,” said Joel Fleming, a partner at Block & Leviton in Boston.  “Sunlight is the best disinfectant and, generally speaking, having more information to the courts and the class is a good thing.”

Defense attorneys and law professors who have called for more transparency in the class action process praised the new procedures.  “They’ve done a wonderful job of figuring out what are the most important things to worry about, and let’s make sure every judge has a checklist,” said Brian Fitzpatrick, a professor at Vanderbilt University Law School.  “They are wise to focus on what happens to the money after the settlement’s approved because we don’t know.”

The guidelines apply to all of the district’s judges, some of whom already have detailed standing orders on class action settlements.  Others have raised numerous questions about class action settlements before approving them.  “It’s been my experience that the judges in the Northern District of California have been more attentive to these issues than others in the country,” said William Rubenstein, a professor at Harvard Law School.

Among other things, the guidance asks lawyers to provide billing calculations in class counsel’s fee request, identify the process used to select the settlement administrator, consider social media and a marketing specialist for the notice program, disclose relationships between the parties and cy pres recipients, and file an accounting of the settlement 21 days after distributing the fund to the class.  Most of the concerns, such as poor claims rates or leftover settlement funds that revert to the defendants, focus on consumer class actions, not securities fraud cases, Fleming said.  For most lawyers, he said, the guidelines shouldn’t impact how they do their jobs.

“If a settlement is reached that would benefit the attorneys more than class members, this information being required will probably serve as a deterrent because it’s getting at information that’s useful for class members to know,” Fleming said.  “But for plaintiffs’ lawyers doing their jobs, and keeping the best interests of class members at heart, I don’t think any of this would change the way you’d litigate your case or change the way you’d structure a settlement.  It will require careful review of your materials to make sure you’re complying, but it won’t have a strategic impact.”

The biggest change in the guidelines is the accounting guidance.  That revision is noteworthy because, in most cases, judges don’t keep up with what happens to a class action settlement after granting final approval.  And there’s a slew of information that lawyers are supposed to post on the settlement’s website: The number of notices sent to class members, claim forms submitted, opt-outs and objections, for example, and the average, largest and smallest amounts paid to class members, methods of notice and payment, number and amount of checks not cashed—all in an “easy-to-read chart.”

The accounting revision is similar to a requirement tucked into a class action reform bill that the U.S. House of Representative passed last year.  “It’s very hard to determine whether class settlements are doing what they’re supposed to be doing if you don’t know where the money goes and where it winds up, and you don’t know how much of the class gets paid,” said Andrew Trask, of counsel at Shook Hardy & Bacon in San Francisco.  “In the past, it’s the propriety information of the settlement vendor.  So the defendant might see that information in a few cases, but usually they don’t.  To the degree we continue to have debates over what class certification ought to be and what class settlement ought to look like, having that information publicly available is better than not having it.”

Fitzpatrick said the data also would help law professors who study class action trends.  “The data that we will be able to gather from these new guidelines will help inform a lot of debate and discussions about whether the class action system is working as intended,” he said.  “They’re making a great contribution to the public understanding of class actions by requiring the lawyers to be transparent and return to the court with this data.”  But the guidelines haven’t come without new concerns.  Rubenstein said the guidance could “dissuade lawyers from filing in the Northern District because it feels like more hoops to jump through.”

Fitzpatrick specifically flagged the revisions prompting plaintiffs attorneys to turn over their lodestar billing, which are the hours they worked on the case multiplied by their hourly rate.  He said such a mandate could encourage more judges to use the lodestar when assessing an attorney fee request that is based on a percentage of the settlement fund. That’s not required in the U.S. Court of Appeals for the Ninth Circuit, he said.

More importantly, he said, the practice raised concerns about the motivations of plaintiffs attorneys in settling class actions.  “The more and more courts that are doing lodestar cross-checks, the more lawyers are going to worry they need to bill a bunch of hours in order to get a decent fee award instead of focusing on the most important thing, which is getting the most recovery for the class,” Fitzpatrick said.  Fleming agreed that requiring lodestar could create “misaligned incentives” but, in most cases, plaintiffs lawyers are prepared to submit billing records as part of their fee requests in the event judges use them as cross-checks.

For more on the N.D. Cal.'s new class action guidelines, visit https://www.cand.uscourts.gov/ClassActionSettlementGuidance

Some Attorneys Chafe as Clients Expand Outside Counsel Guidelines

May 18, 2018

A recent American Lawyer story by Miriam Rozen, “Some Lawyers Chafe as Clients Expand Outside Counsel Guidelines,” reports that Corporate clients are getting more aggressive about broadening and expanding their outside counsel guidelines, according to a number of industry consultants and lawyers who represent law firms. And some attorneys are pushing back.

“Some of the demands clients are making of their outside counsel are so over-broad that they are objectively outrageous,” said New York-based Anthony Davis, who represents lawyers and law firms as a partner in the professional practice group at Hinshaw & Culbertson.  ”I talk to general counsel of large and midsized firms all the time, and they are repeatedly being confronted with demands that are so extreme that they are or ought to be unpalatable.”

Outside counsel guidelines, which govern the relationship between a company and its law firms, can include requirements on topics ranging from billing and expenses to IT and cybersecurity to the scope of what’s considered a conflict of interest.

“Clients will try to put in their outside counsel guidelines that the firm won’t work for any other company that the business thinks is adverse,” said Bruce MacEwen, a consultant at Adam Smith Esq.

For Davis and other critics, such restrictive guidelines—especially those that define conflicts more broadly than established norms of legal ethics—can go so far as to contradict the Model Rules of Professional Conduct.

Last year, at an American Bar Association conference on professional responsibility, Davis and his partner Noah Fiedler presented a paper that included examples of such guidelines that they collected from law firm general counsel. The pair proposed a change to Rule 5.6—which governs the right to practice—that would explicitly prohibit law firms from agreeing to client guidelines that exceed the Model Rules.

Not all companies have beefed up their requirements, said Rebecca Lamberth, an Atlanta-based trial practice leader at Duane Morris who also serves in the firm’s general counsel office.

“I think it is fair to say that a few corporate clients have expanded their outside counsel guidelines,” Lamberth said. But for some, the changes have been voluminous, she said.

A lawyer she knows quantified the shift by tallying pages, she said. When he started a job in a senior in-house legal department role five years ago, the company’s standard outside counsel guidelines ran just a few pages. When he left this year, they consumed about 25 pages, Lamberth said.

Kevin Rosen, a partner in the Los Angeles office of Gibson Dunn and chairman of its law firm defense practice group, said it was mainly clients with large books of litigation that are adding to their guidelines.

“I would not say that the expansion is universal among all clients. I do think though that clients with experience negotiating with law firms, and in particular those conducting RFPs and/or retaining panel counsel, tend to have more expansive approaches to defining what they perceive to be conflicts,” Rosen said.

One factor emboldening clients to be more restrictive in their outside counsel guidelines may be lackluster demand for outside legal work.

“The relationship of law firms and their clients is unstable. Where once it was a seller’s market, today the leverage is entirely on the client side,” Davis said. The result, he suggested, is a threat to a core value of the legal profession—namely, lawyers’ independence.

Among the issues Davis cites: Some guidelines broaden the definition of what constitutes a client to include all of a company’s affiliates or “everything we own,” he said. Some insist, “if you represent us, you may not represent any of our competitors.” Some seek to prevent firms from taking opposing positions on issues in ways that could force the firms to violate their own ethical and fiduciary obligations to other clients in unrelated matters.

Corporate clients often update their outside counsel guidelines more frequently and regularly than law firms update their initial retention agreements. If a contractual dispute between the law firm and the client lands in court, judges may then rule that the revised outside counsel guidelines trump language in a preceding retention agreement, according to Davis.

Still, some think the problem is overstated.

Requests that an outside lawyer not advance an opposing position for another client can be perfectly valid on “an issue-by-issue basis,” said Duane Morris’ Lamberth. And often clients are willing to work with law firms to revise sections of outside counsel guidelines that a firm deems objectionable, she said.

“Certainly companies want to work more closely with laws and have law firms that they feel are going to be reliable partners,” said Nick Rumin of Rumin Search Consulting.

Altman Weil consultant Tom Clay said it’s true that clients have more leverage than they used to, but he doesn’t view that as leading to a plague of onerous outside counsel guidelines.

In his experience, Clay said, clients are “always thoughtful” about what they put in their guidelines. And in the end, he added, “A client can say anything they want. They don’t have to have a reason.”

IBM’s Watson Could Help Reduce Outside Counsel Spend

May 19, 2017

A recent the Corporate Counsel story by Jennifer Williams-Alvarez, “IBM Says New Watson Tool Could Dramatically Reduce Outside Counsel Spend,” reports that, a new tool using International Business Machines Corp.'s Watson, notorious for defeating its human competitors on "Jeopardy" in 2011, is hard at work for in-house legal departments with the goal of significantly reducing outside counsel spend.

So far, use of "Outside Counsel Insights," or OCI, has been limited to legal departments in the financial services industry, according to Brian Kuhn, co-founder and leader of IBM Watson Legal.  But with the potential to save as much as 30 percent on annual outside counsel spend, it's no surprise that the tool has piqued the interest of some of the largest companies in that field.

The service relies on cloud-based cognitive computing system Watson to reveal billing insights to in-house legal departments, Kuhn said.  The development of OCI, which became an official offering late last quarter, stemmed from the perceived desire of legal departments to get their arms around this line item on the budget, he added.

"Outside counsel spend is really a significant concern for corporate general counsel," Kuhn said, noting that "on average, corporate law departments spend one-third to 50 percent of their annual budget on outside counsel."

To cut down on these costs, OCI looks at the amount of time a lawyer spends on a task and at line item descriptions in a budget, for instance, and creates a nearly complete automation of the invoice review process, Kuhn said.  The tool also shows how outside counsel are working, he added, which "tells you not just what lawyers did, but in a very granular way, the order in which they did things."

Together, these two features will help facilitate fixed-fee pricing, according to Kuhn, because legal departments will have a very detailed understanding of the work being done by outside counsel and can then dictate price.  What's more, Kuhn said, a future capability of OCI is to extract insights, such as how a judge ruled on certain motions and how specific lawyers perform on cross-examination, in order to "enforce appropriate legal strategy based on the outside counsel who've worked for you."

"There are other tools out there on the marketplace that offer just a pure analytics approach and they can only parse structured data," Kuhn said, explaining what makes Outside Counsel Insights unique.  "What Watson's good at is actually reading like a person, reading language ... and the ability to take narrative descriptions of legal tasks and time entries and understand what a lawyer actually intends by that in the context of a company's billing guidelines, is really how we move the needle and how we use AI.”

While OCI is currently only used in legal departments in the financial services industry, the potential savings are far from insignificant, Kuhn said.  He pointed out that in just the one industry, IBM's analysis shows that the service can provide a 22 to 30 percent savings on annual outside counsel spend after two years.  In one company with over $1 billion on annual outside counsel spend, which IBM declined to identify as the financial services company does not give its name as a reference, Kuhn said the benefits case showed close to $400 million a year in savings after two years.

There are also plans to expand use of the tool in the future to other industries that rely heavily on outside counsel, according to Kuhn.  "This is definitely not a sexy use of Watson," he noted.  "It's about creating efficiency for the lawyers and it's about massively reducing outside counsel spend."

Paper: Restraining Lawyers: From ‘Cases’ to ‘Tasks’

February 3, 2017

A forthcoming Fordham Law Review article, “Restraining Lawyers: From ‘Cases’ to ‘Tasks (pdf),’” by Morris A. Ratner, Professor of Law at the University of California Hastings College of Law, argues that law practice is experiencing two parallel shifts: civil procedure amendments are focusing on cost and resource drain, and the private market is giving in-house departments more options to unbundle legal work for lower costs.  A draft version of this article was posted with permission.  The abstract reads:

Developments in the domains of procedure and private contract highlight a continuing shift in authority away from lawyers and towards courts and clients accomplished by a conceptual downshift from “cases” to “tasks.”  The 2015 amendments to the Federal Rules of Civil Procedure limit attorney and party discretion by further empowering the trial court judge to dissect, assess the value of, and sequence case activity, including discovery.  At the same time, in the private sphere, sophisticated clients aided by advances in project and information management are controlling legal spend by unbundling cases into tasks.  From that position, they can source projects to low-cost providers.  Clients are also increasingly demanding litigation budgets and seeking value-based pricing, both of which work best if there is heightened communication between lawyer and client regarding the means to be pursued to achieve litigation aims.  These regulatory and market restraints on lawyers and lawyer-driven adversarialism, while pointing in a similar direction, differ fundamentally in terms of their reach, efficacy, and fairness.  Despite their differences, these developments in tandem have the potential to inspire the creation of new norms and duties calling on litigators to think more deeply and inclusively about the value of litigation tasks from the perspective of court and client.

Lawyers Try 'Workaound' to Get Paid for Defending Fees

February 9, 2016

A recent Bloomberg BNA story, “Lawyers Can’t Use ‘Workaround’ to Get Paid for Defending Fees” reports that lawyers can't include fee defense provisions in their retention applications as a way to circumvent a recent U.S. Supreme Court ruling, the U.S. Bankruptcy Court for the District of Delaware held Jan. 29.

The Supreme Court held 6–3 in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158 (2015) , that bankruptcy attorneys can't be awarded attorneys' fees for their work in defending their own fee applications.  The majority opinion, delivered by Justice Clarence Thomas, said that Bankruptcy Code Section 330(a)(1) doesn't permit bankruptcy courts to award fees to attorneys and professionals who work on behalf of an estate for defending fee applications.

“Almost as soon as the ink was dry on the ASARCO decision, bankruptcy professionals began to seek ways to escape the draconian impact of that holding,” Prof. Charles J. Tabb, Mildred Van Voorhis Jones Chair in Law, University of Illinois, told Bloomberg BNA Feb. 4.  “The primary effort to do so has focused on attempting to incorporate an indemnification provision for fee-defense fees in the contract retaining a bankruptcy professional pursuant to § 328,” he said.  This case has been a “closely-watched case by bankruptcy professionals across the country,” according to Tabb.

The opinion by Judge Mary F. Walrath concluded that the Supreme Court's ruling in ASARCO, “prevents the Court from concluding that section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling.”

While Walrath's decision may not bind other Delaware judges, they might follow the path that she has created if they have other cases pending with similar issues.  Attorneys need to know if this “workaround” method for getting their fee defenses paid will be accepted by the courts.

“[C]ontractual workarounds of ASARCO are unlikely to work,” Tabb said.  “Since Walrath did not universally reject the very concept of a possible contract exception to the American Rule, one can expect bankruptcy professionals to try to devise other forms of contracts to effect enforceable indemnification agreements,” he said.

“At the very least, it would seem, that the representative of the bankruptcy estate (either the DIP [debtor in possession] or trustee) would have to join such an agreement as a party, and indeed notice and the opportunity to object should be given to all parties in interest,” Tabb said.

“In short, it would seem that something akin to the procedure for approving critical vendor orders or other extraordinary entitlements would be required.  But even with that, it is hard to be sanguine about the prospects for success if other courts agree with Judge Walrath,” he said.

Brown Rudnick LLP and Morris, Nichols, Arsht & Tunnel LLP, Committee counsel to the Official Committee of Unsecured Creditors for debtor Boomerang Tube, LLC included a provision indemnifying them for expenses incurred in any successful defense of their fees.

Boomerang Tube, a maker of products used by drillers in the exploration and production of petroleum and natural gas, filed for bankruptcy June 9, 2015.

The U.S. Trustee objected to the applications, saying that it was precluded by ASARCO.  The UST also argued that the fee defense provisions shouldn't be approved because they are outside the scope of employment and aren't reasonable.

The Creditor's Committee contended that the court had the authority under Section 328 to approve the fee defense provisions.  Section 328 provides that with court approval, a professional may be employed “on any reasonable terms and conditions of employment, including on a retainer, or on an hourly fee basis.”  Section 330(a)(1)(A), which was the provision at issue in ASARCO, provides that bankruptcy judges may award “reasonable compensation” to attorneys and other professionals who work on behalf of an estate.

In ASARCO, the Supreme Court held that any statutory departures from the American Rule must be “specific and explicit” and must “authorize the award of ‘a reasonable attorney's fee,' ‘fees,' or ‘litigation costs,' and usually refer to a ‘prevailing party' in the context of an ‘adversarial action.'”  Under the American Rule, each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise.

Walrath found that Section 328 doesn't provide a statutory exception to the American Rule and can't provide authority for approval of the fee defense provisions.  She agreed with the Creditor's Committee that ASARCO did acknowledge a contractual exception to the American Rule, but concluded that any such contract has to be consistent with other provisions of the Bankruptcy Code.  Walrath asked the parties to provide evidence that similar indemnification provisions are normally provided to counsel in non-bankruptcy contexts.

The Creditor's Committee cited to numerous bankruptcy cases in which indemnification provisions and fees for defending fees have been approved, and noted that the UST guidelines permit award of such fees “if it is judicially allowed in the district.”  In support of their market argument, they also cited to decisions in 11 states, including Delaware, where courts or state bar disciplinary authorities have held that similar indemnification provisions are permissible and don't “run afoul of the Model Rules of Professional Conduct.”

The UST argued that the Supreme Court's ruling in ASARCO precludes the court's consideration of the market in determining the reasonableness of the indemnification agreements.  The court didn't find the Creditor's Committee evidence to be compelling.  According to the court, the UST guidelines generally state that the UST will object to requests for fees defending fee applications.

Ultimately, Walrath agreed with the UST, and said that the cases considering market factors all pre-dated ASARCO.  Therefore, ASARCO prevents the court from “concluding that Section 328 permits defense fees even if they were routinely allowed by the market in bankruptcy or non-bankruptcy contexts prior to that ruling,” the court said.  The court also found that the fee defense provision isn't a “reasonable term of employment for serving as Committee Counsel.”

Great Reviews for NALFA Webinars

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NALFA Welcomes DGT Costs Lawyers

November 18, 2014

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