A class action employment lawsuit settled before trial for $19 million, with the agreement that no more than a third of that recovery would go to class counsel as attorney fees. In seeking the trial court's approval of the settlement, class counsel sought the maximum fee amount, $6,333,333.33. After considering information from class counsel on the hours they had worked on the case, applicable hourly fees, the course of the pretrial litigation, and the potential recovery and litigation risks involved in the case, the trial court — over the objection of one class member — approved the settlement and awarded counsel the requested fee.
The objecting class member contends the trial court's award of an attorney fee calculated as a percentage of the settlement amount violates a holding of this court 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. (See Serrano III, at p. 48, fn. 23.) We disagree. Our discussion in Serrano III of how a reasonable attorney fee is calculated was made in connection with an award under the "private attorney general" doctrine. (See id. at pp. 43-47.) We clarify today that when an attorney fee is awarded out of a common fund preserved or recovered by means of litigation (see Serrano III, supra, at p. 35), the award is not per se unreasonable merely because it is calculated as a percentage of the common fund.
The Court reasoned as follows:
Attorney fee awards in class actions are subject to an abuse of discretion standard of review.
Attorney fees may be calculated in one of two ways: the percentage method (a percentage of the common fund or settlement value); or the lodestar-multiplier method (reasonable hours multiplied by reasonable hourly rates multiplied by an amount more or less than 1.0 to account for factors such as the risks taken and results achieved). Each method is subject to criticism and each has been used more commonly than the other at various times.
Since the 1980s, a majority of courts have used the lodestar-multiplier method when one side must pay the other's fees and the percentage method when the fee is paid from a common fund generated by the litigation. Some courts in common fund cases start with the percentage analysis, then use the lodestar-multiplier method to cross-check whether the fee is reasonable.
In Serrano III, the California Supreme Court affirmed an award of attorney fees in a case affecting public school financing. The litigation had not resulted in creation of a monetary fund, and the Court held that fees could not be calculated using a percentage of common fund method. Instead, the Court approved use of the lodestar-multiplier method under a private attorney general theory because the case had vindicated Constitutional public policies and benefited a large number of Californians. Serrano III did not address common fund fees and does not prohibit use of the percentage method in common fund cases. While cases since Serrano III have expressed doubts regarding the percentage method, they do not establish any rule prohibiting its use.
The trial court did not abuse its discretion by calculating fees as a percentage of the common fund created by the litigation or by cross-checking that number using the lodestar-multiplier method. The benefits of using a lodestar-multiplier cross-check "likely outweigh" the problems it may raise in some cases. Courts may, but need not, scrutinize detailed time sheets to conduct lodestar cross-checks.
The Court's holding here may not apply "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 and, separately, to pay class counsel a reasonable fee as determined by the court, 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 depend on how many claims are made and allowed."
Justice Werdegar wrote the opinion, with all other justices joining. Justice Liu wrote separately "to suggest practices that may help to promote accuracy, transparency, and public confidence in the awarding of attorneys' fees in class action litigation." Chief among these is that class representatives and their counsel should negotiate a fee structure and submit that structure to the court for approval at the start of the litigation.
Attorney fee awards in class actions are subject to an abuse of discretion standard of review.
Attorney fees may be calculated in one of two ways: the percentage method (a percentage of the common fund or settlement value); or the lodestar-multiplier method (reasonable hours multiplied by reasonable hourly rates multiplied by an amount more or less than 1.0 to account for factors such as the risks taken and results achieved). Each method is subject to criticism and each has been used more commonly than the other at various times.
Since the 1980s, a majority of courts have used the lodestar-multiplier method when one side must pay the other's fees and the percentage method when the fee is paid from a common fund generated by the litigation. Some courts in common fund cases start with the percentage analysis, then use the lodestar-multiplier method to cross-check whether the fee is reasonable.
In Serrano III, the California Supreme Court affirmed an award of attorney fees in a case affecting public school financing. The litigation had not resulted in creation of a monetary fund, and the Court held that fees could not be calculated using a percentage of common fund method. Instead, the Court approved use of the lodestar-multiplier method under a private attorney general theory because the case had vindicated Constitutional public policies and benefited a large number of Californians. Serrano III did not address common fund fees and does not prohibit use of the percentage method in common fund cases. While cases since Serrano III have expressed doubts regarding the percentage method, they do not establish any rule prohibiting its use.
The trial court did not abuse its discretion by calculating fees as a percentage of the common fund created by the litigation or by cross-checking that number using the lodestar-multiplier method. The benefits of using a lodestar-multiplier cross-check "likely outweigh" the problems it may raise in some cases. Courts may, but need not, scrutinize detailed time sheets to conduct lodestar cross-checks.
The Court's holding here may not apply "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 and, separately, to pay class counsel a reasonable fee as determined by the court, 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 depend on how many claims are made and allowed."
Justice Werdegar wrote the opinion, with all other justices joining. Justice Liu wrote separately "to suggest practices that may help to promote accuracy, transparency, and public confidence in the awarding of attorneys' fees in class action litigation." Chief among these is that class representatives and their counsel should negotiate a fee structure and submit that structure to the court for approval at the start of the litigation.
The opinion is available here.
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