A federal appeals court, citing an “egregious” ethical violation, has denied attorney fees to McGuireWoods for its work in obtaining a $49 million settlement of antitrust claims against the publishers of the BAR/BRI bar review course.
The U.S. Court of Appeals for the Ninth Circuit on August 10 upheld a ruling by U.S. District Judge Manuel Real in Los Angeles, who had concluded that failing to disclose to class members that incentive awards based on the settlement’s value would go to named plaintiffs constituted an “egregious breach of McGuireWood’s ethical duties” under the California Rules of Professional Conduct.
“The representation of clients with conflicting interests and without informed consent is a particularly egregious ethical violation that may be a proper basis for complete denial of fees,” Judge Sandra Segal Ikuta wrote.
The court also upheld denial of fees to attorneys for 19 objectors, but added that Real had wrongly denied them to the five objectors who alerted him to the potential conflict.
Speaking on behalf of the firm, W. William Allcott, counsel at McGuireWoods in Richmond, Va., said in an e-mailed statement: “The Ninth Circuit recognized that McGuireWoods’ work on behalf of the class resulted in a ‘notable success’ for the class. The opinion also acknowledges that the incentive agreements which were the basis for the denial of attorneys’ fees caused no harm to the class. Nevertheless the Court applied a legal standard that was not generally recognized at the time the incentive agreements were entered into or when the attorney who had entered into them joined our firm. We disagree with the conclusion reached by the Court but we respect the Court’s decision. Our disappointment in the outcome is mitigated by the knowledge that a final distribution of the balance of the $49 million settlement to the class members now is much nearer to a reality.”
The case involved claims that West Publishing Corp. and Kaplan Inc. had conspired to monopolize the market for the BAR/BRI bar review course in violation of the Sherman Act, the federal antitrust law. Originally brought by Van Etten Suzumoto & Becket, which McGuireWoods acquired in 2006, the class included about 300,000 students who paid $1,000 on average in overcharges for the bar review course between 1997 and 2006.
The settlement, reached in 2007, included incentive agreements providing five named McGuireWoods clients with between $10,000 and $75,000, depending on the value of the settlement. Two additional named plaintiffs, represented by New York’s Zwerling Schachter & Zwerling and Washington’s Finkelstein Thompson, did not have such agreements.
Upon approving the deal, Real awarded McGuireWoods fees — now estimated at about $8.5 million — but he declined to approve the incentive awards, citing a potential appearance of a conflict of interest. Real also denied fees to the objectors.
Upon an initial appeal, the Ninth Circuit upheld the settlement but remanded as to the fees, noting that the incentive awards presented a “disturbing appearance of impropriety.”
On remand, Real denied all fees to McGuireWoods, but awarded $500,000 in costs and expenses incurred after the incentive awards were scrapped. He denied most of the fees sought by the objectors, who had argued that their efforts in reducing the fees payable to McGuireWoods enhanced the value of the settlement to class members.
When the case went back to the Ninth Circuit, McGuireWoods argued that rejecting its fees was improper because the incentive awards did not injure the class. But the appeal court deferred to Real. “A district court has the primary responsibility for determining a reasonable fee award and must weigh any benefits McGuireWoods conferred on the class against the pervasive conflict of interest caused by the incentive agreements with class representatives,” Ikuta wrote.
As for the fees for the objectors, most “did not confer any material benefit on the class through their appeals,” she wrote.
John Davis of the Law Office of John W. Davis in San Diego, praised the panel’s rejection of fees for McGuireWoods, despite its decision regarding his own fees.
“My clients are pleased the Ninth Circuit affirmed the return of funds to class members,” Davis wrote in an emailed statement, referring to McGuireWoods’ fees. “We are obviously disappointed that the Court did not recognize the substantial time, effort, and resources expended by counsel…over the past five years toward achieving that result for the class.”
J. Darrell Palmer of the Law Offices of Darrell Palmer in Solana Beach, Calif., who represents six objectors, called both of the Ninth Circuit’s rulings important for objectors in general.
“Time and time again, those of us who represent objectors encounter class counsel who simply do not pay enough attention to the rules,” he wrote in an e-mailed statement. “The $8.5 [million] penalty suffered here is a very big message to class counsel in every case to follow all the rules and carefully avoid all conflicts.”
As for one group, referred to as the Schneider objectors, the panel reversed Real’s fee rejection as “clear error.”
“Although we do not doubt that the district court made its own interpretation…and applied that interpretation to the facts before it, the district court failed to consider that our ruling…was a response to the Schneider Objectors’ arguments on appeal,” Ikuta wrote.
An attorney for that group, C. Benjamin Nutley of Kendrick & Nutley in Pasadena, Calif., said he would ask for at least an additional $1.7 million in fees in light of the Ninth Circuit’s ruling.
“We don’t know exactly the number and will calculate to the penny to make sure,” he said.
Contact Amanda Bronstad at firstname.lastname@example.org.