class action litigation: avoiding attorney fee recovery...

Class Action Litigation:

Avoiding Attorney Fee Recovery Pitfalls Plaintiff and Defense Best Practices Regarding Reasonableness of Fees,

Tax Consequences, and Ethical Considerations

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

THURSDAY, JULY 19, 2012

Presenting a live 90-minute webinar with interactive Q&A

Elizabeth Erickson, Partner, McDermott Will & Emery LLP, Washington, D.C.

Jeffrey S. Jacobson, Partner, Debevoise & Plimpton LLP, New York

Amanda Arnold Sansone, Carlton Fields, Tampa, Fla.

Sound Quality

If you are listening via your computer speakers, please note that the quality of

your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory and you are listening via your computer

speakers, you may listen via the phone: dial 1-866-869-6667 and enter your

PIN -when prompted. Otherwise, please send us a chat or e-mail

[email protected] immediately so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

For CLE purposes, please let us know how many people are listening at your

location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the SEND button beside the box

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

5

Class Action Litigation: Avoiding Attorney Fee Recovery Pitfalls

Plaintiff and Defense Best Practices

Regarding Reasonableness of

Fees, Tax Consequences, and

Ethical Considerations

Thursday, July 19, 2012

6

The American Rule

“In the United States, the prevailing litigant is not

entitled to collect a reasonable attorneys’ fee

from the loser.”

Alyeska Pipeline Co. v. Wilderness Society,

421 U.S. 240, 247 (1975)

7

Legal Justifications for Recovery of Attorneys’ Fees in Class Action Cases:

Fee shifting statutes

Common Fund Doctrine

Common Benefit Doctrine

8

Fee Shifting Statutes

Provide access to courts for plaintiffs by

incentivizing attorneys

Encourage voluntary compliance with statues

(and deter violators)

Over 150 statutes have fee shifting provisions

Examples include Civil Rights Act, Clayton

Antitrust Act, Fair Housing Act, Truth in

Lending Act, etc.

9

Entitlement to Fee Award in Class Actions With Fee Shifting Statutes

Must first overcome “prevailing party” hurdle

Some statutes have additional requirements

Catalyst theory for entitlement to an award

unavailable at least in FHAA and ADA cases

Defendants not entitled to fees except under highly

special circumstances

Typically Courts utilize lodestar approach

10

The Common Fund Doctrine

Equitable doctrines of quantum meruit and

unjust enrichment

Encourages private enforcement of statutes that

are not fee-shifting

Encourages class suits of claims that otherwise

have small individual claims

11

Entitlement to Fee Award in Common Fund Class Action Case

Movant must demonstrate:

– Common fund was created for benefit of

others and as a result of movant’s efforts

Focus is on the benefit conferred

Percentage approach or lodestar approach

depending on jurisdiction

Mega-fund common fund cases have sparked

significant controversy

12

The Common Benefit Doctrine

Originated from Common Fund Doctrine

Equitable doctrines of quantum meruit and

unjust enrichment

Encourages derivative suits of claims that

otherwise have small individual claims

13

Entitlement to Fee Award in Common Benefit Class Action Case Must show that efforts created a monetary or substantial

nonmonetary benefit for an ascertainable class or group

Must also show that defendant is proper party to pay the fee

Possible in limited circumstances despite the absence of a

fund

– Mills v. Electric Auto Lite Co., 396 U.S. 375 (1970) –

shareholder derivative action

– Hall v. Cole, 412 U.S. 1 (1973) – union member

challenging union practices

Like the common fund doctrine, have to look at the jurisdiction

for whether to use percentage approach or lodestar approach

14

Ethical Considerations:

Statutory or common-fund recovery is not a given

Class cases are usually settled and rarely result in a judgment for the class

Ultimately discretion of the court

Role of class counsel arguably changes from fiduciary for class to that of claimant

Discrepancies between class member’s recovery and large attorney fees for class counsel

15

Litigating Fees:

Fee-Shifting Statute Cases

– Counsel typically awarded fees for litigating

fees (Savoie v. Merchants Bank, 166 F.3d

456, 461 (2d Cir. 1999))

Common Fund Cases

– Counsel not usually awarded fees for litigating

fees (In re Coordinated Pretrial Proceedings

in Petroleum Products Antitrust Litigation, 109

F.3d 602, 610 (9th Cir. 1997))

16

Resources

Attorney Fee Awards by Alba Conte (3d ed. 2012)

The 2012 Carlton Fields Class Action Survey:

Best Practices in Reducing Cost and Managing

Risk in Class Action Litigation,

www.classactionsurvey.com

Amanda Arnold Sansone [email protected] T: 813.229.4251

http://www.classactionsurvey.com/

http://www.carltonfields.com/asansone/asansone','carltonfields.com

What’s a Reasonable Fee

In a Settled Class Action?

Copyright © 2012 Debevoise & Plimpton LLP. All Rights Reserved.

Strafford Webinar – July 19, 2012

18

Frameworks For Class Counsel Fees

• Percentage of the Recovery

– True “common fund” cases with actual cash distributed

– Cases portrayed as common funds that actually aren’t

• “Lodestar” of hours worked X reasonable hourly rate

– Can be used as stand-alone method or “cross check”

– Often increased by a “multiplier” to compensate for risk

– Courts differ widely on propriety and amount of multiplier

• Reasonableness of fee “determined primarily by reference to the

level of success achieved by the plaintiff.” (9th Cir. 2009)

19

Lodestar Multiplier Factors

• Time & labor required

• Novelty & difficulty of issues

• Skill required

• Preclusion of other employment while working on case

• Customary fee for similar work in the community

• Whether fee is fixed or contingent

• Time limits imposed by client or circumstances

• Amount involved and results obtained

• Experience, reputation and ability of attorneys

• Undesirability of the case

• Nature and length of relationship with client

• Awards in similar cases

20

From the Defense Perspective

• True common fund cases:

– Fee taken from common fund

– Defendant cares little or nothing about the amount

– Fund can be paid out to class members or charities

• “Fake” common fund cases/claims-made settlements:

– Defendant pays fee separately from class relief

– Fee often is largest item paid by defendant

– Defendant sensitive to fee amount and rationale

21

What is a “Fake” Common Fund?

• First scenario:

– Defendant agrees to pay “maximum” amount

– Any funds not claimed revert to defendant

– No different from a claims-made settlement

• Second scenario:

– Plaintiff attempts to value injunctive relief or other non-cash

– Seeks fee based on that value

22

What is a “Fake” Common Fund? • Real-world example/Scenario 1:

– Settlement over unwanted text messages providing for $10 per submitted claim, with “maximum” $63 million payment

• Real-world examples/Scenario 2:

– Frosted Mini-Wheats: Donation of $5.5 million “worth” of food items; no indication of how “worth” valued or whether Kellogg would count food it planned to donate anyway

– Nutella spread: $2.5 million made available for cash pmts to class members; “injunctive relief” valued at $3 million

– Sirius XM satellite radio: Sirius agreed not to raise prices for 5 months, assigned $180 million value to this promise

• Courts may not see, or want to see, the sleight-of-hand

23

Ninth Circuit Changes the Game

• Prodded by objectors, including the Center for Class Action

Fairness, the Ninth Circuit has closely scrutinized settlements

– Set 25% benchmark (really a cap) on common-fund fees

– In Bluetooth Headsets, refused to grant even a half-lodestar

fee when the fee greatly exceeded the class recovery

– Last week, in Dennis v. Kellogg, Ninth Circuit blasted a fee

request of $2 million in a (mostly) fake-fund case

• Hard to argue with any of these rulings, BUT

• Decisions like this make it harder to resolve “cheap” cases

24

9th Cir Case #1: In re Bluetooth Headset

• Claim: Insufficient disclosures that prolonged loud-volume use

may cause hearing loss

• Proposed settlement: $100,000 cy pres payment, $800,000 fee

to plaintiffs’ counsel (portrayed as half of a $1.6 million lodestar)

and prospective disclosure changes

• Objectors contended that settlement should be viewed as a

“constructive common fund” of $900,000

• Result: Ninth Circuit rejected both settlement and fee

– Fee was out of proportion to benefits obtained, even if the

fee really represented a fraction of the lodestar

– 654 F.3d 935 (9th Cir. 2011)

25

9th Cir Case #2: Dennis v. Kellogg Co.

• Claim: Kellogg’s advertisements that kids who ate Mini-Wheats

for breakfast were more attentive than kids who skipped meal

deceptively suggested that Mini-Wheats improved thinking

• Proposed settlement: $2.75 million could be claimed at $5 to

$15 by each class member, with remainder donated to

unspecified charities; $5.5 million “worth” of donated food.

• Class counsel represented settlement as $10.5 million common

fund and sought a $2 million fee vs. a $438,000 lodestar

• Result: Ninth Circuit rejected both settlement and fee

No. 11-55674 (9th Cir. July 13, 2012)

Judges Trott and Thomas, C.J., and District Judge Duffy

26


• “Courts must be particularly vigilant not only for explicit collusion,

but also for more subtle signs that class counsel have allowed

pursuit of their own self-interests and that of certain class

members to infect the negotiations.”

• “Not every fee award under 25% is necessarily reasonable. . . .

[W]here awarding 25% of a ‘megafund’ would yield windfall

profits for class counsel in light of the hours spent on the case,

courts should adjust the benchmark percentage or employ the

lodestar method instead.”

• “[T]he $2 million award is extremely generous to counsel —

even if we were to accept their assertion that the value of the

common fund is $10.64 million.”

27


• “[T]he $2 million fee award breaks out to just over $2,100 per

hour. Not even the most highly sought after attorneys charge

such rates to their clients.”

• “If and when the issue of fees is again before the district court,

the court shall consider all of the circumstances of the case as

they exist at the time, including time wasted in preparing a

stillborn settlement, in finally determining a reasonable award

of attorneys’ fees.”

28

Other Circuits . . . Not So Much

• The Ninth Circuit has been way ahead of the pack

in setting rules for fee awards and for settlement

consideration generally

• Elsewhere, fate of settlements and fee requests

will depend on the vagaries of individual judges

29

Example #1: In re Cardinal Health

• Securities class action settled for $600 million.

• The four entities that combined to serve as lead had agreements

with their lawyers to pay a higher percentage fee than other

institutional investors who had sought lead status

• Lead counsel sought $145 million fee (24%), but the institutions

that failed to win lead status objected

• Result: S.D. Ohio reduced fee to 18%.

– Plaintiffs achieved a terrific result & deserved reward

– But requested fee was 8X the lodestar; 6X was enough(!)

– 528 F. Supp. 2d 752 (S.D. Ohio 2007)

30

Example #2: Fairfield Greenwich

• Madoff-related case settled for $7.7 million.

• Plaintiffs’ counsel requested 33% fee, equal to 2.4 multiplier

• Result: S.D.N.Y. approved the fee

– Fairly standard approval order

– Praised counsel for their good work & strong result

– Found 2.4 multiplier “well within the range”

– No. 11 CV 813 (VM), 2012 WL 1981505 (S.D.N.Y. June 1, 2012)

31

Example #3: Heartland Pmt. Systems • Data breach affected 100 million+ credit card holders

• Defendant agreed to pay $1M-$2.4M, but only 11 valid claims were filed

• Defendant thus paid $1 million cy pres in lieu of class damages

• Plaintiffs portrayed settlement as being “worth” $4.85 million, counting maximum damages figure (fake fund) and notice costs

• Plaintiffs’ counsel requested $725,000 fee + $35,000 costs

– Lodestar said to be $866,000

• Result: S.D. Tex. reduced the fee from $725,000 to $606,193.

– Value to class of cy pres discounted from $1 million to $500k; court rejected outright “fake fund” claim that full $2.4M should be counted

– $1.8 million in notice/admin costs and $760,000 fee also included in value, giving settlement “value” of $3 million

– Many factors counseled in favor of negative adjustments; court thought it appropriate to reduce percentage to 20%

– Court awarded fee of roughly $600,000, valid as percentage of settlement with a lodestar cross-check

– MDL No. 09-2046, 2012 WL 948365 (S.D. Tex. Mar. 20, 2012)

32

Example #4: In re TJX Companies • Another hacking-caused data breach case

• Plaintiffs portrayed settlement as having $200 million in value

– 454,000 people given right to claim credit monitoring services valued by plaintiffs at $390 each ($177M total)

– Others could claim $15 check or $30 voucher ($10M cap)

– Plaintiffs’ counsel sought $6.5 million double-lodestar fee

• Result: D. Mass approved the $6.5 million fee

• “Simply put, the class action vehicle is broken”

• “Tying [fees] to claims made by class members is one step that judges can take toward repair

• Court still found $3.3 million lodestar reasonable and appropriately doubled given potential $177M benefit.

– 584 F. Supp. 2d 395 (D. Mass. 2008)

33

What Does All This Mean?

• In true common fund settlements, setting fees is easy

• In claims-made settlements, where only lodestar fees are

available, courts made widely varying decisions

– Sometimes they multiply the lodestar based on potential

value of claims

– Sometimes they apply negative multipliers when actual

claims rate is low

– Special rules in Ninth Circuit

• In “fake common fund” cases, judge’s fee ruling may depend on

whether the judge recognizes or wants to recognize that the

settlement does not actually create a common fund

35

Elizabeth Erickson, McDermott Will & Emery LLP

The basic rules are pretty easy.

But, almost everyone is doing it wrong.

The IRS is starting to notice - which affects mostly claimants and defendants.

All parties should understand the law before settling.

36

Unless a very specific exception applies, all settlement payments, including attorney fees, are taxable to the claimant.

All payments that are taxable to the claimant must be reported on Form W-2 and/or Form 1099 issued to the claimant. Attorney fees = Form 1099.

Payments are taxable to the claimant even if the check is written out to the attorney, and even if the claimant never receives the money.

Additional Forms 1099 may need to be issued to the attorney, resulting in Forms 1099 totaling more than the settlement amount.

37

• As a general rule, settlement payments for attorney fees and costs are taxable to claimants. •Fee structure does not matter. •Even if the claimant owes these amounts to

another. •Even if the claimant never gets the amounts.

• “Assignment of Income” doctrine - attorney fees are the obligation of the claimants, who receive a benefit when they are paid.

• Comm’r v. Banks - 2005 Supreme Court case.

38

Physical injury cases - I.R.C. § 104.

◦ Very narrow, must be physical injury or medical expenses.

◦ Damages for emotional distress do not qualify (even if accompanied by physical symptoms). (Did you lose an arm?)

◦ If a non-taxable recovery, attorney fees are also excluded.

Cases where a claimant is not liable for attorney fees.

◦ Again, very narrow.

◦ Fees must actually be the expenses of another person or entity. (Not an attorney!)

◦ Based on IRS Revenue Ruling 80-364, example 3.

◦ In the class action context, this translates to: Opt-out class actions, with no fee agreement.

39

Companies must also issue a Form 1099 to the attorney whenever the check is written in a manner that gives the attorney the right to endorse the check.

This may result in the issuance of Forms 1099 to the claimant and the attorney for more than the total settlement amount.

Treas. Reg. §§ 1.6041-1(a), -1(f), -2; 1.6045-5(f).

40

Company settles lawsuit for $25,000 in back wages and $75,000 damages.

Company writes check payable to claimant for $100,000.

Company issues W-2 to claimant for $25,000.

Company issues Form 1099 to claimant for $75,000.

Company does not issue Form 1099 to attorney.

Same result if claimant took $100,000 check from Company and paid her attorney $30,000.

41

Company settles lawsuit for $25,000 in back wages, $50,000 damages, and $30,000 attorney fees.



Company issues Form 1099 to claimant for $80,000 ($50,000 + $30,000).

Company does not issue Form 1099 to attorney.

42

Company settles lawsuit for $25,000 in back wages and $75,000 damages.

Company writes check payable to attorney for $100,000.


Company issues Form 1099 to claimant for $75,000.

Company issues Form 1099 to attorney for $100,000.

Same result if Company writes check payable to attorney and client jointly.

43

Company settles lawsuit for $25,000 in back wages, $50,000 damages, and $30,000 attorney fees.

Company writes check payable to claimant for $75,000 and writes check payable to attorney for $30,000.


Company issues Form 1099 to claimant for $80,000 ($50,000 + $30,000).


44

Company settles lawsuit for $100,000 for physical injury and medical expenses (non-taxable).


No Form 1099/W-2 is required.

45

Company settles lawsuit for $100,000 for physical injury and medical expenses (non-taxable).

Company writes check payable to attorney for $100,000.

No Form 1099 for claimant is required.


Same result if check is payable to attorney and claimant jointly.

46

Open Questions: ◦ Fee-shifting statutes.

◦ Injunctive relief.

◦ Non-certified classes.

Rules can lead to unfortunate results.

“Above-the-line” tax deduction for attorney fees may be available for certain types of lawsuits. I.R.C. § 62(a)(20) and (e).

47

48

Elizabeth Erickson is a partner in the law firm of McDermott

Will & Emery LLP and is based in the Firm’s Washington, DC,

office. She focuses her practice on tax controversies,

including tax litigation. Elizabeth represents clients in

disputes before the U.S. Tax Court, U.S. district courts, the

Internal Revenue Service Appeals and Examination Divisions,

and the Internal Revenue Service National Office.

Substantive issues in dispute in these matters have included

capitalization and change in method of accounting issues,

captive insurance, accounting for redemption of premium

coupons, abandonment loss issues, section 1341 claims, the

tax treatment of settlement payments and legal fees, including

tax reporting requirements, and tax advantaged transactions.

Elizabeth also has substantial experience assisting clients

with the resolution of transfer pricing issues, including

competent authority matters and advance pricing agreements.

Education

Georgetown University Law Center, J.D. (cum laude)

The Florida State University, M.Acc.

The Florida State University, B.S. (magna cum laude)

Tel: +1 202 756 8097

Fax: +1 202 756 8087

[email protected]

class action litigation: avoiding attorney fee recovery...

Documents