A recent Law 360 story by Chris Villani, “Labaton Rebuke Sends Message: Botch Fees and Pay a Price,” reports that by slashing $15 million in fees from Labaton Sucharow LLP and Thornton Law Firm LLP for a $300 million State Street Corp. settlement, a federal judge sent a sharp warning to the class action bar to remain vigilant about attorney fee fundamentals, or else risk an embarrassing and possibly expensive fight.
Double checking lodestar calculations before submitting a fee request, signing off on fee declarations, being careful about referrals and erring on the side of disclosure seem like routine activities for class action firms. But if major players in the field like Labaton and Thornton can get slapped down by a federal judge for falling short on the basics, it should catch the attention of other firms across the bar, experts told Law360.
“It's a very important decision for all class action lawyers to pay close attention to, particularly when submitting lodestar applications, when contract attorneys are involved, when you have rates that you report to the court are your hourly billable rates,” said Lance Harke of Harke Clasby & Bushman LLP. “There's a number of significant issues for all of us.”
The long-running fight began after Labaton Sucharow, Thornton Law and Lieff Cabraser were awarded a $75 million fee after reaching the nine-figure settlement. A media report unveiled allegations of double-counting hours, which the firms admitted but asked the court to let slide. But what the firms called an inadvertent mistake instead led to U.S. District Judge Mark L. Wolf's vacating the fee award and appointing retired U.S. District Judge Gerald Rosen as a special master to investigate.
Rosen suggested chopping up to $10 million from the fee, but Judge Wolf ended up reducing the award by $15 million and sending his order to the Board of Bar Overseers for potential disciplinary action. “This case demonstrates that not all lawyers can be trusted when they are seeking millions of dollars in attorneys' fees and face no real risk that the usual adversary process will expose misrepresentations that they make,” Judge Wolf wrote in the 160-page order.
Rosen’s investigation turned up a number of problems, including a false fee declaration signed by Thornton Law’s managing partner, Garrett Bradley, that he called a “stupid mistake” during a subsequent hearing. Thornton was accused of trying to inflate the firm's lodestar by having lawyers bill at a higher rate than Rosen believed they should.
Drawing perhaps the most scrutiny was a $4 million payment to a Texas lawyer named Damon Chargois. Chargois did not work on the case, but he did introduce Labaton Sucharow to the lead plaintiff, the Arkansas Teacher Retirement System. The fee was never disclosed to the class or Judge Wolf.
John Coffee Jr., a professor at Columbia Law School with expertise in class action and securities litigation, was skeptical that the arrangement Labaton Sucharow had with Chargois is unique. “That suggests that there are major plaintiffs’ law firms, and the Labaton firm is a major plaintiffs’ law firm, that have a business model of effectively buying lead plaintiffs on an open market from these finders,” Coffee said. “The practices [Rosen] uncovered is like turning over a rock in the field and finding some ugly things crawling around.”
Another retired judge, hired by Labaton Sucharow, found that the Chargois arrangement was an aberration and that in other instances involving referral fees, the lawyers who referred the case did substantial work. The firms vigorously pushed back against Rosen’s conclusions, and Labaton Sucharow even tried to have Judge Wolf removed from the case.
In a statement Friday, Labaton Sucharow said the Chargois arrangement was a one-off and highlighted the settlement it reached with Rosen in which it agreed to pay $4.8 million and institute new best practices regarding referral fees. Judge Wolf “chose to ignore” the settlement, the firm said. “We now identify who will be sharing in any fee the firm is awarded, regardless of whether the jurisdiction requires such disclosure,” Labaton Sucharow said, adding that a payment like the one in the State Street case is legal in Massachusetts. “We are confident that the concerns raised in this case were an anomaly.”
But even those who support class actions as a valuable legal tool said Rosen’s findings are a black eye for a bar that already faces public criticism over the massive fees doled out to lawyers. “Lawyers should not behave this way,” said Deborah Hensler, a professor at Stanford Law School. “This is not the way that this powerful tool is intended to be used. When leading class action firms appear to have been engaged in self-serving behavior, whether or not it complies with a narrow definition of the rules, it’s highly inappropriate and it weakens the arguments for continuing to use class actions.”
Francis Scarpulla of the Law Offices of Francis O. Scarpulla said the double counting seemed seemed unintentional on the firms' part, rather than Labaton trying to pull a fast one. He also said the Chargois arrangement should have been disclosed. The lesson, he said, is to be extra careful with fee declarations. “Judges have to trust what lawyers tell them, and if they lose that trust, you can forget about that judge believing anything you tell him or her,” Scarpulla said. “Even if it's the time of the day and you're both looking at the same watch.” The worst-case scenario for the class action bar would be the U.S. Supreme Court getting involved in a class action fee fight, he added.
Other jurists have taken notice of the State Street case. A few days after Judge Wolf’s order, another judge sat in a Boston courtroom and warned the class action firms before her about the scrutiny they would face if and when it came time for them to submit fee declarations. “I don't know how many of you have read Judge Wolf’s order from this week,” U.S. District Judge Indira Talwani told the lawyers at the outset of a hearing over which firm would lead an ERISA suit against General Electric Corp. “If you haven't, you should.”
“If I was a class action lawyer, I would read the entire 160-page order twice, with a highlighter,” said Jan Jacobowitz of the University of Miami School of Law. “And I would review the billing practices in my firm, which lawyers should do from time to time anyway, and just be especially careful to dot all my I’s and cross my T’s.” The incentive is strong to follow the rules carefully, Jacobowitz said, because firms “are still going to make a whole lot of money” and can do so without the professional embarrassment of a scandal like this one.
Labaton Sucharow ended up losing more than $10 million in fees from the original amount approved by Judge Wolf to the amount awarded after the investigation. Thornton Law lost nearly $7 million. Even Lieff Cabraser, which emerged largely unscathed as Judge Wolf laid the blame on the other firms, had to shell out a portion of the nearly $5 million spent on Rosen’s investigation.
As rough as the lengthy battle was for all of the firms involved, they still each brought in eight-figure fees for their work on the State Street case, with the total fee reduced from 25% to 20% of the amount recovered for the class. “That does not strike me as a major victory for four years and a special master and a significant amount of alleged misconduct,” said Daniel Klerman of the University of Southern California's Gould School of Law. “For those lawyers, if I had gone through four years and I had a judge who sounds as hostile as this judge appears, I would be jumping for joy if I only lost 20%.”