We Don't Need No Stinkin' Lodestar...

Laffitte v. Robert Half Int’l, No. S222996 (Cal. Aug. 11, 2016)

A long time ago, in Serrano v. Priest, 20 Cal. 3d 25 (1977)—Serrano III, the first two Serranos being about equal educational opportunity in public schools—the California Supreme Court ruled that the lodestar method (hours times reasonable rate) is the proper means of calculating an attorney fee award under the private attorney general doctrine. What happens when the award is not based on the private attorney general statute, but instead under the “common fund” doctrine—where one party obtains a pool of recovery to the collective benefit of a group of potential plaintiffs? Is the plaintiffs’ attorney stuck with a lodestar, or can he argue instead that he is entitled to a percentage of the overall recovery, even if that significantly exceeds the lodestar. 

This is just that case. Plaintiff settled a wage-and-hour class action for $19 million. His attorney asked for a third of the recovery, which was a little more than double the lodestar. After considering the lodestar multiple as a “cross-check” on the reasonableness of the percentage, the trial court approved the award. A member of the class objected and appealed, and the Court of Appeal affirmed. (My post on that opinion here.) The Supreme Court granted review on the 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.”

The Court, in a unanimous opinion by Justice Werdegar, says yes. After a very extensive historical review of the evolving rationales for how to compute attorney fee awards in class actions, the court holds that Serrano III, does not, in fact, require the use of a lodestar computation in a common fund case. Among the many considerations, the court finds it particularly convincing that a lodestar promotes inefficiency in a common fund case as it creates an incentive to do unnecessary work when an early settlement can be obtained.

The court does find, however, that—in line with most of the other federal and state courts to address the issue—a lodestar computation and a comparison of the multiple is a permissible cross-check for the trial court to gain confidence in the reasonableness of the award. The cross-check doesn’t need to be a full bore lodestar analysis. A reasonable estimation of hours and rates is enough to provide a benchmark to give confidence in the reasonableness of a percentage award.

Justice Liu, as he lately seems wont to do, concurs, raising some interesting, if somewhat academic, issues. He notes that there are serious issues in the public confidence in the courts that arise from potential rent-seeking in attorney compensation in class action cases.

The concurrence discusses how the academic literature and economic theory support the idea that class actions plaintiffs’ counsel should agree to fees ex ante and then be held to that agreement in the case of a settlement, subject to equitable modifications due to unforeseen circumstances. Making those assessments behind the veil of ignorance promotes a fairer allocation of the ultimate proceeds of the case between clients and lawyers, and avoids the conflict of interest issues that result from negotiating fee awards at the same time as a settlement. This could all be done early in the case, when a lead counsel is appointed, in a process overseen by the court. (Some academics have suggests that, at least for significant cases where there is competition amongst lawyers to represent the class, the process could be run like an auction. See Jill E. Fisch, Lawyers on the Auction Block: Evaluating the Selection of Class Counsel by Auction, 102 Colum. L. Rev. 650 (2002).)
 
Justice Liu also suggests that, in connection with fee litigation, a trial court can take the option of appointing an amicus to be a devil’s advocate about the fee award, ensuring that the issue is subjected to an appropriate adversarial process. That would ameliorate the post-settlement alignment of the interest of the defendants with the plaintiffs’ counsel in ensuring that the settlement struck is approved.

Both interesting ideas. We’ll see if some trial court ever bites on them.

Affirmed.