Opinion ID: 197312
Heading Depth: 2
Heading Rank: 1

Heading: The PSC-Cost Reimbursement Regimen

Text: 24 Appellants aim their main broadside at the regimen established for documenting, monitoring, submitting, and approving PSC costs. Although the PSC, IRPAs, and plaintiffs in mass-tort MDLs share the same litigation goal (viz., an optimum common fund), internecine differences as to subsidiary matters--particularly the appropriate allocations from the common fund for their respective attorney fees and costs--are commonplace. The greater the attorney fees and costs awarded the PSC, of course, the less available for the IRPAs and their individual clients. Appellants maintain that these conflicting self-interests necessarily entail heightened oversight responsibilities on the part of the district courts in mass-tort MDLs to ensure stringent monitoring and review procedures adequate to protect the individual plaintiffs and IRPAs from overreaching by the PSC. 25 Appellants fault the district court for adopting reimbursement procedures which delegate important judicial oversight responsibilities to auditors appointed either by the court or the PSC. It is the PSC, they say, rather than the appellants, which must bear the ultimate burden in establishing entitlement to reimbursement, see Grendel's Den, Inc. v. Larkin, 749 F.2d 945, 956-57 (1st Cir.1984), which in turn necessitates three distinct showings by the PSC for each claimed reimbursement; viz., that it document: (i) the actual expenditure; (ii) its necessariness to the assigned litigation task; and (iii) its reasonableness, see, e.g., In re Agent Orange Prod. Liab. Litig., 611 F.Supp. 1296, 1314 (E.D.N.Y.1985) (Expenses must be both reasonable in amount and reasonably related to the interests of the class.), aff'd in pertinent part, 818 F.2d 226, 238 (2d Cir.1987). 26 Appellants contend that the Raben and Kevane audits did not inform the district court adequately regarding potential PSC excesses. Raben and Kevane were accountants, neither trained in the law nor familiar with the litigation tasks assigned to the PSC. At best they could verify that the PSC and its members actually made the claimed expenditures, but in many instances PSC members maintained no detailed records relating to their reasonableness and necessariness. Moreover, appellants argue, though Monita Sterling and others similarly designated by the PSC undoubtedly were more familiar than Kevane and Raben with the nature and demands of the PSC's litigation responsibilities, their assessments of claimed expenses were inherently biased because their employment with the PSC gave them a vested interest in justifying PSC reimbursements. 27 Appellants contend that the district court erred in suggesting that it was incumbent upon them, rather than the PSC, to demonstrate that particular PSC expenditures were not reimbursable. See, e.g., Order No. 520, at 1 n. 1 (Parties questioning payments previously approved carried the burden of setting them aside whereas the PSC/Mr. Foulds were required to justify the pending request.). The court based its ruling on the ground that most PSC cost-reimbursement claims during earlier stages in the litigation had been approved, without opposition, as submitted. 28 Appellants complain not only that the district court thereby subverted the well-established burden of proof incumbent upon the PSC, see Grendel's Den, 749 F.2d at 956-57, but foisted on the plaintiffs and IRPAs the impracticable task of rummaging through mountainous PSC documentation to determine--within very restrictive court-ordered deadlines--which PSC-cost submissions were either inadequately documented or otherwise nonreimbursable. Appellants therefore urge that all otherwise allowable PSC-cost reimbursements be reduced by a fixed (if somewhat arbitrary) discount (25% to 33%), see, e.g., Mokover v. Neco Enters., Inc., 785 F.Supp. 1083, 1093-94 (D.R.I.1992), to reflect the likely extent to which the PSC inferably overcharged due to its failure to maintain appropriate documentation.
29 District court orders awarding costs normally are reviewed only for abuse of discretion. See Grendel's Den, 749 F.2d at 950; see also Anderson v. Secretary of Health & Human Servs., 80 F.3d 1500, 1507 (10th Cir.1996); National Info. Servs., Inc. v. TRW, Inc., 51 F.3d 1470, 1471 (9th Cir.1995); Estate of Borst v. O'Brien, 979 F.2d 511, 517 (7th Cir.1992) (The award of costs 'is the type of discretionary ruling to which appellate courts should give virtually complete deference.' ) (citations omitted). 30
31 The PSC and its members undoubtedly must establish their entitlement to reimbursement. See Grendel's Den, 749 F.2d at 956-57. Furthermore, there can be no quarrel that the respective self-interests of the plaintiffs, the IRPAs, and the PSC in mass-tort MDLs often diverge, nor for that matter that the cost-containment regimen initiated at the outset in this case (without benefit of hindsight) ultimately proved inadequate and even chaotic, see supra Section I.D, as the district court itself acknowledged several years later. 32 We nevertheless part company with appellants' contention that the belatedly perceived shortcomings in the adopted safeguards against PSC overreaching proximately caused the unsatisfactory regimen in this case, or that the PSC and its members must therefore be required to bear the entire brunt of its failure to function as envisioned by the district court. Quite apart from formal burdens of proof, all litigants must share in their mutual obligation to collaborate with the district court ab initio in fashioning adequate case management and trial procedures, or bear the reasonably foreseeable consequences for their failure to do so. See, e.g., Reilly v. United States, 863 F.2d 149, 160 (1st Cir.1988) (noting that district court reasonably may presume affected parties, which take no exception to an announced course of action, have no objection); see also Clemente v. Carnicon-Puerto Rico Mgt. Assocs., 52 F.3d 383, 387 (1st Cir.1995); K-Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 913 (1st Cir.1989); Austin v. Unarco Indus., Inc., 705 F.2d 1, 15 (1st Cir.), cert. dismissed, 463 U.S. 1247, 104 S.Ct. 34, 77 L.Ed.2d 1454 (1983). 33 As the lawbooks bear out, in many respects this has been a groundbreaking mass-tort MDL from its onset in 1987. See, e.g., supra n. 1. The district court was confronted not only with the daunting task of devising (sometimes from whole cloth) mechanisms for streamlining case administration (e.g., the JDD), but with establishing auxiliary administrative entities, including the PSC itself, which would permit adequate ongoing judicial oversight to be reserved for the most pressing and essential litigation. The PSC, IRPAs, and plaintiffs were indispensable partners in this important endeavor. Spurred by their respective self-interests, these broadly allied litigants were far better positioned than the trial judge to propose the prophylactic procedures believed necessary to protect their respective interests from undue encroachment by potential adversaries, including one another. 34 These complex and unwieldy mass tort cases are a breed apart, Thirteen Appeals, 56 F.3d at 311, to the point that efficient, and often innovative, administrative arrangements become absolutely essential to enable the court[ ][to] run [a] tight ship[ ] to ensure that [the] litigation stays on course. Nineteen Appeals, 982 F.2d at 614. See In re Recticel Foam Corp. (In re San Juan Dupont Plaza Hotel Fire Litig.), 859 F.2d 1000, 1004 (1st Cir.1988) (In multi-party, multi-case litigation, the district court's success is largely dependent upon its ability to uncomplicate matters.). Trial judges newly immersed in mass-tort MDLs simply cannot reasonably be expected to anticipate, from the inception, all potential flaws in their unopposed procedural and administrative initiatives. 35 It is essential, therefore, that counsel collaborate with the trial judge from the outset in fashioning workable programmatic procedures, and thereafter alert the court in a timely manner as operating experience points up infirmities warranting further judicial attention. Absent this collaborative administrative monitoring, there inevitably remains an unacceptable potential for internecine conflicts among the PSC, IRPAs and plaintiffs over their respective dormant claims to the common fund, which threaten to convert their cost-reimbursement disputes into wasteful satellite litigations. See Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983) (cautioning that cost claims should not [be allowed to] result in a second major litigation). 36 Even at the outset, while their primary focus remained on establishing defendants' liability, the PSC, IRPAs, and plaintiffs surely could anticipate that their respective financial stakes in future PSC-cost reimbursement rulings would be substantial (e.g., $10 million, or 4 1/2 percent of common fund), especially since the district court had authorized the PSC not only to take over certain IRPA litigation tasks but to establish and finance its own ad hoc law firm at a centralized and inevitably costly adjunct office. Confronted with this serious potential for conflicting self-interests, see Pretrial Order No. 2 (cautioning counsel that your working relationship will occasionally be strained, communication hampered, and mutual trust impeded), and the virtually certain prospect that the massive litigation would be protracted, see id. (cautioning that counsel would probably be laboring together [in strained relationships] for several years), the PSC, IRPAs, and plaintiffs were on reasonable notice from the outset that establishing adequate prophylactic procedures was a priority matter. 37 Thus forewarned, the PSC, IRPAs, and plaintiffs all were fairly alerted that the massive cost-submission documentation generated over the years ahead would become critically important to them; viz., to satisfy the PSC's burden of proof under Grendel's Den and enable both the IRPAs and plaintiffs to assert informed objections to inappropriate PSC cost-reimbursement submissions. Clearly, then, their timely fashioning of mutually satisfactory documentation and monitoring procedures offered the most reasonable prospect for forfending this satellite litigation. See Hensley, 461 U.S. at 437, 103 S.Ct. at 1941. 38 As appellants acknowledge that there are no legal precedents which provide detailed models for designing suitable mass-tort cost-reimbursement procedures, they now urge, after the fact, that we define the relevant responsibilities incumbent upon the district court and the PSC in these matters. We decline their request, however, in large part for the reason that the guidance presently available plainly runs counter to their premise that the primary responsibility for designing cost-submission procedures, ab initio, rests with the district court. 39 Although the Manual for Complex Litigation (the MCL ) itself includes no detailed provisions on the subject, opting instead to encourage counsel for the principal parties to forge ad hoc prophylactic procedures by mutual agreement from the outset, 8 it envisions that prescriptive procedural models will emerge, and deserving ones gain currency, through the litigants' own collaborative ad hoc initiatives, rather than originate in appellate case law. See Pretrial Order No. 127, at 22 (The Manual for Complex Litigation ... has been and will continue to be a primary reference text in this litigation. Counsel must become familiar with the Manual.). Furthermore, ex post facto pronouncements detailing model procedures would be particularly inappropriate in these circumstances as it is readily apparent that the present dispute sprang inexorably from the flawed procedural design in which appellants acquiesced from the outset, and for six years thereafter, to the point that its deficiencies became both systemic and irremediable. Appellants simply waited too long before asking the district court to undo, with their broad axe (viz., a 25% to 33% across-the-board cut), the documentary muddle allowed to accumulate. 40 Moreover, pressed on many other fronts since 1987, it was not practicable for the district court alone to scrutinize all cost-related documentation maintained by the PSC for nearly half a decade. See Grendel's Den, 749 F.2d at 950 (noting that courts must strive for cost-setting processes which are not unnecessarily burdensome to the courts themselves). Unlike less attenuated and complex litigation, mass-tort MDLs by their very nature predetermine that detailed monitoring of case-administration-related responsibilities be delegated. The early pretrial orders entered by the district court, with appellants' acquiescence, accordingly established a cost-monitoring regime which required the PSC to submit cost summaries every sixty days for interim approval by the court. The PSC-cost summaries, which merely reflected total expenses by general type and category, represented the cumulative, edited product of the Raben and Kevane audits, without the underlying documentation. Thus, the interim-approval regime was reasonably designed to ensure that cost verification and containment by the parties not simply await an end to the entire litigation, by which time the accompanying avalanche of documentation would all but preclude cogent review. 41 Nevertheless, two serious deficiencies made their way into these interim-approval procedures with appellants' acquiescence: (1) the failure to include defined criteria for assessing reasonableness and necessariness; and (2) the failure explicitly to authorize or require appellants to monitor the underlying documentation as interim PSC-cost summaries were submitted to the district court. 9 Thus, appellants settled from the outset simply for the broad, undefined general criteria that claimed-PSC costs be necessary and reasonable, thereby implicitly foregoing such ongoing prophylactic measures as particularized monetary guidelines and/or ceilings on major cost categories; for example, maximum per diem rates for hotels and page-rates for photocopying. 10 42 Yet more fundamentally, the pretrial procedural orders did not identify a minimum level of detail in the documentation required to substantiate that a particular PSC-member cost was necessary to a PSC litigation task and reasonable in amount. Rather, the orders simply directed the PSC to keep careful, contemporaneous, detailed records and provide proper verification of its expenditures. Although Grendel's Den makes clear that an entity requesting reimbursement must document its actual expenditures, normally by itemized receipt, see 749 F.2d at 956-57, the more amorphous and subjective criteria for substantiating that a given expenditure was necessary and reasonable may not be so readily documented. For example, in some instances courts do not require exacting documentation even for major cost reimbursements, such as overhead expenses incurred in connection with the PSC office, relying instead on their intimate knowledge of the litigation for determining whether entire categories of costs pass the reasonableness test; viz., whether the nature of the expenditure strikes the court as clearly superfluous or its amount transcends the broad bounds of reasonableness in the circumstances. 11 43 Furthermore, the early pretrial orders afforded both an obvious and ready opportunity for appellants, inter alios, to propose, with somewhat greater particularity at least, more definite contours for monitoring, testing, and verifying PSC compliance with the amorphous necessariness and reasonableness criteria laid down by the district court. As this litigation demonstrates all too well, the terms detailed records and proper verification--though perhaps perfectly adequate benchmarks in a smaller, non-MDL litigation--simply were not up to the task in this mass-tort MDL. See MCL § 20.223 (The court should also inform counsel what records should be kept....). For example, even though early pretrial orders forewarned that the litigation would be prolonged and that it would be impracticable for the PSC to submit all its underlying documentation directly to the district court for interim-approval review, the PSC, IRPAs, and plaintiffs nonetheless refrained from proposing any further definition of the required level of documentary particularity. Thus, these matters were left unattended until the end of the litigation at their peril. 44 Moreover, appellants exacerbated the documentary muddle from the start by opting to forego ongoing monitoring of the PSC documentation. Unlike less prolonged and complex litigation, wherein interim-cost reimbursement claims may be deferrable until the litigation nears completion, the hands-off approach taken by appellants is utterly impracticable in these large and enduring mass-tort proceedings. 45 Given the potential for serious, long-term overreaching by the PSC under the relaxed regime envisioned by these pretrial orders, we discern no sound justification for appellants' failure to propose in 1987 that one of their own number be designated to conduct closer review of the underlying PSC-cost documentation on an ongoing basis. 12 See Francis Bacon, Of Suspicion (There is nothing makes a man suspect much, more than to know little.). Alternatively, the IRPAs could have sought district court authorization to retain an auditor to monitor these interim-cost reports on an ongoing basis for necessariness and reasonableness. Thus, appellants' failure even to attempt interim monitoring directly contributed to the serious and otherwise avoidable consequences ultimately brought to the district court's attention at a time when corrective action could no longer be considered practicable. 46 Nor are appellants absolved of their primary responsibility for protecting their own interests based on the mere fact that the pretrial orders did not explicitly direct interim monitoring. Rather, the record is clear that appellants were neither precluded nor incapacitated from taking appropriate and timely precautions. First and foremost, fundamental deficiencies in the interim PSC-cost submissions to the court, especially their lack of particularity, readily could have been addressed and corrected ab initio, rather than at the end of the litigation. Second, appellants placed too much reliance upon non-MDL case authority, see, e.g., Grendel's Den, supra, in failing to conduct interim monitoring, based on their ill-advised assumption that the PSC's ultimate burden of proving its entitlement to reimbursement relieved appellants of their independent responsibility to collaborate with the district court and other parties to develop and monitor appropriate cost-containment procedures. 47 Appellants were well aware, throughout the proceedings, that the PSC had not been directed to submit its voluminous cost documentation to the district court together with the interim summaries. Thus, appellants knowingly failed to assume their rightful responsibilities for safeguarding their own interests by monitoring interim PSC-cost submissions as required to ensure that the evolving documentation practices actually utilized by the PSC were equal to the task and, if not, to broach the matter first with the PSC and, as need be, with the court, in time to permit effective preventive and corrective measures before matters became completely unmanageable. 13 48 We underscore the central administrative necessity in mass-tort MDLs, that the PSC, IRPAs, and plaintiffs attempt very early on to work out mutually acceptable procedures for documenting and monitoring costs for which reimbursement is to be sought. No less importantly, both at the outset and thereafter, where cooperative efforts fail to produce agreement, or cost-benefit considerations independently warrant, judicial intervention should be promptly sought before matters worsen or become irremediable. See Jaquette v. Black Hawk County, Iowa, 710 F.2d 455, 463 (8th Cir.1983) ([T]he key to avoiding excessive costs ... is early and stringent judicial management of the case.) (emphasis added). 49 The individual plaintiffs and IRPAs have enough at stake in these matters to prompt their early intervention. For example, if overly particularized PSC-cost documentation on reasonableness and necessariness were to be required without regard to sound cost-benefit considerations, its unnecessary procedural costs ultimately would be borne by the individual plaintiffs. See Laffey v. Northwest Airlines, Inc., 572 F.Supp. 354, 383 (D.D.C.1983) (Indeed, the amount of time that would be required to document each item of expense in the detail apparently suggested by Defendant would be prohibitive; the compensable time required to generate the detail would exceed the expenses claimed.). Conversely, if appellants were to designate an IRPA, or retain an independent auditor, to monitor PSC-cost submissions, the expense conceivably could exceed whatever direct savings might be derived through any resulting cost-reimbursement disallowances. Thus, as the ultimate payors the individual plaintiffs and IRPAs have enough at stake to warrant reasonable efforts at ensuring that adequate documentation and cost-monitoring procedures also make cost-benefit sense. 50 An adequate cost containment and monitoring system in a mass-tort litigation cannot be economically and efficiently designed and implemented from the outset absent a series of tradeoffs among the PSC, IRPAs, and plaintiffs, all of whom are under a mutual obligation to engage in an earnest effort to resolve their differences early on. These appellants, on the other hand, elected to acquiesce for four years in the flawed cost containment and monitoring system first set in place in 1987, awaiting an end to the principal litigation before coming forward with their objections. See Reilly, 863 F.2d at 160 (litigants share mutual burden to collaborate with district court in fashioning workable litigation procedures).
51 Next we consider whether the PSC-cost reimbursements should be subjected to the across-the-board cuts (25% to 33%) urged by appellants notwithstanding their own failure to take appropriate preventive or corrective action. In our view, their crude cuts ought not be imposed in these circumstances absent evidence that the PSC acted in bad faith or took unfair advantage of the procedural deficiencies. Not only have we found no such evidence, but we can discern no appreciable PSC overreaching from the record. 52 First, there should be no ready presumption that counsel appointed to the PSC expended its funds in bad faith; that is, with intent to inflate PSC-cost reimbursement submissions. This is especially true in the present circumstances, since the PSC members repeatedly attested that their cost submissions were bona fide. See, e.g., Alabama Power Co. v. Gorsuch, 672 F.2d 1, 5 (D.C.Cir.1982) ([I]n most cases, the court should be content to rely upon the integrity of counsel, and allow the[ ] expenses [claimed].); Greenspan v. Automobile Club of Mich., 536 F.Supp. 411, 413-14 (E.D.Mich.1982) (refusing to second-guess necessariness of costs and relying in part on affidavits filed by requesting parties and their attorneys); cf. also, e.g., In re Agent Orange Prod. Liab. Litig., 611 F.Supp. at 1322 (If there was doubt about the reason for a[n] [attorney's phone] call, it was allowed.); 28 U.S.C. § 1924 (permitting attorneys to vouch for necessariness of costs). Whether or not there is a direct or formal attorney-client relationship between plaintiffs and the PSC, the PSC and its IRPA members necessarily owed a fiduciary obligation to the plaintiffs. Cf. In re Agent Orange Prod. Liab. Litig., 818 F.2d at 223 (noting that lead counsel owes fiduciary duty to class plaintiffs); see also MCL § 20.22 (counseling court to remind PSC members of their responsibility to the court and their obligation to act fairly, efficiently, and economically in the interests of all parties and their counsel). Furthermore, these PSC members simultaneously were acting in their respective roles as IRPAs, with direct professional responsibility for representing approximately seventy percent of the plaintiff class. In these circumstances especially, given their professional obligations to the court and their individual clients, we would be highly reluctant to suppose that the PSC members promoted overreaching by the PSC. 53 Second, the PSC auditing which did occur, whether or not adequate, cannot be dismissed as perfunctory, since it did screen out some significant cost excesses. For example, Adamina Soto attested that she contacted PSC members concerning problem expenses and followed up with requests for further documentation. Indeed, the Raben and Soto audits resulted in cost reductions exceeding $346,000. Although appellants object that some PSC auditing was conducted at random, particularly that performed by Kevane and Soto, as it did not purport to verify each expense claim, the reviews conducted by Raben and Sterling were not random. Finally, even the random audit procedures were not conducted under PSC control. Thus, we are not persuaded that the random review procedures were flawed to the point that they could provide no effective deterrent to substantial PSC overreaching. 54 Third, appellants emphasize that Kevane and Raben were accountants, with little personal knowledge regarding the precise litigation tasks assigned to the PSC. Both were professional CPAs, however, and Raben in particular was no neophyte, having been responsible for comparable cost oversight in the MGM case, itself a hotel fire litigation. It does not seem unreasonable, therefore, absent evidence to the contrary, to expect that Raben was reasonably qualified for the professional task assigned to him. 55 Fourth, as there is no indication in the appellate record that the PSC ever attempted to prevent appellants from examining its underlying cost documentation prior to 1991, the reasonably foreseeable prospect that appellants might well (indeed should) have requested interim access to the documentation presumably had some deterrent effect upon PSC overreaching. Not only did the pretrial orders not preclude ongoing access by appellants to the PSC documentation, but there would appear to have been no conflict of interest or work product privilege which would have prevented the individual plaintiffs or IRPAs from inspecting the PSC documentation at any time during the litigation. See supra note 12. 14 56 Finally, and most importantly, the district court initially proposed to limit PSC attorney fees and costs, combined, to ten percent of the eventual common fund, thus providing PSC members a substantial inducement to exert reasonable efforts to minimize PSC costs with a view to preserving a larger balance with which to fund their attorney fees as PSC members. See In re Wells Fargo Securities Litigation, 157 F.R.D. 467, 470 (N.D.Cal.1994) ([A]n attorney generally has no incentive to minimize litigation expenses unless his fee award is inversely related to such expenses.). Appellants respond that the ten percent ceiling did not deter inflated costs, however, because the district court announced in January 1991 that it would not be enforced after all. See Thirteen Appeals, 56 F.3d at 307 n. 10 (holding that tentative cap was not binding on district court); Nineteen Appeals, 982 F.2d at 612 (same). Nevertheless, until January 1991, by which time the lion's share of its $10 million in costs had accrued, the PSC could not have known that the district court would discard the ten percent ceiling. 57 We therefore conclude, based on the foregoing considerations, particularly the absence of reliable evidence of overreaching or bad faith on the part of the PSC, that it would be inequitable to resort to the crude cost-cutting bludgeon proposed by appellants, who share at least equal responsibility for these procedural lapses. Although the procedural deficiencies discussed above may have led to some unnecessary or unreasonable expenditures, appellants clearly failed to alert the district court until it had become impracticable either to prevent or assess, let alone correct them in any reliable or cost-effective manner.