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11th Cir. Upholds Denial of Attorney’s Fees From Common Fund in Class Settlement

tcpa class actionThe U.S. Court of Appeals for the Eleventh Circuit recently affirmed a trial court’s denial of a plaintiff counsel’s motion for attorney’s fees, finding the firm’s prioritization of their interests over those of the class cut off any entitlement to attorney’s fees.

A copy of the opinion in Arkin, et al. v. Smith Medical Partners, LLC is available at:  Link to Opinion.

The appeal arose from a lawsuit brought by a doctor (“Doctor”) who was represented by a law firm (“Firm”) against a company (“Company”) after Company sent Doctor an unsolicited fax. Doctor filed suit on behalf of a putative class of other people or entities who allegedly received “unsolicited advertisements” by fax in violation of the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227(b).

The parties reached a settlement agreement (“Settlement I”) which provided that Company would create a common fund of $21 million to pay verified claims against it and the claimants would receive $492.32 per fax number they had received unsolicited advertisements from company. 

Additionally, Firm would receive one third of the common fund as a fee award subject to court approval. Finally, the Settlement allowed Company to terminate the agreement for any reason.

Because Eleventh Circuit precedent generally limits the award of attorney’s fees to 25% of the common fund, Doctor and Company agreed to voluntarily dismiss the case (“Case I”) and refile in state court in Illinois (“Case II”).

In Case II, the same Settlement was preliminarily approved and notice of settlement was sent to the class members. One claimant (“Pharmaceutical Company”) filed an objection to the settlement. In response to the objection, Company terminated the settlement agreement. 

Pursuant to the terms of the settlement agreement, Case II was dismissed and refiled in federal court in Florida (“Case III”).  Meanwhile, Pharmaceutical Company filed a separate class action in Illinois which was eventually consolidated with Case III. 

Company and Pharmaceutical Company subsequently filed a new proposed settlement agreement in Case III (“Settlement II”).

Settlement II provided for a $4.5 million common fund which was non-reversionary and entitled each claimant to receive a pro rata share of the common fund. The trial court approved Settlement II and appointed Pharmaceutical Company’s attorney as class counsel, awarding them the full amount of attorney’s fees. The court further denied Doctor and Firm’s motion for a portion of the attorney’s fees finding that Firm did not confer a substantial or independent benefit to the class which would justify a portion of the fees. 

Doctor and Firm appealed.

The Court began its review by discussing when attorneys may receive a portion of the common funds.  Although plaintiff’s attorneys are able to receive payment from the common fund, only attorneys who “recover [] a common fund” for the plaintiffs are entitled to receive a portion of the funds as a reasonable attorneys’ fee. In re Home Depot Inc., Customer Data Sec. Breach Litig., 931 F.3d 1065, 1079 (11th Cir. 2019).  The court appointed class counsel is typically the one who recovers the common funds for the class.  However, sometimes other attorneys may aid in recovering the common fund and thus be entitled to attorney’s fees from the fund. 

Thus, Federal Rule of Civil Procedure 23(h) provides a format for awards to other counsel whose “work produced a beneficial result for the class.” The Eleventh Circuit held that under Rule 23(h), if a substantial and independent benefit to the class that aids in the recovery or improvement of the common fund is conferred by a non-class counsel attorney, then he is generally entitled to a portion of the common fund recovered in a class action as attorney’s fees. In re Cendant Corp., Sec. Litig., 404 F.3d 173, 197 (3d Cir. 2005). 

A substantial benefit “creates, discovers, increases, or preserves’ the class’s ultimate recovery” of the common fund. Id. at 197. An independent benefit is one that class counsel did not provide and that could not have been easily duplicated by class counsel. Id. 

Firm argued that it provided substantial and independent benefits to the common fund by “identif[ing], fil[ing], and litigat[ing]” the class action and because 1,633 Settlement II claimants filed their claims under Settlement I.

The Eleventh Circuit disagreed in part. 

First, the Appellate Court found the fact that Firm devoted substantial time and effort to litigating the action did not entitle Firm to attorney’s fees. 

Instead, the Eleventh Circuit ruled that the effort Firm spent in obtaining a failed settlement agreement was not compensable unless it directly aided in the recovery or improvement of the common fund that was actually obtained. The Court thus held that Firm was incorrect in arguing that it was entitled to attorney’s fees merely for the time and effort expended litigating the class action or pursuing Settlement I. See Cendant, 404 F.3d at 197.  However, the Eleventh Circuit noted that, although Firm’s work pursuing Settlement I did not substantially benefit the class or aid in the recovery or improvement of Settlement II, the efforts Firm spent in identifying the 1,633 class members who ultimately recovered under Settlement II were an exception.  

Nevertheless, the Appellate Court also ruled that this did not confer an independent benefit, as class counsel reviewed the same documents as Firm and found the same class members.  In addition, even though class counsel did not require these members to submit new claims under Settlement II, they easily could have. 

Firm further argued it provided a substantial benefit in filing the class action almost two years prior to class counsel’s filing. The Eleventh Circuit agreed that filing a class action before other attorneys can provide a substantial benefit by preventing class members from falling outside the statute of limitations. 

However, the Appellate Court found that Firm squandered any benefit it may have conferred by filing early by dismissing the case twice and refiling it, as the relevant filing date for Firm was the date it refiled in federal court in Case III. 

Finally, the Eleventh Circuit found Firm did provide a substantial and independent benefit in one way: by identifying Company’s TCPA violations and the potential for a class action. The Appellate Court noted that “attorneys who alone discover grounds for a suit, based on their own investigation rather than on public reports, legitimately create a benefit for the class.” Cendant, 404 F.3d at 196-97.  Normally, Firm’s identification of the class action would have provided a substantial and independent benefit that aided in recovery of the common fund and would entitle Firm to attorney’s fees.  However, it did not in this instance.

Instead, the Eleventh Circuit found that Firm repeatedly subordinated the interests of the class to its own interests during the litigation.  

The Appellate Court noted that Settlement I provided a huge payout for Firm but little to the class and allowed Company to terminate the agreement for any reason including if there were too many claimants. Additionally, the Court pointed to the requirement of Settlement I that the case be refiled in Illinois appeared to only exist so Firm could receive one-third of the common fund as attorney’s fees instead of only 25%.

The Eleventh Circuit found that the record showed that Firm put the class in serious risk of harm with Settlement I for the sake of inflated attorney’s fees and for convenience. Thus, Firm “closed the doors of equity” on its claim for attorney’s fees under Settlement II. 

Therefore, the Eleventh Circuit held that the trial court did not abuse its discretion by denying Firm attorney’s fees and affirmed the ruling of the trial court.

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Jenna Tersteegen is an Associate in Maurice Wutscher's New York City office, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Prior to joining the firm, Jenna was an associate attorney at a litigation law firm in New York City. Her practice covered New York state labor and employment laws, premises liability and property damage cases. She conducted all pre-trial aspects of litigation, including preparing case strategy and evaluation reports, taking and defending depositions, and drafting dispositive pre- and post-trial motions. She is admitted to practice law in Illinois and New York, and the U.S. District Court for the Eastern District of New York.

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