Consumer Class Action Blog

News, analysis and commentary on state and federal consumer class action litigation

Beware of lodestar “cross-checks”

Posted by Philip Kay on September 13, 2009

The 3rd Circuit affirmed an attorney fee award of $29,950,000 in conjunction with the approval of two settlement agreements in In re Insurance Brokerage Antitrust Litigation, 2009 WL 2855855 (3rd Cir., Sept. 8, 2009), a consolidated class action alleging that insurance brokers had solicited fixed bids from insurance companies and had then received improper payments for directing customers to those companies.

The origins of this case date back to October 2004 when the New York State Attorney General, Eliot Spitzer (yes, that Eliot Spitzer), filed a civil complaint against the insurance broker Marsh & McLennan in New York state court, alleging that Marsh had solicited fixed bids from insurance companies and had then received improper payments for directing customers to those companies. In November 2004, a multi-state group consisting of twelve attorneys general and several state insurance departments began investigating the alleged bid rigging and steering activities of brokers and insurers in the property and casualty insurance industry. Private parties commenced numerous putative class actions in federal courts across the country as well.

The Judicial Panel on Multidistrict Litigation consolidated these private civil actions from multiple jurisdictions and transferred the cases to the United States District Court for the District of New Jersey for pretrial proceedings.  The plaintiffs claimed a vast conspiracy between some of the nation’s largest insurance brokers and insurance carriers involving bid rigging and allocating or steering customers to defeat competition in the insurance market in exchange for high brokerage commissions.

Ultimately, the district court approved the settlement agreements entered into between the plaintiffs and Zurich ($100,000,000) and the plaintiffs and Gallagher (approx. $27,000,000).  The district court also approved an attorney fee award of $29,950,000 attendant to the Zurich settlement.  Various members of the class objected to various aspects of the settlement agreements, and they appealed to the 3rd Circuit following the district court’s final approval of the agreements.

The 3rd Circuit affirmed the approval of the settlement agreements and the attorney fee award.

Most interesting to me was the Court’s discussion of the attorney fee award.  In assessing the reasonableness of the award, the Court analyzed such factors as the size of the settlement fund created, the number of persons benefitted, etc.  The Court then calculated the lodestar to “cross-check” the reasonableness of the award.  Interestingly, the Court accepted the total number of hours submitted by class counsel – 200,000 hours – despite class counsel’s inclusion of all of the time spent to date in the entire consolidated case as opposed to the time spent just in the Zurich component of the case, and despite the appellants’ allegation that the excessive amount of time allegedly spent by some of the firms “raises the possibility of fraud.”

Regarding the inclusion of the entire 200,000 hours in the lodestar calculation, the Court seemed to accept the district court’s finding that “there are situations where the plaintiff’s claims for relief will involve a common core of facts or will be based on related legal theories and that much of counsel’s time will be devoted generally to the litigation as a whole, making it difficult to divide the hours expended on a claim-by-claim basis.”  The Court also seemed to accept class counsel’s argument that “Class Counsel’s efforts cannot be compartmentalized, as a number of their actions against all the Defendants provide a benefit to the Class and clearly had a bearing on the Zurich Defendants’ interest in and willingness to settle.”  Thus, the Court allowed the lodestar calculation to be based on the entire 200,000 hours expended in the overall MDL litigation.

Since the district court’s calculation of the lodestar multiplier was .4 (based on the 200,000 hours at $365 per hour), the Court concluded that it was reasonable since it was less than 1 “and thus reveals that Class Counsel’s fee request constitutes only a fraction of the work that they billed in conjunction with the Zurich Settlement Agreement.”

Addressing the appellants’ allegations of “billing inflation,” the Court stated:

“Even assuming there was some inflation of the hours billed in relation to the Zurich Settlement or some duplicative work       involved in the total hours count, a significant adjustment would have to be made to the hours calculation before the lodestar multiplier (here, a fraction) would even begin to approach one. While district courts must be aware of the potential for manipulation of the lodestar and lodestar multiplier, we are satisfied that in the present case the District Court’s lodestar cross-check confirmed the reasonableness of the fee request.”

As a matter of principle, I disagree with lodestar cross-checks.  The reasonableness of class counsel’s attorney fee award can be accurately determined without resort to the lodestar analysis, see the 3rd Circuit’s discussion of the seven Gunter factors, and by suggesting that an attorney fee award is prima facie unreasonable if the lodestar multiplier is more than “1” ignores the economic realities of class action litigation.  If class counsel takes the economic risk, their fee should reflect that risk and not be tied to the sing-song hours worked multiplied by a “reasonable” hourly rate.  Personal injury attorneys routinely take cases on a contingency fee basis, and if they score a quick settlement, they deserve their 33% cut regardless of the hours spent on the case because they took the economic risk.  I’ve never heard of anyone “cross-checking” a PI attorney’s contingency fee against the lodestar to determine the reasonableness of his fee.  It should be no different here.  When class counsel invests time, money and resources successfully pursuing a large class action, their fee award should reflect their economic risk and not be artificially “cross-checked” against the lodestar.

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