Court Opinion

ID: 2996343
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:27:45.616448+00
Date Added: 2024-06-11T11:38:55.166848
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                         ____________

Nos. 02-2398 & 02-2519
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 JANUARY 10, 2003—DECIDED APRIL 15, 2003
                    ____________

 Before EASTERBROOK, MANION, and KANNE, Circuit
Judges.
  EASTERBROOK, Circuit Judge. A prior appeal in this
nationwide class action ended with two principal conclu-
sions: first, the district court did not abuse its discretion
in approving the settlement; second, the court erred in
capping attorneys’ fees at 10% of any “megafund” recovery.
In re Synthroid Marketing Litigation, 264 F.3d 712 (7th
Cir. 2001). A court must give counsel the market rate
for legal services, we held. Although the market rate, as a
percentage of recovery, likely falls as the stakes increase,
whether it exceeds 10% for recoveries above $100 million
must be answered by reference to arrangements that sat-
isfy willing buyers and sellers rather than the compensa-
tion that a judge thinks appropriate as a matter of first
principles.
2                                   Nos. 02-2398 & 02-2519

   On remand, the district court awarded the third-party
payor (TPP) class counsel 22% of that class’s recovery, plus
litigation costs and expenses. Consumer class counsel
received 30% of the first $10 million recovered by that
class, 25% of the next $10 million, 20% of the third $10
million, 15% of the fourth $10 million, and 10% of the
remaining $48 million—an average of 15.45%—without
separate compensation for litigation costs and expenses.
In re Synthroid Marketing Litigation, 201 F. Supp. 2d 861
(N.D. Ill. 2002). Consumer class counsel appeal in quest
of a higher award; a group of TPPs calling itself the Health
Benefit Payers appeals to seek a reduction in the award
made to the TPP counsel.
  Readers seeking the back story can find it in our prior
opinion and the district court’s decision on remand. For
now it is enough to say that the district court divided the
plaintiffs (who contend that Knoll Pharmaceuticals and
its successors defrauded purchasers into paying too much
for Synthroid) into two classes: consumers who used the
drug to treat their hypothyroidism, and third-party payors
(insurers and other health-care vehicles) that reimbursed
some of the consumers or paid directly for the Synthroid.
The consumer class receives $88 million, and the TPP
class $46 million. Under the district court’s formula, total
disbursements to consumer class counsel are $13.6 million,
while TPP class counsel receive fees of $10.12 million plus
about $621,000 in reimbursements.
  Fixing the market rate for the legal services of the TPP
counsel is simple, the district judge found, because attor-
neys and clients set it themselves through arms’-length
negotiations. All of the TPPs are sophisticated financial
intermediaries with in-house counsel who can (and do)
shop for legal services in a national market. Many of the
TPPs hired law firms to conduct this litigation, and these
TPPs agreed on which of these lawyers would take the
laboring oar for the class. Almost all of the TPPs that hired
Nos. 02-2398 & 02-2519                                    3

lawyers for this case did so on contingent rather than
hourly fees, and the average rate that the TPPs agreed
to pay their lawyers is 22% of any recovery. As we re-
marked the last time around, the outcome of this com-
petitive process among informed buyers and sellers defines
the market rate for legal services, given the risks and
investments of time that the lawyers expected to encoun-
ter in this case. 264 F.3d at 720. The district judge there-
fore adopted it as the measure of TPP class counsel’s com-
pensation.
  According to the Health Benefit Payers, however, a bet-
ter market measure is available: the deal the parties made
in July 1999 when negotiating toward settlement. Under
this agreement, many TPPs that had their own lawyers
would pay them from their share of the kitty; counsel rep-
resenting the TPP class as a whole would receive about
22% of the portion of the fund attributable to the remain-
ing TPPs. Class counsel’s compensation would have been
close to 10% of the whole fund. Yet the district judge
awarded class counsel more than twice what counsel had
agreed to accept. How can that be a market rate?, the
Health Benefit Payers ask. The district court did not
answer this question. Instead it ruled that, because the
Health Benefit Payers are class members rather than
class representatives, they lack standing to protest the
amount of fees. This decision is hard to fathom. The Health
Benefit Payers stand to receive more from the settlement
fund if they win on this appeal than if they lose; payments
to counsel come at their expense, and this loss is re-
dressable by a favorable judicial decision. What more
is required for standing? See Lujan v. Defenders of
Wildlife, 504 U.S. 555 (1992). The Supreme Court has
held that class members may obtain appellate resolution
of their objections without formally intervening, see Devlin
v. Scardelletti, 536 U.S. 1 (2002), so we take up the Health
Benefit Payers’ arguments.
4                                  Nos. 02-2398 & 02-2519

   One fundamental problem is that these arguments
should have been made three years ago, as reasons to af-
firm the district court’s initial award, which at 10% of the
TPP class fund was exactly what the Health Benefit Payers
now say is right. Yet the Health Benefit Payers did not
bother to file a brief in that appeal. We analyzed the
situation on the assumption, held by all who provided us
with their views, that the TPP class counsel would receive
a share of the entire settlement fund, not a fund reduced
(as the July 1999 document contemplated) by the en-
titlements of TPPs that had engaged separate counsel. Our
remand instructed the district court to proceed exactly as
it did. The earlier appeal concerning the TPP counsel, and
the remand, were pointless if the only proper outcome is
an award equaling 10% of the whole fund. That is the
very award we reversed, and the law of the case is against
reviving it now.
  What is more, although we used the word “agreement”
two paragraphs ago to describe what transpired in July
1999, no definitive agreement was reached and signed. The
negotiations came unglued. True, the stumbling block
was an issue other than attorneys’ fees, but the fact re-
mains that no deal resulted. Contracts are enforced or
not as a whole; negotiators cannot insist on enforcement
of one provision unless all loose ends have been tied up.
Negotiations such as those that occurred in mid-1999 are
designed to bring closure; TPP class counsel may have
been willing to accept less than their legal entitlement in
order to increase the chance that they would be paid
then and there. They were not paid in 1999. Now, four
years later, the case is on its second appeal. For four years
the TPP class counsel have had to fight for their compensa-
tion, incurring costs (and facing risks) that they would
not have borne had the case been wrapped up and pay-
ment made in 1999. Perhaps, too, concessions made on
attorneys’ fees were related to some of the issues on which
Nos. 02-2398 & 02-2519                                     5

agreement could not be achieved. Moreover, according to
TPP class counsel, the 1999 bargain on attorneys’ fees
was a response to the Health Benefit Payers’ representa-
tion that they would opt out, a step that would have
prevented class counsel from recovering any fees on their
account. After the arrangement broke down, however, the
Health Benefit Payers remained in the class and thus
must bear their portion of the legal expense. At all events,
until a contract is signed—and, in class litigation, approved
by the court under Fed. R. Civ. P. 23(e)—no one is bound
by any of the proposed terms. If the lawyers represent-
ing the Health Benefit Payers contributed toward the
success of this litigation, they could have sought a distrib-
ution from the fund. They did not do so and are not en-
titled to have the class counsel’s compensation for their
work on behalf of the entire class (including the Health
Benefit Payers) cut down.
  Having awarded the TPP class counsel 22% of that fund,
the district court awarded only 15% of the separate, and
larger, fund to consumer class counsel. The district judge
derived the 15% figure from the average bid by plaintiffs’
law firms in the handful of securities class actions in
which other courts have held auctions to choose lead coun-
sel. The judge thought that the 22% contingent fee ac-
tually negotiated in this very case was inferior to these
auctions as a benchmark for two principal reasons: first, the
judge wrote that the market in legal services is not com-
petitive; second, the judge opined that class counsel had
handled this suit inefficiently. They obtained an excellent
result for the class, the judge thought, but took too long
and spun too many wheels in the process.
  The upshot is that the TPP class lawyers recover at a
higher rate (and almost as much in absolute dollars), even
though the consumer class counsel bore the principal
risk of outright loss. As our first opinion explained, by
the time the TPPs appeared as parties, the consumer class
6                                 Nos. 02-2398 & 02-2519

counsel had done the entrepreneurial work and the defen-
dants had agreed to a substantial settlement. Insurers
and other intermediaries paid their lawyers to secure
a portion of that settlement for themselves (and to en-
large the total pot if possible). The risk in that venture
was limited, for normal rules of subrogation entitled the
insurers to compensation for their outlays. Consumer
class counsel, by contrast, took the risk that they would
come away with nothing—and, as our initial opinion
observed, that was a significant risk, for the consumer
class did not have an easy road. If the suit had a 50%
chance of ending in defendants’ favor, then an award equal
to 15% of the pot (given that the class has prevailed) is
equivalent to an ex ante offer of 7.5% of the amount
that will be recovered if the class should prevail. Yet we
know that the sophisticated TPPs agreed to pay their
lawyers 22% of whatever could be diverted from an offer
that was already on the table. It is most unlikely that the
market rate for law firms negotiating to represent the
consumer class ex ante (the right time, for reasons our
initial opinion explained) would have been 15% of any
eventual winnings, when we know that even after a good
deal of the risk had been dissipated the TPPs had to
offer 22% to sign up lawyers on contingent fee.
  Average rates differ from marginal rates, so it is pos-
sible for one set of lawyers to receive extra compensation
for risk even though its average rate is lower. What is
required is that the marginal rate be higher throughout
but that the lawyers for the riskier class generate a high-
er recovery. Suppose that the TPPs had agreed to pay
their lawyers 25% of the first $40 million and 10% of
everything over that, averaging out to 23% of the actual
$46 million settlement. It is easy to see how consumer
class counsel could receive a greater marginal award on
every increment and still take home a lower average. For
example, the (hypothetical) ex ante contract with con-
Nos. 02-2398 & 02-2519                                      7

sumer class counsel might grant 35% of the first $20 mil-
lion, 25% of the next $20 million, and 10% of the residue.
Class counsel would receive more than TPP counsel on the
initial $40 million, to compensate for the greater risk of
loss, and then the same marginal rate on higher incre-
ments. The hypothetical schedule we have given would
work out to an average fee of 19.1% on the actual $88
million recovery, and the average fee would fall to 15.3%
if the recovery were $150 million. These averages would
lie below the average for the TPP counsel—but the impor-
tant thing for purposes of compensating risk-bearing is
that, for each band of recovery, the consumer class counsel
would recover at least as much as TPP counsel, and for
the initial bands of recovery consumer counsel would
recover more.
  Unfortunately, however, the district judge did not adopt
such a structure. Only for the lowest two bands does the
compensation of consumer class counsel exceed that of TPP
class counsel: the first $10 million (30% for consumer
counsel, 22% for TPP counsel) and the next $10 million
(25% for consumer counsel, 22% for TPP counsel). By the
third $10 million, consumer class counsel is down to 20%,
and for everything over $40 million consumer class coun-
sel receives 10% while TPP class counsel receives 22%.
That fails to compensate risk-bearing activities, though
voluntary market transactions would be certain to pro-
vide such compensation.
  The district court’s reasons for thinking 22% too high
as a benchmark are not persuasive—or at least not sup-
ported on this record, which does not contain any evi-
dence that the market in legal services is uncompetitive
or that the TPPs are victims of a cartel. No law firm sup-
plies more than a tiny fraction of the nation’s legal services
(even of the specialized submarket in big-stakes litiga-
tion). The Herfindahl-Hirschmann Index in this market
is minuscule, and no evidence in this record implies that
8                                  Nos. 02-2398 & 02-2519

law firms have conspired to reduce competition. It is true,
as the district court emphasized, that the bids in auctions
for the right to represent classes in some securities cases
fall below 22% of the recovery. Yet if securities suits pre-
sent less risk to the plaintiff class than does a fraud
suit against a drug manufacturer, it is unsound to use a
contingent fee appropriate to the former as the measure
in the latter. The record does not show how risky secur-
ities suits are (something that may have been affected by
the Securities Litigation Reform Act of 1995 and any
ensuing changes to suit selection by the securities—plain-
tiffs’ bar) and therefore does not permit a reliable com-
parison between fees in securities cases and the fees in
a suit such as this one.
  There is, moreover, considerable question just what
is being auctioned in bidding to represent a class. Nor-
mally an auction specifies the precise product to be sold
(a particular painting, a share of stock in a named cor-
poration, or 5,000 cubic yards of concrete having defined
attributes). For legal services, however, it is hard if not
impossible to hold the quality dimension constant. Con-
tingent-fee arrangements are used when it is difficult to
monitor counsel closely; otherwise some different arrange-
ment, such as hourly rates, is superior. See Kirchoff v.
Flynn, 786 F.2d 320, 324 (7th Cir. 1986); A. Mitchell
Polinsky & Daniel L. Rubinfeld, Aligning the Interests
of Lawyers and Clients, 5 Am. L. & Econ. Rev. 165 (2003).
When it is hard to monitor counsel’s effort and other
elements of quality, it is also hard to know what the bid
represents. Maybe it shows that less work will be invested,
and that less compensation then is required. See Jill E.
Fisch, Lawyers on the Auction Block: Evaluating the
Selection of Class Counsel by Auction, 102 Colum. L. Rev.
650 (2002); Lucian Arye Bebchuk, The Questionable
Case for Using Auctions to Select Lead Counsel, 80 Wash. U.
L.Q. 889 (2002). Lawyers will earn a competitive return
even at the lower level of compensation, but the class
Nos. 02-2398 & 02-2519                                     9

may be worse off. Large and sophisticated purchasers of
legal services, such as Exxon/Mobile and General Motors,
do not acquire legal services at auction; even clients able
to monitor lawyers closely may be worried about the ef-
fect of the auction process on quality. So it is not possible
to say, without other evidence of a kind missing in this
record, that the outcome of auctions for the right to repre-
sent other classes in other litigation shows that the 22%
contingent fee agreed to in arms’-length transactions
between well informed parties in this case is “too high.”
  As for the possibility that consumer class counsel liti-
gated inefficiently: using too many hours to achieve a
given result is a problem with hourly billing, but the
district court did not employ the lodestar method of com-
pensation. If consumer class counsel invested too many
hours, dallied when preparing the settlement, or otherwise
ran the meter, the loss falls on counsel themselves. One
advantage of the contingent fee is that the client (or the
judge as protector of the class’s interests) need not mon-
itor how many hours the lawyers prudently devoted to the
case. The client cares about the outcome alone. Here, the
district judge found (and we agree), the outcome is excel-
lent from the class’s perspective. Inefficient conduct of
the litigation therefore does not afford any reason to re-
duce class counsel’s percentage of the fund that their
work produced.
  Instead of remanding for still a third calculation, we
think it best to set the fees ourselves, as we have done
in other class actions that have necessitated multiple
appeals, so that the class members may at last receive
their awards (something that is not possible until the
attorneys’ stakes have been determined). See, e.g., Florin v.
Nationsbank of Georgia, N.A., 60 F.3d 1245, 1248 (7th Cir.
1995); In re Continental Illinois Securities Litigation, 985
F.2d 867, 869 (7th Cir. 1993). See also Divane v. Krull
Electric Co., 319 F.3d 307, 318 & n.2 (7th Cir. 2003)
10                                 Nos. 02-2398 & 02-2519

(collecting authority). We stick as close as possible to the
district court’s approach and thus give consumer class
counsel 30% of the first $10 million and 25% of the next
$10 million. Because consumer class counsel bore at least
as much risk as TPP class counsel for the band from $20
million to $46 million, consumer class counsel is entitled
to 22% of that portion of the recovery. And we think that
15% of all amounts over that is a decent estimate of the
fee that would have been established in ex ante arms’-
length negotiations. Because the consumer class recovered
a total of $88 million, the fee comes to $17.52 million, or
19.9% of the fund. (The award in absolute dollars must
be adjusted to reflect the interest that the fund has been
accumulating; the parties should be able to agree on
this mechanical calculation.) Because we have used the
TPP award as the benchmark, and the TPP class counsel
recovered costs and expenses on top of their 22% (as
their contracts provided), consumer class counsel also
are entitled to a separate award on this score. We hope
that this sum can be liquidated quickly in the district
court so that the fund may be distributed promptly to
the consumers.
  The decision of the district court with respect to the
TPP classis affirmed on Appeal No. 02-2519. The decision of
the district court with respect to the consumer class is
vacated on Appeal No. 02-2398, and the case is remanded
for entry of the fee award we have described and for fur-
ther proceedings consistent with this opinion.

A true Copy:
      Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit

                   USCA-02-C-0072—4-15-03