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Category: Lodestar Multiplier

Article: Why the Catalyst Theory Matters in Class Actions

March 11, 2024

A recent Law.com article by Adam J. Levitt, “Arguing Class Actions: Why the Catalyst Theory Matters”, examines the catalyst theory in class action litigation.  This article was posted with permission.  The article reads:

The story presents a conundrum.  Plaintiffs file a class action, which the defendant initially resists.  Plaintiffs counsel spends hundreds of thousands of dollars (or more) in lodestar and costs prosecuting the case, but after potentially years of hotly contested litigation, the defendant issues a recall or announces a refund program that fixes the problem and then argues that the case is moot.  The question: Should those who filed this case, and consequently induced (or “catalyzed”) the defendant to fix the problem, be paid?

The right answer is obvious.  Of course the plaintiffs lawyers should be paid.  Without plaintiffs counsel’s actions and active litigation threat, the defendant would have never changed its behavior, ultimately for consumers’ benefit.  The law routinely rewards those who confer benefits on others, even in the absence of, say, a contractual guarantee (as with the doctrine of quantum meruit).  In short, nobody works for free.  Nobody, as some would have it, except plaintiffs lawyers.

The Rise and Fall of the Catalyst Theory

Rewarding lawyers for catalyzing a change used to be noncontroversial. See, e.g., Marbley v. Bane, 57 F.3d 224 (2d Cir. 1995) (“a plaintiff whose lawsuit has been the catalyst in bringing about a goal sought in litigation, by threat of victory … has prevailed for purposes of an attorney’s fee claim…”); Pembroke v. Wood Cnty., Texas, 981 F.2d 225, 231 (5th Cir. 1993) (recognizing viability of catalyst theory); Wheeler v. Towanda Area Sch. Dist., 950 F.2d 128, 132 (3d Cir. 1991) (same).

But the law became murkier in May 2001, with the U.S. Supreme Court’s decision in Buckhannon Bd. & Care Home v. W. Virginia Dep’t of Health & Hum. Res., 532 U.S. 598 (2001).  There, an assisted living facility sued West Virginia, arguing that a regulation violated the Fair Housing Amendments Act.  After the suit was filed, the Legislature removed the regulation, mooting the case.

In a 5-4 decision, the Supreme Court ruled that the plaintiff was not a “prevailing party” for purposes of the applicable fee-shifting statute.  Discarding the “catalyst theory,” it ruled that: “A defendant’s voluntary change in conduct, although perhaps accomplishing what the plaintiff sought to achieve by the lawsuit, lacks the necessary judicial imprimatur on the change” sufficient to make the plaintiff a “prevailing party.” Id. at 605.  As Justice Ruth Bader Ginsburg explained in her dissent, the Buckhannon decision frustrates the goals of the catalyst theory because it “allows a defendant to escape a statutory obligation to pay a plaintiff’s counsel fees, even though the suit’s merit led the defendant to abandon the fray, to switch rather than fight on, to accord plaintiff sooner rather than later the principal redress sought in the complaint.” Id. at 622 (Ginsburg, J., dissenting).

The Catalyst Theory Today

Notwithstanding the Buckhannon decision, the catalyst theory remains a powerful tool outside of Buckhannon’s specific context.

First, Buckhannon has no bearing on state causes of action.  In California, Cal. Code Civ. Proc. §1021.5 allows a court to award fees to a “successful” party.  The California Supreme Court has explained it takes a “broad, pragmatic view of what constitutes a ‘successful party,’” Graham v. DaimlerChrysler, 34 Cal. 4th 553, 565 (2004), and explicitly endorsed the “catalyst theory [as] an application of the … principle that courts look to the practical impact of the public interest litigation in order to determine whether the party was successful.” Id. at 566.  In short, it disagreed with the U.S. Supreme Court regarding what it means to “prevail” or “succeed” in a litigation.

The catalyst theory has also largely survived in the context of favorable settlements.  For example, in Mady v. DaimlerChrysler, 59 So.3d 1129 (Fla. 2011), the Supreme Court of Florida considered an award of attorney fees to a consumer who accepted defendant’s offer of judgment, an offer that neither conceded liability nor plaintiff’s entitlement to fees, in a case filed under the Magnuson Moss Warranty Act (MMWA), which guarantees fees to a “prevailing party.” Id. at 1131.  Explicitly considering and distinguishing Buckhannon, the court found that a party may “prevail” with a settlement.  In doing so, it rearticulated the logic underpinning the catalyst theory:

[The plaintiff] achieved the same result with a monetary settlement only after being forced to bear all of the costs and expenses associated with litigation and facing the statutory penalty if the offer of judgment had not been accepted. DaimlerChrysler could have resolved this dispute during the “informal dispute settlement” phase, but instead waited until after [plaintiff] was forced to commence this action and incur the expenses of this litigation. Id. at 1133.

Further, even in federal court, attorney fees may be awarded under statutes other than those limiting such awards to “prevailing” parties.  For example, in Templin v. Indep. Blue Cross, 785 F.3d 861 (3d Cir. 2015), the Third Circuit explained that a fee may be awarded for an Employee Retirement Income Security Act claim under the catalyst theory, because ERISA does not limit fee awards to the “prevailing party.” 785 F.3d at 865.  Including the Third Circuit, at least five circuits have endorsed the catalyst theory under such statutes: Scarangella v. Group Health, 731 F.3d 146, 154–55 (2d Cir. 2013); Ohio River Valley Env’l Coalition v. Green Valley Coal, 511 F.3d 407, 414 (4th Cir. 2007); Sierra Club v. Env’l Protection Agency, 322 F.3d 718, 726 (D.C. Cir. 2003); Loggerhead Turtle v. Cty. Council, 307 F.3d 1318, 1325 (11th Cir. 2002).

Despite the ongoing recognition of the catalyst theory in many contexts, there remains the risk that courts may apply the catalyst theory narrowly, or that defendants may find a way around it. Consider Gordon v. Tootsie Roll Indus., 810 F. App’x 495, 496 (9th Cir. 2020), a “slack-fill” case in which the plaintiff alleged that the defendant’s boxes of Junior Mints were mostly air.  After the plaintiff moved for class certification, the defendant changed the box’s label.  The plaintiffs dismissed and moved for fees.

The fee application was denied because “Gordon’s theory of the case was that the size of the box was itself misleading, and that Tootsie Roll should either fill the Products’ box with more candy to account for the size of the box … or shrink the box to accurately represent the amount of the candy product therein[, and] Tootsie Roll did not make either of these changes.” Id. at 497 (internal quotation omitted).  Considering the disincentives (or, conversely, the moral hazards) that arise from this type of narrow application of the catalyst theory, courts should take a decidedly more equitable view when adjudicating this important issue.

A Way Forward

For practitioners, a few lessons come out of this case law and history.  First, in writing their complaint, attorneys must think through the various paths that a company might take to remedy the purported harm.  Recall that in Gordon, the plaintiff focused entirely on the misleading box, but not on the misleading labeling. Second, favorable settlements and offers of judgment remain viable tools, and may support a catalyst theory attorney-fee payment even if the defendant resists paying fees in the settlement itself.  Finally, despite Buckhannon, the catalyst theory remains readily available under a host of statutes (state and federal).  In relying on citing those statutes, plaintiffs should not shy away from the catalyst theory’s compelling logic.  Courts understand that basic fairness requires that attorneys be paid if their lawsuit ultimately confers a significant benefit.  Nobody should work for free.  Not even plaintiffs lawyers.

Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups.  DiCello Levitt senior counsel Daniel Schwartz also contributed to this article.

Second $185M Attorney Fee Request Called ‘Indefensible’

March 6, 2024

A recent Law 360 story by Jack Karp, “Quinn Emanuel’s 2nd $185M Fee Bid Blasted as ‘Indefensible’”, reports that Quinn Emanuel Urquhart & Sullivan LLP's second attempt to win $185 million in attorney fees in $3.7 billion litigation over the Affordable Care Act still fails to justify the "indefensible" amount and barely pays "lip service" to a reevaluation ordered by the Federal Circuit, health insurers told the federal claims court.

The Federal Circuit already wiped out the $185 million attorney fee that the U.S. Court of Federal Claims awarded to Quinn Emanuel and directed the claims court to reexamine objecting class members' insistence that the firm hadn't justified its fee request, Kaiser Foundation Health Plan Inc. and UnitedHealthcare Insurance Co. said.

"Despite this clear direction, class counsel's second petition again fails to justify its lodestar and again seeks to avoid a lodestar cross-check.  It instead asks the court to rubberstamp the same $185 million award," the health insurers said in their opposition to the firm's latest motion for approval of its fee request.

That motion for approval fails to support the 10,000 hours Quinn Emanuel says it spent on the case, suggests that the firm double-counted hours by including time spent on a separate multibillion-dollar class, and tries to skew its rates higher by seeking 2023 rates, even though its first fee petition was filed in 2020, according to the insurers.

"Trying to reverse-engineer defenses for its indefensible fee demand, class counsel uses inflated and unproven hours, multiplies those alleged hours by unprecedented rates, and then proposes a multiplier that is miles outside accepted norms.  That is akin to applying no cross-check at all," the insurers said.

Quinn Emanuel and a group of healthcare plan insurers the firm represents have insisted the firm used a novel claim and achieved a 100% recovery for the class in litigation over so-called risk corridor payments under the ACA.  But objectors Kaiser Foundation, UnitedHealthcare and others have argued that class counsel was entitled to just $8.8 million after a lodestar cross-check.

A Court of Federal Claims judge granted Quinn Emanuel's request for $185 million, or 5% of the total $3.7 billion settlement, in 2021 finding that a lodestar cross-check was unnecessary.  But that conclusion "was legal error," according to the Federal Circuit, which vacated the award in 2023.

That $185 million amount was inconsistent with promises made in class opt-in notices, and the "extraordinarily high award" wasn't justified, the three-judge panel ruled, ordering the fees to be recalculated.  But Quinn Emanuel's renewed request for $185 million "does little more than pay lip service" to the Federal Circuit's order, according to the insurers.

While the insurers still think their original $8.8 million fee request is reasonable, they are willing to agree to a fee award between $11.77 million and $23.14 million in "the interest of finality," they told the claims court.  "[T]he objectors sincerely want class counsel to be handsomely rewarded.  $11.77 [million] to $23.14 million represents an incredibly large fee award that also fulfills class counsel's promise of a lodestar cross-check," the insurers said.

Second $185M Attorney Fee Request Called ‘Indefensible’

March 6, 2024

A recent Law 360 story by Jack Karp, “Quinn Emanuel’s 2nd $185M Fee Bid Blasted as ‘Indefensible’”, reports that Quinn Emanuel Urquhart & Sullivan LLP's second attempt to win $185 million in attorney fees in $3.7 billion litigation over the Affordable Care Act still fails to justify the "indefensible" amount and barely pays "lip service" to a reevaluation ordered by the Federal Circuit, health insurers told the federal claims court.

The Federal Circuit already wiped out the $185 million attorney fee that the U.S. Court of Federal Claims awarded to Quinn Emanuel and directed the claims court to reexamine objecting class members' insistence that the firm hadn't justified its fee request, Kaiser Foundation Health Plan Inc. and UnitedHealthcare Insurance Co. said.

"Despite this clear direction, class counsel's second petition again fails to justify its lodestar and again seeks to avoid a lodestar cross-check.  It instead asks the court to rubberstamp the same $185 million award," the health insurers said in their opposition to the firm's latest motion for approval of its fee request.

That motion for approval fails to support the 10,000 hours Quinn Emanuel says it spent on the case, suggests that the firm double-counted hours by including time spent on a separate multibillion-dollar class, and tries to skew its rates higher by seeking 2023 rates, even though its first fee petition was filed in 2020, according to the insurers.

"Trying to reverse-engineer defenses for its indefensible fee demand, class counsel uses inflated and unproven hours, multiplies those alleged hours by unprecedented rates, and then proposes a multiplier that is miles outside accepted norms.  That is akin to applying no cross-check at all," the insurers said.

Quinn Emanuel and a group of healthcare plan insurers the firm represents have insisted the firm used a novel claim and achieved a 100% recovery for the class in litigation over so-called risk corridor payments under the ACA.  But objectors Kaiser Foundation, UnitedHealthcare and others have argued that class counsel was entitled to just $8.8 million after a lodestar cross-check.

A Court of Federal Claims judge granted Quinn Emanuel's request for $185 million, or 5% of the total $3.7 billion settlement, in 2021 finding that a lodestar cross-check was unnecessary.  But that conclusion "was legal error," according to the Federal Circuit, which vacated the award in 2023.

That $185 million amount was inconsistent with promises made in class opt-in notices, and the "extraordinarily high award" wasn't justified, the three-judge panel ruled, ordering the fees to be recalculated.  But Quinn Emanuel's renewed request for $185 million "does little more than pay lip service" to the Federal Circuit's order, according to the insurers.

While the insurers still think their original $8.8 million fee request is reasonable, they are willing to agree to a fee award between $11.77 million and $23.14 million in "the interest of finality," they told the claims court.  "[T]he objectors sincerely want class counsel to be handsomely rewarded.  $11.77 [million] to $23.14 million represents an incredibly large fee award that also fulfills class counsel's promise of a lodestar cross-check," the insurers said.

Attorney Fees as Stock Options in Tesla Case?

March 4, 2024

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.

Connecticut State Worker Seeks Fees After Trial Win

March 1, 2024

A recent Law 360 story by Brian Steele, “Conn. State Worker Wants Atty Fees After Noose Trial Win”, reports that a Black employee of Connecticut's state energy and environmental regulator is asking a federal judge to award more than $200,000 in attorney fees after he prevailed in a lawsuit alleging that he was racially tormented and exposed to nooses in a hostile work environment.

The Law Office of W. Martyn Philpot Jr. represents Omar Tyson, who won $5,000 in a Feb. 14 jury verdict on his claims that his supervisors at the Connecticut Department of Energy and Environmental Protection, or DEEP, failed to protect him from a co-worker's racial hostility.  Tyson asked U.S. District Judge Jeffrey A. Meyer of the District of Connecticut for a ruling that recognizes certain "economic realities" of prosecuting the suit, arguing further that he is entitled to the award under Title VII of the Civil Rights Act and court rules.

"It is not hyperbole to suggest that civil rights cases such as the one at bar are often lost, with no recovery," Tyson's memorandum said.  "The results of a loss of this sort can often be calamitous for both the client and a small firm where there has been a substantial expenditure of time and expense.  Moreover, the incentive created by Congress was to attract competent attorneys to take on socially significant, yet difficult cases, on a contingent fee basis."  The motion asks for $200,750 in fees based on a $500 hourly rate, and about $7,700 in expenses like taking depositions and issuing subpoenas.

Tyson claimed in his November 2021 amended complaint that he suffered race-based mistreatment starting in 2011, also alleging that on two occasions, he found a hangman's noose near his workstation.  A colleague taunted and bothered Tyson at work, once pointing a cane at him as if it were a gun, and referred to the Black community as "you people" and "your people" when Tyson was present, among other offensive comments and behavior, according to the complaint.

A rate of $500 per hour "is the prevailing rate in the community" and similar to the fees charged by comparable attorneys, according to Tyson, who paid a $5,000 retainer.

"In this matter, the plaintiff's attorney's fee award should be determined in accordance with the well-established lodestar calculation method," the memo said.  "The pertinent factors for calculating the lodestar include, but are not expressly limited to: the novelty and complexity of the litigation involved, the skill and experience of the attorney, the overall quality of the representation, and the understanding that payment of fees will generally not come until the end of the case, if at all."