Court Nixes $14 Million Lawyer-Fee Request
When last we checked in with class-action lawyer Ted Frank, he was fresh off a significant win in a class-action lawsuit involving bluetooth headsets.
Mr. Frank (pictured), who makes a living objecting to class-action settlements he thinks are unfair, has struck big again.
The U.S. Court of Appeals for the Third Circuit on Tuesday nixed a $35 million class-action settlement reached between a class of plaintiffs and a handful of defendants, including Toys “R” Us and Babies “R” Us.
The plaintiffs had accused Toys “R” Us and Babies “R” Us of violating antitrust laws by coercing manufacturers to jack up their prices on a handful of high-end baby products.
In early 2011, the parties struck a settlement in which $14 million would go to the plaintiffs’ lawyers, and the remainder — about $21 million — would go to the class members.
Thing is, the class members, each of whom were entitled to receive a percentage of what they spent on the products whose prices had allegedly been inflated, only claimed about $3 million of the funds. Under the terms of the settlement, the remaining $18.5 million or so would go to a handful of organizations not involved in the litigation. Such arrangements, in which money is given to charities or other organizations in lieu of actual class-members, are called “cy pres” settlements.
Mr. Frank objected to the deal on behalf of a handful of class members, arguing that the attorneys’ fee was disproportionately large when compared to the class’s recovery.
On Tuesday, the Third Circuit voided the lower court’s approval of the agreement. The lower court, ruled the Third Circuit, did not know just how much was going to the class members when it made its determination. Therefore, wrote the Third Circuit, the lower court “did not have the factual basis necessary to determine whether the settlement was fair to the entire class.”
The court went on:
The court sent the case back to the district court to reconsider its decision in light of these facts.
“It’s a good win,” Mr. Frank told Law Blog on Wednesday. “It was clear that the plaintiffs’ lawyers were going to be the big winners in this, and that there was no telling where the cy pres money was going to go.”
Gene Spector, the lawyer who argued the case at the Third Circuit on behalf of the class, did not immediately respond to a request seeking comment.
Mark Weyman, who argued the case on behalf of the defendants, did not immediately respond to a request seeking comment. A spokeswoman for Toys “R” Us did not immediately respond to a request seeking comment.
According to a recent American Lawyer story, Mr. Frank estimates he has lodged 42 objections in 39 cases and claims 23 wins, partial wins, or other settlement improvements.
For instance, last June, at Mr. Frank’s urging, the U.S. Court of Appeals for the Seventh Circuit in Chicago tossed a settlement in a class action against directors of Sears Holdings Corporation.
Dispute Arises Over Cost of Temp-Help Lawyers
Citigroup Case Focuses on Markup for Contract Lawyers in Class-Action Suits
By JENNIFER SMITH
Attorneys for a group of plaintiffs who sued Citigroup Inc. want to bill their clients as much as $550 an hour for contract lawyers who sifted through reams of documents in the case.
The problem, according to one legal gadfly, is that the plaintiffs' firm probably paid no more than $60 to $75 an hour for the help.
Ted Frank, a litigator who often objects to class-action settlements, is taking issue with the nearly $100-million cut plaintiffs' attorneys are seeking of a proposed settlement between Citigroup and investors who claim the bank hid the extent of its exposure to toxic mortgage debt. Mr. Frank says the requested share—16.5% of the $590 million settlement—is based in part on bloated billing for thousands of hours of mostly routine legal work, and would be a windfall that rewards the lawyers at the expense of their clients.
The dispute is putting a spotlight on the practice of marking up the price of temporary legal help in class-action suits, sometimes by extraordinary margins. And it raises questions about methods used to calculate how big a share of the winnings should go to plaintiffs' firms, which pay for legal costs up front, taking on risk in hopes of a big payday later.
Law firms increasingly rely on armies of contract attorneys to review the massive amounts of material generated during the discovery phase of litigation. Firms might hire lawyers directly, paying them $25 to $40 an hour, or through staffing agencies that bill $50 to $80 an hour for their services, depending on an attorney's qualifications and the complexity of the assignment.
Such arrangements can save the firms a lot of money, but the savings aren't always passed on to the client. Markups are permissible as long as the total fee remains "reasonable" and the contract lawyers' work is charged to the client as a fee for legal services (not as an expense), according to a 2000 nonbinding ethics opinion issued by the American Bar Association, which cited similar opinions by bar groups in Virginia, Colorado and the District of Columbia.
A law firm might charge a client more because the firm is professionally liable for the contract lawyer's work, or because it provided the temps with office space or computers, said Stephen Gillers, a law professor and legal-ethics expert at New York University School of Law. "All of that justifies a markup," he said. "The question is how much."
Kirby McInerney LLP, the New York firm representing the lead plaintiff in the Citigroup case, said its fee request is fair given the risks it assumed by taking on the case.
"The fact that the billing rates of contract attorneys are in excess of what the law firm pays them is not unusual or untoward," said Ira Press, a partner at Kirby McInerney. "That's to cover overhead and have a profit built in."
The average contract lawyer rate it cites—about $465 an hour—reflects the going price in the New York legal market for lawyers with similar expertise, the firm said. Much of the work done by Kirby McInerney's contract lawyers required an understanding of sophisticated financial structures and concepts, it said in court filings. All told, the contract attorneys worked more than 61,000 hours on the Citigroup case.
But Mr. Frank and others say that much of the work contract lawyers perform in such cases requires no special expertise, and that plaintiffs' firms use their labor to artificially inflate legal fees. "We have not heard from a single paying client in the New York area who pays $500 an hour for contract attorneys," Mr. Frank, a Citigroup shareholder, said at a hearing on the fee request last week in Manhattan federal court before Judge Sidney H. Stein.
Mr. Frank's efforts in the Citigroup case are funded by a nonprofit group he founded called the Center for Class Action Fairness. A handful of other parties have also filed objections to the settlement on other grounds; a ruling on the settlement is expected in coming weeks.
In big securities cases like the Citigroup matter, judges often evaluate plaintiffs' law-firm fee requests by stacking that amount up against a calculus known as a lodestar: the number of hours the lawyers worked on the case, times the reasonable hourly rate for each of the lawyers, with a further multiplier whose size depends on how much risk the firm incurred by taking on the case.
How much Kirby McInerney paid its temp lawyers isn't the point, Judge Stein said at last week's hearing. "The issue," he said, "is what a reasonable client would pay."
To support its fee request, Kirby McInerney has cited more than a dozen large securities class actions where judges approved settlements where the average rates for contract lawyers weren't much lower than those for firm associates, according to court filings. For instance, the average hourly fee for contract lawyers in the Enron Corp. case settled in 2008 was $305.83, compared with $349.90 for the average associate.
Judges rarely question the market rates in such applications because they "don't want to open Pandora's box," said Lester Brickman, an expert on class-action litigation and professor at Yeshiva University's Benjamin N. Cardozo School of Law.
To be sure, plaintiffs' firms aren't the only lawyers who make a profit off contract lawyers. Defense firms also use them for document review and other tasks, and they too may charge clients more than what they paid for those services, according to two litigators at major U.S. law firms who said arrangements vary depending on the client, the firm and the case.
But in other instances firms pass on contract-lawyer costs directly to clients as an expense. Some big corporations and financial institutions even cut their own deals with staffing agencies, and direct firms to use those providers exclusively.
For example, in the Citigroup case the bank hired its own contract lawyers, according to Citigroup's lawyer, Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison LLP. "I believe the cost was $25 to $35 an hour," Mr. Karp told Judge Stein at the hearing. "But Citigroup is a large vendor and has enormous market power."
Big law-firm clients also typically negotiate such costs at the front end of a case. That doesn't always happen with class actions, where agreements with lawyers who take such cases on a contingency basis might have looser parameters.
"A corporation whose law firm hires contract lawyers can protect itself, it's quite sophisticated," said Mr. Gillers of NYU. "This is an after-the-fact claim that the plaintiffs' firms make in their application to the court…The question is, who's watching the lawyers."
Write to Jennifer Smith at firstname.lastname@example.org
A version of this article appeared April 15, 2013, on page B5 in the U.S. edition of The Wall Street Journal, with the headline: In Dispute: The Price of Help.