Court Opinion

ID: 2995242
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:19:13.689398+00
Date Added: 2024-06-11T11:45:24.460311
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

Nos. 00-3164, 00-3183, 00-3262, 00-3285,
00-3290, 00-3291, 00-3292, 00-3293,
00-3302, 00-3303 & 01-2000

In the Matter of:

   Synthroid Marketing Litigation

Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 97 C 6017 (MDL No. 1182)--Elaine E. Bucklo, Judge.

Argued April 20, 2001--Decided August 31, 2001

  Before Easterbrook, Manion, and Kanne,
Circuit Judges.

  Easterbrook, Circuit Judge.
Hypothyroidism occurs when the thyroid
gland fails to produce sufficient
hormones. Symptoms include fatigue,
extreme sensitivity to cold, joint pains,
muscle aches, and weight gain. Left
untreated, victims eventually suffer hair
loss, numbness in the limbs, depression,
and mental confusion. For more than 40
years hormone-replacement therapy based
on levothyroxine sodium has been used to
alleviate these symptoms. Introduced
during the 1950s, Synthroid was the first
orally administered levothyroxine
product. This synthetic derivative of
thyroxine is a "narrow therapeutic index"
drug, meaning that dosage levels must be
established for each recipient by trial
and error, which may take several months.
Too much or too little can cause heart,
brain, psychological, and reproductive
problems. Although levothyroxine sodium
is not patented and is available from
many vendors, Synthroid still represents
more than two-thirds of sales. Its
manufacturer, keen to maintain this lead,
asserts that no other thyroid hormone
drug is bioequivalent to Synthroid and
warns physicians that switching brands
may cause the side effects associated
with incorrect levels of thyroid hormones
in the blood, unless the patient goes
through a new monitoring and calibration
process.

  If Synthroid is bioequivalent to other
drugs containing levothyroxine, the
tedious and costly calibration step can
be omitted, and its less-expensive rivals
would be likely to claim a greater share
of the market. In 1990 Betty J. Dong, a
professor of clinical pharmacy at the
University of California, San Francisco,
concluded that Synthroid and its rivals
are interchangeable. To publish a paper
based on the data collected in her study,
Dong needed the permission of Knoll
Pharmaceuticals, Synthroid’s owner at the
time. Knoll’s predecessor Flint
Laboratories had financed Dong’s work
under condition that she secure its
approval before making any public
disclosures. Knoll objected to
publication, asserting that it found
Dong’s work methodologically sub-par. The
conclusions nonetheless found their way
to the press after Dong decided to
dishonor the promises she had made to
Flint. See Editorial: Thyroid Storm, 277
J. Am. Medical Ass’n 1238 (1997).
Embarrassed by the accusation of covering
up unfavorable information, Knoll
permitted Dong to release the study. It
was published as Dong, et al.,
Bioequivalence of Generic and Brand-name
Levothyroxine Products in the Treatment
of Hypothyroidism, 277 J. Am. Medical
Ass’n 1205 (1997).

  After the article’s publication, lawyers
across the country began filing class
action suits. They sought relief under a
variety of state and federal law
theories, including antitrust, rico, and
state consumer-fraud statutes.
Thesetheories had in common the
contention that Knoll misled physicians
into keeping patients on Synthroid
despite knowing (as Dong had concluded)
that the physicians could have switched
their patients to less costly but equally
effective drugs. These suits were
transferred to the Northern District of
Illinois for consolidated pretrial
proceedings under 28 U.S.C. sec.1407. See
Lexecon Inc. v. Milberg Weiss Bershad
Hynes & Lerach, 523 U.S. 26 (1998).
Settlement talks ensued, and in mid-1998
the parties presented a compromise to the
district judge. She rejected it, finding
that too little discovery had been
completed, that the size of the class was
still unknown, and that the insurance
companies that had actually paid for much
of the Synthroid were not parties. 1998
U.S. Dist. Lexis 12936 (N.D. Ill. August
14, 1998). The court then split the
plaintiffs into two classes: one of
consumers and the other of insurance
companies (also known as third-party
payors or TPPs). 188 F.R.D. 287, 295
(N.D. Ill. 1999). After additional
negotiations the parties submitted a
second proposed settlement, under which
Knoll and its former parent BASF
Corporation would pay approximately $88
million to consumers and $46 million to
the insurance companies in exchange for a
release of all claims. (Abbott
Laboratories, which purchased BASF’s
pharmaceutical business in March 2001, is
not a party to the suit.) The district
court rejected motions to intervene filed
by several dissatisfied consumers and
approved the settlement. 110 F. Supp. 2d
676 (N.D. Ill. 2000). The court then
awarded attorneys’ fees from these common
funds at a level significantly below what
the lawyers had requested.

  We deal first with the proposed
intervention. The objectors, who call the
settlement a sell-out, wanted to
intervene so that they could obtain
appellate review of any decision
approving the deal. Status as a party is
a condition to taking an appeal. See
Marino v. Ortiz, 484 U.S. 301 (1988);
Felzen v. Andreas, 134 F.3d 873 (7th Cir.
1998), affirmed by an equally divided
Court under the name California Public
Employees’ Retirement System v. Felzen,
525 U.S. 315 (1999). The district judge’s
order approving the class-fund settlement
devoted one sentence to intervention:
"All pending motions to intervene . . .
are denied." 110 F. Supp. 2d at 686.
That’s all she said, either orally or in
writing. This decision, which puts the
objectors behind the eight ball, is
impossible to reconcile with Crawford v.
Equifax Payment Services, Inc., 201 F.3d
877 (7th Cir. 2000), which holds that "it
is vital that district courts freely
allow the intervention of unnamed class
members who object to proposed
settlements and want an option to appeal
an adverse decision." 201 F.3d at 881.
See also Griffith v. University Hospital,
LLC, 249 F.3d 658, 661-62 (7th Cir. 2001);
Southmark Corp. v. Cagan, 950 F.2d 416,
419 (7th Cir. 1991); Keith v. Daley, 764
F.2d 1265, 1272 (7th Cir. 1985). The
district judge may have worried that, if
she allowed intervention, objectors would
enter the case and, as parties, block the
settlement by withholding agreement to
its terms. But as Crawford observed that
worry is insubstantial; a judge can solve
the problem by limiting intervenors to
the privilege of appealing. For this
limited-purpose intervention, it is
irrelevant whether the class members come
in under Rule 24(a) (intervention as of
right) or Rule 24(b) (permissive
intervention). See Crawford, 201 F.3d at
881; Vollmer v. Publishers Clearing
House, 248 F.3d 698, 707 (7th Cir. 2001).
District judges are not entitled to block
appellate review of their decisions by
the expedient of denying party status to
anyone who seems likely to appeal, as the
district judge apparently tried to do in
this case. Crawford’s requirement that
"district courts freely allow the
intervention of class members who object
to proposed settlements" means that the
intervenors must be given their say in
this case. We reverse the district court
and grant the objecting class members a
place at the table.

  Whether we can do anything for the
intervenors now that they are parties is
the next question. The intervenors
appealed from the district court’s denial
of their motions to intervene, but not
from the final judgment embodying the
settlement. A decision reversing an order
denying intervention usually leads to a
remand, not to a decision on the merits.
See Jessup v. Luther, 227 F.3d 993, 998-
99 (7th Cir. 2000). Yet there would be
nothing to do on remand here; the
settlement’s approval ended the case. No
further appealable judgment could be
entered, so the objecting class members
seem to be out of luck. This problem has
a ready solution, however. Blair v.
Equifax Check Services, Inc., 181 F.3d
832, 834 (7th Cir. 1999), instructs
putative intervenors that, when a
substantive appeal is contingent on the
success of the intervention appeal, they
should file two notices of appeal: one
from the denial of intervention and a
second springing or contingent appeal
from the final judgment-- which will kick
in if they are successful on the first.
The approach is used elsewhere too, see
Purcell v. BankAtlantic Financial Corp.,
85 F.3d 1508, 1511 nn. 1, 2 (11th Cir.
1996), and has been obvious to class
members in other cases. See Crawford;
Cusack v. Bank United of Texas FSB, 159
F.3d 1040 (7th Cir. 1998). Our
intervenors, however, failed to file a
contingent appeal and called the approach
of Blair and Cusack nonsensical. Why they
spent time and money arguing the point
rather than filing a precautionary
springing notice of appeal from the final
judgment is puzzling. After oral
argument, however, the objectors took our
advice. They filed a contingent notice of
appeal with the district court. With
today’s decision that notice springs into
effect (it is timely by analogy to Fed.
R. App. P. 4(a)(2) because, until today,
the objectors have not been entitled to
appeal) and brings the district court’s
approval of the settlement before us.

  Although officially in the game, the
objectors have not presented any
objection to the settlement that was not
convincingly addressed by the district
court. The objectors contend that the
settlement should have been larger, that
the notice was not sufficient, and that
the release of liabilities is too broad.
Yet it seems to us, as it did to
thedistrict judge, that the settlement is
generous in light of the difficulties
facing the class. Knoll owned the Dong
study and cannot be required to pay
damages for exercising its contractual
rights. It might be held liable for
fraud, if Dong’s work proved to Knoll’s
satisfaction that Synthroid and other
drugs are bioequivalent, and Knoll then
tried to bamboozle the public by
maintaining the opposite of what it knew
to be the truth. But it would be hard to
say that the study compelled Knoll to
tell the public that levothyroxine
products are interchangeable; other works
in the medical literature reach a
contrary conclusion. The Food and Drug
Administration, which has been asked
repeatedly to declare that at least some
other levothyroxine medications are
bioequivalent to Synthroid, has not done
so in the four years since the Dong
study’s publication. (The FDA’s Approved
Drug Products with Therapeutic
Equivalence Evaluations does not list any
hypothyroid medications as
therapeutically interchangeable.) Nor do
physicians act as if they accept Dong’s
conclusions. The American Association of
Clinical Endocrinologists recommends that
patients not switch brands, and that, if
they do switch, the dosage level be
recalibrated. See Clinical Practice
Guidelines for Evaluation and Treatment
of Hyperthyroidism and Hypothyroidism,
available at
www.aace.com/clin/guides/thyroid_guide.h
tml. Synthroid’s sales are up. Although
its share has dropped from 71% to 64%
since Dong’s study appeared, the market
is growing, for all the data reveal the
entire drop in market share may have been
from new patients starting on different
medications. Add to this the difficulty
of proving damages when many of the
consumers do not bear the full expense of
the drugs (and often do not purchase them
directly), and the plaintiffs would have
had a headache trying to get any judgment
on the merits. See Illinois Brick Co. v.
Illinois, 431 U.S. 720 (1977) (federal
law prohibits price fixing suits by
indirect purchasers of a product); In re
Brand Name Prescription Drugs Antitrust
Litigation, 248 F.3d 668, 670 (7th Cir.
2001); Teamsters Health and Welfare Trust
Fund v. Philip Morris Inc., 196 F.3d 818,
825-26 (7th Cir. 1999) (health insurers
may not pursue direct litigation against
tobacco companies accused of suppressing
research on the health effects of
cigarettes because the injuries are too
remote, the chain of causation is too
long, and the damages "wickedly hard" to
calculate); Health Care Service Corp. v.
Brown & Williamson Tobacco Corp., 208
F.3d 579 (7th Cir. 2000).

  Unlike members of the consumer class,
TPPs are sophisticated purchasers of
pharmaceuticals. Their consent to this
deal shows that a larger judgment was
unlikely. The objectors maintain that the
consumers should have received a larger
piece of the pie, but this is
implausible. The settlement forecloses
all subrogation rights the TPPs would
have held against any consumer. Had the
TPPs held back and sued in subrogation,
they might well have taken almost the
entire fund. Except for uninsured persons
and Medicare patients without separate
prescription drug coverage (who must pay
for their own pills), most persons’
expenses for Synthroid are paid by third
parties. Insurance generally requires
consumers to provide a co-payment for
prescriptions; this payment rises only
marginally (if at all) for more expensive
drugs. And hypothyroid sufferers are
likely to meet their deductibles whether
they switch from Synthroid or not. That
the consumers received two-thirds of the
settlement funds seems more like a gift
(or a public relations gesture) by the
TPPs rather than a reason to upset the
deal. The objectors’ other grounds are
well covered by the district court’s
opinion. The judge did not abuse her
discretion in approving this settlement.
It is time for the plaintiffs to receive
their payments and for their lawyers to
be paid.

  Unless a class contracts privately over
attorneys’ fees, lawyers in class-fund
cases must petition the court for their
compensation. See Cook v. Niedert, 142
F.3d 1004, 1011 (7th Cir. 1997). Counsel
for the consumers have asked for $26.3
million, about 29% of the consumers’
recovery. The insurance companies’
lawyers request $10 million,
approximately 22% of the insurers’ fund.
As the district judge saw it:

Essentially there are two very large
funds created and a great many
people benefited; the objections
were insubstantial; the class
counsel were able and efficient; the
litigation was fairly complex but
short; the risk of nonpayment was
moderate; and the class counsel
devoted a fair amount of time to
the case, but not a great amount
compared to the size of the
settlement.
110 F. Supp. 2d at 684. Recoveries of
"$75-200 million and more" constitute
"megafunds," she continued. Following the
approach of decisions in the Northern
District of Georgia, the Southern
District of Texas, and the Eastern
District of Pennsylvania, the judge
concluded that "fees in the range of 6-
10% and even lower" are common in
megafund cases. "[W]hen the figures hit
the really big time," she said, larger
fees constitute a windfall. Stating that
"class counsel ha[d] done a fine job in
terms of a speedy and professional
resolution of a major class action", the
judge awarded 10% of each fund to each
set of counsel.

  The judge did not explain why she
decided to follow decisions of district
courts in other jurisdictions, rather
than decisions of the United States Court
of Appeals for the Seventh Circuit. For
the approach that these districts take,
and that our district judge followed,
cannot be reconciled with the approach
our opinions adopt. We have held
repeatedly that, when deciding on
appropriate fee levels in common-fund
cases, courts must do their best to award
counsel the market price for legal
services, in light of the risk of
nonpayment and the normal rate of
compensation in the market at the time.
See Montgomery v. Aetna Plywood, Inc.,
231 F.3d 399, 409 (7th Cir. 2000);
Gaskill v. Gordon, 160 F.3d 361 (7th Cir.
1998); Florin v. Nationsbank of Georgia,
N.A., 60 F.3d 1245 (7th Cir. 1995)
(Florin II); Florin v. Nationsbank of
Georgia, N.A., 34 F.3d 560 (7th Cir.
1994) (Florin I); In re Continental
Illinois Securities Litigation, 985 F.2d
867 (7th Cir. 1993) (Continental II); In
re Continental Illinois Securities
Litigation, 962 F.2d 566 (7th Cir. 1992)
(Continental I). Of these opinions only
Florin II was cited or discussed by the
district judge, and then for a question
unrelated to the market rate of legal
services. We have never suggested that a
"megafund rule" trumps these market
rates, or that as a matter of law no
recovery can exceed 10% of a "megafund"
even if counsel considering the
representation in a hypothetical arms’
length bargain at the outset of the case
would decline the representation if
offered only that prospective return.

  The district judge defined megafunds as
settlements of $75 million and up. Fees
in "megafund" cases should be capped at
10% of the recovery, the judge held,
although she recognized that fees of 30%
and more are common and proper in smaller
cases. This means that counsel for the
consumer class could have received $22
million in fees had they settled for $74
million but were limited to $8.2 million
in fees because they obtained an extra
$14 million for their clients (the
consumer fund, recall, is $88 million).
Why there should be such a notch is a
mystery. Markets would not tolerate that
effect; the district court’s approach
compels it. A notch could be avoided if
the 10% cap in "megafund" cases were
applied only to the portion of the
recovery that exceeded $74 million, but
that is not what the district court did;
it capped fees at 10% of the whole fund.
Under the court’s ruling, a $40 million
settlement would have led to the same
aggregate fees as the actual $132 million
settlement. Private parties would never
contract for such an arrangement, because
it would eliminate counsel’s incentive to
press for more than $74 million from the
defendants. Under the district court’s
approach, no sane lawyer would negotiate
a settlement of more than $74 million and
less than $225 million; even the higher
figure would make sense only if it were
no more costly to obtain $225 million for
the class than to garner $74 million.

  Having disapproved the megafund cap, we
must remand--for the district judge did
not attempt a market-based approach, even
as an alternative holding. On remand the
district court must estimate the terms of
the contract that private plaintiffs
would have negotiated with their lawyers,
had bargaining occurred at the outset of
the case (that is, when the risk of loss
still existed). The best time to
determine this rate is the beginning of
the case, not the end (when hindsight
alters the perception of the suit’s
riskiness, and sunk costs make it
impossible for the lawyers to walk away
if the fee is too low). This is what
happens in actual markets. Individual
clients and their lawyers never wait
until after recovery is secured to
contract for fees. They strike their
bargains before work begins. Ethically
lawyers must do this, but the same thing
happens in markets for other professional
services with different (or no) ethical
codes. Many district judges have begun to
follow the private model by setting fee
schedules at the outset of class
litigation--sometimes by auction,
sometimes by negotiation, sometimes for a
percentage of recovery, sometimes for a
lodestar hourly rate and a multiplier for
riskbearing. (The greater the risk of
loss, the greater the incentive compensa
tion required.) Timing is more important
than the choice between negotiation and
auction, or between percentage and hourly
rates, for all of these systems have
their shortcomings. See, e.g., Kirchoff
v. Flynn, 786 F.2d 320 (7th Cir. 1986);
Winand Emons, Expertise, Contingent Fees,
and Insufficient Attorney Effort, 20
Int’l Rev. L. & Econ. 21 (2000); Bruce L.
Hay, Contingent Fees and Agency Costs, 25
J. Legal Stud. 503 (1996); Geoffrey P.
Miller, Some Agency Problems in
Settlement, 16 J. Legal Stud. 189 (1987);
Daniel L. Rubinfeld & Suzanne Scotchmer,
Contingent Fees for Attorneys: An
Economic Analysis, 24 RAND J. Econ. 343
(1993); Terry Thomason, Are Attorneys
Paid What They’re Worth? Contingent Fees
and the Settlement Process, 20 J. Legal
Stud. 187 (1991). 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. Before the litigation
occurs, a judge can design a fee
structure that emulates the incentives a
private client would put in place. At the
same time, both counsel and class members
can decide whether it is worthwhile to
proceed with that compensation system in
place. But in this case the district
judge let the opportunity slip away,
turning to fees only ex post. Now the
court must set a fee by approximating the
terms that would have been agreed to ex
ante, had negotiations occurred.

  The second circuit has criticized this
court’s market-mimicking approach on the
ground that one "cannot know precisely
what fees common fund plaintiffs in an
efficient market for legal services would
agree to". Goldberger v. Integrated
Resources, Inc., 209 F.3d 43, 53 (2d Cir.
2000). "Instead," that court "adhere[s]
to [the] practice that a fee award should
be assessed based on scrutiny of the
unique circumstances of each case, and ’a
jealous regard to the rights of those who
are interested in the fund.’" We grant
the premise; it is indeed impossible to
know ex post the outcome of a
hypothetical bargain ex ante. But a court
can learn about similar bargains. That is
at least a starting point. The second
circuit’s consider-everything approach,
by contrast, lacks a benchmark; a list of
factors without a rule of decision is
just a chopped salad. Even Goldberger,
which resorted to using a lodestar, had
to look at the market rate for lawyers’
hours. Determining lawyers’ fees ex post
is a perilous process. But any method
other than looking to prevailing market
rates assures random and potentially
perverse results.

  It is impossible to be sure what would
have happened earlier, but some guides
are available: the fee contracts some
TPPs signed with their attorneys; data
from large common-pool cases where fees
were privately negotiated; and
information on class-counsel auctions,
where judges have entertained bids from
different attorneys seeking the right to
represent a class.

  The first benchmark is actual
agreements. Before joining the class, a
group of more than 100 TPPs (the "Health
Benefit Payers," as they call themselves)
contracted with two law firms to
represent them. Unfortunately they have
not put the details in the record, but
they tell us that the contracts provided
for a 25% contingent fee at maximum. The
"Porter Wright Group" (18 TPPs referred
to collectively by their law firm’s name)
also negotiated with and hired counsel.
Their setup allowed each insurance
company to pick one of two fee options.
Either the client paid Porter Wright’s
full costs and 70% of its normal hourly
fees each month, with a 4% of recovery
kicker at the end, or the client paid
only costs each month but had to pony up
15% of the final settlement. Insurers are
sophisticated purchasers of legal
services, and these contracts define the
market. Unfortunately, though, they
identify a market mid-way through the
case, after defendants already had agreed
to pay substantial sums. The Porter
Wright contracts provide little guidance
on how to compute fees for the consumer
class, because none of the consumers’
lawyers was paid on an ongoing basis. For
these reasons the contracts are of
limited utility--but they do show that
even after an initial settlement, with
the TPPs’ risk of loss slight, arms’
length bargains did not yield a "megafund
cap" on fees.

  A second benchmark for determining legal
fees is data from securities suits where
large investors have chosen to hire
counsel up front. Data about these ex
ante arrangements have been widely
available since the changes to securities
practice wrought by legislation in the
mid-1990s. At about the same time some
district judges started conducting
auctions for the right to be lead
counsel, and the outcome of these
auctions provide the third benchmark.

  At first thought, auctions appear to be
a poor mechanism for replicating the
market price of legal services. Quality
varies among lawyers, and awards net of
fees could rise with the level of fees if
a higher payment attracts the best
counsel. We never see private clients
auctioning off their legal work to the
lowest bidder. Law firms pitch their
services in negotiation--competing for
business by demonstrating to potential
clients that they provide quality legal
work at good value. But the word
"auction" is an imprecise description of
the process that judges have used to
choose lead counsel in class actions.
Judges don’t look for the lowest bid;
they look for the best bid--just as any
private individual would do in selecting
a law firm, an advertising firm, or a
construction company. See Wenderhold v.
Cylink, 191 F.R.D. 600 (N.D. Cal. 2000).
Bidding law firms provide the judge with
firm profiles, testimonials of former
clients, predictions of expected
recovery, fee proposals, and arguments on
why their firm provides good value. The
judge in turn acts as an agent for the
class, selecting the firm that seems
likely to generate the highest recovery
net of attorneys’ fees. The court in
Wenderhold compared bids by evaluating
how much the class would take (after
attorneys’ fees) at different levels of
damages. The court then evaluated the
firms’ resumes and determined that the
low bidder would do as good or better a
job than the other firms. See also In re
Wells Fargo Securities Litigation, 157
F.R.D. 467 (N.D. Cal. 1994).

  Auctions are less helpful ex post, and
not only because it’s too late to put the
legal services up for bid. After
settlement, we have lost all opportunity
to put in place incentives for attorneys
to secure larger awards. Courts must at
this point simply determine what value
the lawyers have provided. The judicial
opinions from auction cases are helpful
in this respect, though, because they
provide detailed analysis of the market
rate for attorneys facing different
levels of risk. Forcing firms to bid at
least approximates a market, providing
the judge with multiple options. We
cannot assume that judges always select
the best bid. See In re Bank One
Shareholders Class Actions, 96 F. Supp.
2d 780 (N.D. Ill. 2000); In re Amino Acid
Lysine Antitrust Litigation, 918 F. Supp.
1190 (N.D. Ill 1996) (both winning bids
provided the attorneys with a percentage
of the recovery yet capped the fee award,
eliminating any incentive for the lawyers
to push for a larger recovery). But a
court can examine the bids and the
results to see what levels of
compensation attorneys are willing to
accept in competition.

  The market rate for legal fees depends
in part on the risk of nonpayment a firm
agrees to bear, in part on the quality of
its performance, in part on the amount of
work necessary to resolve the litigation,
and in part on the stakes of the case.
Both negotiations and auctions often
produce diminishing marginal fees when
the recovery will not necessarily
increase in proportion to the number of
hours devoted to the case. In Oracle
Securities Litigation, 132 F.R.D. 538
(N.D. Cal. 1990), the judge selected a
bid with a declining contingent-fee
scale, plus an early-settlement discount.
132 F.R.D. at 541, 548. The schedule
provided for 30% of the first million,
25% of the next $4 million, then 20% of
the next $10 million, and 15% of
everything above $15 million. Following
settlement, counsel received a total of
$4.8 million, or 19.2% of the $25 million
recovery. In re Oracle Securities
Litigation, 852 F. Supp. 1437, 1457 (N.D.
Cal. 1994). The advantages of such a
structure over the fee schedule laid out
by the district court in our case are
apparent: in Oracle the attorneys’ fees
never went down for securing a larger
kitty, and counsel always had an
incentive to seek more for their clients.
See also In re Bank One Shareholders
Class Actions, 96 F. Supp. 2d 780 (N.D.
Ill. 2000) (providing for 17% of first $5
million, 12% of next $10 million, etc.);
Amino Acid Lysine Antitrust Litigation,
918 F. Supp. 1190 (similar scale).

  This is not to say that systems with
declining marginal percentages are always
best. They also create declining marginal
returns to legal work, ensuring that at
some point attorneys’ opportunity cost
will exceed the benefits of pushing for a
larger recovery, even though extra work
could benefit the client. This feature
exacerbates the agency costs inherent in
any percentage-of-recovery system, just
as the lodestar approach creates the
opposite incentive to run up the billable
hours. Other options are available.
Suppose that recovery is certain and that
the major dispute concerns its amount. A
fee schedule could be created that takes
the base recovery for granted (no need to
pay counsel to "produce" a recovery that
is there for the asking) while magnifying
the incentive to seek more. This was the
approach of the successful bidder in In
re Auction Houses Antitrust Litigation,
197 F.R.D. 71 (S.D.N.Y. 2000). Counsel
agreed to take no fees for the first $405
million recovered and 25% of everything
above $405 million. Because the
government had already established
liability in criminal proceedings, the
civil lawyers in Auction House concluded
that the first few hundred million would
come easy. Convinced that their superior
skills could generate a larger-than-
expected recovery, they agreed to be paid
only for the upper tail of the
distribution of possible recoveries. (If
the expected damages were $350 million,
for example, then this structure would
create a very powerful incentive to do
well by the class; but it would be
verboten under our district court’s
"megafund rule.")

  Bids also differ in how they compensate
lawyers for their time. "Calendar-based"
bids (seen in Oracle) compensate lawyers
for additional time spent. See also Wells
Fargo and Amino Acid Lysine. Others
compensate based on the stage of
litigation, but not the amount of time it
actually takes to get there. We are
skeptical of the calendar-based bids,
because they do little to reduce agency
costs and tempt lawyers to delay
settlement talks unnecessarily. Systems
where fees rise based on the stage of
litigation rather than the calendar are
more common in private agreements (indeed
they are the norm for contingent-fee
contracts in tort suits). These tie the
incentives of lawyers to those of the
class by linking increased compensation
to extra work.

  The record compiled in this case is
limited. We know the agreements between
some TPPs and their lawyers, but we also
know that they entered the case only
after a large kitty seemed likely. The
district court’s task on remand will be
to gather such additional data as the
parties provide and to approximate the
arrangements that would have prevailed at
the outset. The district judge should
keep in mind that she separated the
consumer and TPP classes. The fees of
each class’s group lawyers should be
determined by that group’s risk and
productivity. The consumer and TPP
classes were rivals for a limited fund,
not confederates in common cause. Any use
of a sliding scale should be based solely
on each class’s settlement, not the total
amount recovered by the two classes.

  Two additional issues require only brief
discussion. The district court declined
to authorize full reimbursement for the
expenses of litigation. The judge wrote
that too many claims had been lumped into
broad categories, that she was perplexed
by the difference between reproduction
and copying expenses, and that travel and
telephone costs were too high. She
reduced the TPP counsels’ request by one
third and consumer counsels’ request by
one half. Reducing litigation expenses
because they are higher than the private
market would permit is fine; reducing
them because the district judge thinks
costs too high in general is not. See
Continental I, 962 F.2d at 570; Dutchak
v. Central States Pension Fund, 932 F.2d
591, 597 (7th Cir. 1991); Heiar v.
Crawford County, 746 F.2d 1190, 1204 (7th
Cir. 1984). Likewise the amount of
itemization and detail required is a
question for the market. If counsel
submit bills with the level of detail
that paying clients find satisfactory, a
federal court should not require more.
See, e.g., Medcom Holding Co. v. Baxter
Travenol Laboratories, Inc., 200 F.3d 518
(7th Cir. 1999).

  Counsel contend that their expenses and
their billing methods are normal in
commercial practice. They explain that
"copying" charges denote outside copy
centers while "reproduction" charges
denote in-house copying. They say that
their telephone and travel expenses are
standard fare for a case of this
magnitude. Our remand instructions
regarding expenses mirror those on fees.
Parties should submit information on what
expenses private clients in large class
actions (auctions and otherwise) pay. In
examining market rates the court should
be careful not to pay the attorneys
twice. Some cases award large percentages
of the recovery in order to cover for
litigation expenses as well. If the
district court selects such a fee
structure, it should not separately
reimburse expenses.

  Finally, the district court awarded
incentive reimbursements to named
consumer class plaintiffs but not to the
TPPs’ representatives. The judge
explained that the "cases cited by the
third-party payers involve awards to
individuals who took significant risks .
. . not to corporations who will receive
large recoveries in any event." The TPP
representatives appeal this decision.
Incentive awards are justified when
necessary to induce individuals to become
named representatives. See Montgomery,
231 F.3d at 410; Cook, 142 F.3d at 1016;
Continental I, 962 F.2d at 571-72. We see
no reason why this rationale would not
apply equally to corporations and other
organizations. But if at least one TPP
would have stepped forward without the
lure of an "incentive award," there is no
need for such additional compensation, as
the district judge recognized. Many
insurance companies entered this suit
knowing that a large payment was on its
way. The TPPs were "clear winners" from
the start. See Continental I, 962 F.2d at
572. Appellants argue that some of the
TPPs didn’t shoulder a reasonable portion
of the discovery burden. To the extent
one company’s law firm played a larger
role than others, that difference must be
accounted for in divvying up attorneys’
fees. But it is evident that the prospect
of recovery created enough incentive for
the representative TPPs to step up even
without an additional award for doing so.
The market rate for incentive
reimbursements here is accordingly zero.

  Affirmed in part, Vacated in part, and
Remanded in part for proceedings
consistent with this opinion.