Court Opinion

ID: 3170075
Source: CourtListenerOpinion
Date Created: 2016-01-15 19:00:50.089269+00
Date Added: 2024-06-11T11:57:18.567856
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

ROBERT STANGER, Individually and           No. 13-56903
on behalf of all others similarly
situated,                                     D.C. No.
                              Plaintiff,   2:11-cv-02794-
                                               R-AGR
                  and

MIKE MCGEE, Individually and on              OPINION
behalf of all others similarly
situated,
                   Plaintiff-Appellant,

                  v.

CHINA ELECTRIC MOTOR, INC.;
WESTPARK CAPITAL, INC.; ROTH
CAPITAL PARTNERS, LLC; RICHARD
RAPPAPORT; PHILLIP KEMPISTY;
KEMPSITY & COMPANY, CPAS, P.C.;
MALONEBAILEY LLP,
            Defendants-Appellees.

       Appeal from the United States District Court
          for the Central District of California
        Manuel L. Real, District Judge, Presiding
2             MCGEE V. CHINA ELECTRIC MOTOR

                 Submitted December 11, 2015*
                     Pasadena, California

                      Filed January 15, 2016

        Before: Harry Pregerson, A. Wallace Tashima,
         and Consuelo M. Callahan, Circuit Judges.

                        Per Curiam Opinion

                           SUMMARY**

                  Securities / Attorneys’ Fees

   The panel vacated an award of attorneys’ fees to class
counsel following the settlement of an action under the
Securities Act of 1933.

    The panel held that the district court’s choice to apply the
lodestar method, rather than the percentage-of-fund method,
was well within the district court’s discretion in this common
fund case. The district court abused its discretion, however,
by failing adequately to explain its reasons for reducing the
lodestar.

    *
    The panel unanimously finds this case suitable for decision without
oral argument. See Fed. R. App. P. 34(a)(2)(C).
  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
            MCGEE V. CHINA ELECTRIC MOTOR                   3

    The panel vacated the fee award and remanded with
instructions to recalculate the award and provide a more
detailed explanation.

                        COUNSEL

Laurence M. Rosen, The Rosen Law Firm, P.A., New York,
New York, for Plaintiff-Appellant.

No appearance for Defendants-Appellees.

                         OPINION

PER CURIAM:

    This is an appeal of an attorneys’ fees award in a
securities class action. The parties reached a settlement and
the district court approved the settlement and awarded
attorneys’ fees. Named-plaintiff, Mike McGee, appeals on
behalf of class counsel (“Class Counsel”) contending that the
fee award was arbitrary. We conclude that the district court’s
near total failure to explain the basis of its award was an
abuse of discretion. Thus, we vacate the award and remand
with instructions to recalculate the fee award and provide a
more detailed explanation of the fee award.

                              I.

   Class Counsel represented a class of investors in an action
under the Securities Act of 1933 against China Electric
Motor, Inc., and its officers, directors, auditors, and
underwriters. After two years of litigation – during which
4            MCGEE V. CHINA ELECTRIC MOTOR

Plaintiffs survived motions to dismiss, conducted discovery,
and filed for class certification – the parties reached a $3.78
million global settlement. The settlement notice to the class
included notice that Class Counsel would seek a fee award of
25% of the class fund. No one objected to the size of
proposed attorneys’ fees award.1

     Soon thereafter, together with their motion for final
approval of the settlement, Plaintiffs filed a motion for
attorneys’ fees and expenses. Class Counsel requested 25%
of the $3.78 million award, or $944,583. They submitted
billing records and argument justifying the sought
percentage-of-fund fee award.

    At the hearing on final approval of the settlement, the
district court also discussed the fee request. It declined to use
Class Counsel’s proposed percentage-of-fund method for
calculating the fee award; instead, it applied the lodestar
method. It multiplied a blended hourly rate of $475 by the
1,402 hours Class Counsel had collectively spent working on
the case, for a lodestar value of $666,488. The court then
found that a downward adjustment from the lodestar was
appropriate. It stated that a review of the billing records
disclosed “numerous examples of legal tasks being
inappropriately [lumped] together.” The court did not,
however, point to any specific tasks by way of example,
much less explain why grouping those tasks was
inappropriate, or how any of this affected the ultimate fee
award. Instead, the court merely asserted that the case was “a
very simple case” and commented that “a lot of high-cost
lawyers were not doing work . . . that would . . . take their

  1
    One putative class member requested exclusion from the settlement
class and one objected to the settlement.
               MCGEE V. CHINA ELECTRIC MOTOR                              5

expertise to do.” Ultimately, the court reduced the lodestar
by 422 hours.2 This resulted in a final fee award of $466,038
– a 30% reduction from the original lodestar value, and a 50%
reduction from Class Counsel’s requested fee.

     In its subsequent written Order Awarding Lead Plaintiff’s
Counsel Attorneys’ Fees and Reimbursing Expenses (the
“Order”), the district court did not offer any additional
explanation for its decision to cut Class Counsel’s hours by
30%. Indeed, some language in the Order directly
contradicted the court’s statements at the final approval
hearing and may have even supported applying a positive
multiplier to the original $666,488 lodestar. For example, the
Order stated that “the litigation of this Action involved
complex factual and legal issues and was actively prosecuted
since its filing, and in the absence of the Settlement, the
Action would have continued to involve complex factual and
legal questions,” and that “if Lead Plaintiff’s Counsel had not
achieved the Settlement, there was a risk of either a smaller
or no recovery.” Nevertheless, in keeping with its statements
at the final approval hearing, the court awarded Class Counsel
the significantly reduced fee.

                                    II.

    We review an award of attorneys’ fees for abuse of
discretion. Childress v. Darby Lumber, Inc., 357 F.3d 1000,
1011 (9th Cir. 2004). “A district court abuses its discretion

    2
       Presumably, the inappropriate “high-cost lawyers” work was
discounted by the court in arriving at its “blended” hourly rate of $475 per
hour. If so, then discounting the number of hours was double-counting the
same discount. But the district court did not explain how it arrived at the
blended hourly rate.
6           MCGEE V. CHINA ELECTRIC MOTOR

if its decision is based on an erroneous conclusion of law or
if the record contains no evidence on which it rationally could
have based its decision.” In re Mercury Interactive Corp.
Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010) (quoting Fischel
v. Equitable Life Assurance Soc’y, 307 F.3d 997, 1005 (9th
Cir. 2002)). We review underlying factual determinations for
clear error. Native Vill. of Quinhagak v. United States,
307 F.3d 1075, 1079 (9th Cir. 2002). We review whether the
district court applied the correct legal standard de novo. Sea
Coast Foods, Inc. v. Lu-Mar Lobster & Shrimp, Inc.,
260 F.3d 1054, 1058 (9th Cir. 2001).

                              A.

    In a common fund case, such as this, the district court has
the discretion to choose between either the lodestar or the
percentage-of-fund methods when calculating fees. E.g.,
Fischel, 307 F.3d at 1006. “Under the lodestar method, the
court multiplies a reasonable number of hours by a reasonable
hourly rate.” Id. Because there is a strong presumption that
the lodestar amount represents a reasonable fee, adjustments
to the lodestar “are the exception rather than the rule.” Id. at
1007 (quoting D’Emanuele v. Montgomery Ward & Co.,
904 F.2d 1379, 1383–84 (9th Cir. 1990)).

    Under the percentage-of-fund method, the district court
may award plaintiffs’ attorneys a percentage of the common
fund, so long as that percentage represents a reasonable fee.
E.g., In re Wash. Pub. Power Supply Sys. Sec. Litig., 19 F.3d
1291,1294 n.2 (9th Cir. 1994) (“WPPSS”). The Ninth Circuit
has set 25% of the fund as a “benchmark” award under the
percentage-of-fund method. Powers v. Eichen, 229 F.3d
1249, 1256 (9th Cir. 2000) (citing Torrisi v. Tucson Elec.
Power Co., 8 F.3d 1370, 1376 (9th Cir. 1993); Paul, Johnson,
            MCGEE V. CHINA ELECTRIC MOTOR                    7

Alston & Hunt v. Graulty, 886 F.2d 268, 272 (9th Cir. 1989)).
“Reasonableness is the goal, and mechanical or formulaic
application of either method, where it yields an unreasonable
result, can be an abuse of discretion.” Fischel, 307 F.3d at
1007 (quoting In re Coordinated Pretrial Proceedings in
Petroleum Prods. Antitrust Litig., 109 F.3d 602, 607 (9th Cir.
1997) (“Petroleum Prods.”)). In this case, the choice to apply
the lodestar method, rather than the percentage-of-fund
method, was well within the district court’s discretion.

    In order for this Court to conduct a meaningful review of
the fee award’s reasonableness, however, the district court
must “provide a concise but clear explanation of its reasons
for the fee award.” Hensley v. Eckerhart, 461 U.S. 424, 437
(1983). The district court must state not only the grounds on
which it relied, but also how it weighed the various
competing considerations. Powers, 229 F.3d at 1257–58.
“Without some indication or explanation of how the district
court arrived at the amount of fees awarded, it is simply not
possible for [the appellate court] to review such an award in
a meaningful manner.” Chalmers v. City of L.A., 796 F.2d
1205, 1213 (9th Cir. 1986); see also Ferland v. Conrad
Credit Corp., 244 F.3d 1145, 1151–52 (9th Cir. 2001).
Especially “where the disparity [between the requested fee
and the final award] is larger, a more specific articulation of
the court’s reasoning is expected.” Moreno v. City of
Sacramento, 534 F.3d 1106, 1111 (9th Cir. 2008).

     Here, the district court did not adequately explain its
reasons for reducing the lodestar. While the court noted one
or two considerations that might have supported its decision,
it failed to explain how it weighed those considerations when
calculating the final award. Specifically, the record lacks any
explanation as to why the lodestar was reduced by 422 hours,
8              MCGEE V. CHINA ELECTRIC MOTOR

as opposed to any other number of hours. What’s more, those
422 hours represent a 30% reduction of the hours
compensable under the presumptively correct lodestar. A
30% reduction is large enough that the parties were entitled
to a more detailed explanation of the court’s reasoning. See
Costa v. Comm’r of Soc. Sec. Admin., 690 F.3d 1132, 1136
(9th Cir. 2012) (requiring “relatively specific reasons” where
compensable hours were reduced by nearly one-third).
Based on the evidence (or lack of evidence) before us, we can
only conclude that the 422-hour cut was arbitrary. We
therefore vacate the fee award, and remand for further
consideration.3

                                    B.

    In addition to arguing that the reduction to the lodestar
was arbitrary, Class Counsel challenge the district court’s
failure to consider three additional grounds for increasing the
award.      Class Counsel first contend that the Kerr
“reasonableness” factors entitled them to an upward
adjustment of the lodestar. See Kerr v. Screen Extras Guild,
Inc., 526 F.2d 67, 70 (9th Cir. 1975).4 Class Counsel further

        3
     Class Counsel ask us to exercise our discretion to determine the
appropriate fee award on appeal, rather than remand to the district court.
Because the record is insufficiently developed, we decline Class Counsel’s
invitation.
    4
    In Kerr, the Ninth Circuit adopted a twelve-factor matrix to guide the
district court’s consideration of the reasonableness of the fee award. Kerr,
526 F.2d at 70. The continued relevance of two of the original factors has
since been called into question by the Supreme Court. See Resurrection
Bay Conservation All. v. City of Seward, Alaska, 640 F.3d 1087, 1095 n.5
(9th Cir. 2011) (citing Davis v. City & Cnty. of S.F., 976 F.2d 1536, 1546
n. 4 (9th Cir.1992)).
             MCGEE V. CHINA ELECTRIC MOTOR                         9

contend that the court’s failure to apply two modifiers to the
adjusted lodestar – namely, compensation for delay in
payment and the risk of litigation – was an abuse of
discretion. Whether these factors require an increase of the
lodestar amount is for the district court to decide in the first
instance on remand. We agree, however, that the court’s
failure explicitly to consider the Kerr “reasonableness”
factors, as well as the delay and risk factors, was an abuse of
discretion. We therefore include the following discussion of
the applicable legal standards to aid the district court in
awarding an appropriate fee on remand.

    1. The “reasonableness” factors

     Class Counsel first argue that several of the Kerr
“reasonableness” factors entitle them to an upward
adjustment of the lodestar. Once the lodestar has been
calculated, “the court may adjust it upward or downward by
an appropriate positive or negative multiplier reflecting a host
of ‘reasonableness’ factors, including the quality of
representation, the benefit obtained for the class, the
complexity and novelty of the issues presented, and the risk
of nonpayment.” In re Bluetooth Headset Prods. Liab. Litig.,
654 F.3d 935, 941–42 (9th Cir. 2011) (internal quotation
marks omitted). Class Counsel emphasize the excellent result
they believe they obtained; the difficulty and risks inherent in
litigating against defendants in China; the complexity and
difficulty of prosecuting the specific claims raised in the
complaint; and the high quality of representation Class
Counsel provided the class.5

   5
     Contrary to the district court’s approach, Class Counsel include
detailed citations to the record supporting their arguments.
10            MCGEE V. CHINA ELECTRIC MOTOR

    While the decision to enhance or reduce the lodestar
under the Kerr factors is within the district court’s discretion,
the court still must explain how it arrived at its final decision.
Here, the district court never mentioned the Kerr factors, nor
did it discuss in any detail the substance of Class Counsel’s
tendered grounds for applying a positive multiplier to the
final lodestar amount. Without more, “we have no choice but
to remand the case to the district court to permit it to make
the necessary calculations and provide the necessary
explanations.” McCown v. City of Fontana, 565 F.3d 1097,
1102 (9th Cir. 2009) (as amended). On remand, the district
court must explicitly discuss why the Kerr reasonableness
factors do or do not favor applying a multiplier (positive or
negative) in this case.

     2. The delay factor

    As for the delay factor, “[a]ttorneys in common fund
cases must be compensated for any delay in payment” and
failure to do so is an abuse of discretion. Fischel, 307 F.3d at
1010. The district court may choose one of two methods to
compensate attorneys for a delay in payment: (1) the court
may apply “the attorneys’ current rates to all hours billed
during the course of the litigation”; or (2) the court may use
the attorneys’ historical rates and add a prime rate
enhancement. Id. (quoting Petroleum Prods., 109 F.3d at
609). Here, the district court gives us no clue on whether it
relied on Class Counsel’s current or historic rates to calculate
the blended hourly rate.6 On remand, the district court must
apply one of the two delay-compensation methods outlined
above to compensate for the delay in payment and clearly

  6
    Neither did the district court otherwise explain how it arrived at the
blended hourly rate of $475. See also note 2, supra.
            MCGEE V. CHINA ELECTRIC MOTOR                    11

explain how it utilized that method to arrive at its calculated
delay compensation.

   3. The risk factor

    Finally, Class Counsel contend that the district court’s
failure to apply a risk multiplier was an abuse of discretion.
Risk multipliers incentivize attorneys to represent class
clients, who might otherwise be denied access to counsel, on
a contingency basis. WPPSS, 19 F.3d at 1300. This incentive
is especially important in securities cases. Id. Thus, the
district court must apply a risk multiplier to the lodestar
“when (1) attorneys take a case with the expectation they will
receive a risk enhancement if they prevail, (2) their hourly
rate does not reflect that risk, and (3) there is evidence the
case was risky.” Fischel, 307 F.3d at 1008. Failure to apply
a risk multiplier in cases that meet these criteria is an abuse
of discretion. Id.

    The record is insufficiently developed to allow us to
determine whether this case warrants the application of a risk
multiplier. On remand, the district court may take steps to
develop the record more fully. See WPPSS, 19 F.3d at 1302.
We emphasize that regardless of whether or not the district
court ultimately finds that this case requires application of a
risk multiplier, it must fully and adequately explain the basis
for its decision.

                              III.

    We recognize that the district court had a difficult task in
balancing the interests of the class against the need to award
a fee that adequately compensates Class Counsel for their
representation in this case. Yet, this difficulty does not
12          MCGEE V. CHINA ELECTRIC MOTOR

relieve the district court of its responsibility, not only to
consider carefully Class Counsel’s fee application, but also to
explain fully its reasoning in arriving at its award. The
entirely impressionistic reasoning offered by the district court
is inadequate, and thus arbitrary; it prevents us from properly
reviewing the award on appeal.

   The district court’s award of attorneys’ fees is vacated
and the matter is remanded for further proceedings consistent
with this opinion.

     VACATED and REMANDED.