Court of Appeals Sustains Validity of Fee Reversion Clause Based on Exceptional Results and Affirms Percentage of Recovery Fee Award.
The Ninth Circuit Court of Appeals recently considered two attorney’s fees issues in the context of a class action, albeit in an unpublished memorandum decision. Glass v. UBS Financial Services, Inc., Case No. 07-15278 (9th Cir. Feb. 9, 2009) (unpublished mem.) is a very interesting decision for practitioners on both sides of class actions. We thank Michael Rubin of San Francisco’s Altshuler Berzon LLP for a great “heads up” on class action pointers from this case.
Glass involved plaintiff brokers suing various financial entities for wage/hour violations in improperly classifying them as “exempt” employees. Because the exemption issue was unsettled, plaintiffs’ attorneys made a prudent decision to engage in a quick mediation and attempt to settle the matter after informal discovery by both sides. It worked: plaintiffs and defendants reached a fairly early settlement by which $45 million was set aside in a common fund (even though the settlement class was in the low thousands), with plaintiffs’ counsel seeking about $11.25 million in attorney’s fees—about a 25% percentage of recovery even though the lodestar was much less. Plaintiffs’ early settlement efforts were rewarded, with the district court giving their counsel the requested 25% percentage recovery.
Unfortunately, two objectors—not the defendants—objected to the settlement, challenging various aspects of the fees award. Objectors did not prevail on appeal.
One objector challenged a provision in the settlement stating that any reduction in attorney’s fees by the district court would revert to the defense, rather than to the class. The Ninth Circuit did agree that these type of “fee reversionary clauses” were subject to close scrutiny, given that they “act[ed] as a device to isolate fees from scrutiny” because they were favorable both to class counsel and defendants which would receive the benefit of any judicial fee reduction. (Staton v. Boeing Co., 327 F.3d 938, 964-965, 970-971 (9th Cir. 2003).) However, this scrutiny is modified by an exception—if the class members obtained exceptional results for the class. The exception applied in Glass because the class representatives primarily negotiated a settlement before the Department of Labor issued an opinion letter reducing the value of plaintiffs’ claims.
Objector also argued that the district judge’s approval of a fees award constituting 25% of the total award constituted an abuse of discretion. Even though agreeing that the award was “high” relative to the total class recovery, the Ninth Circuit still found that the award was justified because proper circumstances were considered and the district judge performed an informal lodestar cross-check. (Vizcaino v. Microsoft Corp., 290 F.3d 1043, 1048 (9th Cir. 2002); Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1311 (9th Cir. 1990).)
Objector next contended that the district court erred in using a percentage-of-recovery approach rather than a lodestar multiplier approach. Not so, said the federal court of appeals, especially in a common fund case. (Hanlon v. Chrysler Corp., 150 F.3d 1011, 1029 (9th Cir. 1998).)