Court Opinion

ID: 3001018
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:11:53.308182+00
Date Added: 2024-06-11T15:02:56.139810
License: Public Domain

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

No. 06-3778
DOUG SUTTON and
PRESCOTT NOTTINGHAM,
on behalf of themselves and
all others similarly situated,
                                                          Plaintiffs,
                                 v.

ROBERT F. BERNARD, et al.,
                                                        Defendants.

APPEAL OF:
    MILBERG WEISS BERSHAD & SCHULMAN LLP,
    lead counsel for plaintiffs, on behalf of itself and
    all other counsel for plaintiffs.
                          ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
               No. 00 C 6676–John F. Grady, Judge.
                          ____________
    ARGUED APRIL 4, 2007—DECIDED OCTOBER 12, 2007
                     ____________

  Before KANNE, WILLIAMS, and SYKES, Circuit Judges.
  WILLIAMS, Circuit Judge. The legal claims in this multi-
million dollar securities class action have been settled. The
issue of attorneys’ fees for class counsel, however, has
2                                               No. 06-3778

not. Having saved the calculation of the fee award for
the end of the litigation, the district court concluded that
the “degree of success” obtained for the class was the
controlling factor in its decision. As we explain more fully
below, the district court failed to approximate what the
market would have paid the lawyers for their services
had they negotiated their fee at the beginning of the case,
an approach that our precedent requires. Therefore, we
vacate the district court’s decision and remand for a
recalculation of the award.

                   I. BACKGROUND
  On February 27, 2001, the district court appointed the
law firm of Milberg Weiss Bershad & Schulman LLP
(“Counsel”) as the lead attorneys for the plaintiffs in a
securities fraud action against three former executive
officers of the Internet consulting company Marchfirst, Inc.
The complaint alleged that the defendants had made
false and misleading public statements that artificially
inflated the price of the company’s stock, resulting in
damages to those who had purchased or acquired
Marchfirst stock between March and November of 2000.
Marchfirst, which filed for bankruptcy shortly before the
complaint was filed, was not named in the suit. In the
district court’s February 27, 2001, order appointing
Counsel, it reserved for later determination the issue of
how attorneys’ fees would be awarded.
  On December 17, 2001, the district court granted the
plaintiffs’ motion for certification of the class, and discov-
ery began. During this time, the Trustee in the Marchfirst
bankruptcy proceeding filed an action against former
directors and officers of the company, including the three
defendants to the class action, alleging a breach of their
fiduciary duties. Claiming priority over the class action,
the Trustee succeeded in obtaining an injunction to stay
No. 06-3778                                                  3

those proceedings, except for discovery, pending the
resolution of its action. The class members found them-
selves competing with the Trustee for Marchfirst’s
assets, so they, along with the defendants and the defen-
dants’ insurer, took part in a sixteen-month-long media-
tion. As a result of this process, an agreement was final-
ized on December 20, 2004, which provided for an
$18,000,000 settlement for the class and a $6,000,000
settlement of the Trustee’s action.
  After receiving no objections to the settlement from the
class, on March 24, 2005, Counsel petitioned the district
court for compensation equal to 28% of the gross settle-
ment amount, or $5,040,000, in fees.1 Counsel explained its
request by first noting that according to a study by Na-
tional Economic Research Associates, the $18,000,000
settlement exceeded the median expected settlement by
50%. In addition, Counsel argued that the quality of its
legal services was demonstrated by its ability to secure
this amount in spite of the legal and factual complexities
presented by the case. Counsel further contended that
its fee request was fair and reasonable because it repre-
sented 88% of its cumulative lodestar of $5,693,884 (the
equivalent of Counsel’s hours spent on the case multiplied
by its hourly rate), and was lower than fee percentage
awards of 33% approved by other judges in the Northern
District of Illinois. Counsel also told the court that it
risked nonpayment at the outset of the litigation since
its compensation depended on the success of the suit.
  On July 12, 2006, before addressing Counsel’s fee
award, the district court granted final approval of the
settlement amount, declaring it “reasonable, considering

1
   Counsel also sought reimbursement of $757,274.23 in expenses
it incurred during the litigation. The district court approved
expenses of $639,508.56, which Counsel does not appeal.
4                                               No. 06-3778

the uncertain outcome of the legal and factual questions
that would be involved in a trial of the case . . . .” Sutton
v. Bernard, 446 F. Supp. 2d 814, 816 (N.D. Ill. 2006). The
court then stated that Counsel’s fee would be awarded
from the net settlement amount of $17,360,491.44, a figure
that excluded expenses, as opposed to the total recovery.
Id. at 819-22 (citing Montgomery v. Aetna Plywood,
Inc., 231 F.3d 399, 408 (7th Cir. 2000)).
  The court began its calculation of the appropriate fee
percentage by looking to the “degree of success” Counsel
had obtained for the class, a factor it considered crucial to
its determination of an appropriate fee percentage. Id. at
820. Next, it cited Counsel’s representation that the
settlement equaled a recovery of nineteen cents per
share, which the court calculated would yield a distribu-
tion of $78 to a class member with the median number of
shares, 400. Id. at 821. Although the court regarded the
settlement as the best Counsel could obtain “under the
circumstances,” it did not believe that the small recovery
could justify Counsel’s requested fee percentage of 28%,
which it considered “excessive.” Id. at 821, 822. Citing
its duty to render a fair judgment, the court decided that
a fee of 15% of the net settlement amount, or $2,605,000,
was the highest it could award. Id. at 822. A few days
after issuing its decision, the district court filed a supple-
mental opinion and stated that the Private Securities
Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(6)
(2007), “contemplate[s] a fee . . . that is measured by
the results that have actually been achieved in the case.”
See Sutton v. Bernard (“Sutton II”), 446 F. Supp. 2d 823,
824 (N.D. Ill. 2006).
  Counsel appeals, challenging the district court’s ap-
proach in determining that the appropriate attorneys’ fee
was 15% of the settlement fund, barely half of Counsel’s
fee request.
No. 06-3778                                               5

                     II. ANALYSIS
  We review the district court’s methodology de novo “to
determine whether it reflects procedure approved for
calculating awards.” Harman v. Lyphomed, Inc., 945 F.2d
969, 973 (7th Cir. 1991). Our review of the final award
is for an abuse of discretion, which “occurs when the
court reaches an erroneous conclusion of law, fails to
explain a reduction or reaches a conclusion that no evi-
dence in the record supports as rational.” Id.
   Once a settlement has been reached in a class action, the
attorneys for the class petition the court for compensation
from the settlement or common fund created for the class’s
benefit. This method of payment is an exception to the
“American Rule,” which requires each party to bear its
own expenses. Florin v. Nationsbank of Ga., N.A., 34 F.3d
560, 562-63 (7th Cir. 1994); Skelton v. Gen. Motors Corp.,
860 F.2d 250, 252 (7th Cir. 1988). Also known as the
common fund doctrine, this payment scheme “is based on
the equitable notion that those who have benefited from
litigation should share in its costs.” Skelton, 860 F.2d at
252 (internal quotations omitted).
  In deciding fee levels in common fund cases, we have
consistently directed district courts to “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.” In re Synthroid
Mktg. Litig., 264 F.3d 712, 718 (7th Cir. 2001) (collecting
cases). In Synthroid, we vacated the district court’s award
after finding that it failed to follow our market-based
approach when it capped counsel’s fee percentage at 10%
on the basis that there was a large recovery involved. Id.
at 717-18. Because the attorneys’ fee had not been deter-
mined up front in that case, we instructed the district
court on remand to undertake an analysis of the terms to
which the private plaintiffs and their attorneys would have
6                                                 No. 06-3778

contracted at the outset of the litigation when the risk of
loss still existed.2 Id. at 718-19; see also In re Cont’l Ill.
Sec. Litig., 962 F.2d 566, 572 (7th Cir. 1992) (the goal in
awarding a reasonable attorneys’ fee is to give the lawyer
what he would have received in an arms-length negotia-
tion).
  A similar disposition is required in this case. Like the
court in Synthroid, the district court here employed a
methodology that does not reflect the market-based
approach for determining fee awards that is required by
our precedent. As described earlier, the district court’s
analysis centered solely on the results achieved by Counsel
to justify awarding a fee percentage of 15% of the common
fund. The court attributed its emphasis on this standard
to Hensley v. Eckerhart, 461 U.S. 424, 436 (1983), which
involved the appeal of an award of attorneys’ fees to a
group of plaintiffs who prevailed on five of their six
constitutional challenges to the defendants’ practices. In
deciding the issue of whether a partially prevailing
plaintiff could recover fees for legal services on unsuccess-
ful claims, the Court held “that the extent of a plaintiff ’s
success is a crucial factor in determining the proper
amount of an award of attorney’s fees under 42 U.S.C.
§ 1988,” the applicable fee-shifting provision. Id. at 440.
The Court continued, “where the plaintiff achieved only
limited success, the district court should award only that
amount of fees that is reasonable in relation to the
results obtained.” Id. Based on this language, the district

2
  We also pointed the district court to the following benchmarks
to aid in its determination on remand of what might have
occurred ex ante: (1) actual fee agreements; (2) data from large
common fund cases where the parties negotiated the fees
privately, and (3) bids and results from class counsel auction
cases for insight into the fee levels attorneys in competition
were willing to accept. Synthroid, 264 F.3d at 719-21.
No. 06-3778                                                7

court decided that Counsel was not entitled to a fee
percentage of 28% because it had achieved what the court
considered to be only a small net recovery for the class. See
Sutton, 446 F. Supp. 2d at 820-21. In reaching this conclu-
sion, however, the district court misapplied the principles
that govern fee shifting cases to the common fund case
before it.
   As indicated above, Hensley involved an award of attor-
neys’ fees under 42 U.S.C. § 1988(b), which provides that
in certain proceedings “the court, in its discretion, may
allow the prevailing party, other than the United States,
a reasonable attorney’s fee as part of the costs . . . .” By
contrast, in this case, the district court was required to
determine a reasonable attorneys’ fee for Counsel to be
paid out of the common fund. In Skelton, we highlighted a
key difference between these two fee recovery schemes,
namely the source of the plaintiffs’ attorneys’ fees. See
860 F.2d at 252. As we observed, in statutory fee-shifting
cases, the prevailing party, usually the plaintiff, recovers
the attorneys’ fee from the defendant, whereas in a
common fund case, the court awards the plaintiffs’ attor-
neys’ fees from the fund. Id. In Hensley, the Court empha-
sized the significance of the results obtained to avoid
awarding excessive fees in cases where the plaintiff had
only achieved limited success. See 461 U.S. at 436. In a
common fund case, where the defendant’s liability is
limited to the amount paid into the fund, there is no
danger of unduly burdening that party with payment of
the plaintiffs’ attorneys’ fee for time spent on unsuccess-
ful claims. This is especially so considering that compen-
sating Counsel from the common fund is premised on the
idea that the plaintiffs and their counsel share in the
litigation’s costs. See Skelton, 860 F.2d at 252. We there-
fore find that the district court erred in holding that the
“degree of success” standard articulated in Hensley applied
to its calculation of a fee percentage in a common fund
8                                               No. 06-3778

case. Cf. Hensley, 461 U.S. at 433 n.7 (applying standard
to cases where Congress has authorized a fee award to
the prevailing party).
   The district court also sought to justify its methodology
by citing to the section of the Private Securities Litigation
Reform Act that governs the award of attorneys’ fees and
expenses in securities class actions. See Sutton II, 446
F. Supp. 2d at 823. Under that provision, “[t]otal attor-
neys’ fees and expenses awarded by the court to counsel
for the plaintiff class shall not exceed a reasonable per-
centage of the amount of any damages and prejudgment
interest actually paid to the class.” 15 U.S.C. § 78u-4(a)(6).
According to the district court, this language requires an
ex post determination of the fee percentage that is mea-
sured by the results achieved for the class. See generally
Sutton II, 446 F. Supp. 2d 823. We emphasize that we
do not take issue with the timing of the district court’s
fee determination, but rather, with the method used.
Because the court chose to wait until the end of the
litigation, it was required to set the fee by estimating
what the parties would have agreed to had negotiations
occurred at the outset. Synthroid, 264 F.3d at 719. The
trouble we have with the district court’s methodology
is that the fee determination began and ended with the
amount actually recovered for the class; the court did not
consult the market for legal services for guidance in what
constituted, as an abstract matter, a “reasonable percent-
age.” Cf. Missouri v. Jenkins, 491 U.S. 274, 285 (1989) (in
determining attorneys’ fees, “we have consistently looked
to the marketplace as our guide to what is ‘reasonable’ ”).
By looking to the marketplace, the district court avoids
assigning a value “based on nothing more than a subjective
judgment regarding [Counsel’s] work.” Montgomery, 231
F.3d at 408; see also In re Cont’l, 962 F.2d at 568 (in fail-
ing to follow the market, district court judge “thought he
No. 06-3778                                                   9

knew the value of the class lawyers’ legal services better
than the market did”).
  We have said that the market price 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.” Synthroid, 264 F.3d
at 721. Here, the district court dismissed Counsel’s
contention that it faced a risk of nonpayment for its
services by declaring, “[t]his is a common argument in
support of large fees in class actions, but it has no rela-
tionship to reality,” and adding that class actions rarely go
to trial and that they all settle. Sutton, 446 F. Supp. 2d
at 822. In Continental, we rejected this rationale as an
inadequate basis for the district court’s refusal to account
for the risk of loss in its fee award. 962 F.2d at 569-70. We
recognized that there is generally some degree of risk that
attorneys will receive no fee (or at least not the fee that
reflects their efforts) when representing a class because
their fee is linked to the success of the suit. Id. Be-
cause the district court failed to provide for the risk of loss,
the possibility exists that Counsel, whose only source of a
fee was a contingent one, was undercompensated. See id.
at 569.
  A review of the shortcomings in the district court’s
methodology leads us to conclude that the court abused its
discretion in awarding Counsel’s fee percentage. The
district court erroneously concluded that its fee determina-
tion was controlled by the “degree of success” achieved
for the class. In addition, it did not factor into its assess-
ment the value that the market would have placed on
Counsel’s legal services had its fee been arranged at the
outset. Because the district court’s fee award of 15% of
the common fund is based on an erroneous conclusion of
law, it must be vacated.
10                                          No. 06-3778

                 III. CONCLUSION
  The judgment of the district court is VACATED and the
case is REMANDED for further proceedings consistent with
this opinion. On remand, Circuit Rule 36 shall apply.

A true Copy:
      Teste:

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

                 USCA-02-C-0072—10-12-07