By Michael Gallub
- This article was first published on Law.com
Network - March 11, 2014
Art China Co. v. Foxfire Printing and Packaging, Inc., No.
13-2569, 2014 U.S. App. LEXIS 2930 (7thCir.,
Feb. 18, 2014), the Seventh Circuit rejected plaintiffs’
counsel’s attempt at a voluntary FRAP 42(b) dismissal of their
appeal in favor of providing guidance to district courts on the
determination of class action attorney fees. The action claimed
that defendant improperly “fax-blasted” 28,879 recipient class
members with 110,853 illegal faxes in violation of the Telephone
Consumer Protection Act of 1991, 47 U.S.C. §227. The district
court approved a class action settlement whereby defendant’s
insurer agreed to make a $6.1 million settlement fund available
to the class members based upon an agreed damage recovery of
$55.03 for each improper fax. The settlement included a
“clear-sailing” agreement for a $2 million attorney fee to
plaintiffs’ counsel based upon one-third of the total amount of
the settlement fund, with a reversion to defendant’s insurer of
any unused portion of the fund after payment of the attorney
When the settlement was administered, only 1,820 class members
elected to submit a claim to collect from the settlement fund.
This resulted in a payout of only $397,000 out of the $6.1
million settlement fund. Id.
at *3-4. Despite what the court acknowledged as “the relatively
meager final payout to class members,” plaintiffs’ counsel
continued to press for their $2 million attorney fee. “Wary of
an inequitable distribution, the district court applied to
lodestar method, rather than the percentage method, to determine
the fee award.” Id.
at *4. There was no opposition from defendant, since the
attorney fee was agreed to as part of the settlement. The
district court accepted counsel’s unopposed lodestar and applied
a 1.5 multiplier based on the contingency nature of the
representation, arriving at a final reduced fee of approximately
$1.1 million. Id.
Plaintiffs’ counsel appealed the fee reduction on the basis of
two arguments: (1) that the district court’s consideration of
the amount actually recovered by the class amounted to an
post facto rationalization for an attorney fee reduction, and
(2) the district court erred in choosing lodestar over the
percentage method. However, the oral argument apparently did
not go well, and plaintiffs’ counsel tried to pull the plug on
the appeal by filing a joint FRAP 42(b) motion to voluntarily
dismiss it. The Seventh Circuit denied the motion, stating that
in view of “the conflicting incentives present in any class
action suit,” it would be “irresponsible” not to review the
appeal and take the “opportunity to provide additional guidance
to the district courts.” Id.
at *1-2, 5.
In doing so, the court held that both arguments by counsel
missed the mark. The fee determination was not ex
post facto, because district court did not consider the
ultimate outcome in calculating the lodestar, although it did
properly “consider the paucity of the class recovery as compared
to the requested fee when deciding whether to apply the lodestar
method, as opposed to the percentage method, in the first
at *7-8. This, said the court, comports with what the Seventh
Circuit had previously suggested to allow district courts to
forego use of the percentage method in circumstances that would
result in an over-compensation of counsel. Id.
at *8, citing
Harman v. Lyphomed, Inc., 945 F.2d 969, 974 (7th Cir.
1991). Since the choice of fee methodology is discretionary in
the Seventh Circuit, the court held that the district court did
not abuse its discretion by choosing lodestar over the
percentage method under the circumstances of the case. Id.
Significantly, the court acknowledged that the district court
could rightfully have considered the actual amount recovered by
the class in determining the attorney fee. Id.
at *8-9, citing Sutton
v. Bernard, 504 F.3d 688, 692 (7th Cir.
2007). The court noted that “[a]ttorneys and clients
negotiating fee schedules ex
anteoften, and in some practice contexts almost exclusively,
consider the litigation’s ultimate degree of success,” which is
also how a contingency fee works. Id.
at *8. Thus, there was no basis for counsel’s argument that a
district court cannot consider the amount actually recovered –
or the ultimate degree of success of the litigation – in
determining a reasonable class action attorney fee. Id.
at *8-9. In fact, the court noted that if the district court
had solely considered the ultimate benefit to class members, as
plaintiffs’ counsel suggested, the fee reduction would have been
far more drastic than the approximate 50% reduction that was
ultimately ordered. Id.
Despite the substantial fee reduction, plaintiffs’ counsel were
fortunate that there was a “clear-sailing” agreement and that
the defendant did not oppose their fee applicable. In the
absence of such an agreement, defendant could have argued
persuasively for an even more substantial fee reduction, both in
the district court and on appeal, based upon the “paucity of the
class recovery as compared to the requested fee.” The guidance
afforded by the Seventh Circuit sends a clear message that
district courts may consider the amount of actual recovery by
class members, both in choosing the appropriate fee methodology
and in determining what constitutes a “reasonable” class action
attorney fee in a particular case.
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