A recent Law 360 story by Jeff Montgomery, “Epic Tesla Fee Bid May Blaze Extraordinary Chancery Path”, reports that an unprecedented $5 billion-plus stock-based fee award sought by class attorneys who recently short-circuited Tesla CEO Elon Musk's 12-step, $51 billion compensation package has set up an equally unprecedented test for Delaware Court of Chancery fee guidelines and a potential award one law expert described as "dynastic wealth."

Class attorneys who have battled Tesla's compensation scheme for Musk since mid-2018 last week sought more than 11% of the 266,947,208 Tesla shares freed up Jan. 30, when Chancellor Kathaleen St. J. McCormick ordered rescission of the options that Tesla's board awarded to Musk in an all-stock compensation plan.  The value had been estimated initially at $5.6 billion, but would fluctuate with the value of Tesla's stock.

While the process of seeking a stock fee award instead of cash is not unprecedented, it is an unusual posture for Delaware Chancery litigation, and its scale is likely to reopen what were once considered settled questions over counsel risks, rewards, and just how much attorneys can command for corporate benefit fees, experts told Law360.

"Given the order of magnitude here, I suspect that the case will not set any records in terms of percentage of the recovery awarded to the plaintiffs attorneys, but in absolute terms it'll still amount to dynastic wealth," said University of Connecticut School of Law professor Minor Myers. He described the fee as "destined to be epic, if only because it involves the invalidation of a pay package that was itself comically large."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan Jan. 30, after a week-long trial in November 2022.  The ruling cited disclosure failures, murky terms, conflicted director architects and Musk's own conflicted influence in Tesla's creation of an Everest-sized mount of fast-triggering stock options.

"Plaintiff won complete recission of the largest pay package ever issued," the fee motion, filed last week, said.  "Our research demonstrates that the court's decree of recission, conservatively valued, was the largest compensatory award in the history of American jurisprudence by multiples," driven by "the gargantuan size of the tort underlying this action."

But class attorneys are seeking an equally gargantuan fee, even after departing from calculation customs that Vice Chancellor J. Travis Laster stressed last year in declining to apply a size reduction to a nearly 27%, $267 million award to stockholders who challenged a Dell Technolgies stock swap in 2018.  In his fee ruling, the vice chancellor said the calls to reduce the Dell fee conflicted with court efforts to reward attorneys for going deeper into litigation and taking greater risks in pursuit of legitimate claims.

"Of course, everyone involved will try to fit this into an existing framework, but the reality is that a $5.6 billion fee award is staggeringly high, whatever factors are considered," said Lyman P.Q. Johnson, Robert O. Bentley professor of law, emeritus, at Washington and Lee School of Law.  "I think Chancellor McCormick will find a way to go a fair bit lower, while still providing the attorneys with a very high award of some amount."  Johnson added: "The shock of Musk's compensation, undone by the chancellor, is unlikely to be followed by what many would regard as a shockingly high $5.6 billion fee award."

Vice Chancellor Laster's most recent big fee ruling established, pending appeal, a $266.7 million fee last year for attorneys who secured a $1 billion settlement for minority stockholders who sued over a $23.9 million Dell Technologies stock swap in 2018.

In Dell, the vice chancellor rejected investor arguments that large "mega-fund" settlements justified throttling back on fee payouts because customary fee percentages can produce massive, windfall payouts.  Instead, Vice Chancellor Laster defended the use of customary, variable percentages, including 15% to 25% shares of awards for settlements after "meaningful litigation and motion practice" and up to 33% post-trial.  He also acknowledged the tension between successful plaintiffs' counsel seeking appropriate compensation and large investors working to minimize carve-outs from court awards.

In Tesla, class attorneys, wary of blowback over big recoveries borne of typical fee ratios, acknowledged the Dell ruling's guidance, but also pointed to an earlier ruling that produced the current largest court-approved fee, a $304 million award approved in 2011 by then-Chancellor Leo E. Strine and upheld by Delaware's Supreme Court a year later.

That decision required Grupo Mexico to return to Southern Peru Copper Corp. nearly $1.3 billion worth of Southern Peru stock — rather than cash — after finding that Southern Copper had been coerced by a conflicted, controlling stockholder into overpaying for a Grupo Mexico mine in 2005.  With pre- and post-judgment interest, the award reached more than $2 billion, with class attorneys awarded 15%, or $304 million, for fees and expenses.

Tesla class attorneys referenced the 15% fee carve-out approved in Southern Peru, but adjusted even that percentage downward — to just over 11% — to reflect value added by the absence of a holding period for any award of Tesla shares before they could be sold.  Case costs included more than $13.6 million in attorney fees and more than $1.1 million in expenses during the multi-year Chancery action.  Requested fees would equal a $288,888 hourly rate that the fee motion said was justified by the case's complexity, results and attorney skill levels, among other factors.

Jill E. Fisch, Saul A. Fox distinguished professor of business law at the University of Pennsylvania Carey Law School, said use of stock for attorney fees was once "kind of frowned upon," but is not unprecedented.  "They are repeat players" in Delaware's courts, Fisch said of the attorney teams that prevailed in the Tesla case.  "They want credibility before the court.  The numbers, I think, reflect the benefit and risk of this kind of litigation, and traditionally, Chancery Court has acknowledged those risks."

The suit, led by stockholder Richard Tornetta, branded Musk's compensation package as unprecedented and unfair, noting that Musk had already qualified for some $20 billion in awards by the time the suit was filed, "making him one of the richest men on Earth" at the time.  It alleged in part that he relied on two in-house Tesla attorneys for work on the plan before the board's conflicted compensation committee took up the issue.

Ann M. Lipton, the Michael M. Fleishman associate professor in business law and entrepreneurship at Tulane University Law School and associate dean, pointed to another Tesla- and Musk-related case to illustrate the risks stockholder attorneys take.

Last year, after about seven years of litigation, Delaware's Supreme Court upheld a post-trial dismissal of a suit filed by stockholders of rooftop solar venture SolarCity, seeking damages tied to Tesla's $2.6 billion purchase of the company, for which Musk was CEO and also held a big share of company stock.

At one point during the case, the SolarCity stockholders suggested a damage award amounting to a $13 billion giveback of Tesla stock Musk received for his SolarCity shares. Dismissal of the case and rejection of class claims, however, wiped out class attorneys' hopes for a share of a big award.

In the more-recent scuttling of Musk's Tesla stock awards, Lipton said, shareholders benefited from the stock award cancelations by being dramatically less diluted in their holdings.  "That the attorneys are asking for a little bit of dilution" through their fee, "but far less than the shareholders would otherwise have suffered, seems like a real benefit that was provided, from a financial point of view."

Lipton said she was not familiar enough with the current Tesla fee motion to comment on the percentage sought, but cited the enormous risk and stockholder counsel loss in SolarCity and said that "attorneys deserve to be compensated" when they prevail.

University of Michigan Law School professor Gabriel Rauterberg said the fee bid in Tesla appears excessive, despite the importance of fee as a motivator.  "It seems to me extremely implausible that an award this large is necessary to provide the right incentives, given that plaintiffs attorneys' fixed costs for investigating lawsuits, conducting research, and prosecuting cases can be significant but not on this scale," Rauterberg said.  "It seems like a windfall to me. You can give the attorneys a large award, while still falling short of billions."

Counsel for the Tesla stockholders have pointed out that Delaware's Supreme Court has in the past declined to replace the current fee approach with declining percentages.  "Under Delaware law, the unprecedented size of the benefit conferred does not alter plaintiff's counsel's entitlement to 33% of that benefit," attorneys for the Tesla stockholders wrote.  They also pointed to voluntary concessions reducing the total ask to around 11%, with features that reduce the cost to the company.

Some of the sting felt by Tesla, the brief indicated, could be taken away by federal tax law terms that will make 21% of the fee award cash tax-deductible, reducing the post-tax fee award cost from $5.63 billion to $4.45 billion.  State corporate income tax and payroll tax deductions and allowances also could offset the share payout.

UConn's Myers said the Tesla stockholder attorneys won a landmark victory and "deserve to be compensated handsomely" for taking a risky case through trial, while also predicting that the court will "take a hard look at the magnitude of the benefit actually achieved here — that may be a figure in some dispute."  The case nevertheless also stands as an example of "how the Delaware system effectively harnesses the efforts of folks like the plaintiffs attorneys to generate powerful incentives for good governance at public companies," Myers said.

A recent Law 360 story by Jeff Montgomery, “Tesla Investors Weigh In On $5B Fee Proposed For Class Attys”, reports that Tesla Inc. stockholders are sounding off to Delaware's chancellor after class attorneys sought a stock-based fee potentially worth more than $5 billion at current share prices following the Court of Chancery's reversal of Elon Musk's $55.8 billion stock-based pay plan on Jan. 30.  Chancellor Kathaleen St. J. McCormick said in a letter that the judicial code bars her from considering communications outside the case process.  But she directed attorneys for the class to come up with a method for "handling" the stockholder communications ahead of a yet to be scheduled hearing and argument on the fee.

Nothing in the chancellor's letter characterized the aims or identities of those attempting to contact the court.  Founder Elon Musk owns 20% of Tesla's shares followed by institutional investors, with individuals accounting for less than 1%.  The proposed fee seeks just over 11% of the total formerly earmarked for Musk and now available for company use, well below the 33% sometimes awarded in complex cases that proceed through a full trial.

"I have not read these communications because, as you all are aware, Rule 2.9 of the Delaware Judges' Code of Judicial Conduct prohibits me from considering ex parte communications concerning a pending proceeding," the chancellor wrote in the latest entry of a derivative action launched in 2018.  Some of the letters apparently originated with small stockholders, some of whom have gravitated to X, formerly known as Twitter, to share thoughts on Tesla, Musk, the case, the fee and letters sent to the chancellor.  Some, using the hashtag #DelawareCourt81, have proposed sending letters directly to the parties or to Tesla for forwarding.

Tesla's top five institutional holders hold about 19% of the business, led by The Vanguard Group at nearly 7%.  Blackrock accounts for 5.8%, with State Street Corp. at 3.3%, Geode Capital Management at about 1.6% and Capital World Investors at about 1.3%.  None of the top five immediately responded to requests for comment and counsel for the stockholders did not provide details.

Lawrence Hamermesh, former director of the University of Pennsylvania Carey Law School's Institute for Law and Economics and professor emeritus at Widener University Delaware Law School, said he would not be surprised if the letters Chancellor McCormick referred to were sent by larger investors opposing the requested fee.

"That'd be my guess," Hamermesh said. "Without knowing everything about it, I harbor a certain lack of sympathy with them.  The upshot of the case is they're avoiding dilution" that would have resulted had Musk won.  "The award would dilute them back in a real small way, at least in terms of proportional interest. They're way better off" with the decision.  Nevertheless, Hamermesh said, given the 29,402,900-share cut of the 266,947,208 shares freed up by Chancellor McCormick's decision, the court is certain to be pondering the billions involved.

"She has to be thinking to herself: 'There's no case, no effort, no measure of success that's worth that much to lawyers. You don't need to give them that much to incentivize them to take this case."  In the absence of precedent or clear rules, he added, "it's a gut-level, gut-check thing. How much is enough? Either they become more rich, or fabulously rich."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan on Jan. 30 after a week-long trial in November 2022. The ruling cited disclosure failures, murky terms, conflicted director architects and Musk's own conflicted influence in Tesla's creation of a mountain of fast-triggering stock options.

At the time of the ruling, Tesla's stock was trading at more than $191 per share, putting the potential maximum award at around $5.6 billion.  Slipping since has pruned the potential maximum by hundreds of millions.  Costs for the derivative case included more than $13.6 million in attorney fees and more than $1.1 million in expenses during the multi-year Chancery action.  Requested fees would equal a $288,888 hourly rate that the fee motion said was justified by the case's complexity, results and attorney skill levels, among other factors.

A recent Law 360 story by Lauren Berg, “Tesla Stock for Fees? Attys Who Got Musk’s Pay Cut Say Yes”, reports that the lawyers who convinced the Delaware Chancery Court to scuttle Elon Musk's proposed $55 billion Tesla compensation package filed a request for legal fees that came with a twist — they want to be paid in Tesla stock that rounds out to about $5.6 billion.

The attorneys from Bernstein Litowitz Berger & Grossmann LLP, Friedman Oster & Tejtel PLLC and Andrews & Springer LLC, who represent the shareholders who in November 2018 challenged Musk's pay package as unfair, asked for more than 29 million Tesla shares and an additional $1 million to cover their litigation expenses, according to the motion.

They are seeking about 11% of the 267 million shares they say are now available for Tesla's use as a result of Chancellor Kathaleen St. J. McCormick's decision in January striking down Musk's 10-year compensation plan, the motion states.  She found that disclosure failures, murky terms, conflicted director architects and Musk's own hand on the tiller warranted an order to roll back the award.

"Rather than debate the value conferred to Tesla by canceling the options or the value of the underlying stock returned to the Tesla treasury free of restriction, plaintiff's counsel instead seeks a fee award in kind — a percentage of the shares returned for unrestricted use by Tesla (rather than cash)," the lawyers said.  "In other words, we are prepared to 'eat our cooking.'"

"This structure has the benefit of linking the award directly to the benefit created and avoids taking even one cent from the Tesla balance sheet to pay fees," they added. "It is also tax-deductible by Tesla."  The plan went to a week-long trial in November 2022 after it was challenged by stockholders led by plaintiff Richard J. Tornetta.  The compensation scheme included 12 tranches or performance milestones that Musk had to meet before qualifying for a portion of the total, once estimated at as much as $56 billion.

In her order squashing the plan, Chancellor McCormick found that "Musk dictated the timing of the process, making last-minute changes to the timeline or altering substantive terms immediately prior to six out of the ten board or compensation committee meetings during which the plan was discussed."  Although the defendants argued that Musk was "uniquely motivated by ambitious goals," with Tesla desperately needing him to succeed, the opinion observed, "these facts do not justify the largest compensation plan in the history of public markets."

The price was no better than the process, the chancellor concluded, observing that "Musk owned 21.9% of Tesla when the board approved his compensation plan.  This ownership stake gave him every incentive to push Tesla to levels of transformative growth — Musk stood to gain over $10 billion for every $50 billion in market capitalization increase."

In their motion for attorney fees, the shareholders' attorneys from the three firms said they collectively logged nearly 19,500 hours throughout the case, which came out to about $13.6 million in lodestar, as well as $1.1 million in out-of-pocket expenses.  And although a typical attorney fee request seeks about one-third of a settlement or verdict won in favor of their client, in this case, the attorneys said they are asking for a conservative 11% of the recovery.

"We recognize that the requested fee is unprecedented in terms of absolute size," the attorneys said.  "Of course, that is because our law rewards counsel's efforts undertaken on a fully contingent basis that, through full adjudication, produce enormous benefits to the company and subject the lawyers to significant risk."

"And here, the size of the requested award is great because the value of the benefit to Tesla that plaintiff's counsel achieved was massive," they added.  And this isn't the first time a court has awarded plaintiffs a fee of recovered shares, according to the motion.  The attorneys point to the 2000 case Sanders v. Wang, in which the Chancery Court granted plaintiffs judgment on the pleadings over the improper issuance of 4.5 million shares, approved a settlement and then awarded the plaintiffs a fee comprising 20%, or 900,000, of the 4.5 million recovered shares.

Overall, the attorneys said their fee request is supported by their history as experienced stockholder advocates, the substantial effort they put forth, the complexity of the case, and the "unprecedented result" they achieved in this case.

A recent article by Judge Marina Corodemus and Mark Eveland, “Four Ways Plaintiffs’ Firm Can Prevent Common Benefit Fund Fee Disputes”, reports on ways plaintiffs’ firms can prevent common benefit fund fee disputes.  This article was posted with permission.  The article reads:

Common benefit funds (CBFs) ensure fairness and equity in the distribution of legal fees and expenses in aggregate and complex litigation, including class actions, mass torts, trust and securities, and multidistrict litigations (MDLs), where the litigation is prosecuted by either an ad hoc or judicially appointed committee or team of attorneys.  Their primary purpose is to recognize and compensate the plaintiffs’ attorneys who contribute their time, expertise, and resources to advancing the interests of most, if not all, of the plaintiffs in a particular litigation, including litigants who are not their clients but are benefited by the attorneys’ work product prosecuting the suit.

CBFs provide a compensation mechanism that enables large scale, highly expensive complex class actions and mass torts to proceed.  They provide the financial incentive for plaintiffs’ attorney groups to organize and then collect and centralize financial contributions and disbursements necessary to fund critical litigation activities like document management and reviews, scientific or factual investigations, expert recruitment, and, where needed, retention of specialized legal experts (such as bankruptcy, tax, and transactional practitioners).  CBFs help ensure that no single attorney or firm shoulders the entire financial burden of the legal work that puts the plaintiffs in complex litigation in position to resolve the litigation favorably.  When appropriately managed, CBFs reward attorneys and firms for doing work that benefits the greater good.

Certainly, attorneys who take on the risks and leadership roles in complex litigation deserve fair compensation for their efforts.  But lately, there seems to be a larger number of disputes over disbursements from CBFs among the plaintiffs’ firms involved in complex litigation (so called “Common Benefit Attorneys”) when and where such disbursements are forthcoming.  These disputes often garner public attention, perpetuating a narrative that plaintiffs’ attorneys are motivated solely by greed and self-interest.  Certain defense firms whose clientele often are mass tort defendants and advocacy organizations—the entities most responsible for creating this narrative in the first place—are happy to use those disputes as part of their public relations efforts supporting “tort reform.”

The pelvic mesh MDL, established in 2010 and which involved over 100,000 female plaintiffs suing seven companies in what is undoubtedly one of the most complicated MDLs in history because it is a series of seven MDLs (MDL nos. 2187, 2325, 2326, 2327, 2387, 2440 and 2511) consolidated in the U.S. District Court for the Southern District of West Virginia, is an example of how a highly publicized CBF dispute can cast a shadow on the legal profession.  That dispute, like so many other CBF disputes, centered on whether certain law firms deserved the allotted fees from the CBF that the members of the plaintiffs’ executive committee in that litigation allocated to them.

And, just this past August, the Ninth Circuit settled a dispute—for now—in the Bard IVC filters litigation, In Re Bard IVC Filters Products Liability Litigation, MDL No. 2641 (D. Ariz.), established in 2015, regarding whether plaintiffs’ attorneys who agree to contribute to common benefit funds in MDLs are bound by those deals if they settle cases that were not part of an MDL.

In our view, there are four principal causes of CBF disputes.  We list them below, along with strategies for preventing them.

1.  A lack of billing standards and concurrent billing and time/expense review can be readily avoided through precise case management orders (CMOs) and clear billing guidelines.

Many CBF disputes are caused by the absence of well-defined requirements and standards for billing common benefit time and expenses.  Ambiguity surrounding billing practices leads to inconsistencies in the way attorneys record and submit their costs, giving rise to misunderstandings and disputes when fees are allocated.  Additionally, the lack of a standardized framework and mechanics for billing and expenses complicates attorneys’ perceptions of the fairness and validity of fee requests, in turn potentially eroding trust among plaintiffs’ firms.  Without clear and precise billing standards in place, and an evenhanded administration of those standards, it becomes challenging to objectively gauge the contributions of each attorney and firm.

Implementing comprehensive case management orders (CMOs) and clear billing guidelines can prevent CBF disputes.  CMOs should not only specify the tasks that qualify for compensation but also the allowable rates and expenses.  In doing so, they will provide an independent standard to reference when disputes arise.

For instance, a standardized CMO might include a provision stating that research tasks directly related to the case, such as reviewing medical records or consulting with expert witnesses, are billable, while unrelated tasks, like administrative work, are not.  (Of course, in highly complicated cases requiring extensive coordination and collaboration, administrative work may certainly be deemed permitted billable time.)  In addition, it is well established that there is a hierarchy of value for work that has a greater impact on the litigation and generates more “common benefit.”  Such work deserves greater compensation.  A CMO and related agreements can specify this hierarchy, providing guidelines for determining what kind of work generates a common benefit, and calculating the fees to be paid for this work.

CMOs and agreements as to billing guidelines are binding and provide clarity needed during fee allocation in MDL cases, potentially preventing major fee disputes.

For example, the CBF dispute in the pelvic mesh litigation arose in part because of a disagreement over what work provided more of a common benefit: the settlement of cases quickly and for relatively small dollar amounts or high-dollar jury verdicts.  Ultimately, Judge Joseph R. Goodwin of the Southern District of West Virginia granted a request from a fee and cost committee in that litigation that deemed the former to provide more common benefit than the latter.

The Bard IVC filters litigation provides another useful illustrative case.  There, some plaintiffs’ attorneys moved to reduce and exempt their clients’ recoveries from common benefit and expense assessments, arguing that no assessment should be paid by clients whose cases were filed in federal court after the MDL closed, were filed in state court, or were never filed in any court. U.S. District Judge David G. Campbell of the District of Arizona denied this motion.  As we noted above, the Ninth Circuit affirmed Campbell’s ruling, holding that these attorneys, who had agreed to pay a share of their fees to the MDL leaders, were required to abide by those agreements even if they settled cases outside of the consolidated proceeding.

Agreed-upon CMOs that set forth procedures, guidelines, and limitations for submitting applications for reimbursement of litigation fees and expenses inuring to the claimants’ common benefit can be instrumental in resolving or avoiding CBF disputes.

2.  The problems caused by late submissions of billing records can be avoided by requiring attorneys to make regular, contemporaneous submissions.

Another frequent cause of CBF disputes is attorneys delaying their submission of billing records.  Too often, attorneys and their support teams, engrossed in all-consuming complex litigation, fail to timely submit their time and expense records.  Attorneys sometimes submit crucial billing details months or even years after the fact, making it necessary for others to “forensically” reconstruct this information, a practice that not only jeopardizes the accuracy of time and expense submissions but may result in crucial work being overlooked or submitted without adequate supporting documentation. 

Delayed submissions also prevent courts and plaintiffs’ leadership teams from performing comprehensive and accurate assessments of work described in billing submissions.

CMOs or fee committees that mandate the regular submission of time and expense records can put an end to this problem.  As was the case in the pelvic mesh MDL, adopting CMOs that include specific provisions requiring attorneys to submit their time and expense records at regular intervals throughout a litigation significantly enhances efficiency and transparency.  These CMOs may, for instance, stipulate that detailed records must be submitted monthly or quarterly, with a reduction in potential compensation for any submissions beyond agreed-upon deadlines. 

This practice ensures that time and expense records are submitted relatively promptly after attorneys perform the work described in them, capturing the most accurate information (and fresh memories).  The regular submission of records also enables the court and MDL leadership to compare billing records with case calendars to determine if the work completed and the time spent completing it is consistent with expectations of when that work should have been completed and how long it should have taken.

3.  The lack of independent oversight can be remedied by bringing on a neutral.

When plaintiffs’ leadership teams collect, review, and approve CBF allocations, and stand to benefit personally from those decisions, it is easy to see how this lack of independent oversight can cause CBF disputes and give rise to accusations of conflicts of interest and self-dealing.  Appointing a neutral third party to oversee time and expense submissions to the CBF and mediate disputes can remedy this problem. 

This impartial overseer should be an independent legal expert or mediator with no vested interest in the litigation outcome, which should preclude accusations of conflicts of interest and self-dealing.  This neutral party should also be empowered to enforce deadlines for submissions, review and evaluate the reasonableness of time and expenses submissions, disallow submissions containing excessive time and expenses, and swiftly address any discrepancies that arise during the allocation process.

Some attorneys and judges are satisfied with handing off the issues at the center of a CBF dispute to an accountant.  We would suggest that the calculations necessary to resolve such a dispute require more than a bookkeeping background.  We believe hiring a neutral who is experienced in mass torts litigation and awarding attorneys’ fees, and who recognizes the worth of litigation roles, is a superior selection method.

4.  Disputes caused by an opaque process could be reduced by making it more transparent.

Inadequate transparency is a major cause of CBF disputes.  Those attorneys and firms that are not in leadership positions often have limited knowledge of the fees and expenses incurred as the litigation progresses, which could make them feel blindsided when their allocated fees are less than those they submitted.  Without ongoing and timely communication regarding billing submissions and allocations, attorneys and firms outside the leadership circle may question the fairness and reasonableness of both.

The solution to this problem is simple.  Leadership committees in complex litigation should provide all law firms that pay assessments into the CBF with regular reports that explain time and expense submissions.  In addition, every firm could ask questions of the people responsible for submitting those bills and allocating distributions from a CBF.

Attorneys whose inquiries are addressed by leadership and a court-appointed neutral throughout the process are far less likely to contest fee allocations at the conclusion.  Plus, increased transparency enhances confidence among plaintiffs’ firms, fostering greater trust and a more cooperative environment.

Simple solutions to a complex problem?

Given the time plaintiffs’ attorneys spend litigating complex litigation, it is not surprising that they want to ensure they are paid for the work they did that went to the common benefit of the plaintiffs in a litigation.  But given the number of attorneys and firms representing clients in these litigations, and the sizes of CBFs in complex litigation today—the CBF in the Vioxx litigation, In re Vioxx Products Liability Litigation, MDL No. 1657 (E.D. La.), established in 2005, was $315 million—disputes over whether those attorneys’ contributions are fairly reflected in their CBF allocation are practically inevitable.

In our view, the core four causes of CBF disputes can be reduced in frequency and severity, if not outright eliminated, by implementing standardized billing practices, promoting timely billing submissions, and instituting impartial oversight and increasing transparency concerning the CBF allocation process.

Unless plaintiffs’ attorneys can eliminate CBF disputes, the positive social change they can bring about through complex litigation will be overshadowed by what the public—thanks in part to the corporate defense bar and advocacy organizations—will perceive as greedy attorneys bickering over millions of dollars.  That, in and of itself, should motivate more plaintiffs’ leadership teams to adopt these methods for reducing CBF disputes.

Judge Marina Corodemus is a former New Jersey Superior Court judge who helped establish New Jersey Mass Torts court (MCL).  She is now the managing partner of the ADR practice at Corodemus & Corodemus.  She has served as a special master in numerous MDLs and complex litigation in federal and state courts.  Mark Eveland is the CEO of Verus, a leading mass tort litigation support services firm.

A recent Law 360 story by Celeste Bott, “7^th Circ. Scraps $57M Chicken Price-Fixing Atty Fee”, reports that the Seventh Circuit threw out a $57 million attorney fee award in a $181 million deal for chicken buyers in sprawling antitrust litigation, saying that the district court failed to consider bids made by class counsel in auctions in other cases and fee awards in different circuits.  Objector John Andren had taken issue with the roughly one-third cut of the settlement that Hagens Berman Sobol Shapiro LLP and Cohen Milstein Sellers & Toll PLLC were to receive in a deal the firms had struck with Fieldale Farms, Peco Foods, George's, Tyson Foods, Pilgrim's Pride and Mar-Jac Poultry in the sprawling antitrust case.

A three-judge Seventh Circuit panel complimented the lower court for its "fine job of shepherding" the complex litigation, but said it made a mistake when it discounted bids made by one of the two firms serving as class counsel in other cases because the proposals had declining fee scale award structures.  The published opinion concluded that "it was error to suggest that this court has cast doubt on the consideration of declining fee scale bids in all cases."

"In the district court's view, this court has explained that these awards do not reflect market realities and impose a perverse incentive insofar as they ensure that attorneys' opportunity cost will exceed the benefits of seeking a larger recovery, even when the client would otherwise benefit," the panel said.  "Yet, this court has never categorically rejected consideration of bids with declining fee scale award structures.  Rather, the nature of the typical costs in litigation must be assessed in determining whether counsel and plaintiffs would have bargained ex ante for such a structure."

The Seventh Circuit has observed that such a fee structure, where the amount being awarded in fees goes down as the settlement amount goes up, can present certain advantages, and the appellate court took that approach in another case — In re: Synthroid Marketing Litigation — which was a class action suit against the manufacturer of a synthetic thyroid drug.

"Fees do not always decline for securing a larger recovery, and in those instances, counsel will have an incentive to seek more," the panel said.  "Accordingly, the appropriateness of a declining fee scale award structure may depend on the particulars of the case.  It was an abuse of discretion to rule that bids with declining fee structures should categorically be given little weight in assessing fees."

Andren had also argued that the lower court should have taken into account that class counsel frequently did work in Ninth Circuit district courts, which employ a lower 25% "benchmark" for presumptively reasonable attorney fees.  The appellate panel agreed that the district judge shouldn't have categorically assigned less weight to Ninth Circuit cases in which counsel was awarded fees under a mega-fund rule.

"It is true that this court has rejected the application of a mega-fund rule.  Yet, continued participation in litigation in the Ninth Circuit is an economic choice that informs the price of class counsel's legal services and the bargain they may have struck," the panel said.  "The district court should have considered where class counsel's economic behavior falls on this spectrum and assigned appropriate weight to fees awarded in out-of-circuit litigation."

In addition to vacating the fee award, the panel remanded the matter for "greater explanation and consideration" of the factors it laid out, noting that it expressed no preference as to the amount or structure of the award, just the need for further review.

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