First District, Division 5 Rejects Clear Sailing Clause/Class Counsel Conflict Challenges to Fee Award.
In the next case that we review, the Court of Appeal dealt with “clear sailing clauses” in class action settlements and the claim that class counsel conflicts in obtaining fees need “structural” review. The appellate panel found that these clauses are very customary and that the trial court can easily make sure that attorney’s fees are reasonable in class action settlements—in fact, that is the charge of the lower courts.
In re Consumer Privacy Cases, Case Nos. A120591 et al. (1st Dist., Div. 5 June 30, 2009) (certified for partial publication, with the fee award portions published) dealt with the class action settlement of a Business & Professions Code section 17200 case against Bank of America alleging that it violated customer privacy by providing customer information to third party and direct telemarketers for a fee. A settlement was reached by which Bank guaranteed it would provide aggregate benefits to the class of $10.75 million, plus additionally providing financial privacy kits to requesting customers and paying $3.25 million to a privacy-related cy pres fund. In the settlement agreement, Bank agreed that it would not oppose class counsel’s application for an award of attorney’s fees and costs to be determined by the court as long as the amount did not exceed $4 million (this is known as a “clear sailing clause” in class action nomenclature). Later, the trial court awarded class counsel $2,907,982 in fees (based on a $1,671,704 lodestar with a 1.75 multiplier) and $110,373 in costs. Fees were awarded under the “private attorney general statute” (Code of Civil Procedure section 1021.5) and the “common fund doctrine.” The lower court actually denied almost $1 million in claimed fees and costs to class counsel. Certain objectors appealed the fee/cost orders.
Objectors did not prevail; the fee and costs awards were affirmed.
The first challenge was to the “clear sailing clause” in the settlement agreement, with objectors claiming that it put class counsel’s interests ahead of maximizing the class’s recovery. This was firmly rejected by the Court of Appeal, stating that these clauses are quite typical in class action settlements and actually help facilitate completion of settlements. The appellate panel even observed that the Manual for Complex Litigation actually acknowledges the propriety of such clauses and that numerous California decisions have implicitly approved their use.
Objectors next argued that trial courts could not be trusted to weed out self-interested behavior by the settling parties in class actions. Rubbish, said the appellate court in so many words. Trial judges are well aware of their roles as fiduciaries in the class action settlement process. In California, they generally use the lodestar analysis, which may be enhanced on the basis of a percentage-of-the-benefit analysis. (In re Vitamin Cases, 110 Cal.App.4th 1041, 1052 (2003).) The First District even noted that empirical studies showed that fee awards in class actions average around one-third of the recovery, which may give even more impetus to using the percentage method in class actions. In fact, the trial court retains discretion “to choose one method over another as long as the method chosen is applied consistently using percentage figures that accurately reflect the marketplace.” (Chavez v. Netflix, Inc., 162 Cal.App.4th 43, 65-66 (2008).)
Objectors finally argued that any claimed “surplus” (the difference between the $4 million Bank agreed to pay and the $3 million actually awarded) should go to the class. No way, said the appellate panel. Nothing in the Manual for Complex Litigation dictated this result, and the bargain between the settling parties certainly did not contemplate this result. The Court of Appeal honored the fact that Bank should only have to pay $3 million, as they agreed to do (and could have paid more if the trial court had determined more fees had been due to class counsel).