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Category: Billing Practices

Judge Cuts $100M in Fees in $3B Petrobras Securities Settlement

June 27, 2018

A recent Reuters story by Alison Frankel, “Judge in $3B Petrobras Securities Case Cuts Class Lawyers’ Fees by $100M,” reports that on the attorney fee award in the Petrobras securities class action settlement.  The views expressed in this post are not those of NALFA.  The article reads:

Jeremy Lieberman and his partners at the securities class action firm Pomerantz are about $171 million richer, after U.S. District Judge Jed Rakoff of Manhattan issued a decision granting final approval of a $3 billion securities class action settlement against the Brazilian energy company Petrobras and one of its auditors.  Pomerantz, one of three lead firms in the case, did the bulk of the work, so it’s receiving the lion’s share of the total $186.5 million Judge Rakoff awarded class counsel for obtaining an “exceptional” result in a risky case without a foreordained outcome.  You might expect Lieberman to be a very happy man today.  He’s not – and it’s not just because Judge Rakoff awarded Petrobras class counsel nearly $100 million less than the $284.4 million they requested.

Lieberman told me that what bothers him wasn’t so much the result as the process.  I’ll explain below how Judge Rakoff got to $186.5 million, but Lieberman’s complaint is that the judge did not honor Pomerantz’s fee agreement with its U.K. pension fund client, lead shareholder Universities Superannuation Scheme.  When USS retained Pomerantz, the fund rejected Pomerantz’s initial fee suggestion and instead, as class counsel recounted in their memo requesting $284.4 million in fees, brought in former U.S. pension fund official Keith Johnson of Reinhart Boerner Van Dueren to advise the U.K. fund on appropriate fees for its class action lawyers.  Their eventual sliding-scale deal, which granted Pomerantz a declining percentage of the recovery as the size of the settlement fund increased, would have netted lead counsel 9.4 percent of the $3 billion settlement, or $284.5 million.  Judge Rakoff took that pre-negotiated fee deal into account when he appointed USS a lead plaintiff in the Petrobras case.

The judge, as Pomerantz and the other lead counsel acknowledged in their fee petition, was not required to defer to USS’s fee agreement with Pomerantz.  Federal judges, after all, are supposed to look out for the interests of all class members, not just lead plaintiffs.  But Pomerantz and the other firms argued that Judge Rakoff should give considerable weight to the USS fee deal, especially because it was negotiated before the litigation began.

Pomerantz partners relied on the terms of their USS fee deal when they made decisions about how to litigate the case, the fee memo said.  To finance the expensive undertaking, they pledged their personal assets to assume a crushing debt load, “in large part informed by the ex ante fee agreement that was previously reviewed (and commended) by (Judge Rakoff).”

But when it actually came time to award fees, the judge said Pomerantz’s pre-negotiated fee deal was “at best just one factor” to consider in the tapestry of litigation events “that provide a much better indication of what was the value of the attorneys’ work to the class as a whole than any before-the-fact private agreement reached with an individual plaintiff.”

Instead, as I’ll explain, Judge Rakoff based his fee award on class counsel’s lodestar billings, boosted by a multiplier to reflect the excellent result they obtained.  Rakoff used the 1.78 multiplier Pomerantz, Labaton and Motley Rice had originally suggested, when they analyzed lodestar billings as a cross-check on their fee request for the 9.4 percent of the settlement, the percentage Pomerantz had negotiated with lead shareholder USS.

Lieberman told me he’s distressed at the short shrift Judge Rakoff gave to Pomerantz’s fee agreement with its client and believes that, in the long run, disregarding such agreements undermines the legitimacy of class actions.  Federal judges, as the class action bar is all too aware, are pushing for more transparency in these cases, pressing for details on relationships between lead plaintiff candidates and their firms, referral fees paid to firms that don’t have a role in the litigation, and dubious dismissals.  Lieberman said judges should similarly recognize that arms-length fee agreements between institutional investors and their lawyers enhance the professionalism of the class action bar.

“Fee awards can’t be random in high-stakes litigation.  It shows a lack of respect for the process, to just say, ‘Oh, I’ll figure it out afterwards,’” Lieberman said.  “If you want class action work to be taken as a serious industry, you have to have a systematic way to assure in advance how lawyers will be paid.  If we’re trying to clean up the business, let’s clean it up in all ways.  No more randomness at the end.”

Lieberman said he believes Judge Rakoff acted with good intentions.  He also acknowledged the inescapable truth of the judge’s point that he’s awarding a tremendous amount of money to plaintiffs’ firms.  (Rakoff’s exact words: “It is important to also remember that we are dealing here, not just with percentages, billable rates, and multipliers, but with very large amounts of money in absolute terms that plaintiffs’ counsel will be receiving under any analysis.”)

But he said – and this is a legitimate point – that disregarding lead plaintiffs’ pre-negotiated fee agreements can distort the way class counsel litigate a case.  “I was thinking for three years my fee agreement was going to be honored,” he said.  “The future of our firm was on the line.  We did that because we thought our agreement with the client would be honored.”

For a contrary take, I went to the Competitive Enterprise Institute, which filed a thought-provoking objection to the Petrobras settlement, protesting class counsel’s fee request, among other things.  In an email responding to Lieberman’s argument, CEI lawyer Anna St. John said it’s important to remember that USS isn’t the only client in this class action, which is being settled on behalf of all Petrobras shareholders.  USS, St. John wrote, “is just one of more than 1 million potential class members who are the clients that Pomerantz is supposed to represent,” she said in her email.  “That agreement also does not protect those absent class members, who like in this case, are taken advantage of when lawyers seek to recover windfall hourly rates.”

CEI’s objection urged Judge Rakoff not to defer to the USS fee agreement because the class as a whole didn’t negotiate the deal and wasn’t apprised of its terms.  “If it fails to preclude a windfall hourly rate, then it does not satisfactorily protect the class’s interests,” the filing said.  “Class counsel fear that there is no value to ex ante vetting if courts can ‘simply upend (agreements) by the subjective post hoc determinations.’ Not so; a negotiated fee can reasonably serve as a ceiling even if it is inappropriate to employ it as a floor.”

Judge Rakoff’s award of $186.5 million, as I mentioned, was based on lodestar billings by class counsel, but he used a very unusual process to review their bills.  Rather than appoint a special master – presumably at the expense of class members – to comb through the timekeeping records submitted by plaintiffs lawyers, the judge asked defense lawyers for Petrobras and its auditor to do it.  “The court took this step because of defendants’ intimate knowledge of various aspects of the case, and the court’s confidence was rewarded by the highly professional way in which defendants’ counsel undertook their court-directed task,” he wrote.

Defense lawyers found some hinky charges, like the seven days a contract attorney claimed to have spent reviewing the third amended complaint – after the complaint had been filed.  Class counsel voluntarily adjusted their lodestar report to eliminate some of the questionable hours uncovered by the defense firms but protested other supposedly inflated charges.

Judge Rakoff then waded into the time records himself.  He ended up focusing on class counsel’s $28 million in billing for foreign contract lawyers who cannot practice in New York and nearly $100 million in bills for contract lawyers.  He shifted the foreign lawyers’ bills to a reimbursable litigation cost (which means no multiplier) and cut contract lawyers’ fees by 20 percent. He also imposed an additional 50 percent cut on bills by contract lawyers acting as translators.  Those cuts brought the total lodestar down from $159.5 million to $104.8 million.  When the judge applied the 1.78 multiplier, the total came to the aforementioned $186.5 million.

Judge Rakoff said any more would be a “windfall” to plaintiffs lawyers who were already “highly incentivized to heavily litigate this huge case regardless of the expected fee award.”  Jeremy Lieberman begs to differ.

Overbilling Case Raises Questions about Public Corruption

June 19, 2018

A recent NLJ story by Amanda Bronstad, “How a Fee Inquiry Led to Hints of Public Corruption That Have Labaton Fight,” reports that, what began as a judge’s inquiry into a $75 million attorney fee has morphed into hints of public corruption, with one of the top securities plaintiffs firms in the nation on the defensive.  A year ago, U.S. District Judge Mark Wolf in Boston began looking into potential overbilling in a securities class action settlement with State Street Corp.  To spearhead the probe, Wolf brought in a special master who filed his 377-page report on May 14 under seal.

But the report’s findings prompted Wolf last month to order that George Hopkins, the executive director of the lead plaintiff, the Arkansas Teachers Retirement Fund, show up in person for a May 30 hearing.  Wolf said he could end up returning a “significant amount of money” to class members, according to a transcript of that hearing.  But it’s not overbilling that’s caught his attention.  The judge appears focused on the report’s finding of an undisclosed payment that went to a lawyer for a referral.

According to the hearing transcript, Wolf wanted to know more about New York-based Labaton Sucharow’s relationship with the Arkansas pension fund.  Then, mentioning “referral fees,” he asked about a number of individuals, including a former state legislator in Arkansas and two Texas plaintiffs lawyers.  In the sealed report, one of those lawyers, referred to in the transcript as “Mr. Chargois,” said Labaton asked him to introduce the firm to institutional investors in Arkansas, the judge said. He now gets 20 percent of Labaton’s fees in the class action even though he “didn’t do any work for it, and there was an assiduous effort to keep that from counsel in the case and others,” the judge said in the transcript.  “I think it is foreseeable that when the report becomes public, there are going to be questions about the origin of this relationship and whether all those millions of dollars stopped with Mr. Chargois,” the judge said in a transcript.

Labaton has fought back against the allegations, insisting the payments were legal.  On June 15, Wolf unsealed several documents including a June 8 motion in which the firm asked the judge to recuse himself, citing a “serious conflict” and a “legitimate concern as to whether Labaton will receive a truly impartial review.”  A footnote in the motion indicated that the special master has proposed a $4.1 million cut to its fees, the “same amount as the fee paid to the referring firm.”

Also unsealed was a sidebar discussion during the May 30 hearing at which Labaton’s counsel raised concerns about the judge’s remarks.  “You’re suggesting public corruption,” the firm’s attorney, Joan Lukey, of Boston’s Choate Hall & Stewart, told the judge.  “Honestly, your honor, I am appalled that that was even said.”

Special Master’s Focus

Wolf’s initial concerns focused on potential overbilling on the part of the three lead plaintiffs firms, which also include San Francisco’s Lieff Cabraser Heimann & Bernstein.  Those firms agreed to pay the costs of the special master, Gerald Rosen, a retired federal chief judge from the Eastern District of Michigan.  In ordering Hopkins to testify, Wolf raised concerns about whether, given the findings of the report, he should replace class counsel, and the lead plaintiff, in light of a potential conflict of interest.  Hopkins, in a June 6 affidavit, said he had retained outside counsel to handle questions relating to the special master’s report but insisted that the Arkansas pension fund could continue to adequately represent the class.

Hopkins, in sworn testimony, told the judge: “I have never asked a law firm to hire some attorney.  I have never asked a law firm to make a political contribution.”  The questioning appeared to catch Labaton off guard.  “Have you formed an opinion that there is something in this record that suggests that some form of public corruption occurred?”  Lukey asked the judge during the sidebar discussion.

“No,” the judge said.  “But I’ve formed the opinion that those are questions that are raised.”  He added: “I can foresee the reasonable likelihood that the conduct of Arkansas Teacher is going to become part of the controversy, and it causes me to have questions about whether it’s an appropriate lead plaintiff.  Who is representing—remember what this is about.  Who is representing the class?”  Labaton has its own questions.  The recusal motion indicated that class counsel would be seeking an accounting of the $3.8 million they had agreed to pay to fund the special master’s report.

“That millions of dollars paid by customer class counsel have been expended on the master’s investigation without a suggestion of, or a shred of evidence to support, public corruption is telling,” the motion continues.  Labaton and its lawyers have frequently made campaign contributions to both federal and state politicians, but their donations to Arkansas state election campaigns have been minimal, according to a search of records since 2002 at FollowTheMoney.org, the website of the National Institute on Money in Politics.

The questions raised by the judge in this case, though, may shed light on the politics behind how plaintiffs firms often get public pension funds for clients in large securities class actions.  “This is the murky underworld of how securities fraud class action firms acquire their clients,” said Adam Pritchard of the University of Michigan Law School, who has written about how plaintiffs attorneys have made political contributions in hopes of getting institutional investor clients.  “This may be an alternative way of getting yourself a lead plaintiff. People have connections—good ol’ boy networks—that help grease the wheels. And, if they do that, then they expect to get paid.”

Making the Introduction

Hopkins became the executive director of the Arkansas pension fund in 2009.  At the May 30 hearing, Hopkins told Wolf that even though Labaton had started working with them a year earlier, he hadn’t considered moving forward on potential lawsuits.  “Then our political leaders in Arkansas convinced me that I should,” he said.  “I’m sorry, what did you say?” Wolf responded. “The political leaders convinced you that you should be interested in these class actions?”  The judge pressed Hopkins to give names. Hopkins mentioned “several legislators,” “people at the governor’s staff” and “the Department of Finance Administration of Arkansas.”

But Wolf’s focus was on a retired state legislator named Steve Faris.  In particular, he wanted to know how much Hopkins had talked to Faris about the law firms handling the pension fund’s class actions.  Faris, Hopkins explained, was a member of the Arkansas General Assembly, which has indirect supervision of the pension fund because it adopts the laws that govern the organization.  He said Faris was co-chair of the public retirement committee in the state’s House of Representatives at the same time Hopkins co-chaired the public retirement committee in the state Senate.  They grew up in the same county and went to the same college.  Hopkins acknowledged he’d talked to Faris and others about the case.

“You know, sometimes we’d get an interesting case, and I would tell him, here’s this case and Labaton represents us,” Hopkins told the judge, noting that the fund works with other firms such as Bernstein Litowitz Berger & Grossmann and Kaplan Fox & Kilsheimer.  But he denied that Faris ever encouraged him to use Labaton.  “Did he ever tell you that he had a role in introducing Labaton to Arkansas Teacher?” Wolf asked.  “No, he never told me that.”

After the report came out, Faris acknowledged to Hopkins that “he had met a couple of Labaton attorneys” and introduced them to Paul Doane, who was the pension fund’s executive director at the time.  Hopkins told the judge “he introduced some attorneys that he knew, and sort of rolled out of the room.”

In an interview, Faris, now a board member of the Arkansas Public Employees Retirement System, acknowledged that he called Doane to introduce him to Labaton—but that was the extent of it.  “All I did was call Paul Doane and say, ‘Here are these people,’” he said.  “Every member of the retirement committee gets requests like that.”  Doane resigned in 2008 following a state audit that found he spent $34,515 on out-of-state travel expenses during the year he was executive director of the Arkansas pension fund.

In court, Hopkins denied any wrongdoing occurred.  He told the judge “you seem to assume that, you know, how Labaton became associated with ATRS was in some way improper, illegal, or untoward, and I don’t think the record shows that.”  Labaton’s attorney, Lukey, said she was shocked at the judge’s remarks at the hearing, according to the transcript of the sidebar discussion.  She asked the judge to clarify if he was “suggesting there was an impropriety involving Senator Faris with the monies being paid?  Because there is nothing.  I mean nothing.”  Wolf replied that “yes, those questions occur to me when I read it.”

Neither Labaton nor any of its current or former lawyers gave political donations to Faris, who ran in elections from 2000 to 2006, according to FollowTheMoney.org.

Finding Mr. Chargois

But Wolf didn’t ask about political donations.  He asked Hopkins if he knew of an Arkansas lawyer named “Herron.”  Hopkins said he knew the name but had not met him.  During the sidebar discussion, the judge elaborated, describing “Mr. Chargois”—the lawyer who was getting a 20 percent fee from Labaton—as having a partner named Herron who knew Faris.

The only attorneys in Arkansas by those names are Timothy Powell Herron and Damon Chargois, both with the same address in The Woodlands, Texas, according to Arkansas bar records.  But Herron, who said he’s retired from practicing law, said in an interview that he and Chargois were law partners with an office in Arkansas.  His uncle also was an aide to Faris.  “We had a referral practice,” he said. “We worked with other firms on some cases, like asbestos cases, toxic torts, things like that.”

He also insisted that that his firm worked on all the cases it referred, often handling depositions.  Any referral fees would have been justified and disclosed, he said.  “We did refer a number of firms but the expectation was we wouldn’t want the case if we weren’t involved,” he said.  “I never remember any kind of arrangement with anybody where we got a percentage and didn’t do a damn thing.”

He said his memory is “fuzzy” when it comes to Labaton.  He remembered the firm asked for an introduction to Faris for a case that the governor’s office was handling, but he did not recall the State Street lawsuit.  “I knew some people, did some campaign contributions, so it opened a few doors,” Herron said.  “George Hopkins was a longer-term friend of Steve Faris, and I imagine what happened is we may have cracked the door a bit, but Mr. Hopkins stepped in. We never had anything to do with that case. He steered that case to Labaton.”

Labaton, in a statement, called the judge’s suggestion that a payment may have led to the firm’s hiring is “baseless.”  Further, the firm wrote, “there is no mention of any such influence payment in the special master’s exhaustive report, which remains under seal” and “not a single finding suggesting that attorneys’ fees awarded by the court were used to pay elected or other officials.”

“The evidence and testimony of all relevant parties in this matter is clear: the referral payment went only to the lawyer who made the original introduction of our firm to ATRS,” Labaton said in its statement.  “State Senator Steve Faris has received no political contributions or any other payments from any member of either the Labaton firm or the referring lawyer, and Labaton made no payment of any kind to obtain work by ATRS.”

At the May 30 hearing, Labaton’s attorney, Lukey, insisted that the referral payment at issue was legal under Massachusetts law, but a lawyer for the special master, William Sinnott, of Barrett & Singal in Boston, disputed that characterization, calling it an undisclosed “finder’s fee.”  Failing to disclose the payment might be enough for the judge to be concerned, Pritchard said.

“It may be that this referral fee is nothing sordid, but that doesn’t mean that it doesn’t have to be disclosed to the client,” he said.  “If part of the money paid by Labaton is being spent on referral fees, the court likely thinks it’s entitled to know that because it has to approve the fees.”  But it’s imperative that the judge ask, Labaton said in its statement.

“The special master’s conclusions—which have no basis in fact or law—put the burden of disclosure of a referral payment on counsel, while the law itself places the burden on the court to ask,” the firm said.  “Here the court did not ask.  Thus, the court is placed in a tenuous position having to decide whether it bears responsibility for not asking—or shifting the blame to class counsel.”

Judge Wants Detailed Billing Records in Anthem Data Breach Class Action

June 15, 2018

A recent The Recorder story by Ross Todd, “Judge Again Says She’s ‘Disappointed’ in Plaintffs Lawyers in Anthem Data Breach Case ,” reports that the federal judge overseeing litigation targeting Anthem Inc. with data breach claims on continued her grilling of plaintiffs lawyers who represent the health insurer’s customers about the number of firms who worked on the case.

U.S. District Judge Lucy Koh asked lead plaintiffs counsel, Eve Cervantez of Altshuler Berzon and Andrew Friedman of Cohen Milstein Sellers & Toll, a string of detailed questions about which lawyers submitted bills on work settling the litigation, who defended depositions of name plaintiffs and who handled basic discovery tasks.  Koh previously grilled the lead plaintiffs for having 49 other firms beyond those on the four-firm plaintiff steering committee she appointed.

After Cervantez said that 27 firms had worked on the “crisis” of getting through millions of pages of discovery, Koh stopped the plaintiffs lawyer.  “Is that how you run most of your cases?  You have 27 firms doing document review?” the judge said.

Cervantez said it didn’t matter who did the work or the firm where they practiced, but “were the hours expended reasonable.”  “How is that consistent with the conversation that I had with you and Mr. Friedman at the selection of counsel hearing?” asked Koh, who initially trimmed the lead plaintiffs proposed six-member steering committee to two firms.

Plaintiffs struck a $115 million settlement deal with Anthem last June, which included a proposed $38 million in attorney fees, or 33 percent of the total settlement.  The deal provided two years of credit monitoring and identity protection services to Anthem customers whose personal data was compromised in the 2015 breach, and creates a $15 million fund to reimburse customers for things such as falsified tax returns.

The Competitive Enterprise Institute’s Center for Class Action Fairness filed an objection last year on behalf of Adam Schulman, an attorney at the Washington, D.C., organization, partially because of the fee request.  Schulman claimed fees should be closer to $13.8 million and questioned why 49 other firms not appointed by the court stood to earn a total of $13.6 million in fees as part of the settlement.

Koh told plaintiffs counsel that she was “deeply disappointed” about the number of firms brought on to handle the case at a hearing in February.  At Schulman’s request, she appointed a special master, retired Santa Clara County Superior Court Judge James Kleinberg, to comb over the fee request.

Kleinberg, who is now a mediator and arbitrator at JAMS, pointed to duplicate efforts and excessive billing rates for contract lawyers in suggesting in April that the fee award be trimmed to $28.59 million. 

Koh didn’t tip her hand on where she will ultimately come out on the fee request, but she did indicate that she’ll rule on final approval of the deal by late July.  She asked the plaintiffs to hand over detailed records about document review, depositions and post-settlement work.

“I would like to be able to see who did what work when at what hourly rate and for how many hours,” she said.  “I think I’ve already indicated that I’m disappointed, but it is what it is.”

Lead Plaintiff in State Street Overbilling Case Hires Outside Counsel

June 7, 2018

A recent NLJ story by Amanda Bronstad, “Lead Plaintiff in State Street Overbilling Probe Hires Own Counsel but Stays in Case” reports that the executive director over an Arkansas pension fund has retained outside counsel but insisted he could continue to serve as lead plaintiff in settlements with State Street Corp. despite an overbilling probe that could end up returning a “significant amount of money” to class members, according to a federal judge’s remarks.  In an affidavit, George Hopkins, executive director of the Arkansas Teacher Retirement System, said he had retained Thomas Hoopes of Boston’s LibbyHoopes, who represents professionals in criminal matters and corporate investigations.

Senior Judge Mark Wolf of the U.S. District Court for the District of Massachusetts had ordered the affidavit following a May 30 hearing at which Hopkins testified about his role as lead plaintiff and the relationship between his Arkansas pension fund to Labaton Sucharow, one of three plaintiffs firms whose potential overbilling in a $75 million attorney fee request prompted Wolf to bring in a special master, who filed his report under seal last month.  At last week’s hearing, Wolf raised concerns that Hopkins and Labaton Sucharow, which has defended the fee request, now has a conflict with class members.

“The conduct of Labaton and the other lawyers you selected has been called into question,” he told Hopkins, who testified at the hearing.  “The special master, as you know, recommends that what, by my standards, is a significant amount of money be returned by those lawyers and distributed to the class.”  He said his “paramount responsibility” is to the class and whether the lead plaintiff is “typical and adequate,” in light of the report’s recommendations.

“Do you understand, therefore, that I have a concern that there may be a conflict at this point between the interests of Labaton and the other lawyers, who want to vindicate the propriety of everything they did and keep the money,” he said, “and the class that would benefit if I ordered some of that money paid back?”  In his May 31 order, Wolf asked whether the Arkansas pension fund wanted to continue to be lead plaintiff and, if so, whether it would seek legal advice other than Labaton concerning the case.

In his affidavit, Hopkins acknowledged the judge’s concerns but insisted he could still represent the class.  “I do firmly believe that we all can learn from this case, including a little more ‘trust but verify,’” wrote Hopkins, who has been the system’s executive director since 2008.  “However, trusting those who have not previously given us cause to distrust does not create a failure of duty.  Imperfection may or may not signal more.  Still, hindsight is 20/20 and hindsight will certainly lead to refinements in best practices, at least for class representatives both sophisticated and less sophisticated as there is no instruction manual on how to be a class representative.  But that does not prevent ATRS from continuing to do our best to be both fair and vigorous on behalf of those we serve.”

He wrote that Hoopes’ legal advice consisted of the Arkansas pension fund’s duties to the class and other issues raised in the special master’s report.  But Hopkins said he would continue to consult with Labaton on the settlement’s distribution.  Labaton issued a statement defending the affidavit and saying the Arkansas pension fund had a “critical role in helping formulate and evaluate litigation strategy, overseeing and supporting class counsel and establishing a basis for a strong financial recovery for the class.  George Hopkins personally did an outstanding job as class representative throughout the six-year entirety of the case.”

A year ago, Wolf appointed the special master, Gerald Rosen, a retired federal chief judge from the Eastern District of Michigan, to look into potential overbilling in a $300 million settlement of cases alleging State Street overcharged pension fund clients in connection with foreign currency trades.  Lawyers at New York-based Labaton and two other lead counsel firms, San Francisco’s Lieff Cabraser Heimann & Bernstein and the Thornton Law Firm in Boston, admitted to double-counting hours relating to staff attorneys but continued to defend their fee request.

Rosen filed his report on May 14.  The three plaintiffs firms have challenged Rosen’s findings and insisted on redactions to the 375-page report.  Wolf has set deadlines for those redactions and a possible June 22 hearing.  He also scheduled last week’s hearing and ordered Hopkins to show up in court to address whether, given the findings of the report, the judge should replace class counsel and the lead plaintiff.

At the hearing, arguments by the special master’s lawyer, William Sinnott, and Joan Lukey, who represents Labaton, shed some light on the polarized opinions about the report.  Sinnott, of Barrett & Singal in Boston, pointed to a declaration filed by Hopkins as “very troubling.”

“And not for nefarious reasons, but with respect to what he saw as his role with respect to the class and the members,” he said.  But Lukey, of Boston’s Choate Hall & Stewart, called the report’s conclusions “very vigorously disputed.”  Some items in the report, she said, “are extremely injurious to the reputations of the three firms” and could have an “effect on these firms and perhaps others in the plaintiffs’ class action bar.”

She also said some of the report is based on “errors of law as to what the Massachusetts law is on the subject at issue.”  That issue became clearer when, following a closed sidebar discussion, Lukey stated in court: “We wish to make it clear that the nature of the misconduct which is asserted relates to the existence of a so-called bare referral or origination or forwarding fee, as permitted under Massachusetts Rules of Professional Conduct, which was not disclosed to the court under the premises of Rule 54(d)(2), and which the master feels was inappropriate withheld from the court.”

Given that the hearing was public, she said, “I did not wish anyone publicly present to be left with the impression that there was anything more nefarious than that.”  Sinnott responded: “This was not a referral fee.  This was a finder’s fee.  And, more importantly, this was a finder’s fee that was not disclosed to the client, to the class, to co-counsel, nor to the court.”

Massachusetts Rules of Professional Conduct permits a referral fee—a fee paid from one law firm to another for referring a client —“only if the client is notified before or at the time the client enters into a fee agreement.”  But the Massachusetts rules on referral fees are less stringent than that of the American Bar Association’s, said Tigran Eldred, a professor at New England Law in Boston.

“The ABA rules require that, if there’s going to be a division of fees between two or more lawyers that either the fees are distributed proportionate to the amount of work each lawyer does, or that those lawyers take on ethical responsibility for all the work done,” he said.  Massachusetts rules do not define a finder’s fee, he said, but that presumably could mean any kind of payment for “law-related services,” like title insurance, financial planning, real estate lobbying or legislative lobbying.

Opinion: The Trouble with Lodestar Fee Awards

May 30, 2018

A recent Reuters editorial by Alison Frankel, “The Trouble with Lodestar Fee Awards, Anthem Class Action Edition,” opines on the recent fee request in the Anthem data breach class action.  The editorial reads:

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 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 mega-cases 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 and 2017’s Nitsch v. Deamworks Animation.  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 lodestar 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.  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.”