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Fee Calculation in Class Actions Before California Supreme Court

November 27, 2015 | Posted in : Contingency Fees / POF, Fee Award Factors, Fee Calculation Method, Fee Issues on Appeal, Fee Jurisprudence, Hourly Rates

A recent WSJ story, “Lawyers’ Class Action Payouts Face Court Challenge” reports that a case before California’s highest court could fundamentally change the way class action attorneys are paid—and cut lawyers’ fee in the process.

In Lafitte v. Robert Half Intenat., Inc., California's highest court considers the following question: Does Serrano v. Priest (1977) 20 Cal.3d 25 permit a trial court to anchor its calculation of reasonable attorney's fees award in a class action on a percentage of the common fund recovered?

Typically, attorneys who represents plaintiffs in class actions—like employees accusing a company of discrimination, or customer claiming a product misled them—are paid a percentage of any money recovered for their clients.  The payouts, which nationally average about 25% of the collected funds, can be substantial.

The fee challenge comes at the time of intensifying attacks on class actions, which provide a way for one lawsuit to potentially benefit hundreds or thousands of people.  U.S. Supreme Court decisions in recent years have limited the ability to bring cases, and many companies have added clauses into contracts with employees and customers that instead require disputes to go to arbitration.

Courts have also long grappled with the fairest way to pay class action attorneys.  The percentage and hourly methods have “always been two different and warring approaches,” said Adam Zimmermanm a professor of law at Loyola Law School in Los Angeles.

Some federal circuits require the percentage method be used in class actions where a “common fund” is being split between attorneys and their clients.  But two states have rejected the use of percentages in such cases, and in New York earlier this year, a federal judge denied a proposed 33% fee in favor of hourly compensation.  The final fees in class actions are ultimately up to judges.

The California appeal stems from a 2004 wage-and-hour class action against staffing firm Robert Half.  In 2013, a judge approved a $19 million settlement on behalf of 4,000 employees, who said they were denied overtime pay and other benefits.  Using the percentage method, $6.33 million was slated for the plaintiffs’ attorneys.

The plaintiffs’ lawyers say in a court filing that if their percentage-based fee is overturned, “class counsel will be less inclined to take on complex class action suits against large, well-financed institutions.”  They haven’t been paid while the appeal works its way through the courts.  Robert Half said it doesn’t have a stake in the fee dispute.

Class action proponents say such lawsuits are the only remedy for people who feel they have been wronged but don’t have the financial resources to go to court alone.  Dissenters say they offer outsize payments to plaintiffs’ lawyers while providing little value for their clients.

The California court ruling will affect how fees are paid in class actions filed in state courts there, and could influence judges in other jurisdictions.

Paying lawyers a percentage of the ultimate recovery is seen by some as an incentive to work harder for clients, in some ways akin to compensating corporate executives with shares of stock.  When a class action fails, “the firms just have to eat all that money,” says Kathryn Honecker, an Arizona plaintiffs’ lawyer who co-chairs a class-action committee for the American Bar Association.