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A federal judge may have been too generous when he awarded more than $31 million in fees to the lawyers who secured a $126 million settlement in a class action against Rite Aid Corp., the 3d U.S. Circuit Court of Appeals ruled on Jan. 26. In re Rite Aid Corp. Securities Litigation, No. 03-2914. A unanimous three-judge panel found that “in all respects but one,” Judge Stewart Dalzell of Pennsylvania’s eastern district had “performed an exemplary analysis” in his rulings on the fee award. Dalzell had correctly followed the percentage-of-recovery approach in deciding that the plaintiffs’ lawyers were entitled to 25% of the fund, but he erred in his application of a lodestar “crosscheck” by focusing only on the hourly rates for the top lawyers. The lodestar is calculated by multiplying the reasonable number of hours worked on a case by a reasonable hourly billing rate based on the given geographical area, the nature of the services provided and the experience of the attorneys. Although the 3d Circuit prefers the percentage-of-recovery method for deciding class action fee awards, the court said trial judges should “crosscheck” the percentage fee award against the lodestar method. The court now insists that the crosscheck must be based on the hourly rates of all of the plaintiffs’ lawyers so that it will accurately reflect how much of a “multiplier” the fee award represents. The panel found that Dalzell erred in calculating the rate solely on the basis of the most senior partners at lead firms-whose average hourly billing rate was $605-instead of the “blended billing rate” that would approximate the fee structure of all the plaintiffs’ attorneys who together logged more than 12,000 hours on the case. “Failure to apply a blended rate, we believe, is inconsistent with the exercise of sound discretion and requires vacating and remanding for further consideration,” Chief 3d Circuit Judge Anthony J. Scirica wrote for the panel. But Scirica also stressed that the percentage-of-recovery approach “is the proper method” of awarding attorney fees, and said the lodestar crosscheck calculation “need entail neither mathematical precision nor bean-counting.” The shareholder suits were filed in the wake of Rite Aid’s accounting scandal. Over a three-year period, the suit alleged, Rite Aid succeeded in artificially inflating its after-tax earnings by more than $1.6 billion. The suit also alleged that KPMG was “aware of” and “recklessly disregarded” Rite Aid’s improper accounting practices. The suits settled for more than $334 million. The first settlement, worth $207 million, led to a fee award of $48.25 million. In the second settlement, the accounting firm KPMG paid $125 million and former Rite Aid CEO Martin Grass paid $1.4 million. The 3d Circuit focused only on the $31 million in fees awarded in the second case. “Our jurisprudence confirms that it may be appropriate for percentage fees awarded in large recovery cases to be smaller in percentage terms than those with smaller recoveries,” Scirica wrote.

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