A recent Law 360 story by Dorothy Atkins, “Facebook Class’s $98M Fee Win ‘Outrageous,’ 9^th Circ. Told” reports that objectors' counsel urged the Ninth Circuit to throw out class counsel's $97.5 million fee award for striking a $650 million deal that resolves claims Facebook's facial recognition technology violated Illinois users' biometric privacy rights, arguing that the judge abused his discretion in awarding the "outrageous" fee award.  During a virtual hearing, the objectors' counsel, Kendrick Jan, told a three-judge panel that the case has a "cornucopia of issues" that should be reversed on appeal.

For one, Jan said, U.S. District Judge James Donato breached his fiduciary duty to the class by awarding class counsel 15% of the total $650 million settlement in fees, even though class counsel told him they wouldn't seek fees for an additional $100 million added to the settlement fund after Judge Donato rejected an initially proposed $550 million deal, which forced Facebook and class counsel back to the negotiating table.  Instead, Judge Donato should have awarded class counsel 10% of the initial $550 million proposed settlement, or $55 million, which would've been reasonable and in line with case law on other mega-settlements, Jan said.

Jan's co-counsel John Jacob Pentz III also noted that class counsel's initial fee request reflected a 5.3 lodestar multiplier, which is the number of times the hourly rate would be multiplied to get the total fee award.  Judge Donato ended up awarding fees that came out to a 4.7 multiplier, "which is still outrageous," Pentz said, because 4.7 is well above the 1-4 multiplier ranges approved by the Ninth Circuit, and it translates to $3,750 per hour.

"That's beyond the pale in our opinion," Pentz said.  The objectors' comments came during a hearing on an appeal of multiple aspects of Facebook's revised $650 million deal resolving claims the social media giant breached the Illinois Biometric Information Privacy Act by using facial recognition technology without users' consent to fuel its photo tag suggestion feature.  After years of hotly contested litigation, the case was headed to a jury trial, but the parties struck an initial $550 million settlement in 2020, which class counsel hailed as the largest amount ever doled out to resolve a privacy-related lawsuit.

But Judge Donato tore into the initial proposal, which he noted gave users just 1.25%, or $300 at most, of what they could be entitled to under BIPA, even though the state statute comes with a $1,000-per-violation fine and a $5,000 enhancement for intentional or reckless violations.  At the time, Judge Donato told the parties that the enhancement appeared to be a potentially viable claim in light of the $5 billion fine Facebook agreed to pay the Federal Trade Commission in 2019 for violations of a 2012 consent decree over its privacy practices.

Roughly a month later, the parties filed a motion asking the judge to preliminarily approve a revised $650 million deal, which attempted to address Judge Donato's concerns by narrowing the release provision and increasing class members' potential recoveries to up to $400.  At the time, class counsel said it would seek up to $110 million in fees plus expenses based on the initial settlement amount.

In February 2021, Judge Donato signed off on the revised deal, calling it a "landmark result," but he trimmed the $110 million requested attorney fees to $97.5 million which reflected a 15% portion of the settlement.  He also slashed the requested incentive awards to three class representatives from $7,500 each to $5,000 each.

The objectors' counsel argued that the incentive awards are too high, and the fee award is outrageous, particularly given that the settlement only reflects 5% of the total damages at stake.  Jan noted that in In re: Wash. Pub. Power Supply Sys. Secs. Litig., a 1994 case that involved a megasettlement, the Ninth Circuit awarded fees based on a 1.2 multiplier, which represented less than 5% of the total settlement fund.  In that case, the court also rejected a 3.1 multiplier class counsel requested, even though their settlement reflected 47% of the total damages at stake, which is significantly higher than the 5% recovery at issue in the instant suit, Jan said.

U.S. Circuit Court Judge Michael Daly Hawkins pressed the attorneys and asked the objectors' counsel how much they charge hourly. Pentz replied that he's charging $800 per hour for work on the case, which he noted is based on the Laffey Matrix, an hourly rate schedule set by the U.S. Attorney's Office based on a lawyer's years in practice.

Jan also argued that class counsel's hourly rate and lodestar calculation included hours the firm spent lobbying legislatures, even though both California and Illinois statutes preclude lobby efforts from being included in contingency fees. Without those hours, the lodestar multiplier jumps from 4.7 to 5.38, Jan said.

But counsel for the class, John Aaron Lawson of Edelson PC, defended the attorney fee award, arguing that the fact that Judge Donato rejected the initial settlement proves that he was honoring the class.  "The record is pretty clear that he was constantly aware of duty to the class," Lawson said.  Still, Judge Forrest remained skeptical and noted that it seemed, from the record, that if the court awarded fees based on the initial $550 million settlement, and not the revised $650 million settlement, nobody probably would have objected.

The attorney replied that it's the judge's discretion to award fees and 15% is the range of reasonableness, particularly since this case presented major risks and was tackling a novel legal issue with huge damages at stake.  He added that the objectors' complaints about the lodestar multiplier aren't relevant because Judge Donato only considered the lodestar to cross-check the reasonableness of the award, and the final basis for his decision was on a percentage of the settlement.  Additionally, the objectors waived their arguments about lobbying fees by failing to raise the issue before the lower court, Lawson said.

A recent article by Charles H. Dick, Jr., “Recovering Attorney Fees in Arbitration,” reports on recovering attorney fees in arbitration.  This article was posted with permission.  The article reads:

An accurate assessment of damages is crit­ical for case evaluation, and the cost of dispute resolution plays an important role in deciding to pursue claims.  Even strong liability cases can fail to make economic sense.  That is why a thorough case appraisal should thoughtfully consider the attorney fees to be incurred.  And equally important, an objective case valuation should assess the likelihood of recovering attor­ney fees.

The “American Rule,” which specifies that each party must bear its own attorney fees, is a lesson for law school’s first year, and though the rule has been slightly modified to encour­age certain litigation in the public interest, fee-shifting remains the exception rather than the rule.  Against this background, professional responsibility obliges counsel to keep clients informed about litigation economics (Cal. Rules Prof. Conduct, rule 1.4)—something critically important as a case approaches the in­evitable mediation.  Unfortunately, experience teaches that an exacting analysis of litigation cost and exposure to fee-shifting often is an afterthought, and that the development of case strategies, discovery plans, and tactical maneu­vers occurs without thoughtfully weighing the implications of the American Rule and its ex­ceptions.  This is a recurring issue in arbitration.

Perhaps litigators approach attorney fee recovery casually, thinking there will be ample time to deal with the question before a final judgment is entered.  Arbitration, however, is different.  The binding nature of arbitration makes appellate relief unlikely.  An arbitrator’s award of attorney fees is unlikely to be sec­ond-guessed by a court, even if there is no stat­utory or contractual basis for the award. (See Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 33; id. at p. 11 [“it is the general rule that, with narrow exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law.  In reaffirming this general rule, we recognize there is a risk that the arbitrator will make a mistake.”].)  When it comes to recovering attor­ney fees in arbitration, counsel needs to get the issue correct from the beginning.

California has codified the American Rule in Code of Civil Procedure section 1021.  Con­tractual arrangements can modify the rule and provide for fee-shifting, but a careful study of the parties’ language is critical. (See Valley Hard­ware, LLC v. Souza (Nov. 20, 2015, D067076) 2015 Cal.App.Unpub. Lexis 8347 [affirming arbitrator fee award in face of inconsistent contract provisions].)  Contractual language inevitably varies: Some agreements provide for recovery of fees “when permitted by law”; some say fees “actually incurred” are recoverable; some limit attorney fees to a percentage of the damages awarded; some say the prevailing party “shall” recover fees, while others use the uncertain “may.” Civil Code section 1717 de­fers to the contracting parties, subject to minor tweaks that limit fees to a “reasonable” amount and require that fee recovery be reciprocal.

In addition to carefully scrutinizing con­tract language, one also needs to know the procedural rules that will be applied in arbi­tration.  For example, in a Financial Industry Regulatory Authority (FINRA) arbitration regarding the investment brokerage industry, the arbitral panel is directed to determine the “costs and expenses,” yet absent some statutory exception to the American Rule, fee-shifting still depends on the parties’ underlying agree­ment (see FINRA rule 12902(c)).  Unless the parties’ agreement forbids fee-shifting, the rules of the International Institute for Conflict Prevention and Resolution (CPR) authorize the arbitration tribunal to apportion costs for “legal representation and assistance … incurred by a party to such extent as the Tribunal may deem appropriate” (see CPR 2019 Adminis­tered Arbitration Rules, rule 19.1(d) & 19.2). Rule 24(g) of the JAMS Comprehensive Arbi­tration Rules & Procedures is the mirror image: “[T]he Arbitrator may allocate attorneys’ fees and expenses … if provided by the Parties’ Agreement or allowed by applicable law” (ac­cord, Uniform Arbitration Act, § 21).

If all parties request an award of attorney fees, rule 47(d)(ii) of the American Arbitra­tion Association’s Commercial Arbitration Rules and Mediation Procedures authorize an award of attorney fees even if the underlying agreement is silent on the issue.  Throwing in a boilerplate prayer for attorney fees and costs without considering the consequences can result in fee-shifting.  And during arbitration, even casual discourse about attorney fees can be a basis for fee-shifting, absent an express agreement to the contrary.  (Marik v. Univ. Vill. LLC (Oct. 3, 2013, B247171) 2013 Cal.App. Unpub. Lexis 7143 [brief asserting entitlement to recover fees provided basis for arbitrator’s fee award]; see Prudential-Bache Securities, Inc. v. Tanner (1st Cir. 1995) 72 F.3d 234, 242-243 [“costs and expenses” under New York Stock Exchange Rules interpreted to permit award of attorney fees when both sides to dispute requested attorney fee award].)

Counsel should be mindful of an arbitra­tor’s predisposition to produce an award that is “fair to all concerned,” and this may include fee-shifting as an exercise in equity. (See Co­hen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 877 [absent parties’ agreement limiting arbitrator power, award of attorney fees on basis of equity and conscience affirmed].)  Further, misconduct of counsel may be a reason to “sanction” a party by reducing an attorney fee award. (E.g., Karton v. Art Design & Const., Inc. (2021) 61 Cal.App.5th 734 [fees reduced for incivility of counsel].)  And consider JAMS Comprehensive Arbitration rule 24(g), which authorizes an arbitrator to consider noncompliance with discovery orders when awarding attorney fees.

Attorney fees incurred prosecuting or defending a complaint to compel arbitration may be recoverable, but the procedural posture of the civil court action will determine when fee-shifting may occur. (E.g., Otay River Const. v. San Diego Expressway (2008) 158 Cal.App.4th 796.)  Though there is authority to the contrary (Benjamin, Weill & Mazer v. Kors (2011) 195 Cal.App.4th 40 [allowing recovery of fees even though liability on claim awaited arbitration]), the better-reasoned view is expressed in Roberts v. Packard, Packard & Johnson (2013) 217 Cal. App.4th 822.  In that case, clients filed suit against their former lawyers, alleging breaches of fiduciary duty and conversion in connection with settlement of qui tam litigation.  The law firm’s motion to compel arbitration was grant­ed, and the trial court awarded the firm its fees as the prevailing party.  On appeal, the court was persuaded the phrase “an action” means an entire judicial proceeding; procedural steps in the course of a lawsuit, such as a motion to compel arbitration, are steps in the prosecution or defense of an action, but they are not the entirety of an action on a contract.  The Roberts case stands for the proposition only one side can “prevail” in a lawsuit, and fee-shifting had to await the arbitrator’s final determination of the clients’ professional liability claims. (Id. at p. 843.)

Civil Code section 1717 defines the “pre­vailing party” as the person who recovers the greater amount on a contract.  Yet, Hsu v. Ab­bara (1995) 9 Cal.4th 863, makes it clear this involves more than a mathematical calculation.  The “court is to compare the relief awarded on the contract claim or claims with the parties’ demands on those same claims and their liti­gation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources.” (Id. at p. 876.)  Thus, it is possible for a party to prevail by achieving litigation objectives, even though an opponent may have obtained a favorable verdict on liability theories.  Generally, however, when a verdict on contract claims is good news for one party and bad news for another, a court is obligated to treat the happy litigant as the prevailing party.

The identity of a prevailing party becomes more complicated when results of an arbitra­tion are mixed. In this regard, Marina Pacific Homeowners Association v. Southern California Financial Corp. (2018) 20 Cal.App.5th 191, is instructive.  This case between a homeowners’ association and a finance institution exempli­fies litigation that produces some wins and some losses for both sides.  The case involved a claim by the homeowners that they did not owe monthly fees the financial institution contended amounted to $97 million over the life of a lease.  The trial court found against the homeowners and declared there was an obligation to make monthly payments.  But the court also found the monthly payment rate was only 40% of the financial institution’s demand.  On appeal, the court declined to consider settlement communications as being a reliable expression of a party’s litigation objectives and concluded the “substance” of the result was a $58 million loss for the defendant.  Invoking the decision in the Hsu case, the court con­cluded there was no simple, unqualified result pointing to either side as a prevailing party, and the trial court had acted within its discretion in denying recovery of attorney fees.

One lesson regarding “prevailing parties” is the need for caution in over-pleading one’s case. Some counsel cannot resist converting a straight-forward breach of contract action into a fraud case with overtones of unfair business practices and assorted tort claims.  Pleading multiple claims that eventually are discarded for want of proof can be dangerous, especially unsubstantiated allegations of fraud.  In De La Questa v. Benham (2011) 193 Cal.App.4th 1287, 1295, an appellate court acknowledged the practice of overstating one’s claims, which makes it more difficult to determine the victor.  In a case producing mixed results, unsupported claims may lead to an opponent’s recovery of fees.

Counsel in arbitration need to address fee-shifting with a laser focus, beginning with the preliminary hearing, which is the first op­portunity to meet the arbitrator and learn his or her preferences.  Arbitrators can be expected to employ the lodestar method recognized as acceptable by a long line of California cases (e.g., PLCM Group v. Drexler (2000) 22 Cal.4th 1084, 1094).  Several issues can be dis­cussed at the hearing: What procedures will the arbitrator use to deal with attorney fee and cost issues?  Will these matters be bifurcated until an interim or tentative award on the merits is de­livered? Does the arbitrator have requirements for form, style, and specificity of time records? Will “block billing” be accepted? If more than one law firm will be appearing for a party, the conference also is an opportunity to explain why and set the stage to defuse a later argument about duplicated efforts.

In a case with both contract and tort claims, counsel should consider keeping a separate re­cord of time spent on matters that may not be entitled to recovery of attorney fees.  Counsel should be prepared to demonstrate that time records were prepared contemporaneously with the work reported, since there often is a lack of daily time recordation, let alone contem­poraneous reporting.  The fee application also should explain how the litigation team was de­ployed and why individual tasks were assigned to team members.

Proving the reasonableness of time and rates ordinarily can be accomplished by declarations of counsel regarding the usual, customary, and regular timekeeping and billing practices of the law firm.  Resumes of the personnel involved and a summary of the work may be useful.  (See, e.g., Syers Properties III, Inc. v. Rankin (2014) 226 Cal.App.4th 691, 702.)  And this informa­tion can be supplemented by the opinions of other lawyers objectively knowledgeable about actual practices within the community.  Survey data often is available for firms in metropolitan areas, and those reports also carry credibility.  But counsel should be alert to differences between posted or rack rates and hourly rates actually realized, because there often is a ma­terial difference.  As with hotels and rental cars, there may be a significant disparity between the advertised rate and what people actually pay.

Nemecek & Cole v. Horn (2012) 208 Cal. App.4th 641 makes it clear that a calculation of “reasonable fees” does not hinge on what fees actually were paid.  In that case, defense counsel had been compensated on the basis of negotiat­ed insurance panel rates.  The arbitrator refused to be controlled by such rate structures and declined to use the Laffey Matrix employed by the United States Department of Justice in de­termining rates the federal government believes are reasonable.  Instead, the award of attorney fees was based on an independent assessment of what would be reasonable, and the appellate court affirmed confirmation of that award. (See Chacon v. Litke (2010) 181 Cal.App.4th 1234, 1260 [awarding reasonable rate $50 greater than counsel’s regular rate].)

There are three important things to remember about recovering attorney fees in arbitration.  First, carefully study the parties’ agreement to understand the rights it extends and the limitations it imposes.  Second, avoid pleading unnecessary claims that make it seem the end result tips in favor of one’s opponent.  Third, vacating an erroneous fee award is unlikely, so make your best case regarding fee-shifting before the entry of a final award.

Charles H. Dick, Jr. is a neutral with JAMS, and he serves as a mediator and an individual arbitrator or member of multi-arbitrator panels in complex commercial matters, securities and investment disputes, professional liability cases, products liability issues, and other business-related controversies.

A recent NLJ story by C. Ryan Barber, “Ballard Spahr Wins $122K in Legal Fees in FOIA Suit Over PPP Loan Secrecy,” reports that Ballard Spahr will receive $122,347 in legal fees for its work in an open records lawsuit that forced the U.S. government to release detailed information about who received hundreds of millions of dollars through a COVID-19 emergency loan program.  The law firm asked for nearly $154,842 in fees and costs, but U.S. District Judge James Boasberg of the District of Columbia said Ballard Spahr failed to support its billing rates and hours worked, and subsequently shaved off nearly $32,000.

Ballard Spahr, representing The Washington Post and other media outlets against the Small Business Administration and U.S. Treasury Department, sought to use the higher rates available under the Legal Services Index Matrix.  The federal government countered that Boasberg should use the lower rates detailed in a matrix used by lawyers at the U.S. Attorney’s Office for the District of Columbia.

Boasberg ultimately found Ballard Spahr failed to show how its preferred rates were in-line with rates used within the legal community for similar FOIA litigation, and granted the government’s request.  “They offer no evidence whatsoever—such as surveys or billing-rate tables—of rates charged and received by lawyers of comparable skill and experience in the D.C. market generally, let alone when handling FOIA cases,” Boasberg wrote.  “Indeed, their declarations do not even assert that their requested figures are in line with prevailing community rates for similar litigation.”

Boasberg shaved off another $6,710 due to an error in the hours billed, ultimately settling on $122,347 in legal fees and costs.  According to the USAO matrix listed in the ruling, Ballard Spahr partner Charles Tobin’s hourly rate came to $665.  Associates Maxwell Mishkin and Kristel Tupja’s rates came to $388 and $369 an hour, respectively.

Tobin said the award highlights the public importance of the case in ensuring there’s accountability of a program that handed out nearly half-a-billion dollars.  “Overall, the fee award is higher than most, and fully justified in this case,” Tobin said.  ”We are hopeful it serves as a powerful deterrent for government agencies that aren’t transparent enough on issues like this one.”

A recent Law 360 story by Hailey Konnath, “DC Judge Slams DOJ’s $212K Fee Payment to Arnold & Porter,” reports that a District of Columbia federal judge criticized a deal in which the Trump administration will pay Arnold & Porter more than $212,000 in legal fees to resolve a battle over expedited traveler security clearance programs, calling the fees excessive and the government's conduct "embarrassing."

The U.S. Department of Homeland Security in August backed down from its defense of the policy barring New Yorkers from enrolling in some of U.S. Customs and Border Protection's Trusted Traveler Programs, including Global Entry, SENTRI, NEXUS and FAST.  The government also admitted that it violated the Administrative Procedure Act's rulemaking process in instituting the policy and admitted that it made "inaccurate or misleading statements" about the policy.

As part of the agreement ending the case, DHS said it would not stop New Yorkers from participating in Global Entry or other traveler programs on the basis of the state's refusal to provide the federal government with access to the New York State Department of Motor Vehicles' records, according to the settlement.  The government also agreed to cover the plaintiffs' counsel's fees.  To be clear, the parties don't need court approval to move forward with their agreement, U.S. District Judge Richard J. Leon noted in the order.  However, the government and Arnold & Porter were seeking a court order incorporating the deal into a final order of dismissal.

Judge Leon declined to do so, saying that while the other provisions of the agreement are fair and reasonable, "I am quite concerned, and have been from the outset, about the reasonableness of the amount of attorney fees agreed to by the parties."  In particular, the judge knocked the U.S. Department of Justice for not requesting the actual billing records from Arnold & Porter.  Those records show that eight total attorneys billed time on the case, a number of attorneys that he deemed "entirely unnecessary to the needs of the case."  The DOJ also chose not to suggest that attorney fees be calculated according to anything other than the firm's standard corporate rates, Judge Leon said.

Had the DOJ pushed for using rates established in the U.S. Attorney's Office's Laffey Matrix — and only covered the fees for four attorneys — the fee award would be just $82,562, he said.  "The court believes the Department of Justice should have been more aggressive in protecting the public fisc," the judge said.

Judge Lean added that "[p]erhaps, however, it is not so surprising that they weren't in this case.  After all, it is not every day the Department of Justice and their clients have to confess to written and oral misrepresentations on the record in a high profile case!"  It appears that Arnold & Porter — "unfortunately at the taxpayer expense" — simply capitalized on the government's desire to put the matter to rest as quickly as possible, he said in the order.  Judge Leon said he hopes that in the future, the DOJ's leadership will take the necessary steps to ensure that attorney fees it agrees to are indeed fair and reasonable.

As far as the conclusion of the Global Entry case, Judge Leon said the parties have two options: they can file a stipulation of dismissal or they can reduce the fees portion of their deal and get it incorporated into his final order of dismissal.  "The parties have made it clear to the court that their settlement agreement does not require judicial approval and is in fact self-executing," he said. "Fine."

He added, "Negotiating an agreement in a pro bono case that bypasses judicial approval and requires defendants to pay in excess of $200,000 in attorney fees might warrant a tip of the proverbial cap from fellow practitioners, but it is irrelevant to a judicial analysis of whether to incorporate the parties' agreement into an order of dismissal."

Stanton Jones, one of the Arnold & Porter attorneys on the case, told Law360 that it was "illegal for the federal government to try to deny Global Entry to New Yorkers in retaliation for its refusal to participate in immigration enforcement."  In a statement provided to Law360, Jones added that "all fees recovered in this case will be contributed to the Arnold & Porter Foundation, a tax-exempt private foundation that provides scholarships to minority law students, funds fellowships for recent law school graduates at tax-exempt organizations, and awards grants to other charitable and educational organizations."