Arguing Class Actions is a monthly column by Adam J. Levitt for the National Law Journal.
Reprinted with permission from the September 9, 2024 edition of the National Law Journal. © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Last year, U.S. District Judge Brian C. Wimes of the Western District of Missouri approved a $500 million settlement in the T-Mobile data breach litigation, finding that the “historic” settlement extended “extraordinary” relief to the class. In re T-Mobile Customer Data Breach Litigation, Case No. 21-MD-3019 (W.D. Mo. June 29, 2023). On appeal, the U.S. Court of Appeals for the Eighth Circuit agreed—and the appellant objectors did not even dispute—that class counsel had “represented the class well” and “obtained a significant result.” In re T-Mobile Customer Data Breach Litigation, Nos. 23-2744 and 23-2798 (8th Cir. July 29, 2024). Nevertheless, the Eighth Circuit overturned the $78 million fee award, deeming it a “windfall,” because class counsel had not, in its view, logged a sufficient number of hours to justify a roughly 16% fee.
The Eighth Circuit offered two main reasons for its decision: first, that many attorneys will still take these cases even with a lowered percentage, and second, that awarding high multipliers early in a case could encourage counsel to settle early and move on to the next case. Id. at *6-7. The flaw in both of those arguments is that it assumes the historic result was inevitable and that any lawyer would have achieved the same. It is incorrect to assume that lawyers are fungible, or that a large settlement will be available early in the case regardless of the skill of the attorneys involved. Corporate defendants shelling out thousands of dollars per hour believe that paying for top talent will get them the best result, even though they could find others to take their case at much lower rates. One of the main reasons any client chooses a contingent fee arrangement, in addition to shifting the downside risk from client to lawyer, is that the attorney gets paid according to the quality of the results, and, therefore, better aligns the incentives between attorney and client. Thus, trial courts should be afforded the deference and focus primarily on the result achieved for the client (here, the class), just as in any other contingent arrangement.
Paying for Results, Not Hours
The Eighth Circuit’s focus on billable hours actually creates, rather than removes, a perverse incentive for class action lawyers. Under that regime, plaintiffs counsel who have the type of strong case that could be settled for a large sum early on would be better off waiting to settle the case until they had generated more “lodestar.” Needlessly prolonging cases in this way not only wastes judicial resources, but it also demonstrably hurts the class, which must wait longer to receive any payments. And, during that time, any available insurance money is diverted to defense fees, meaning that there will be less insurance proceeds left to pay a settlement. Cutting attorney fees because a great result was achieved quickly is like telling a heavyweight boxer that he didn’t “earn” his purse if he knocked his opponent out in the first round, rather than needlessly dancing around for the next 11 rounds to justify his full compensation for what would have otherwise been a stellar, early result (not to mention the risk of losing the fight during those extra rounds). The absurdity here is no different.
The percentage method, by contrast, “directly aligns the interests of the class and its counsel and provides a powerful incentive for the efficient prosecution and early resolution of litigation.” See Wal-Mart Stores v. Visa U.S.A., 396 F.3d 96, 121 (2d Cir. 2005), quoting In re Lloyd’s American Trust Fund Litigation, 96 Civ. 1262 (RWS) (S.D.N.Y. Nov. 26, 2002). Of course, these considerations will really only come into play when an excellent result is achieved quickly. If the result is lackluster, then a percentage-based fee will reflect that—hence the incentive alignment. Seventh Circuit Judge Frank Easterbrook recognized this principle in In re Synthroid Marketing Litigation, 325 F.3d 974, 977 (7th Cir. 2003), where he wrote that a 22% contingent fee in an early settlement was proper because one great “advantage of the contingent fee is that the client (or the judge as protector of the class’s interests) need not monitor how many hours the lawyers prudently devoted to the case. The client cares about the outcome alone.”
The Fallacy of Fungibility
Further, the Eighth Circuit’s implication that any attorney could have achieved the same result overlooks the particular skills and experience of class counsel and fails to account for the reality that not all attorneys are equally capable of securing a great outcome for the class early on in a case. Easterbrook rejected the idea that legal services can be treated as fungible commodities. Criticizing the district court’s reliance on average bids by plaintiffs’ attorneys in auctions held by other courts to choose lead counsel, Easterbrook astutely noted that there was no “evidence that the market in legal services is uncompetitive, or that the [class members] are victims of a cartel.”
The legal services auction framework that Easterbrook rejected is precisely what the Eight Circuit encourages by suggesting that other attorneys would take on the case for less money. As Easterbrook noted, while contingent-fee arrangements work to benefit the class, choosing attorneys based on the amount of their bid (i.e., their hourly rate), would have an adverse impact on the quality of representation: “When it is hard to monitor counsel’s effort and other elements of quality, it is also hard to know what the bid represents. Maybe it shows that less work will be invested, and that less compensation then is required. … Lawyers will earn a competitive return even at the lower level of compensation, but the class may be worse off.” In re Synthroid Marketing Litigation, 325 F.3d at 979 (citation omitted). Classes’ best interests are far better served by attorneys who are focused on efficiency and optimal results, rather than “dancing around the ring” so as to not risk a penalty from the court.
Abuse of Abuse of Discretion?
What’s especially disappointing here is that, while the Eighth Circuit acknowledged that there were no “missteps in the [district] court’s overall methodology for determining attorney’s fees,” it nevertheless substituted its judgment for that of the presiding judge. See In re Genetically Modified Rice Litigation, 764 F.3d 864, 871 (8th Cir. 2014) (“We give substantial deference to a district court’s determinations, in light of [its] superior understanding of the litigation.”) (citations omitted). For example, the district court, in performing its analysis, found the requested lodestar multiplier to comport with several comparable results. While the Eighth Circuit simply dismissed these opinions as “outliers” from other circuits, the only contrary authority on which it relied were opinions from other circuits from more than 20 years ago that were totally unrelated to the subject matter of the case at hand. The court even seems to suggest that the outcome might have differed without the lodestar cross check, which isn’t even required in the Eighth Circuit: “We aren’t obligated to close our eyes to a crosscheck that the court performed even if it didn’t have to.” By ruling that the district court abused its discretion, despite its careful consideration of the correct factors, the Eighth Circuit declined to afford proper deference to the presiding judge, undermining the role of district courts in managing complex litigation.
Conclusion
Clients want two things: a good result and a swift result. Class cases should be no different. By overturning the district court’s well-reasoned fee award and prioritizing hours logged over results achieved, decisions like T-Mobile risk deterring skilled attorneys from taking on complex, contingency-fee cases, ultimately to the detriment of class members. Courts should emphasize the importance of outcomes and preserve the integrity and effectiveness of class actions as valuable and necessary consumer protection tools on the path to economic justice.
Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups. He can be reached at [email protected] you to DiCello Levitt partner Corban Rhodes and associate Emma Bruder for contributing to this column.