Court Opinion

ID: 2709409
Source: CourtListenerOpinion
Date Created: 2014-08-05 15:15:16.411937+00
Date Added: 2024-06-11T13:23:36.202646
License: Public Domain

In the

      United States Court of Appeals
                      For the Seventh Circuit
                          ____________________  

Nos.  12-­‐‑2339  &  12-­‐‑2354  
ERIC  SILVERMAN,  et  al.,  
                                                           Plaintiffs-­‐‑Appellees,  
                                        v.  

MOTOROLA  SOLUTIONS,  INC.,  et  al.,  
                                                        Defendants-­‐‑Appellees.  
Appeals  of:  

         EDWARD  FALKNER  and  PAUL  A.  LILES  
                          ____________________  

           Appeals  from  the  United  States  District  Court  for  the  
             Northern  District  of  Illinois,  Eastern  Division.  
                 No.  07  C  4507  —  Amy  J.  St.  Eve,  Judge.  
                          ____________________  

     ARGUED  NOVEMBER  1,  2012  —  DECIDED  AUGUST  14,  2013  
                  ____________________  

  Before   EASTERBROOK,   Chief   Judge,   and   ROVNER   and  
HAMILTON,  Circuit  Judges.  
    EASTERBROOK,  Chief  Judge.  A  class  of  Motorola’s  investors  
contended   that,   during   the   second   half   of   2006,   the   firm  
made  false  statements  in  order  to  disguise  its  inability  to  de-­‐‑
liver  a  competitive  mobile  phone  that  could  employ  3G  pro-­‐‑
Nos.  12-­‐‑2339  &  12-­‐‑2354                                                    2  

tocols.   When   the   problem   became   public,   the   price   of  
Motorola’s   stock   declined.   After   the   suit   had   been   pending  
for   four   years,   the   district   court   denied   Motorola’s   motion  
for  summary  judgment.  798  F.  Supp.  2d  954  (N.D.  Ill.  2011).  
The   parties   then   settled   for   $200   million.   None   of   the   class  
members  contends  that  this  is  inadequate—but  two  contend  
that  the  judge  abused  her  discretion  by  approving  counsel’s  
proposal   that   they   receive   27.5%   of   the   fund.   See   2012   U.S.  
Dist.  LEXIS  63477  (N.D.  Ill.  May  7,  2012).  
     Paul  Liles,  one  of  the  objectors,  protested  almost  a  month  
after  the  deadline.  And  although  he  filed  a  belated  objection  
to  the  award  of  legal  fees,  he  did  not  file  a  claim  to  his  share  
of  the  recovery.  He  thus  lacks  any  interest  in  the  amount  of  
fees,  since  he  would  not  receive  a  penny  from  the  fund  even  
if  counsel’s  take  should  be  reduced  to  zero.  The  class  repre-­‐‑
sentatives’   appellate   brief   flags   this   problem;   Liles’s   reply  
brief  ignores  it.  We  dismiss  his  appeal  on  the  ground  that  he  
lacks  any  interest  in  the  outcome.  
     Edward   Falkner,   the   other   objector,   contends   that   the  
award  is  improper  because  it  was  fixed  at  the  end  of  the  liti-­‐‑
gation.  He  maintains  that  fee  schedules  should  be  set  at  the  
outset,  preferably  by  auction  in  which  law  firms  competing  
to  represent  the  class  tell  the  judge  how  much  they  will  ac-­‐‑
cept,   and   the   judge   picks   the   low   bidder.   We   agree   with  
Falkner’s  premise  that  attorneys’  fees  in  class  actions  should  
approximate   the   market   rate   that   prevails   between   willing  
buyers   and   willing   sellers   of   legal   services.   See   In   re   Conti-­‐‑
nental   Illinois   Securities   Litigation,   962   F.2d   566,   572   (7th   Cir.  
1992);   In   re   Synthroid   Marketing   Litigation,   264   F.3d   712,   718  
(7th   Cir.   2001)   (Synthroid   I);   In   re   Synthroid   Marketing   Litiga-­‐‑
tion,  325  F.3d  974,  975  (7th  Cir.  2003)  (Synthroid  II).  In  many  
3                                                     Nos.  12-­‐‑2339  &  12-­‐‑2354  

markets   competition   proceeds   by   auction.   But   we   also   ob-­‐‑
served   in   Synthroid   II,   325   F.3d   at   979–80,   that   solvent   liti-­‐‑
gants   do   not   select   their   own   lawyers   by   holding   auctions,  
because  auctions  do  not  work  well  unless  a  standard  unit  of  
quality  can  be  defined  and  its  delivery  verified.  There  is  no  
“standard  quality”  of  legal  services,  and  verification  is  diffi-­‐‑
cult  if  not  impossible.  
      The  two  Synthroid  decisions  observed  that  establishing  a  
fee   structure   at   the   outset   of   a   suit   is   desirable;   unlike   auc-­‐‑
tions,  which  private  markets  in  legal  services  do  not  use,  ex  
ante  fee  structures  are  common  and  beneficial  to  clients.  But  
neither   Synthroid   nor   any   other   decision   of   which   we   are  
aware  holds  that  fee  schedules  set  ex  ante  are  the  only  lawful  
means  to  compensate  class  counsel  in  common-­‐‑fund  cases.  It  
is   unfortunate   that   the   district   judge   originally   assigned   to  
this  case  did  not  consider  the  possibility  of  establishing  a  fee  
schedule   when   he   appointed   a   lead   plaintiff   and   approved  
that   party’s   choice   of   counsel.   By   the   time   that   judge   died,  
and  the  case  had  been  reassigned  to  the  judge  who  awarded  
the   fees,   it   was   not   possible   to   recreate   the   conditions   that  
existed   at   the   case’s   outset.   Too   much   legal   time   had   been  
sunk  into  the  litigation,  and  it  would  have  been  counterpro-­‐‑
ductive  to  invite  other  law  firms  to  make  other  offers  and,  if  
selected,  start  over.  
    When   reviewing   awards   set   after   the   fact,   the   court   of  
appeals   asks   whether   the   district   judge   has   abused   her   dis-­‐‑
cretion.  Harman  v.  Lyphomed,  Inc.,  945  F.2d  969,  973  (7th  Cir.  
1991).  Falkner  contends  that  the  judge  abused  her  discretion  
here   because   fees   substantially   less   than   27.5%   have   been  
awarded  in  other  cases.  Data  show  that  27.5%  is  well  above  
the   norm   for   cases   in   which   $100   million   or   more   changes  
Nos.  12-­‐‑2339  &  12-­‐‑2354                                                4  

hands.   See   Brian   T.   Fitzpatrick,   An   Empirical   Study   of   Class  
Action   Settlements   and   Their   Fee   Awards,   7   J.   Empirical   Legal  
Studies  811  (2010);  Theodore  Eisenberg  &  Geoffrey  P.  Miller,  
Attorney   Fees   and   Expenses   in   Class   Action   Settlements:   1993–
2008,   7   J.   Empirical   Legal   Studies   248   (2010);   Theodore   Ei-­‐‑
senberg   &   Geoffrey   P.   Miller,   Attorney   Fees   in   Class   Action  
Settlements:   An   Empirical   Study,   1   J.   Empirical   Legal   Studies  
27   (2004).   Eisenberg   and   Miller   find   that   the   mean   award  
from  settlements  in  the  $100  to  $250  million  range  is  12%  and  
the  median  10.2%.  All  three  articles  find  that  the  percentage  
of   the   fund   awarded   to   counsel   declines   as   the   size   of   the  
fund   increases.   An   award   fixed   at   27.5%   of   a   $200   million  
fund  is  exceptionally  high.  
     It  does  not  necessarily  follow  that  27.5%  is  legally  exces-­‐‑
sive.   Contingent   fees   compensate   lawyers   for   the   risk   of  
nonpayment.   The   greater   the   risk   of   walking   away   empty-­‐‑
handed,   the   higher   the   award   must   be   to   attract   competent  
and  energetic  counsel.  See  Kirchoff  v.  Flynn,  786  F.2d  320  (7th  
Cir.  1986).  The  district  court  received  a  report  from  Professor  
Charles   Silver,   who   concluded   that   this   suit   was   unusually  
risky.   Defendants   prevail   outright   in   many   securities   suits.  
This   one   took   more   than   four   years,   and   more   than   $5   mil-­‐‑
lion  in  out-­‐‑of-­‐‑pocket  expenses  by  counsel  to  conduct  discov-­‐‑
ery   and   engage   experts,   before   reaching   the   summary-­‐‑
judgment   stage.   Only   after   the   district   court   denied   its   mo-­‐‑
tion   for   summary   judgment   was   Motorola   willing   to   settle  
for   a   substantial   sum—and   Motorola   might   well   have   pre-­‐‑
vailed   on   summary   judgment   but   for   some   unanticipated  
facts   plaintiffs’   lawyers   turned   up   in   discovery.   When   this  
suit  got  under  way,  no  other  law  firm  was  willing  to  serve  as  
lead  counsel.  Lack  of  competition  not  only  implies  a  higher  
fee  but  also  suggests  that  most  members  of  the  securities  bar  
5                                                   Nos.  12-­‐‑2339  &  12-­‐‑2354  

saw  this  litigation  as  too  risky  for  their  practices.  The  district  
judge   did   not   abuse   her   discretion   in   concluding   that   the  
risks   of   this   suit   justified   a   substantial   award,   even   though  
compensation  in  most  other  suits  has  been  lower.  
    Our   concern   is   less   with   the   absolute   level   of   fees   than  
with   the   structure   of   the   award.   The   articles   we   have   cited  
reinforce  the  observation  in  the  Synthroid  opinions  that  nego-­‐‑
tiated   fee   agreements   regularly   provide   for   a   recovery   that  
increases   at   a   decreasing   rate.   In   Synthroid   II,   for   example,  
the   award   was   30%   of   the   first   $10   million,   25%   of   the   next  
$10   million,   22%   of   the   band   from   $20   to   $46   million,   and  
15%  of  everything  else.  
     Many  costs  of  litigation  do  not  depend  on  the  outcome;  it  
is  almost  as  expensive  to  conduct  discovery  in  a  $100  million  
case  as  in  a  $200  million  case.  Much  of  the  expense  must  be  
devoted  to  determining  liability,  which  does  not  depend  on  
the   amount   of   damages;   in   securities   litigation   damages   of-­‐‑
ten  can  be  calculated  mechanically  from  movements  in  stock  
prices.   There   may   be   some   marginal   costs   of   bumping   the  
recovery  from  $100  million  to  $200  million,  but  as  a  percent-­‐‑
age  of  the  incremental  recovery  these  costs  are  bound  to  be  
low.   It   is   accordingly   hard   to   justify   awarding   counsel   as  
much  of  the  second  hundred  million  as  of  the  first.  The  justi-­‐‑
fication  for  diminishing  marginal  rates  applies  to  $50  million  
and  $500  million  cases  too,  not  just  to  $200  million  cases.  
      Awarding  counsel  a  decreasing  percentage  of  the  higher  
tiers  of  recovery  enables  them  to  recover  the  principal  costs  
of   litigation   from   the   first   bands   of   the   award,   while   allow-­‐‑
ing  the  clients  to  reap  more  of  the  benefit  at  the  margin  (yet  
still  preserving  some  incentive  for  lawyers  to  strive  for  these  
higher   awards).   Professor   Silver’s   report   does   not   identify  
Nos.  12-­‐‑2339  &  12-­‐‑2354                                                     6  

suits  seeking  more  than  $100  million  in  which  solvent  clients  
agree  ex  ante  to  pay  their  lawyers  a  flat  portion  of  all  recover-­‐‑
ies,   as   opposed   to   a   rate   that   declines   as   the   recovery   in-­‐‑
creases.  The  district  judge  did  not  discuss  whether  a  market-­‐‑
based   rate   would   include   different   portions   of   different  
bands   of   the   recovery.   There’s   a   reason   for   that   omission:  
Falkner   did   not   raise   this   subject   in   the   district   court.   (Nor  
did  he  call  the  judge’s  attention  to  data  showing  that  27.5%  
substantially  exceeds  the  norm  for  large  settlements.  Falkner  
pointed  to  three  cases  where  the  rates  were  low,  but  the  dis-­‐‑
trict  court  needed  data  rather  than  cherry-­‐‑picked  examples.)  
     A   district   judge,   looking   out   for   the   interests   of   all   class  
members,  sometimes  must  consider  issues  that  the  class  rep-­‐‑
resentatives   and   their   lawyers   prefer   to   let   pass.   This   is   not  
such   a   situation,   however.   Institutional   investors   such   as  
pension   funds   and   university   endowments   hold   claims   to  
more   than   70%   of   the   settlement   fund.   These   institutional  
investors  have  in-­‐‑house  counsel  with  fiduciary  duties  to  pro-­‐‑
tect  the  beneficiaries.  That  these  large  investors,  looking  out  
for  themselves,  help  to  protect  the  interests  of  class  members  
with   smaller   stakes   is   a   premise   of   several   rules   in   the   Pri-­‐‑
vate  Securities  Litigation  Reform  Act  of  1995.  The  difference  
between  27.5%  of  $200  million  and  a  smaller  award  (say,  one  
averaging   20%)   could   be   a   tidy   sum   for   institutional   inves-­‐‑
tors  (including  this  suit’s  lead  plaintiff,  a  pension  fund),  one  
worth   a   complaint   to   the   district   judge   if   the   lawyers’   cut  
seems   too   high.   Yet   none   of   the   institutional   investors   has  
protested—either   by   filing   a   motion   asking   the   judge   to   re-­‐‑
duce   the   fees   or   by   supporting   Falkner’s   position   in   this  
court.   This   award   may   be   at   the   outer   limit   of   reasonable-­‐‑
ness,  but,  given  the  way  the  subject  was  litigated  in  the  dis-­‐‑
7                                                  Nos.  12-­‐‑2339  &  12-­‐‑2354  

trict  court,  deferential  appellate  review  means  that  the  deci-­‐‑
sion  must  stand.  
   Appeal   No.   12-­‐‑2339   is   dismissed   for   lack   of   a   justiciable  
controversy.  In  appeal  No.  12-­‐‑2354,  the  decision  is  affirmed.