Opinion ID: 6342044
Heading Depth: 2
Heading Rank: 1

Heading: Ex Ante Fee Agreement

Text: District courts deciding on attorney fee awards for class actions “must do their best to recreate the market by considering factors such as actual fee contracts that were privately 2 A district court may choose either the percentage method or the lodestar method, Americana Art China Co. v. Foxfire Printing & Packaging, Inc., 743 F.3d 243, 247 (7th Cir. 2014), and here the parties do not challenge the district court’s choice. No. 20-2055 7 negotiated for similar litigation, information from other cases, and data from class-counsel auctions.” Taubenfeld v. Aon Corp., 415 F.3d 597, 599 (7th Cir. 2005), citing Synthroid I, 264 F.3d at 719. An ex ante agreement between the parties is a particularly useful guidepost for determining the market rate. See Synthroid I, 264 F.3d at 719 (“Only ex ante can bargaining occur in the shadow of the litigation’s uncertainty; only ex ante can the costs and beneﬁts of particular systems and risk multipliers be assessed intelligently.”). The district court here did not address a September 2016 retention agreement between lead counsel and the Mississippi Attorney General. The agreement authorized lead counsel to represent the Mississippi fund in the Stericycle litigation and to seek a percentage of the recovery achieved for the class as compensation. That percentage, however, would be limited to “the percentage corresponding to [the Mississippi fund’s] estimated individual recovery set forth in Exhibit B … plus reasonable and necessary costs.” Exhibit B outlined the following tiered recovery structure: Twenty-ﬁve percent (25%) of any recovery up to Ten Million Dollars ($10,000,000.00); plus Twenty percent (20%) of any portion of such re- covery between Ten Million Dollars ($10,000,000.00) and Fifteen Million Dollars ($15,000,000.00); plus Fifteen percent (15%) of any portion of such re- covery between Fifteen Million Dollars ($15,000,000.00) and Twenty Million Dollars ($20,000,000.00); plus 8 No. 20-2055 Ten percent (10%) of any portion of such recov- ery between Twenty Million Dollars ($20,000,000.00) and Twenty-Five Million Dol- lars ($25,000,000.00); plus Five percent (5%) of any portion of such recov- ery exceeding Twenty-ﬁve Million Dollars ($25,000,000.00). In this schedule, “recovery” refers to the esti- mated recovery that [the Mississippi fund] is awarded as its share of the recovery achieved for the class. Exhibit B thus provides for increasing attorney fees, but declining percentages, as the settlement fund increases, which is generally consistent with widespread practices in cases generating funds to be distributed. See In re Synthroid Marketing Litigation (Synthroid II), 325 F.3d 974, 975 (7th Cir. 2003) (“[T]he market rate, as a percentage of recovery, likely falls as the stakes increase….”). At oral argument here, however, lead counsel asserted that this sliding scale structure applies only to the amount recovered by the Mississippi fund itself—not to the total amount recovered by the class. In this case, for instance, the fund’s share of the $45 million settlement presumably was far less than $10 million, so the Exhibit B schedule would be consistent with a 25 percent fee award. 3 3 In their motion for appointment as lead plaintiffs, the Mississippi and Arkansas funds asserted that they had purchased 462,826 shares of common stock during the class period (as it was defined at the time) and sustained losses of around $13 million. The Arkansas fund had also purchased 67,700 depositary shares. The parties’ settlement agreement estimated that if all eligible class members participated in the settlement, the average recovery—before deducting any fees, expenses, or costs—would No. 20-2055 9 That interpretation is consistent with the last sentence of Exhibit B of the agreement, but the limitation is improbable, arbitrary, unreasonable, and not consistent with a class representative’s ﬁduciary duty to class members. To see why, imagine a hypothetical settlement for $1 billion where the Mississippi fund suﬀered 1 percent of the class’s total losses. In that case, the fund would recover $10 million, and lead counsel would be entitled to a fee award of 25 percent of the entire settlement fund—$250 million. But a 25 percent fee in a $1 billion settlement would be well above fees awarded for such large funds, especially where counsel launched the case after others had done most of the heavy lifting and then settled early. See Stefan Boettrich & Svetlana Starykh, NERA, Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review, at 33 tbl.2 (Jan. 29, 2019) (average fee award plus expenses for ten largest settlements since 2000, all over $1 billion, was 10.45 percent); id. at 41 ﬁg.32 (median fee award for settlements over $1 billion was 7.6 percent in 1996–2013 and 15.4 percent in 2014–2018); Brian T. Fitzpatrick, An Empirical Study of Class Action Settlements and Their Fee Awards, 7 J. Empirical Legal Stud. 811, 839 tbl.11 (2010) (median fee award for 2006–2007 federal class action settlements over $1 billion was 9.5 percent); Theodore Eisenberg & Geoﬀrey P. Miller, Attorney Fees and Expenses in Class Action Settlements: 1993–2008, 7 J. Empirical Legal Stud. 248, 265 tbl.7 (2010) (median fee award for settlements over $175.5 million was 10.2 percent). be around $0.27 per share of common stock and $0.22 per depositary share. Based on those numbers, the funds’ estimated recovery would have been around $140,000, or around 0.31 percent of the $45 million settlement. 10 No. 20-2055 Lead counsel’s interpretation ties the fee award to only the Mississippi fund’s portion of the losses, but the award aﬀects the fortunes of the entire class. As class counsel’s compensation increases, each class member’s recovery decreases. Class representatives owe ﬁduciary duties to class members. See Cohen v. Beneﬁcial Industrial Loan Corp., 337 U.S. 541, 549–50 (1949). It is hard to see how those class members would be well served by an agreement where they recover less if the Mississippi fund’s share of the losses is, for example, 20 percent rather than 50 percent. 4 The tiered structure in Exhibit B of the retention agreement makes more sense, and ﬁts with a lead plaintiﬀ’s ﬁduciary duty to class members, if it is understood to apply to the entire settlement fund—not just the Mississippi fund’s portion of the recovery. In our hypothetical $1 billion settlement, for instance, class counsel’s fee would be calculated as follows: 4The math works as follows: If the Mississippi fund’s share of the losses in this case had been 50 percent, then it would have received $22.5 million. Based on counsel’s interpretation of Exhibit B, class counsel would receive 25 percent of the first $10 million, 20 percent of the next $5 million, 15 percent of the next $5 million, and 10 percent of the remaining $2.5 million. That would work out to a total fee of $4.5 million, 10 percent of the fund. Now suppose the Mississippi fund’s share of the losses had been 20 percent, meaning it would have received $9 million. Looking again to counsel’s interpretation of Exhibit B, class counsel apparently would be entitled to a fee award of 25 percent of the entire settlement, or $11.25 million. In that scenario, class counsel would take almost $7 million more out of the total fund—significantly reducing the class’s recovery—even though the only thing that would have changed would be a smaller share of total losses for the Mississippi fund. No. 20-2055 11 $ 10,000,000  (0.25) $ 5,000,000  (0.20) $ 5,000,000  (0.15) $ 5,000,000  (0.10) $ 975,000,000  (0.05) $ 53,500,000 That schedule would result in a fee of $53.5 million, or 5.35 percent of the total settlement, a number more consistent with the empirical evidence cited above. And in this case, applying that schedule to the $45 million settlement fund would result in an award of $5.75 million, or 12.78 percent of the settlement. The 25 percent fee that the district court approved is almost twice that amount. 5 We have recognized that sliding scale fee arrangements, such as the one set out in Exhibit B, are often the product of arms-length negotiations ex ante. See Silverman v. Motorola Solutions, Inc., 739 F.3d 956, 959 (7th Cir. 2013) (“[N]egotiated fee agreements regularly provide for a recovery that increases at a decreasing rate.”). In Silverman, which involved a $200 million settlement fund, we explained that such arrangements are logical because many litigation costs do not depend on the amount of damages, so it is “hard to justify awarding counsel as much of the second hundred million as of the ﬁrst.” Id.; accord, Synthroid I, 264 F.3d at 721 (“Both negotiations and auctions often produce diminishing marginal fees when the 5These calculations do not account for any interest the settlement fund has accrued, see Synthroid II, 325 F.3d at 980, or for removing notice and administration costs. 12 No. 20-2055 recovery will not necessarily increase in proportion to the number of hours devoted to the case.”). We also noted that our logic would apply with equal force to a $50 million settlement. Silverman, 739 F.3d at 959. In an ex ante negotiation, therefore, it would make sense that a sophisticated, repeat-player plaintiﬀ like the Mississippi fund would prefer a sliding scale arrangement to a ﬂat rate. Cf. Aranda v. Caribbean Cruise Line, Inc., No. 12 C 4069, 2017 WL 1369741, at  (N.D. Ill. Apr. 10, 2017) (“[I]n a hypothetical bargaining situation, well-informed class members … likely would shop around to see if any other ﬁrm would be willing to take their case and pursue a large recovery for a sliding-scale fee.”), aﬀ’d sub nom. Birchmeier v. Caribbean Cruise Line, Inc., 896 F.3d 792. That is not to say, of course, that a district court may never award a ﬂat-rate fee. See Synthroid I, 264 F.3d at 721 (recognizing that in some circumstances a sliding scale arrangement will not be ideal). But where, as here, there is evidence of an ex ante agreement for a sliding scale fee structure, we expect a district court to give that evidence substantial weight in assessing the reasonableness of the proposed award. 6 6Petri also refers to a prior retention agreement between lead counsel and the Arkansas fund that authorized a 25 percent fee only in “smaller cases with special circumstances.” There is no copy of that agreement in the record. Petri cites testimony from an Arkansas fund executive in Arkansas Teacher Retirement System v. Bankrate, Inc., 18 F. Supp. 3d 482 (S.D.N.Y. 2014), that discusses the agreement. We are unable to determine conclusively from the transcript whether the executive was describing an agreement unique to the Bankrate litigation or a general retention agreement for all cases involving lead counsel and the Arkansas fund. On remand, lead counsel should provide an actual copy of that agreement as well as any retention agreements between lead counsel and the Arkansas No. 20-2055 13