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7th Cir. Rules Class Settlements Do Not Bar Objector’s Fees Without Express Agreement

The U.S. Court of Appeals for the Seventh Circuit recently held that, unless the parties to a class action settlement agreement expressly agree otherwise, class settlement agreements should not be read to bar objectors from requesting fees for their efforts in adding value to a settlement.

Because the Court determined that the objector did add value to the settlement, it reversed the ruling of the trial court denying the objector’s motion for fees and an incentive award.

A copy of the opinion in Markow v. Southwest Airlines Co. is available at:  Link to Opinion.

Class action counsel settled a class action litigation against the defendant airline wherein the airline made its customers whole by giving them a replacement voucher after it stopped honoring in-flight drink vouchers for customers who bought select fares.

In an initial appeal of the case, the Seventh Circuit “held that 28 U.S.C. § 1712, enacted as part of the Class Action Fairness Act allowed the trial court to award [class counsel] an attorney fee based on the lodestar method rather than the value of the redeemed vouchers,” and therefore affirmed the approval of settlement.  The Seventh Circuit further affirmed but modified the trial court’s decision to award class counsel only $1,649,118 in fees even though the airline agreed not to oppose $3 million, by further reducing the awarded fees to $1,365,882 because one of class counsel’s lawyers failed to disclose a potential conflict of interest.

Following the first appeal, class counsel requested supplemental fees in the trial court for work on a motion to amend the fee award and the appeal.  Specifically, class counsel “essentially requested the difference between the $3 million [the airline] agreed not to oppose” and the $1,365,882 that was approved by the Seventh Circuit in the first appeal.

To get to that amount, class counsel requested a 1.5 multiplier for its post-judgment time as for the initial fee award and by claiming 572 hours in attorney time for the motion to amend and 970 hours in attorney time for the appeal.

The trial court determined that time was “grossly excessive” and instead awarded class counsel $455,294 plus expenses.

An individual (“objector”) moved for reconsideration under Rule 59 or, alternatively, for vacatur of the settlement approval and accompanying fee orders under Rule 60(b).  The trial court granted the motion for reconsideration and vacated the additional fee award so that the class would receive notice of any a chance to object to it.  The objector appealed.

Before the parties briefed the second appeal, they reached an agreement wherein the objector agreed to dismiss his appeal and class counsel agreed to take half its supplemental fee award ($227,647 plus $3,529.68 in expenses), and the airline agreed to triple its relief to the class (two additional vouchers for every one claimed).

Additionally, the trial court was told for the first time that the correct number of vouchers claimed under the original settlement was less than one third what the parties told the trial court earlier about the original settlement it approved. Still, the trial court approved the new settlement and the airline distributed the vouchers and paid class counsel.

The objector then moved for $80,000 in attorney’s fees and an incentive award of $1,000 to come out of the more than $1.8 million attorney fee award to class counsel.  The trial court denied that motion and the objector appealed.

On appeal, the Seventh Circuit noted that the “underlying settlement agreement and the agreement to settle the second appeal . . . are silent on the issue of objector’s fees,” and therefore the Court looked to the law, which permits objectors who add value to a class settlement to be compensated for their efforts.

Specifically, “[u]nless the parties expressly agree otherwise, settlement agreements should not be read to bar attorney fees for objectors who have added genuine value.  Because the equitable common-fund doctrine applies, [the objector’s] counsel should receive fees for improving settlement.”

Thus, because the original settlement agreement and joint status reports leading up to the settlement of the second appeal were silent as to objectors’ fees, the trial court “made legal error by reading them to bar [the objector’s] request.”

In so ruling, the Seventh Circuit noted that “because of the skewed incentives in some class action settlements, objectors who bring those incentives back into balance by increasing a settlement’s benefit to a class may be compensated for their efforts.”

The Court further stated this is consistent with the common-fund doctrine, which provides that “a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund as a whole.”

The Seventh Circuit observed that “[t]he common-fund doctrine applies as a default rule unless that parties draft their settlement agreement to depart from it.”

In this case, “[b]ecause these parties did not address objector’s fees, we ‘interpolate’ the common-fund doctrine to avoid wreaking unintended consequences.”

Moreover, “[i]t would be inequitable for [the objector’s] lawyer to receive nothing despite negotiating . . . a tripling of relief for the class and a significant cut in [class counsel’s] fees.”  Particularly where the objector’s “$80,000 fee request is a modest 10% of the market value of the additional vouchers, $825,630.”

Accordingly, the Seventh Circuit reversed the denial of the objector’s motion for fees and remanded the matter for entry of judgment granting the objector’s request, payable from class counsel.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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