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Category: Fee Doctrine / Fee Theory

Article: Five Lessons for Recovering Attorney Fees in Texas

February 13, 2021

A recent article by Amanda G. Taylor, “Recovering Attorney’s Fees in Texas: Five Lessons” in BizLit News Blog reports on recovering attorney fees in Texas.  This article was posted with permission.  The article reads:

Obtaining an award of attorneys’ fees might be the final step in a long-waged litigation battle but to do so successfully requires careful planning and diligence from the outset of a case.  The Texas Supreme Court recently clarified the evidence required to obtain and affirm such an award.  Rohrmoos Venture v. UTSW DVA Healthcare, LLP, 578 S.W.3d 469 (Tex. 2019).  The Texas Supreme Court also recently confirmed that these evidentiary standards apply equally when fees are sought to be recovered as a sanction.  Nath v. Texas Children’s Hosp., 576 S.W.3d 707, 710 (Tex. 2019).  To best serve a client’s interests of recovering attorneys’ fees in Texas, whether as a prevailing party or as a sanction, lawyers should adhere to five lessons from Rohrmoos.

Lesson One:  Confirm a legal entitlement to recover fees.  “In Texas, as in the federal courts, each party must pay its own way in attorney’s fees … unless a statute or contract provides otherwise.”  Rohrmoos Venture, 578 S.W.3d at 484.  Certain claims, such as a breach of contract claim brought under Chapter 38 of the Texas Civil Practices and Remedies Code, entitle a prevailing party to recover attorneys’ fees.  Other claims, such as a common law fraud claim, do not afford such a remedy.  In establishing your initial case strategy, it is important to consider which claims will and will not allow for recovery of fees, and advise your client about the pros and cons of pursuing each claim accordingly.  Also, be aware of fee-shifting procedural tools (such a motion to dismiss under the Texas Citizens Participation Act) and various Texas statutes and rules that allow for recovery of fees as a sanction (such as Civil Practice and Remedies Code Chapters 9-10, and Texas Rule of Civil Procedure 215).

Lesson Two: Keep accurate, contemporaneous billing records.  Although billing records are not absolutely required to prove the amount of reasonable and necessary fees, it is “strongly encouraged” to submit such proof in support of attorneys’ fees.  Rohrmoos Venture, 578 S.W.3d at 502.  It is much easier to review, summarize, and testify about the work performed (often years later) if you have been diligent in your billing practices throughout.  Time should be kept in a manner that demonstrates the “(1) particular services performed, (2) who performed those services, (3) approximately when those services were performed, (4) the reasonable amount of time required to perform the services, and (5) the reasonable hourly rate for each person performing the services.”  Id.  It is also advisable to keep time in a manner that is specific enough to cover the topic but without legalese and without so much detail that heavy redactions become necessary.  Fact finders prefer to read invoices in plain English without the interruption of hidden text.

Lesson Three:  Your fee agreement does not control the amount awarded.  “[A] client’s agreement to a certain fee arrangement or obligation to pay a particular amount does not necessarily establish that fee as reasonable or necessary.”  Id. at 488.  Translation: even if you have agreed to handle the matter for a flat fee or contingency fee, you still must demonstrate that the amount of fees sought for recovery are reasonable and necessary based on the work performed and the time incurred.  Regardless of the fee arrangement with your client, keeping accurate and contemporaneous billing records is important.

Lesson Four: Remember to timely designate fee experts.   “Historically, claimants have proven reasonableness and necessity of attorney’s fees through an expert’s testimony—often the very attorney seeking the award.”  Id. at 490.  “[C]onclusory testimony devoid of any real substance will not support a fee award.”  Id. at 501.  Because expert testimony will be required, the attorney must remember to designate herself and any other attorney who will offer an opinion about the reasonableness and necessity of the fee amount(s) as an expert witness in compliance with the scheduling order or discovery control plan governing the case.

Lesson Five: Understand the “Texas two-step” calculation method.  At step one, calculate the “base” or “lodestar” amount by multiplying the “reasonable hours worked” by a “reasonable hourly rate.”  Id. at 498.  This is an “objective calculation” that yields a “presumptively reasonable” amount.  Id. at 497-98, 502.  The determination of what is a reasonable market rate and what is a reasonable amount of time will typically include consideration of the following factors: (1) the time and labor required, (2) the novelty and difficulty of the questions involved, (3) the skill required to perform the legal service properly, (4) the fee customarily charged in the locality for similar legal services, (5) the amount involved, (6) the experience, reputation, and ability of the lawyer or lawyers performing the services, (7) whether the fee is fixed or contingent and the uncertainty of collection, and (8) the results obtained.  Id. at 500.  At step two, “adjust[] the base calculation up or down based on relevant considerations … [that were not] subsumed in the first step.”  Id.  “If a fee claimant seeks an enhancement, it must produce specific evidence showing that a higher amount is necessary to achieve a reasonable fee award.”  Id. at 501. Remember that only “rare circumstances” justify such an adjustment.  Id. at 502.

Following these five lessons from the outset of a case will be beneficial to the expert testifying about the amount of fees at the end of a case.  More importantly, it will benefit your client’s best interest in obtaining a monetary award and being able to have that award affirmed on appeal.

Amanda G. Taylor serves as Practice Group Leader of Butler Snow LLP’s Appellate Group and practices from the firm’s Austin, TX office. As a Board-Certified Civil Appellate specialist, Amanda helps to shape successful case strategy from the outset of litigation through the end of an appeal.  Amanda is a detail-oriented lawyer who represents her clients with passion, stays current on emerging trends and issues, and brings a practical perspective to problem solving.  She has a broad range of experience handling complex civil disputes regarding contracts, fraud, tax, insurance, products, employment, real property, and trust and estates.  Amanda is also committed to community service through a number of positions in her State and Local Bar Associations.

Illinois Court Weighs if Wage Law Provides for Attorney Fees

February 10, 2021

A recent Law 360 story by Celeste Bott, “Court Must Weigh if Ill. Wage Law Provides For Atty Fees”, reports that an Illinois appellate court held that a former police officer isn't entitled to attorney fees under the settlement reached in his wage suit with a Chicago-area village, instructing the circuit court to consider on remand whether he can recover the fees under the Illinois Wage Payment and Collection Act.

Former officer David Graham contends he's entitled to attorney fees under the Illinois wage law, which provides workers can recoup fees in a successful civil action brought by "any employee not timely paid wages, final compensation, or wage supplements by his or her employer." Graham, who reached a settlement with the village of Dolton after a benefits dispute, argues that Employee Disability Act benefits constitute "wages," according to the appellate court.

The village had countered that Employee Disability Act benefits are not considered "wages" because they do not compensate employees for work "actually performed," according to the opinion.  The panel said the circuit court never addressed Graham's arguments that he is entitled to attorney fees under the Wage Payment and Collection Act, remanding with directions to consider whether he could recover attorney fees and costs pursuant to the statute.

In Illinois, each party is responsible for his own attorney fees, and the settlement agreement didn't contain a contractual fee-shifting provision that puts the village on the hook for more than $100,000 in fees and costs, the panel said.  Graham had argued that the entire agreement constituted a "contractual undertaking," and that the lower court had relied on a section of that agreement that states that the parties acknowledged he was "the prevailing party for purposes of his petition for [attorney] fees and costs," according to the opinion.

"Although this provision provides that plaintiff is the prevailing party for purposes of his fee petition, it does not expressly provide that the parties agreed that plaintiff, as the prevailing party, is entitled to recover attorney fees from defendant in the underlying action," the panel said.  But in the very next section of the agreement, the parties did expressly set forth which party was responsible for attorney fees if either side has to file suit for a breach of the settlement deal, the court said.

"If a party is forced to file a breach of contract action, the agreement provides that the prevailing party in that action would be entitled to reasonable attorney fees," the court said.  "Because this case is not an enforcement action, section six of the agreement does not apply."

Article: A Double Attorney Fee Clause Is Held Not a Penalty in NY

February 6, 2021

A recent New York Law Journal article by Michael P. Regan, “A Double Attorney Fees Clause Is Held Not a Penalty, But What’s Next,” reports on a recent case in New York where the court held that a provision of a commercial contract requiring the payment of double the amount of attorney fees expended by the ‘substantially prevailing party” in a litigation between the contacting parties is not unenforceable penalty.  This article was posted with permission.  The article reads:

The Appellate Division, Second Department held in Loughlin v. Meghji, 186 A.D.3d 1633, on Sept. 30, 2020, that a provision of a commercial contract requiring the payment of double the amount of attorney fees expended by the “substantially prevailing party” in a litigation between the contracting parties is not an unenforceable penalty.  While some may believe that this particular provision is, in fact, a penalty, the court’s mode of analysis in reaching that result is the more important takeaway for commercial lawyers.

Instead of focusing on the more traditional factual inquiries in determining the enforceability of such provisions, the court in Loughlin invoked the simpler rule that sophisticated commercial parties should be held to the terms of the contract that they signed onto.  It remains to be seen whether Loughlin signals a growing shift in how New York courts treat such provisions in commercial contracts, and whether this new approach knows any boundaries.

The decision in Loughlin does not discuss Court of Appeals’ opinion in Equitable Lumber v. IPA Land Dev., 38 N.Y.2d 516 (1976), which is often cited in this context.  In Equitable Lumber, the Court of Appeals scrutinized the enforceability of a contractual provision establishing 30% as a reasonable attorneys’ fee to be paid in connection with any enforcement and collection efforts by the seller under the parties’ contract, and noted that courts routinely address the enforceability of similar clauses providing for attorney fees in a liquidated amount. See Equitable Lumber, at 522-24.

The court remitted for the resolution of traditional fact inquiries concerning the enforceability of a liquidated damages provision, to wit: (a) was a 30% fee reasonable in the light of the damages to be anticipated by a party in the seller’s position, or, alternatively, (b) was the fee commensurate with the actual arrangement agreed upon by this plaintiff and its attorney? See id. at 524.  Further, the court directed the lower court to determine “whether the amount stipulated was unreasonably large or grossly disproportionate to the damages which the [seller] was likely to suffer” in the event it did not rely on the liquidated damages clause and, if so, indicated that the provision should be voided as a penalty. Id.

Recent decisions from the Commercial Division, New York County, have followed the analysis set forth in Equitable Lumber.  For example, in Julius Silvert v. Open Kitchen 17, 2019 NY Slip Op 30394(U) (Sup. Ct. N.Y. Co.), Justice Cohen, citing Equitable Lumber, declined to enforce, on summary judgment, a contractual provision setting the amount of attorney fees at 33.33% of the balance due under the parties’ credit agreement. See Julius Silvert, at pp. 3-6.

The court held, inter alia, that “[f]ixing attorney’s fees at an arbitrary percentage of an unknown amount … acts as a kind of liquidated damages provision, one which may constitute an unenforceable penalty.” Id. at p. 4. In contrast to Loughlin, Justice Cohen declined to award attorney fees based solely “on the face of the [parties’ agreement],” and held that more information is required to determine whether such a payment for legal fees is fair and reasonable. Id. at pp. 5-6.

Likewise, in Maina v. Rapid Funding NYC, 2014 NY Slip Op 30952(U) (Sup. Ct. N.Y. Co.), Justice Sherwood held that a provision contained in a promissory note, entitling the lender to a payment of attorney fees in the amount of 20% of the principal and interest then due on the note, is an unenforceable penalty. See Maina, at *5, citing Equitable Lumber.  The court reasoned that a party is only entitled to such an attorney fees award “if it demonstrates that the quality and quantity of the legal services rendered were such to warrant, on a quantum meruit basis, that full percentage [provided for in the contract].” Id.

In contrast to Equitable Lumber and its progeny, the decision in Loughlin eschews the traditional method of analyzing the enforceability of a contractual provision requiring a payment of attorney fees based on a fixed, pre-determined percentage of fees incurred—in this case, a whopping 200% of such fees.  Instead, the court principally relies on the Court of Appeals’ holding in Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (2004), which emphasizes the importance of enforcing commercial contracts according to their terms, especially in the context of real-estate transactions. See Vermont Teddy Bear Co., at 475.  But Vermont Teddy Bear dealt with the notice requirements of a commercial lease, not the enforceability of a liquidated damages provision—let alone in the context of awarding attorney fees.  Further, a provision which requires a payment based on a multiple of future, undetermined attorney fees, does not create the kind of “commercial certainty” that the court was seeking to achieve in Vermont Teddy Bear.

Further, the decision in Loughlin cites to the court’s prior decision in White Plains Plaza Realty v. Town Sports Int’l, 79 A.D.3d 1025 (2d Dept. 2010), another commercial-lease dispute, in which the contract provided for holdover rent at 200% of ordinary, monthly rent.  But whereas a multiple of holdover rent can be easily identified and calculated, a multiple of future attorney fees, yet to be incurred, is a more nebulous construct that has been recognized to be “particularly susceptible to abuse[.]” Julius Silvert, at p. 5.

The decision in Loughlin may be indicative of an increasing judicial reluctance to interfere with the bargain struck by commercial parties.  But under the mode of analysis utilized in Loughlin, it is unclear what restrictions the court would impose on even more extreme variations of such a clause, if any.  For instance, would a clause entitling the “substantially prevailing party” to a payment of 500% of incurred litigation fees be enforceable as between commercial parties?  Under the principle that commercial parties must adhere to the agreement they struck, at all costs, the bounds of such a provision seem endless.  And as set forth in Equitable Lumber and its progeny, good reasons exist to impose limits on the use of such provisions.  Indeed, provisions like the one in Loughlin dramatically alter the “American Rule,” employ the courts in creating financial windfalls to commercial parties, and act as a deterrent against the filing and prosecution of important claims.

Michael P. Regan is a litigation partner in the firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP in New York.

Article: Granting Arbitrators the Power to Award Attorney Fees

January 4, 2021

A recent Legal Intelligencer article by Abraham J. Gafni, “Unintentionally Granting Arbitrators the Power to Award Attorney Fees” reports on granting the power to award attorney fees in arbitration.  This article was posted with permission.  The article reads:

In this pandemic period, as courts are limited in their ability to conduct civil trials, parties increasingly consider whether and how to settle their disputes through arbitration.  In his article last month in the Legal Intelligencer, “How Pre-Lawsuit Demand Letters Can Undermine Arbitration” (Nov. 16, 2020), Charles Forer, through his erstwhile attorney foil Bob, explained how a party who had entered into an agreement providing for mandatory arbitration almost suffered the unintended consequence of forfeiting that right by threatening litigation in court.

Yet another area in which this “law of unintended consequences” appears to be regularly occurring these days is when a party unintentionally extends authority to the arbitrator to award attorney fees.  The general “American Rule,” of course, is that, in the absence of a contractual agreement or statutory provision, each party is responsible for its own attorney fees.  Similarly, arbitrators generally lack the authority to award attorney fees.  Nonetheless, parties often determine that it is within their interests to include a provision in the arbitration agreement allowing the arbitrators to award them.

Even when the parties have not included such authority in the arbitration agreement, however, they may unexpectedly find that through their arbitration pleadings or other actions during the arbitration proceeding, they have granted such authority and become responsible for the payment of their successful adversaries’ attorney fees.

A recent opinion of the Massachusetts Superior Court, business litigation session, reflected how a party’s own actions authorized an arbitration panel to award attorney’s fees even though the contract did not provide that authority. See Credit Suisse Securities (USA), (Credit Suisse) v. Galli, No. 2020-0709-BLS 2 (Aug. 31, 2020).  The case involved employees who were formerly employed by Credit Suisse.  They filed an arbitration demand against Credit Suisse alleging a violation of the Massachusetts Wage Act (Wage Act) and related contract claims, asserting that Credit Suisse had failed to pay them earned deferred compensation.

Credit Suisse denied these allegations and filed a counterclaim claiming that the employees had breached their contracts with Credit Suisse.  Consequently, in addition to asserting a claim of millions of dollars in compensatory damages it sought “transaction costs, interest and fees.”  In closing arguments, the employees’ counsel specifically sought attorney fees, asserting that the arbitrators could award them pursuant to the Wage Act, and “because we believe that Credit Suisse, in filing their counterclaims … are requesting” not only millions of dollars in compensatory damages but also “related transaction costs and fees.”  Employees’ position was that since both parties were requesting attorney fees and costs, the arbitrators had the authority to award such fees to the successful party.

In response, in its closing arguments, Credit Suisse’s counsel stated that “we do not think there is any legal basis for an award of fees and expense in this case,” but added that if the arbitration panel were to award fees to the employees, the fee application was insufficiently itemized.  However, they did not directly contest the assertion that Credit Suisse had itself requested attorneys’ fees or that by so doing it had given the arbitrators the authority to award such fees even without a finding of a Wage Act violation.  Moreover, at no time in the proceedings, did they make clear to the arbitrators that they were withdrawing any claim for attorneys’ fees should they prevail.

The arbitration panel awarded the employees compensatory damages as well as over $100,000 in attorney fees.  Credit Suisse appealed, arguing that the panel had exceeded its powers in awarding such fees.  In considering this contention, the court noted that judicial review of an arbitral decision “is extremely narrow and exceedingly deferential.”  Among the limited bases for vacating an award under both the Federal Arbitration Act, 9 U.S.C. Section 10(a)(4) and the Wage Act, however, is where the arbitrators have exceeded the scope of their arbitral authority.

Had the arbitration panel found violations of the Wage Act, the employees would have been entitled to attorney fees pursuant to that statute. The court noted, however, that it was unclear whether the findings of the panel had been based upon violations of the Wage Act.

Critically, however, the arbitration panel did not cite the Wage Act as the basis for its award of attorney fees.  Rather, according to the Massachusetts Superior Court, “the panel stated that it had the authority to award fees because each side had requested its fees.  Where the parties mutually request attorney’s fees in an arbitration, courts have concluded that this mutual request can provide the requisite legal basis for an award of fees, even though the general rule is that each party pays its own attorney fees.  This is precisely what happened here.”

In citing other cases containing a similar holding, the court noted that Rule 43(d) of the Commercial Arbitration Rules of the American Arbitration Association at Rule 43(d) also authorizes the award of attorney fees where all parties have requested it.  In short, “by expressly demanding attorney’s fees and then submitting that demand (through its counterclaim) to arbitration, Credit Suisse effectively gave the arbitrators the authority they would not have otherwise had to award such fees to the prevailing party.”

The court distinguished this situation from Matter of Stewart Abori & Chang, 282 A.D. 2d 385, 723 N.Y.S. 2d 492 (App. Div. 2001), in which the court vacated the arbitrator’s award of attorney fees to the prevailing party because prior to the rendering of the award, the opposing party withdrew its claim to recover its own attorney fees and objected to the opponent’s claim for such relief. It was not deemed, therefore, to have acquiesced in the arbitrator’s consideration of that claim.

Finally, Credit Suisse sought to escape this conclusion by arguing that its counterclaim only asked for “fees,” not “attorney fees.”  This contention was also rejected by the court.  It noted that it was clear from the employees’ closing argument that the employees understood the Credit Suisse counterclaim to be seeking attorney fees and the employees’ own counsel were also seeking attorney fees, regardless of whether an award in its favor was based on a Wage Act violation.  In the face of these contentions by the employees, however, Credit Suisse was silent, neither correcting the supposed mischaracterization of its counterclaim nor making clear that Credit Suisse was not seeking attorney fees.  In addition, its only expressed opposition to the award of attorney fees was based solely on the sufficiency of the fee application submitted by the employees.

Otherwise stated, while Credit Suisse did not actively litigate the issue of its own fees, it never expressly withdrew that claim.  In addition, Credit Suisse did not dispute the employees’ assertion in closing arguments that the parties had agreed to submit the question of attorney fees for resolution by the panel.

In summary, whether arbitrators should be granted the authority to award attorney fees is an issue that must always be considered when drafting an arbitration agreement; and, of course, as the nature of any future dispute is not yet known and the incorporation of such a provision will be adopted without any knowledge of the potential financial burden that may result , counsel must always evaluate the likelihood of success in the arbitration, the relative financial situations of the parties, and the ability to bear such further expense in the event of an adverse result.

What has been further demonstrated here is that parties must remain wary of the possibility of becoming responsible for attorney fees, even when the arbitration agreement does not provide for such by making or joining in such a demand or, perhaps, by simply remaining silent and not objecting in the face of the other side’s request for attorney fees.  Unfortunately, this often occurs merely because parties wish to demonstrate that their aggressiveness and confidence match that of their adversaries.  Ignoring the potential risk of this unintended consequence, however, may result in a significant award well beyond what was contemplated by the parties when they agreed to arbitration.

Abraham J. Gafni is a retired judge and mediator/arbitrator with ADR Options.  He is also a professor of law emeritus at the Villanova University Charles Widger School of Law.

Article: Unusual Settlement Structure Leads to Fee Award Almost Double Judgment

November 1, 2020

A recent New York Law Journal article by Thomas E.L. Dewey, “Unusual Settlement Structure Leads to Approval of Fee Award Nearly Double the Payout,” reports on a recent New York class action were the attorney fee award exceeded the settlement amount.  This article was posted with permission.  The article reads:

Public policy generally prohibits class action settlements in which the attorney fee awards dwarf the amount awarded to the class.  But as a recent case in the U.S. District Court for the Southern District of New York illustrates, such a settlement may be approved if it is structured so that class counsel’s award does not come at the class’s expense.

In Hart v. BHH, No. 15-cv-4804, 2020 WL 5645984, at *2 (S.D.N.Y. Sept. 22, 2020), Judge Pauley approved over $4.6 million in fees and expenses for class counsel, even though the total payments to class members were expected to top out at less than $2.5 million.  However, the court balked at the inclusion of a “quick-pay” provision in an earlier draft of the settlement, which would have allowed class counsel to collect its fees before the class members were paid, and did not allow the parties to submit attorney fees to a separate arbitration.

Background

The two named plaintiffs filed suit in in June 2015, alleging that “ultrasonic pest repeller” devices they had purchased from BHH LLC (branded Bell + Howell) were “ineffective and worthless.”  The complaint included claims under the federal Magnuson-Moss Warranty Act, multiple California consumer protection laws, and the implied warranty of merchantability. In May 2016, the court dismissed the federal statutory claim, but allowed the state law claims to proceed. An amended complaint then added a claim for fraud, citing representations made on the devices’ packaging and via the Home Shopping Network that they would rid homes of “ants, spiders, mice, roaches, rats and other pests.”

In July 2017, the court certified three classes of plaintiffs who had purchased the devices—a nationwide fraud class, a California-only class, and a multi-state breach of warranty class.  Each party then offered experts on the efficacy of the devices.  Judge Pauley began his Sept. 5, 2018, opinion on summary judgment with images from one of the expert reports, noting, “As the photographs show, mice can apparently relax comfortably under a Repeller and even appear to be so drawn in by its siren song that one would scale a wall just to snooze on it.”  Having thus found a disputed issue of fact regarding the efficacy of the devices, the court set jury trial for Sept. 9, 2019.  On July 16, 2019, the parties informed the court that they had reached a settlement, and on Sept. 3, 2019, the plaintiffs moved for preliminary approval of the agreement.

‘Quick-Pay’ Attorney Fees Provision Scuttles Preliminary Approval

The most notable feature of the proposed agreement in Hart was its so-called “quick-pay” provision, under which the plaintiff’s attorneys would be paid their fees within 10 days of final settlement approval.  Plaintiff contended the provision was necessary to discourage “the filing of baseless objections (and appeals), which can delay payment of class relief.”  Analyzing that provision in a July 17, 2020, opinion, the court wrote that it “strains credulity” that such a measure would deter baseless objections.  The court assured the litigants that such objections could be better discouraged by the threat of Rule 11 sanctions.

The court also found that, having reached a proposed agreement, the two parties had little incentive to pour any more resources into the case if valid objectors came forward.  The court noted that “money is the best way to keep lawyers engaged.”

Although plaintiffs’ counsel cited seven previous SDNY orders in which similar provisions had been granted preliminary approval, the court pointed out that none of those previous orders contained “an iota of analysis on ‘quick-pay’ provisions.”  Thus, in the first detailed analysis of such a provision in the Southern District, the court held that paying counsel “prior to compensating the class conflicts with Rule 23(e)’s mandate for fairness, reasonableness, and adequacy.”

Also as part of the preliminary agreement, the parties proposed to engage an arbitrator to determine the amount of attorney fees to be awarded to plaintiffs’ counsel.  The court ruled that such an arrangement was contrary to law, as it would usurp the court’s discretion and eviscerate its duty to “act as a fiduciary who must serve as a guardian of the rights of absent class members.”

The court thus denied preliminary approval of the settlement.  The plaintiffs quickly submitted a revised proposed settlement which no longer included the quick-pay provision or arbitration of attorney fees.  The court reviewed the revised settlement on Feb. 12, 2020, and granted preliminary approval, setting a hearing on final approval for September 2020.

Refunds for Class Members Found Fair

In its Sept. 22, 2020, opinion granting final approval of the settlement, the court devoted significant consideration to the structure of the awards to the class, which were styled as refunds for purchases of repeller devices.  By providing proof of purchase that included the price paid for each unit, a class member could receive a full refund for up to six units.  Without proof of the price paid, the amount of each refund was set at $15, which the parties chose as the best estimate of the purchase price.  Finally, class members who could not provide any proof of purchase could still receive $15 each for up to two units purchased.

As of August 24, class members had filed 82,503 claims for payment, and a total payout of $2,118,505 had been approved by the class administrator.  And crucially, no objections to the settlement had been received from notified class members.  The administrator expected a final payout between $2.1 million and $2.5 million.  BHH had agreed in the settlement to a total potential liability of over $57 million.

In evaluating the fairness of the settlement, the court noted that if the case had proceeded to a jury trial, class members might have received considerably less than full refunds—especially because plaintiffs “faced substantial risk in proving loss causation.”  The court found the settlement to be procedurally and substantively fair, and moved on to considering the fees to be awarded to class counsel.

Attorney Fees Exceed Amount Awarded to Class Members

The agreement allowed class counsel to seek up to $6.5 million in attorney fees and expenses—an amount almost triple the expected payout to class members.  That would typically pose a problem for a reviewing judge, who must “carefully scrutinize lead counsel’s application for attorneys’ fees to ensure that the interests of the class members are not subordinated to the interests of … class counsel.” Hart at 10, citing Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1078 (2d Cir. 1995).  But as the court explained, “This case provides one unique feature absent from most class-action settlements: rather than the class members sharing from a settlement pool, the recovery to the class will be claims based.  As a result, attorneys’ fees will not reduce the class recovery.” Hart at 10.

For such claim-based settlements, the court explained that its “fiduciary role in overseeing the award is greatly reduced, because there is no conflict of interest between attorneys and class members.” Id. citing McBean v. City of New York, 233 F.R.D. 377, 392 (S.D.N.Y.2006).  The opinion also noted that the attorney fees were negotiated after the parties had reached an agreement on class recovery, which “tends to eliminate any danger of the amount of attorneys’ fees affecting the amount of the class recovery.” Hart at 11, citing In re Sony SXRD Rear Projection Television Class Action Litig., 2008 WL 1956267, at *15 (S.D.N.Y. May 1, 2008).

Performing the Second Circuit’s preferred fee analysis from Goldberger v. Integrated Res., as checked by the lodestar method, the court awarded $3,976,762.50 in legal fees and $700,227.57 in litigation expenses.  It rejected plaintiffs’ argument that unclaimed funds should be used as the denominator to calculate the fee percentage, since in this instance, the unclaimed funds would revert to BHH instead of being distributed via cy pres, and therefore the unclaimed funds did not provide an actual benefit to the class.  That was significant, because by plaintiffs’ calculation, nearly 90 percent of the agreed $57 million settlement was expected to go undistributed.

Even so, the final fee award was substantially greater than the total award to the class.  The court considered this carefully. “On one hand, allowing lawyers’ recovery to dwarf the settlement is against public policy,” the court wrote.  Hart at 21. “On the other hand, Class Counsel should be rewarded for concentrating their time, effort, and resources in successfully representing the class on a contingent basis.  And, most importantly, the fee will be paid directly by Defendants and will not come at the class’ expense.”  The court ordered that the attorney fees may be paid when at least 75% of the settlement has been distributed.  The court also awarded each class representative a $5,000 incentive award.

Practice Tips

The Hart case is as a helpful illustration of the restrictions on attorney fee provisions in class action settlements.  Though courts will be skeptical of attorney fee provisions that approach or exceed the total benefit to class members, such skepticism may be overcome if the settlement is structured so that increasing class counsel’s payout does not decrease the benefit to the class.  Additionally, the Hart court’s reasoned disapproval of a quick-pay attorney fee provision may portend greater scrutiny of such provisions in future cases in the Southern District and elsewhere.

Thomas E.L. Dewey is a partner at Dewey Pegno & Kramarsky.  L. Lars Hulsebus, an associate at the firm, assisted in the preparation of the article.