California Supreme Court Affirms Use of Percentage Fee Awards in Class Action Cases Resulting in Recovery of Common Funds – Laffitte v. Robert Half International.
In a significant victory for consumers and plaintiffs class action attorneys, the California Supreme Court, in Laffitte v. Robert Half International, Case No. S222996, clarified existing case law and approved the use of percentage fee awards in class action cases resulting in preservation or recovery of a “common fund” for the benefit of class members.
The facts of the case were simple. In three related wage and class action lawsuits, the defendant agreed to settle for a gross settlement amount of $19M. Plaintiffs counsel sought a fee award of the 1/3 of the gross settlement, or $6,333,333.33. Nice fee! A class member objected to the fee request arguing it was excessive and not adequately supported. The trial court overruled the objection and awarded plaintiffs the requested 1/3 “contingent fee”. Interestingly, the trial court “double-checked” the reasonableness of the contingent fee award with standard lodestar-multiplier analysis.
The objecting class member appealed arguing the trial court’s award of an attorney fee calculated as a percentage of the settlement amount violated the Court’s holding in Serrano v. Priest (1977) 20 Cal.3d.25 (Serrano III) to the effect that every fee award must be calculated on the basis of time spent by the attorney or attorneys on the case. The Court of Appeal affirmed. The Supreme Court granted review on the single issue of whether Serrano III permits a trial court to calculate an attorney fee award from a class action common fund as a percentage of the fund, while using the lodestar-multiplier method as a cross-check of the selected percentage.
In a lengthy opinion discussing the history and anaytical underpinnings of percentage and lodestar methods of determining reasonable fees in class action litigation and California law post-Serrano III, the court upheld the use of percentage fee awards in class action cases resulting in recovery of common funds.
Whatever doubts may have been created by Serrano III, supra, 20 Cal.3d 25, or the Court of Appeal cases that followed, we clarify today that use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion. We join the overwhelming majority of federal and state courts in holding that when class action litigation establishes a monetary fund for the benefit of the class members, and the trial court in its equitable powers awards class counsel a fee out of that fund, the court may determine the amount of a reasonable fee by choosing an appropriate percentage of the fund created. The recognized advantages of the percentage method—including relative ease of calculation, alignment of incentives between counsel and the class, a better approximation of market conditions in a contingency case, and the encouragement it provides counsel to seek an early settlement and avoid unnecessarily prolonging the litigation (See pt. I, ante; Lealao, supra, 82 Cal.App.4th at pp. 48–49; Rawlings v. Prudential-Bache Properties, Inc., supra, 9 F.3d at p. 516)—convince us the percentage method is a valuable tool that should not be denied our trial courts.
The court specifically limited its holding to true common fund cases. It specifically did not address whether the percentage method may be applied when there is no conventional common fund out of which the award is to be made but only a “ ‘constructive common fund’ ” created by the defendant’s agreement to pay claims made by class members or when a settlement agreement establishes a fund but provides that portions not distributed in claims revert to the defendant or be distributed to a third party or the state, making the fund’s value to the class dependent on how many claims are made and allowed. These class action types and the availability of percentage fee awards in same are left for future consideration.
The Court also endorsed the use of traditional lodestar analysis to “double-check” or “cross-check” the reasonableness of the percentage fee award, but held that trial courts have discretion to forego same.
As to the incentives a lodestar cross-check might create for class counsel, we emphasize the lodestar calculation, when used in this manner, does not override the trial court’s primary determination of the fee as a percentage of the common fund and thus does not impose an absolute maximum or minimum on the potential fee award. If the multiplier calculated by means of a lodestar cross-check is extraordinarily high or low, the trial court should consider whether the percentage used should be adjusted so as to bring the imputed multiplier within a justifiable range, but the court is not necessarily required to make such an adjustment. Courts using the percentage method have generally weighed the time counsel spent on the case as an important factor in choosing a reasonable percentage to apply. (5 Newberg on Class Actions, supra, § 15:86, pp. 332–333; see, e.g., In re Thirteen Appeals Arising Out of San Juan Dupont Plaza Hotel Fire Litigation, supra, 56 F.3d at p. 307 [“even under the [percentage of fund] method, time records tend to illuminate the attorneys’ role in the creation of the fund, and, thus, inform the court’s inquiry into the reasonableness of a particular percentage.”].) A lodestar cross-check is simply a quantitative method for bringing a measure of the time spent by counsel into the trial court’s reasonableness determination; as such, it is not likely to radically alter the incentives created by a court’s use of the percentage method.
We therefore agree with the Court of Appeal below that “[t]he percentage of fund method survives in California class action cases, and the trial court did not abuse its discretion in using it, in part, to approve the fee request in this class action.” We hold further that trial courts have discretion to conduct a lodestar cross-check on a percentage fee, as the court did here; they also retain the discretion to forgo a lodestar cross-check and use other means to evaluate the reasonableness of a requested percentage fee.
Laffitte v. Robert Half International is a significant victory for plaintiffs class action attorneys and, in turn, for California consumers injured by unfair, improper, and/or illegal business and employment practices. Whether it will result in a significant uptick in California class action litigation remains to be seen. I suspect it will. The lure of large contingent fees will likely bring in more players.
Plaintiffs class action attorneys should not throw out their time slips or unload their timekeeping software. While percentage fees are available in common fund cases, the Court tacitly endorsed, though it did not mandate, use of a lodestar calculation to “double-check” the reasonableness of such percentage fee awards. In seeking percentage fee awards in class action common fund cases, plaintiffs would be well-served to evaluate and consider whether to offer a lodestar calculation “double-check” of the contingent fee sought. If the percentage fee and the lodestar “double-check” fee are within the same range, offer the lodestar as evidence of the reasonableness of the percentage fee.
But, if the percentage fee requested in a class action common fund case is far in excess of what the fee would be under a lodestar calculation, the likely best approach is not to offer a lodestar calculation and argue the court should “use other means to evaluate the reasonableness of a requested fee”. In such cases, plaintiffs counsel would be well-served to provide other evidence, including detailed declarations, adressing the risks and potential value of the subject litigation, the novelty and difficulty of the issues involved, the history and course of the litigation, the result obtained and benefit to class members, comparable percentage fee awards in comparable cases, and the time and resources expended on the case. Under such circumstances, expect defense counsel to urge the court to require further lodestar evidence of time spent and applicable rates and to argue for lodestar analysis as a check against an exorbitant, unreasonable contingent fee.
After Laffitte v. Robert Half International, the percentage fee award survives in California class action common fund litigation. Again, a nice win for the plaintiffs class action bar!