Opinion ID: 755571
Heading Depth: 3
Heading Rank: 3

Heading: Fairness of the Award

Text: Krell's remaining objections focus on whether the district court properly calculated the fee award. In particular, he challenges the court's decision to credit class counsel for all of the benefits created by the Task Force plan, as well as its determination of the appropriate fee percentage. Krell also contends the district court improperly denied his requests for discovery, and as a result did not have sufficient information to assess the fairness of the award. Because the discovery issues are intertwined with the court's final calculation of class counsel's fee, we will address these objections together.
As noted, the district court found the settlement was most closely aligned to the common fund paradigm and that a percentage-of-recovery calculation was the appropriate measure of the attorneys' fee award. In addition, the court created a bifurcated award designed to compensate class counsel based on the guaranteed minimum benefit created under the settlement, while at the same time tying the second part of the award to the class's response rate, in order to create an incentive for class counsel's continued participation in the remediation process. While we agree with both the method of calculation selected by the court and the structure of the fee award it crafted, we are nonetheless troubled by the actual calculation of class counsel's fee. In particular, we question the court's decision to base its fee calculation on the entire value of the settlement, including any portion which would have been provided to the class under the Task Force Plan. Fee Opinion, 962 F.Supp. at 581 (emphasis omitted). This decision was based on the court's conclusion that class counsel was a material factor in bringing about the regulators' Task Force plan. Id. at 582. The court offered two reasons for this conclusion. First, the court found Prudential's counsel acknowledged the causal relationship between the lawsuits and the Task Force's formation and subsequent remediation plan. Id. (citing Fee Examiner's Report at 56). Second, the district court explained the record shows that plaintiffs' counsel otherwise substantially contributed to the terms of the Task Force plan. Id. The district court relied in part on our decision in Institutionalized Juveniles v. Secretary of Pub. Welfare, 758 F.2d 897 (3d Cir.1985). 116 In that case, a class action civil rights lawsuit was filed on behalf of all juveniles in Pennsylvania who had been voluntarily committed to state mental health institutions. The class challenged the constitutionality of Pennsylvania's voluntary commitment statute on due process and equal protection grounds. Pennsylvania eventually enacted legislation and accompanying regulations which provided much of the relief sought by the class, and the district court entered judgment for defendants and terminated the class. Plaintiffs petitioned for attorneys' fees under 42 U.S.C. § 1988. We affirmed the causation finding, noting the district court specifically found that defendants had been 'extensively involved in the legislative process' and that defendants 'actively worked with the legislature to achieve passage of the 1976 Act.'  758 F.2d at 917. The district court here placed great emphasis on our holding that although the litigation must have been a 'catalyst' ... it need not have been the only catalyst. Id. at 916. As a result, the district court concluded it should consider not only those remedies conferred directly through the litigation process, but also those extra-judicial benefits to the plaintiffs which resulted from counsels' efforts in the litigation. Fee Opinion, 962 F.Supp. at 581 (citations omitted). As a preliminary matter, we believe the facts of that case are distinguishable. In Institutionalized Juveniles, we noted the record contained an affidavit from the chairman of the Pennsylvania Senate Health and Welfare Committee responsible for drafting the litigation in question, in which he confirmed that the litigation, and plaintiffs' counsel in particular, were an  'important catalyst' in bringing about the changes in Pennsylvania law. 758 F.2d at 917. In addition, it is easy to overstate the principle set forth in Institutionalized Juveniles. While a party need not be the only catalyst in order to be considered a material factor and may be credited for extra-judicial benefits created, there must still be a sound basis that the party was more than an initial impetus behind the creation of the benefit. Allowing private counsel to receive fees based on the benefits created by public agencies would undermine the equitable principles which underlie the concept of the common fund, and would create an incentive for plaintiffs attorneys to minimize the costs of failure ... by free riding on the monitoring efforts of others. Coffee, Understanding the Plaintiff's Attorney, 86 Colum. L.Rev. at 681 (noting that the classic illustration of this pattern is in the field of antitrust enforcement, where private antitrust class actions have tended to piggyback on a prior governmental proceeding). It is not clear on the record before us that class counsel had so significant a role in the institution of the Task Force proceedings that the district court was justified in crediting counsel for all of the benefits created under the Task Force plan. Indeed the district court offers no record citation or other explanation to supports its assertion that class counsel made substantial contributions to the terms of the Task Force plan. After reviewing the record, we have doubts whether class counsel was a material factor in bringing about the Task Force plan. Although Prudential may have urged the formation of the Task Force following the institution of the lawsuits, there is evidence to suggest that, absent the institution of the class action proceedings, state regulators would have reached an agreement with Prudential similar to the Task Force plan. For example, Lead Counsel notes that [a]t least every five years, the New Jersey Department of Banking and Insurance is required to conduct a market conduct examination of Prudential ... [and in] March 1995, New Jersey was beginning another such examination. Weiss Aff. p 27. The results of that examination were issued on July 28, 1996, only a few weeks after the Task Force Report, and examined a number of the same issues as the Task Force Report, including customer complaints of vanishing premiums, misrepresentation, improper replacements, and other improper underwriting other than replacements. Furthermore, the Task Force itself explained that it was formed in response to widespread allegations of improper sales and marketing activity of life insurers in general, not just allegations involving Prudential. Taken together, the record evidence raises questions about whether the district court could appropriately base class counsel's fee on the entire value of the proposed settlement. Assuming arguendo that class counsel was a catalyst for the Task Force plan, the question remains to what degree that factor must be considered when calculating the fee award. [N]umerous courts have concluded that the amount of the benefit conferred logically is the appropriate benchmark against which a reasonable common fund fee charge should be assessed. Conte, 1 Attorney Fee Awards § 2.05, at 37. The district court found class counsel should be credited for the entire value created by the Task Force plan, instead of only those enhancements created by class counsel under the Settlement Agreement. We are not so certain. Krell notes that a stay order was in place from October 1995 until after the Task Force issued its report on July 9, 1996, and questions how the district court could credit class counsel for the entire value of the Task Force Plan. In addition, we question why class counsel should be credited for the global enhancements negotiated between Prudential and each of the four objecting states, enhancements which the district court found were incorporated into the final settlement. We do not dispute that class counsel's efforts benefitted the class and that they should receive a fee award which recognizes those efforts. The district court described several enhancements class counsel made to the Task Force plan. See supra § I.B.1. & notes 21-22. Even Krell conceded that class counsel created additional benefits for the class. Fee Hr'g Tr. at 17-18. Our concern is not the number of enhancements created, but rather how to value the benefits created by class counsel. The crux of this inquiry is distinguishing those benefits created by class counsel from the benefits created under the Task Force Plan. This determination is especially crucial in consumer class actions where federal or state agencies, including attorneys general, have conducted their own investigations of wrongdoing. The district court did not address these issues. Because it credited class counsel with creating the entire value of the settlement it did not attempt to distinguish between those benefits created by the Task Force and those created by class counsel. Consequently, we will remand to the district court for further examination. In addition, the matters raised here may counsel in favor of allowing additional limited discovery on this issue on remand. While plaintiffs' expert found that class counsel was responsible for $1.123 billion of the settlement's total value, he also conceded that those figures were merely approximations. Krell claims the lack of discovery prevented him from performing a similar analysis and rebutting the expert's valuations. Although mindful of the common wisdom that discovery in connection with fee motions should rarely be permitted, Manual for Complex Litigation, Third § 24.224, we believe limited discovery may be necessary in this instance to properly determine the value of those benefits for which class counsel can properly be credited. We leave this to the sound discretion of the district court.
We are also troubled by the district court's calculation of the appropriate percentage award. The district court actually examined two distinct percentages in connection with its bifurcated fee award. First, it awarded class counsel approximately 11% of the Minimum Fund of $410 million created by the settlement, resulting in an initial award of $45 million. Second, based on the submission of at least 330,000 election forms, the court awarded class counsel an additional $45 million. Assuming the threshold were met and the full $90 million fee were awarded, the court found this fee constituted 6.7% of the common fund created under the settlement, 117 a figure the district court concluded was fair and reasonable ... [and] comport[ed] with the Fee examiner's recommendation of an award of 7-8%. Fee Opinion, 962 F.Supp. at 587-88. The district court considered several factors in order to determine the appropriate percentage award, including the size of the award, fee percentages applied in other class actions, the quality of class counsel, and the fee percentage that would likely have been negotiated between private parties. While we agree these factors offer some guidance, in cases of this magnitude they should receive less weight. In considering the size of the expected recovery under the proposed settlement, the district court observed that percentage awards generally decrease as the amount of the recovery increases. Fee Opinion, 962 F.Supp. at 580 (citations omitted). The basis for this inverse relationship is the belief that [i]n many instances the increase [in recovery] is merely a factor of the size of the class and has no direct relationship to the efforts of counsel. In re First Fidelity Bancorporation Securities Litigation, 750 F.Supp. 160, 164 n. 1 (D.N.J.1990). The district court concluded that some reduction is appropriate in this case where the recovery will equal at least $410 million. Fee Opinion, 962 F.Supp. at 585. We agree with the district court's analysis, but question whether the reduction implemented adequately adjusted the fee in relation to the size of this settlement. Compared to the other large settlements examined by the district court, the size of this settlement exceeds all of them by a considerable margin. 118 Yet the 6.7% fee the court awarded was actually higher than some of the smaller cases it used as a benchmark. The district court also examined the fee awards in class actions with recoveries exceeding $100 million and found the fee percentages ranged from 4.1% to 17.92%. Id. at 585. The court reasoned the enormous settlements in those cases made them comparable, and provided some guidance as to an appropriate percentage. Id. at 586 n. 32. While we agree this is an appropriate factor to consider in most class actions, we believe in this instance the size of the class and the settlement render such comparisons unreliable. As noted, the fee percentage awarded by the court was actually higher than some of the fee awards in these large class actions, despite the court's finding that the common fund here would be at least $410 million and could increase to more than $1 billion. The district court also found class counsel's representation and the results achieved were nothing short of remarkable. Id. at 585-86. Among the factors it examined were the innovative terms of the settlement, including the availability of full compensatory relief, the extensive and comprehensive outreach, and the multi-tiered review process designed to ensure fair scoring of claims; the approval given to the settlement by insurance regulators from all fifty states and the District of Columbia; and the standing and skill of class counsel. We agree. As discussed, the settlement is a fair and reasonable resolution of this class action. Furthermore, there is no doubt as to class counsel's skill and reputation. All agree class counsel added value to the Task Force plan. 119 The district court then noted the fee examiner's conclusion that were this case the subject of a private contingent fee agreement at the time of engagement, counsel might well have demanded and received ... upward of 20%, and even as high as 40%, of any future recovery. Id. at 587 (quoting Fee Examiner's Report at 60). While the court did not give great weight to this hypothetical exercise, it nonetheless agreed with the fee examiner's conclusion that class counsel would have negotiated a fee of at least 10 to 15% of the recovery. Id. (quoting Fee Examiner's Report at 61). We question the significance of this inquiry to class action lawsuits of this magnitude. While such private fee arrangements might be appropriate in smaller class actions or litigation involving individual plaintiffs, we do not believe they provide much guidance in cases involving the aggregation of over 8 million plaintiffs and a potential recovery exceeding $1 billion. Because the district court's basis for, and calculation of, the appropriate fee percentage was unclear in light of the facts and cases it referenced, and because it should set forth a reasoned basis and conclusion regarding the proper percentage applicable in this case, we will remand for a more thorough examination and explication of the proper percentage to be awarded to class counsel in this case, in light of the magnitude of the recovery.
Krell objects to the district court's application of the lodestar method to cross-check its fee award, in particular its application of a risk multiplier to the lodestar in order to bring the calculation in line with the fee awarded under the percentage-of-recovery method. In addition, Krell contends the court improperly based its lodestar calculation on inaccurate time summaries provided by class counsel.
Once the district court created its bifurcated fee award using the percentage-of recovery model, it employed the lodestar method to cross-check the fee award. See G.M. Trucks, 55 F.3d at 820. Based on the analysis submitted by Lead Counsel, the court found the lodestar as of January 31, 1997 was approximately $17.7 million 120 plus expenses of just over $3 million. While it noted this figure was understated because it did not include hours billed after Lead Counsel submitted the analysis, the court found the lodestar figure would result in a multiplier of only 5.1 and an average hourly rate of $1,148.70 if the full $90 million were awarded under the modified fee schedule. The court found this multiplier was substantially less than the multiplier approved by this Court in Weiss v. Mercedes-Benz of North America, Inc., 66 F.3d 314 (3d Cir.1995), aff'g 899 F.Supp. 1297, 1304 (D.N.J.) (awarding a fee that resulted in a multiplier of 9.3 and an average hourly rate of $2,779.63). We question the use of such a large a multiplier in this instance. Courts apply multipliers to lodestar calculations for various reasons. Multipliers may reflect the risks of nonrecovery facing counsel, may serve as an incentive for counsel to undertake socially beneficial litigation, or may reward counsel for an extraordinary result. By nature they are discretionary and not susceptible to objective calculation. The Third Circuit Task Force on Court Awarded Attorney Fees implicitly recognized this difficulty. Court Awarded Attorney Fees, 108 F.R.D. at 247 (the lodestar calculation is subject to manipulation by judges who ... first determine what they wish to award, either in percentage or dollar amount terms, and then massage the major variables in the [lodestar] fee-setting procedure). Consequently, courts must take care to explain how the application of a multiplier is justified by the facts of a particular case. Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983) (It remains important, however, for the district court to provide a concise but clear explanation of its reasons for the fee award.); Ranco Industrial Products Corp. v. Dunlap, 776 F.2d 1135, 1140 (3d Cir.1985) ([C]areful appellate review requires that the district court explain on the record the basis for its calculation.). In this instance, the court offers little explanation as to why a multiplier was necessary or appropriate. With no explanation for its application, we have no basis to evaluate it. 121 While we are cognizant that [m]ultiples ranging from one to four are frequently awarded in common fund cases when the lodestar method is applied, 3 Newberg § 14.03 at 14-5, we cannot assess the propriety of a multiplier without findings to review. 122 Furthermore, the testimony of one of plaintiffs' own experts appears to call into question the multiplier of 5.1. Plaintiffs' expert noted the speed and quality of the results achieved were attributable in no small part to the fact that many of class counsel had participated in the New York Life insurance litigation ... in which they created what became the blueprint for the Task Force plan which, in turn, became the baseline from which class counsel began their negotiations with Prudential. Joint Appendix at 4793. While plaintiffs' expert reasoned this expertise should not lead to the conclusion that class counsel should not be rewarded for what arguably appears to be duplicative, we also decline to draw the opposite conclusion. We recognize the district court employed the lodestar calculation only as a cross check. Yet we cannot agree with its conclusion that the cross-check under the lodestar method confirms that the fees and expenses awarded here are fair and reasonable under the circumstances of this case. Fee Opinion, 962 F.Supp. at 592-93. Based on the present record, we cannot find a justification for the multiplier, which appears merely to correspond with the total fee award. Our concerns regarding the lodestar calculation only underscore our questions about the propriety of the district court's fee award.
Krell also disputes the district court's calculation of the lodestar figure, claiming its reliance on time summaries, rather than detailed time records, undermines its value as a cross-check of the fee award. Krell raises certain issues which allegedly demonstrate the unreliability of class counsel's time summaries. First, he questions the number of hours worked by class counsel, noting the figure seems high in light of the district court's order staying discovery from October 1995 until August 1996. 123 Second, Krell alleges Lead Counsel's fee petition contained millions of dollars of overcharges and potential overcharges. 124 Third, Krell notes the lodestar amount nearly doubled between the November and the February petitions, with Lead Counsel claiming additional time had been spent on due diligence, despite the fact that due diligence was expected to end on October 28, 1996. Finally, Krell points out that the fee examiners' report included a $1 million overcharge for expenses. 125 The district court disagreed, finding detailed time summaries were unnecessary where, as here, it was merely using the lodestar calculation to double check its fee award. The court also dismissed Krell's objection to the hours allegedly worked after the settlement was filed on October, 1996, reasoning that class counsel had other responsibilities after that date, including monitoring the 800 number established under the settlement, negotiating the outreach program, and preparing documents in support of the settlement. As we have noted, district courts generally decide fee awards without full blown discovery. In any event, whether to grant discovery is committed to the sound discretion of the court. Also, we are mindful of the Supreme Court's admonition that [a] request for attorneys' fees should not result in a second major litigation. Hensley, 461 U.S. at 437, 103 S.Ct. 1933. We recognize the lodestar calculation in this case was solely intended as a cross-check of the court's primary fee calculation using the percentage-of-recovery methodology, which counsels a cautious approach to additional fee discovery. Furthermore, our primary concern with the lodestar approach here is the multiplier. As a result, we see no abuse of discretion in declining to grant discovery here on the time records. As we have set forth, the district court on remand should reconsider permitting limited discovery on the benefits to the class secured by class counsel.