In Americana Art China Co. v. Foxfire Printing and Packaging, Inc., No. 13-2569, 2014 U.S. App. LEXIS 2930 (7th Cir., Feb. 18, 2014), the Seventh Circuit rejected plaintiffs’ counsel’s attempt at a voluntary FRAP 42(b) dismissal of their appeal in favor of providing guidance to district courts on the determination of class action attorney fees. The action claimed that defendant improperly “fax-blasted” 28,879 recipient class members with 110,853 illegal faxes in violation of the Telephone Consumer Protection Act of 1991, 47 U.S.C. §227. The district court approved a class action settlement whereby defendant’s insurer agreed to make a $6.1 million settlement fund available to the class members based upon an agreed damage recovery of $55.03 for each improper fax. The settlement included a “clear-sailing” agreement for a $2 million attorney fee to plaintiffs’ counsel based upon one-third of the total amount of the settlement fund, with a reversion to defendant’s insurer of any unused portion of the fund after payment of the attorney fee. Id. at *2-3.
When the settlement was administered, only 1,820 class members elected to submit a claim to collect from the settlement fund. This resulted in a payout of only $397,000 out of the $6.1 million settlement fund. Id. at *3-4. Despite what the court acknowledged as “the relatively meager final payout to class members,” plaintiffs’ counsel continued to press for their $2 million attorney fee. “Wary of an inequitable distribution, the district court applied to lodestar method, rather than the percentage method, to determine the fee award.” Id. at *4. There was no opposition from defendant, since the attorney fee was agreed to as part of the settlement. The district court accepted counsel’s unopposed lodestar and applied a 1.5 multiplier based on the contingency nature of the representation, arriving at a final reduced fee of approximately $1.1 million. Id.
Plaintiffs’ counsel appealed the fee reduction on the basis of two arguments: (1) that the district court’s consideration of the amount actually recovered by the class amounted to an improper ex post facto rationalization for an attorney fee reduction, and (2) the district court erred in choosing lodestar over the percentage method. However, the oral argument apparently did not go well, and plaintiffs’ counsel tried to pull the plug on the appeal by filing a joint FRAP 42(b) motion to voluntarily dismiss it. The Seventh Circuit denied the motion, stating that in view of “the conflicting incentives present in any class action suit,” it would be “irresponsible” not to review the appeal and take the “opportunity to provide additional guidance to the district courts.” Id. at *1-2, 5.
In doing so, the court held that both arguments by counsel missed the mark. The fee determination was not ex post facto, because district court did not consider the ultimate outcome in calculating the lodestar, although it did properly “consider the paucity of the class recovery as compared to the requested fee when deciding whether to apply the lodestar method, as opposed to the percentage method, in the first place.” Id. at *7-8. This, said the court, comports with what the Seventh Circuit had previously suggested to allow district courts to forego use of the percentage method in circumstances that would result in an over-compensation of counsel. Id. at *8, citing Harman v. Lyphomed, Inc., 945 F.2d 969, 974 (7th Cir. 1991). Since the choice of fee methodology is discretionary in the Seventh Circuit, the court held that the district court did not abuse its discretion by choosing lodestar over the percentage method under the circumstances of the case. Id.
Significantly, the court acknowledged that the district court could rightfully have considered the actual amount recovered by the class in determining the attorney fee. Id. at *8-9, citing Sutton v. Bernard, 504 F.3d 688, 692 (7th Cir. 2007). The court noted that “[a]ttorneys and clients negotiating fee schedules ex ante often, and in some practice contexts almost exclusively, consider the litigation’s ultimate degree of success,” which is also how a contingency fee works. Id. at *8. Thus, there was no basis for counsel’s argument that a district court cannot consider the amount actually recovered – or the ultimate degree of success of the litigation – in determining a reasonable class action attorney fee. Id. at *8-9. In fact, the court noted that if the district court had solely considered the ultimate benefit to class members, as plaintiffs’ counsel suggested, the fee reduction would have been far more drastic than the approximate 50% reduction that was ultimately ordered. Id. at *9.
Despite the substantial fee reduction, plaintiffs’ counsel were fortunate that there was a “clear-sailing” agreement and that the defendant did not oppose their fee applicable. In the absence of such an agreement, defendant could have argued persuasively for an even more substantial fee reduction, both in the district court and on appeal, based upon the “paucity of the class recovery as compared to the requested fee.” The guidance afforded by the Seventh Circuit sends a clear message that district courts may consider the amount of actual recovery by class members, both in choosing the appropriate fee methodology and in determining what constitutes a “reasonable” class action attorney fee in a particular case.