Opinion ID: 387362
Heading Depth: 1
Heading Rank: 3

Heading: a reasonable attorney's fee-actual cost plus a

Text: REASONABLE AND CONTROLLABLE PROFIT 289 In considering how to achieve the statutory goal of a reasonable attorney's fee, we have delineated the undeniable distinctions inherent in levying fees against private employers as compared to the Government, where in the latter situation there is no market and therefore no market value constraints on fees, but on the contrary the entire mechanism of affording relief to aggrieved Government employees is created by and financed by the Government on both sides. We have seen how the unthinking utilization of the market value fee as the lodestar or basic fee results in gross escalation of fee awards against the taxpayers, far from the reasonable attorney's fee mandated by statute. Now we turn to outline the actual cost plus a reasonable and controllable profit method of fixing a reasonable fee, first enunciated in our panel opinion for the court, pondered and refined in the light of comment and discussion during the almost two years since our first opinion issued. We are convinced that the cost-plus formula is likely better to achieve the statutory goal then any other method yet proposed, and no case is apt better to illustrate this than the case at bar. 290 Returning to the specific facts of this case, putting the matter in perspective, the labors of the two young attorneys (plus some hours of partners' time) resulted in a promotion to a higher GS level and back pay of $4,169.80 for the plaintiff Copeland. In addition, following the negotiation of a settlement, remaining members of the class secured several promotions and back pay awards totaling $27,175.71. The law firm suggested a fee of $206,000, plus $12,602.59 in costs. District Judge Gesell awarded a flat $160,000 in fees and $11,567.11 in costs. 291
292 As witness this case, the application of the existing standards led to a claim of $206,000 by a responsible law firm and an intelligent, experienced judge fixing a fee of $160,000 on a $31,345 monetary benefit to all members of the class. To state the matter this baldly is to make out at least a prima facie case that something is wrong with the previously constructed standards-when applied to fix a fee award in a Title VII case against the Government. 293 Previous Title VII attorney's fees cases before this court have involved private party defendants. While the statute provides that the United States shall be liable for costs the same as a private person, it is rather likely that awards of attorney's fees against a private company, found guilty of race or sex discrimination, have contained a certain amount of a punitive element and have been scrutinized less sharply than awards against the Government (all taxpayers) should be. Hence, the panel of this court believed that it should give careful scrutiny not only to this particular award but to the standards which were to be followed subsequently in attorney's fees cases against the Government. 294 In this opinion, Part I, we examined at some length the unique factors affecting attorney's fees in Title VII litigation against the Government, an analysis which is an elaboration and development of thoughts set forth in our first panel opinion. At that time it was readily apparent that something was needed as a substitute for the commercial fee basis; hence, the court's original opinion suggested that actual cost plus a reasonable and controllable profit be substituted instead of the market value rate as the initial starting point for the district court's calculation.
295 We pointed out the rather surprising fact that when law firms assert the value of their work to their clients-itself a rather nebulous concept, as witness the claim here of $206,000 plus expenses versus the $31,345 in back pay plus promotions awarded-the firm never reveals the value of the attorneys' work to the firm, i. e., the value of the gross income brought to the firm by the attorneys in the ordinary course of business, as compared with the sums paid out to those attorney's as personal income and to defray overhead costs attributable to the maintenance of the attorneys in the firm. 44 It seemed only reasonable to us that where a firm is ostensibly performing a pro bono publico service, its reimbursement for that service should bear a direct relationship to the actual costs incurred by the firm and, in fact, that this was the best possible reference point, at least in the initial calculation. 296 We therefore stated: Thus the trial court should give consideration to abandoning the traditional(ly) claimed hourly-fee starting point for its calculations in favor of a principle of reimbursement to a firm for its costs, plus a reasonable and controllable margin for profit. Such a principle can be applied through separation of the several hidden components of the usual attorney's fee. 45 297 In cases such as this, in which the Government is the alleged offending employer, the Government does not undertake the prosecution of the suit for the benefit of the aggrieved private individuals, as it can where there is a private employer involved. The individual Government employees must turn to private firms for help, and thus the private firms are in effect acting as private attorneys general, and, in fact, they are the only attorneys general who can assist the individual employees. The private law firm, in other words, is performing the same function that Government attorneys frequently perform in cases against private employers. This is a pro bono publico service, or so it is claimed to be, with the objective of bringing about fair and equitable treatment of its employees by the Government itself. 298 Where such a pro bono legal service is involved, what could be a better and more fair measure to the law firm than its actual cost, plus a reasonable and controllable margin of profit? This is the same cost-plus formula which has been applied for innumerable years in innumerable government service contracts. It is recognized as fair and equitable; the usual criticism is that it results in a greater award to the private contractor than if he had been forced to made a competitive bid and be stuck with it. Such a competitive bidding system, of course, is inapplicable for legal services and no one suggests that it should be adopted. Contrary to the rather surprising and unnecessary language of the law firm's petition-Lawyers and law firms are not public utilities, and cost-plus information is irrelevant to determining the reasonable value of their services in the marketplace 46 -this cost-plus formula is a well recognized and equitable one for many various type Government service contracts. 299 The market rate is usually stated as so many dollars per hour, but we all known that in fixing fees in private practice this is only the beginning. Unfortunately, in fixing fees by a court it is too often both the beginning and the end, and in many cases-the instant one for example-the result is indefensible on a commercial basis. In fixing fees in private practice the hourly rate for all the hours worked is a starting point, plus a consideration of the benefit to the client, the client's ability to pay, the previous business with that client or business hoped to be gained in the future, the relationship of the billing lawyer with the lawyers and the clients on the other side, the alternative work on which the lawyers for whom the fee is billed could have been engaged-all these factors are taken into consideration. Not many of them are readily applicable to Title VII suits against the Government. If the market value hourly rate is not to be modified by the usual factors brought into play in a private commercial case, then it is an unsafe and unrealistic starting point. Since pro bono government legal work is involved, actual cost (salary plus overhead) should provide a more accurate starting basis, to which should be added a reasonable profit. 300 To the extent that the cost-plus formula and the other factors mentioned in the opinion might result in a lower than commercial fee, government legal services-and here the private law firm is acting as a private attorney general in a pro bono publico suit-have always been paid less than those in the private sector. For example, Justice Department lawyers do not start at the beginning salary paid at large law firms in Washington, D.C. The very top Justice Department lawyers do not even approach the earnings of partners in large firms such as that involved here. Government legal work has never been expected to pay the same as the top private legal work. What the law firm here and other large law firms, or public interest law firms, are doing is government legal work -on the other side of the issue in these cases from the government employer itself. 47 301 Our colleagues are insistent on using market value as the correct basic concept in fixing fair and reasonable legal fees. Very well. Our colleagues should recognize the market in which we are dealing in a Title VII case against the Government: we are dealing in a market created by the Government, 48 we are paying lawyers to defend the Government and to sue the Government, we are dealing in the market for government legal services; a reasonable attorney's fee must bear some relationship to the usual compensation for government legal services. 302 What our cost plus a reasonable and controllable profit guideline does is to return the actual out-of-pocket cost to the firm for its attorneys' legal services and all overhead, plus a reasonable and controlled profit. How much more should a private law firm receive for its legal services? How much more than cost plus a reasonable profit can it be entitled to? How much more than cost plus a reasonable profit would this court be justified in awarding against the Government and its taxpayers?
303 The petitioning law firm conjures up enormous difficulties of application by the court and of prying into confidential firm matters. We see absolutely none of this, if the proposed cost plus reasonable profit formula is applied on any sensible basis. If the trial court understands what it is doing, there should be no substantial additional evidentiary burden on the trial court. The basic figures are simple and simple to arrive at, as discussed below. 304 The three general components we identified in our opinion were salary, overhead, and profit. 305 1. Salary -The starting salary for young lawyers with the large firms in Washington, New York, and many other large cities is almost a matter of public record. The going rate for hiring is strictly competitive and well known to both the law firms and the young lawyers coming in. Furthermore, even the raises for the first few years are standardized. 306 And, of course, while our opinion talked in terms of the salary actually paid the individual lawyers involved in the case, it would be entirely satisfactory if the law firm merely furnished information on the average salary paid young lawyers in that firm with the same number of years' experience. (In the instant case, both associates were assigned this matter in their first year of employment at the firm.)With regard to partners' salary, our opinion deliberately put this on the basis of an extrapolation from the highest associate's salary. We recognize that the income of partners in the same firm may vary widely, even more widely between firms, and a partner's share may very well be thought of as confidential. Typically, in Title VII cases, the share of the fee claimed for partners' labors is usually very small, as in the instant case. 307 2. Overhead -The firm knows this at least annually, or it is not computing its income tax correctly. If the firm is well managed, it should know its overhead factor quarterly or even monthly. Every firm surely makes a calculation as to the average overhead factor for its individual fee-producing lawyers. 308 One of the preposterous arguments, but strongly made, is that most firms now make no accounting of costs, overhead, and profit on an attorney-by-attorney basis, and that a mountain of details will be called for. This rests totally on a misinterpretation of our opinion. It is the average overhead cost per attorney to which the opinion refers. 49 309 It may be that partners in fact develop more overhead cost for the firm than do associates (bigger offices, more luxurious furnishings, etc.), but this could be taken care of by an average overhead figure for associates and a different figure for partners. 310 In any given city, there is probably no great difference in the overhead per lawyer of similar sized firms in similar practice; hence, there are no great secrets to be revealed. If there are great differences in firm overhead, the firm management claiming a higher overhead factor is out of line and should know about it. 311 The claim is made that since the cost-plus formula allows all overhead costs to be shifted to the losing party, this cuts down the incentive to keep overhead costs low. Unless the firm is engaged virtually exclusively in Title VII work, this would not be so at all. The overhead cost average would reflect all of the work done by all attorneys in the firm on all type cases. 312 3. Profit -Our opinion made no suggestion to the trial court as to what is a reasonable profit. This is a calculation involving many factors, including the attorneys' usual profit return to the firm, the social benefits, the direct gain to the litigants, the skill demonstrated in the particular case, and the degree of contingency involved. 313
314
315 a. The argument is made that small law practices will not be able to prove expenses as high as those of better established practices or larger firms, and thus will not be able to secure equivalent fees for the same work. 316 This may or may not be true (small firms frequently have higher per lawyer overhead), but the question of course arises: Is there any alternate work in which such firms would have been engaged in which they would get greater fees? The answer is that these firms, perhaps composed of younger lawyers, will get just as good fees as any alternative work they could possibly do, and probably better at this stage of their careers. 317 A more fundamental answer is that if both small and large firms obtain a full return of their actual expenses, plus a reasonable profit, there can be no inequity in the treatment of large and small firms. 318 b. It is alleged that the formula is inapplicable to a solo practitioner, because there are no guideposts as to his salary from his associate's salary or his partner's income. 319 Perhaps the solo practitioner is a case in which a fairer award can be made without using the cost-plus formula, and there is nothing in our opinion which mandates the cost-plus formula in every case. However, it would be possible to take the going salary rate of several firms for lawyers of the same years of experience, extrapolate if need be, and award the solo practitioner a fee based on that plus his overhead and a reasonable profit. 320
321 A similar claim is made for these specialists, alleging that the public interest and civil rights firms operate under far lower salary, overhead, and profit margins than others in private practice. The argument is made that somehow cost plus reasonable profit penalizes these firms. 322 The answer is the same as to a small firm or solo practitioner. They will be guaranteed a reasonable profit above their actual costs. We are not aware that public interest and civil rights firms usually receive more than this. However, the trial court could-and, in our view, should -evaluate the special skills which a public interest or civil rights firm may bring to bear among the other quality factors which the court applies to the actual cost plus reasonable profit figures. If the attorneys are specialists in Title VII cases, and thus may have been able to do the work at a high standard with a minimum of hours expended, then their profit in the total compensation awarded should indeed be higher than it otherwise would.
323 It is also argued that most Title VII cases are on a contingent fee basis and thus a successful Title VII case should produce a substantial reward in order to allow their practice to continue. We agree. Contingency is a factor which should be evaluated at the time the trial judge is pondering the reasonable profit part of the fee to be allowed. A reasonable profit in a contingency fee case should be higher than where the fee is relatively certain and the only question decided by the outcome of the case is who pays it. 50
324 The argument is made that somehow a fully remunerative contingency fee recovery from the Government will not be had, and therefore class action claims cannot be sustained. The basis of this is obscure, for it seems readily apparent that the formula of actual cost plus a reasonable profit is in every way fully remunerative, especially when it is remembered that other factors are to be taken into account, as set forth above. 325
326 It is claimed that counsel in this type practice usually have a very low salary overhead and profit margin. If this is true, the cost plus reasonable profit will guarantee them a return that will be at least equal to that received in their usual practice, and probably better.
327 It is argued that those who habitually work long hours will be disadvantaged by any formula based on the average hourly rate of return, since their average hourly return will necessarily be low. If that is true, then the return in these Title VII cases will in no way differ from the alternative work which they might be doing. 328 The theory implicit in several of these hypothetical problems raised above is that somehow compensation for the Title VII work should be a bonanza to lawyers in these particular cases, in order that they may continue their practice in other worthwhile but relatively unremunerative type cases. We cannot see that this is a valid argument at all for fixing a fee against the Government-in fact, it virtually admits that some lawyers have been relying on Title VII work to gain relative bonanzas. 329
330 This is the bugaboo that good firms will simply be unwilling to disclose comprehensive financial information. 51 331 As pointed out above, the required information is not nearly so comprehensive as the parties make it out to be. Unless a firm is drastically out of line in its salary scale or its overhead costs, no detailed data need be submitted to the court. An affidavit of a partner that, based on its accounting records, the average overhead per lawyer was so many dollars an hour and the average salary paid to, for example, lawyers with two years of experience, was a certain amount, should be sufficient, unless this appeared drastically in error when compared to firms similarly situated. 332
333 The law firm argues that for three principal reasons the cost-plus formula will deter lawyers from taking on Title VII cases: (1) lower rates of remuneration; (2) difficulty of compiling relevant data; (3) disclosure requirements. 52 334 As to prospective lower rates of remuneration, the question immediately arises, what kind of remuneration have these lawyers been receiving in Title VII litigation? Have they been receiving their customary salary, all overhead, plus an un reasonable profit? If the latter, it is high time the courts and the taxpayers knew about it. 335 If these Title VII litigators have not been receiving fees amounting to all their customary costs plus an un reasonable profit, their fears of the cost plus reasonable profit formula are groundless. 336 One source of these firms' apprehension may be that they are not sure how a reasonable profit will be calculated. Bear in mind that, as explained above, among other factors bearing on profit a trial court should take into account: any contingent nature of the fee, and the extent to which the particular firm depends upon contingent fees; the expertise in Title VII matters which the lawyers bring to the case, which would favor public interest or civil rights firms who could validly claim a larger profit on their specialized line of practice; and the social benefits arising from a class action of this type. Conversely, another consideration, which the trial court should NOT consider as increasing the profit portion of the fee, is a large overhead cost per lawyer hour. This may reflect, and certainly might encourage, inefficiency. While both the large commercial firm and the small firm or solo practitioner devoting itself largely to poor clients should be recompensed in full for actual overhead costs, the lawyer with the larger overhead should not receive a larger profit component of the total fee because of the overhead. 337 Indeed, it is in the trial court's evaluation of the reasonable profit component that the factors we have discussed herein and in our previous opinion come into play to modify, one way or another, the data as to the profit derived from the services of the lawyers concerned. 338 As to the alleged (2) difficulty of compiling relevant data and (3) disclosure of confidential data, these have been discussed above. 339 On analysis, the fears expressed by the appellee law firm and some amici as to any deterrence in doing pro bono work are wildly exaggerated. The Attorney General, who after all bears some responsibility for the public interest, while not receiving all he sought in the opinion of the panel, had a much more realistic appraisal in his Memorandum submitted to the court: 340 What was of principal concern to the Court, and what is of concern to the Attorney General, is recognition of the strong public interest that the computation of reasonable Title VII attorneys' fees not mechanistically set as its cornerstone the 'customary' and unadjusted fees charged by private attorneys in their unrelated and most highly paid lines of work. In this regard, what the panel stated merits repetition here: 341 It is not our intent to establish a subclass of fees payable for Title VII litigation or to relegate, in any way, the vindication of Title VII rights to second-class status. To do so, obviously, would run counter to the very purpose for which Title VII was enacted .... But it is our intent to resist the imposition on the public sector of the highest standards of legal remuneration adopted in the private sector-standards which are out of line with the ethic of public service with which attorneys are encouraged to engage in public interest litigation, and which may even risk turning the public against the very provisions for the award of attorneys' fees on which appellees rely in this case. (594 F.2d at 257 n.75.) 342 The Attorney General, who is committed to the concept of reasonable attorneys' fees for prevailing Title VII plaintiffs, endorses this statement of the panel. 53 343 We also agree with the Attorney General's interpretation that (t)he panel soundly found that the evidentiary record in this court was completely inadequate for the determination of attorney's fees by any method. 54 We find totally inexplicable the majority's refusal to remand this case to the trial court on any theory-the majority's own new formula, previous precedent, or our cost plus reasonable profit method. Not only was the evidentiary record inadequate, but there was a complete failure by the trial court to articulate a rationale on any theory. Is the award of $160,000 really defensible on any method of calculating a reasonable attorney's fee? The Attorney General concluded: 344 (T)he issue of attorney fee compensation for Title VII plaintiffs claiming unlawful discrimination by the federal government is new, difficult, and complex. The traditional customary approaches, as demonstrated by what has occurred in this case, may not be adequate. More refined analysis and consideration of alternatives are required. When representing a private client, attorneys must exercise billing judgment; they must consider the labor expended in view of the result to be achieved. This economic judgment is absent when the federal treasury is footing the bill. Other solutions must be explored. This is what the panel has wisely suggested. 55 345 We in dissent are convinced that the traditional customary commercial fee approach to billing the Government for attorneys' fees in a Title VII case is not adequate and is likely to lead to grossly excessive fees. A new approach is necessary. We have suggested that the trial court apply an actual cost plus reasonable profit formula in this case. Our analysis, in our original opinion and herein above, indicates that this formula would provide a much more precise and equitable basis, both to the Government and the private attorneys engaged in Title VII practice, for the award of attorneys' fees. We have not ruled out any other innovative methods which may commend themselves to the trial court. Since the trial court has yet to hold a hearing in this case, we think it should do so, and that in adducing evidence it should do so along the lines necessary to provide a foundation for the application of the actual cost plus reasonable profit formula. Then the trial court will have the opportunity to apply the actual cost plus reasonable profit formula to the established facts of a comparatively complex attorneys' fees case. The courts and all litigants engaged in Title VII litigation will benefit.