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2nd Cir. Holds Common Fund Principles Apply Even in Fee-Shifting Class Actions

The U.S. Court of Appeals for the Second Circuit held that even if a class action case is brought pursuant to a fee-shifting statute, common-fund principles control fee awards authorized from a common fund, and a common-fund fee award may be calculated as the lodestar or as a percentage of the common fund.

Accordingly, the Second Circuit affirmed the trial court’s ruling finding that lead plaintiff’s counsel was entitled to its requested fee and expense award.

A copy of the opinion in Fresno County Employees’ Retirement Association v. Isaacson/Weaver Family Trust is available at:  Link to Opinion.

This case involved a settlement of a consolidated securities class action brought by shareholders of a company seeking to recover for alleged material misrepresentations that the company made.  Claims were brought under sections 10(b) and 20(a) of the Securities Exchange Act of 1034; Securities and Exchange Commission Rule 10b-5; and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.

After the consolidated class-action complaint largely survived a motion to dismiss, the parties agreed to settle the claims.  Under the settlement, the class action defendants paid $10.9 million into a common fund in exchange for the class releasing all claims asserted against the defendants.  The settlement also provided that “Lead Counsel will apply to the Court for a collective award of attorneys’ fees to Plaintiffs’ Counsel to be paid solely from (and out of) the Settlement Fund.”

An objector filed an objection to lead counsel’s fee award arguing that whenever an action is initiated under a statute with a fee-shifting provision, an attorney’s fee is presumptively limited to the unenhanced lodestar fee, even if the action is settled by the creation of a common fund.

The lead counsel argued to the contrary that whenever an action is settled with the creation of a common fund, equitable principles permit the trial court to award a fee that can be calculated using either the lodestar fee method or a percentage-of-the-fund method.

After holding a settlement fairness hearing, the trial court found that the lead counsel’s requested fee was reasonable and granted the fee in full. This appeal followed.

On appeal, the Second Circuit observed that “[t]he parties primarily dispute the method by which a reasonable fee should be calculated when class counsel settles claims brought pursuant to statutes with fee-shifting provisions by establishing a common settlement fund.”

The objector argued that “because the parties created the common fund to resolve claims based on statutes with fee-shifting provisions, the Supreme Court’s fee-shifting jurisprudence applies, and Lead Counsel is presumptively entitled only the unenhanced lodestar fee.”

The lead counsel disagreed, “arguing that the settlement that created the common fund resolved claims based on statutes that do not have applicable fee-shifting provisions, and regardless, the common-fund doctrine governs a trial court’s award of attorneys’ fees when counsel has secured a settlement fund for the benefit of the class.”

In ruling in favor of the lead counsel, the Second Circuit made clear “what has long been implicit in this Circuit’s jurisprudence: regardless of whether a case is brought pursuant to a statute with a fee-shifting provision, if the parties settle the case by creating a common fund, common-fund principles control class counsel’s fee recovery.”

The Second Circuit offered no opinion on whether the statutes under which the underlying case was brought contain applicable fee-shifting provisions.

In reaching its ruling, the Second Circuit first examined the “American Rule” and its exceptions.  As you will recall, although under the American system of justice the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys’ fee from the loser, there are two well-known exceptions to this “American Rule”: (1) “where Congress has specifically legislated that the prevailing party may recover fees from the losing party,” and (2) where “a litigant or lawyer . . . recovers a common fund for the benefit of persons other than himself or his client.”

The Second Circuit noted that “the Supreme Court has placed greater restrictions on attorneys’ fees recovered from statutory fee-shifting provisions than on fees recovered from common funds.”

Specifically, when a statute’s fee-shifting provision authorizes a reasonable attorneys’ fee, the Supreme Court has held that “the lodestar method yields a fee that is presumptively sufficient.”  Moreover, the defendant effectively shoulders the burden of these fees.

In contrast, “fees awarded pursuant to the common-fund doctrine do not extract a tax on the losing party but instead confer a benefit on the victorious attorney for her representation of her client and the class members.”  Under the common fund doctrine, a trial court may select “either the lodestar or percentage-of-the-recovery methods” to calculate fees.

“Accordingly, the means by which an attorney becomes entitled to a fee can affect the method used to calculate what a reasonable fee is.”

Still, “fee-shifting statutes are generally not intended to circumscribe the operation of the equitable fund doctrine,” unless the equitable fund doctrine interferes with a fee-shifting statute’s purpose “to encourage the prosecution of certain favored actions by private parties,” in which case the doctrine yields to the statute.

However, “where a common fund results from the commencement of a favored action, no such interference exists, and class counsel is entitled to fees under the common-fund doctrine notwithstanding a statutory fee-shifting provision.”

The Second Circuit further observed that its sister circuits have supported the “unceremonious rejection of the suggestion that statutory fee-shifting principles curtail a trial court’s discretion in common fund cases and have offered compelling reasons when a common fund fee may differ from a statutory fee.”

The objector further argued that applying common fund principles to fee recoveries in cases initiated under fee-shifting statutes would misalign attorneys’ incentives.

The Second Circuit rejected this argument, stating that it did “not share in the Objector’s concern that the percentage-fee approach will destroy class representation for two primary reasons: first, a fee awarded under the common-fund doctrine provides class counsel with the incentive to maximize the settlement payout for the class because the larger settlement yields a proportionally larger fee; second, a trial court is required to review class settlements and class counsel’s fees, providing an extra layer of security that class counsel will fairly and adequately represent the class.”

The Court further explained that it had “confidence in the trial court as fiduciary of the class and ultimate decision maker on a class-action settlement to substantially alleviate the Objector’s concerns about class counsel’s incentives.”

Thus, it held that “where a class action results in a common-fund settlement for the benefit of the class, the common-fund doctrine applies and permits a trial court to use its discretion to award class counsel either an unenhanced lodestar fee or a fee calculated as a percentage of the settlement fund,” regardless of whether “claims are initiated pursuant to a statute with a fee-shifting provision.”

Accordingly, the ruling of the trial court was affirmed.

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