A lawyer who takes a case on an hourly basis expects to collect her lodestar — hours times hourly rate — no matter the outcome.

The same lawyer, when she works on contingent fee basis, plans to earn more than her lodestar if she wins.  The bonus rewards her for sharing the client's risk.

So why did the Second Circuit today uphold an award, in a contingent fee case, equal to the lodestar. McDaniel v. County of Schenectady, No. 07-5580-cv (2d Cir. Feb. 16, 2010) (affirming lodestar award representing 13 percent of common fund instead of 26 percent class counsel applied for).  Why didn't the panel insist on a risk premium for class counsel?

The court's 28 pages never mentions the fact that may explain the no-bonus result:  The class action lawyers who negotiated the settlement seldom, if ever, work on an hourly basis.  

Why does that matter?  Their hourly rates may not reflect how paying clients — who define the market for hourly lawyers — would value their work.

Blawgletter has noted the drawbacks of hourly fees.  But at least they reflect the judgment of actual clients.  

Does a similar mechanism peg the worth of a pure class action lawyer's hour?   Not really.  Judges award the fees in class actions.  Their after-the-fact evaluations may aim to mimic a real market, but their post hoc judgments must indulge a fiction.  No true market gives them useful guidance.  And so their thoughts about a reasonable hourly rate signify little more than a gestalt feeling of overall fairness. 

In McDaniel, class counsel got their nominal hourly rates.  We suspect the judges chose that measure because they felt it approximated what a pure class action lawyer should receive for an average result.  The lawyers' rates already built in a bump for risk.

You will notice that our example at the start of this post implies something different — that our hypothetical lawyer chooses between hourly and contingent fee work.  For her, the market for hourly lawyers does yield a decent indicator of her work's risk-free value per hour.  

Should courts take that into account in setting a fee award for her in a class action common fund case — by which we mean should she get a tip due to the fact that she traded the certainty of an hourly fee for the upside and downside risk of working on a contingent fee basis?  We think so.

The Second Circuit's discussion of the pros and cons of lodestar and percentage-of-recovery methods for awarding common fund fees glides over the difference:

The lodestar method is not perfect. It creates an incentive for attorneys to bill as many hours as possible, to do unnecessary work, and for these reasons also can create a disincentive to early settlement. Goldberger v. Integrated Resources, Inc., 209 F.3d 43,] 48-49 [(2d Cir. 2000)] (citing Savoie, 166 F.3d at 460-61). Under certain conditions, moreover, lodestar awards can create the near opposite incentive, encouraging attorneys to settle before trial even when it is not in their clients’ best interest. While under the lodestar method lawyers share the “downside” risk of trial (i.e., the possibility of an adverse judgment, and hence no fee), they do not share in the potential economic “upside” (i.e., fees as a percentage of a large common fund), especially since trial requires comparatively fewer hours than the process of trial preparation. Janet Cooper Alexander,Do the Merits Matter? A Study of Settlements in Securities Class Actions. Stan. L. Rev. 497, 543 (1991); John C. Coffee, Jr., Understanding the Plaintiff’s Attorney: Implications of Economic Theory for Private Enforcement of Law through Class and Derivative Actions, 86 C. L. R. 669, 717 (1986) (hereinafter Coffee, Understanding the Plaintiff’s Attorney). Although the district court is charged with ensuring the fairness of a proposed settlement, including any lodestar-based attorneys’ fee award, this task is often challenging in common fund cases, especially because – since the attorneys’ fees are drawn from a common fund rather than being paid separately by the defendants – there is little incentive for the defendants to contest the size of the fee. To the contrary, plaintiffs’ and defendants’ lawyers share an interest in the approval of an agreed upon settlement.Goldberger, 209 F.3d at 52-53. As a result, the district judge “los[es] the benefit of an adversarial process, which may . . . inform[] and sharpen[] the judicial inquiry.” Doe v. C.I.A., 576 F.3d 95, 107 (2d Cir. 2009); see also Baker v. Carr, 369 U.S. 186, 204 (1962); Goldberger, 209 F.3d at 53 (“It is not without significance that when [lead counsel for plaintiffs on appeal] stood up at oral argument to petition for a bigger slice of his clients’ recovery, no one sat adjacent to him at opposing counsel’s table.”).

But the percentage method has its limitations as well. As we indicated in Goldberger this Circuit’s adoption of the lodestar method was precipitated by the perception that percentage fees “tended to yield too little for the client-class, and an unjustified ‘golden harvest of fees’ for the lawyer.” 209 F.3d at 48 (quoting City of Detroit v. Grinnell Corp., 495 F.2d 448, 468, 469 (2d Cir. 1974) (“Grinnell I”), abrogated on other grounds by Goldberger, 209 F.3d at 43). Particularly in cases that result in a very large monetary award, the percentage method holds the potential to result in attorneys’ fees many times greater than those that would have been earned under the lodestar of hourly rate multiplied by hours worked. “The principal analytical flaw” in Appellants’ argument for a presumptive percentage award as a “benchmark” in common fund cases lies in the “assumption that there is substantial contingency risk in every common fund case” that would justify such a multiplier.  Id. at 52.

Moreover, although the percentage method has the advantage of aligning the interests of plaintiffs and their attorneys more fully by allowing the latter to share in both the upside and downside risk of litigation, it can create perverse incentives of its own, potentially encouraging counsel to settle a case prematurely once their opportunity costs begin to rise. Coffee, Understanding the Plaintiff’s Attorney at 687-90. And as in the case of the lodestar method, neither defense counsel nor the actual plaintiffs have much of an incentive under the percentage-of-fund approach to oppose an award of attorneys’ fees, the latter since “[t]hey have no real incentive to mount a challenge that would result in only a ‘minuscule’ pro rata gain from a fee reduction.” Goldberger, 209 F.3d at 53 (citing Cont’l Ill. Sec. Litig., 962 F.2d 566, 573 (7th Cir. 1992)).

In short, neither the lodestar nor the percentage-of-fund approach to awarding attorneys’ fees in common fund cases is without problems. It is for reasons such as those just discussed that Goldberger we declined to “junk” the lodestar method in favor of the presumptive or exclusive use of the percentage method, see id. at 47-53, and instead left the decision as to the appropriate method to “the district court, which is intimately familiar with the nuances of the case.” Id. at 48. While Appellants assert that there would be a benefit
in allowing “district judges . . . [to] step away from the business of analyzing and reviewing attorneys’ fee applications,” Appellants’ Reply Br. at 9, we underscore the importance of the district court’s duty “to act as a fiduciary who must serve as a guardian of the rights of absent class members,” City of Detroit v. Grinnell Corp., 560 F.2d 1093, 1099 (2d Cir. 1977) (“Grinnell II”) (internal quotation marks omitted), abrogated on other grounds, Goldberger, 209 F.3d at 43, and reaffirm the requirement of a “searching assessment” regarding attorneys’ fees “that should properly be performed in each case.” Goldberger, 209 F.3d at 52. Even were we not bound by Circuit precedent on the matter, we would decline to hold otherwise.

McDaniel, slip op. at 12-15.

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Photo of Barry Barnett Barry Barnett

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

Barnett is a Fellow in the American College of Trial Lawyers, and Lawdragon has named him one of the top 500 lawyers in the United States three years in a row. Best Lawyers in America has honored him as “Lawyer of the Year” for Bet-the-Company Litigation (2019 and 2017) and Patent Litigation (2020) in Houston. Based in Texas and New York, Barnett has tried complex business disputes across the United States.

Barnett’s background, training, and experience make him indispensable to his clients. The small-town son of a Texas roughneck and grandson of a Texas sharecropper, Barnett “developed an unusual common sense about people, their motivations, and their dilemmas,” according to former client Michael Lewis.

Barnett has been historically recognized for his effectiveness and judgment. His peers chose him, for example, to the American College of Trial Lawyers and American Law Institute. His decades of trial and appellate work representing both plaintiffs and defendants have made him a master strategist and nimble tactician in complex disputes.

Barnett focuses on enforcement of antitrust laws, the “Magna Carta of free enterprise,” in Supreme Court Justice Thurgood Marshall’s memorable phrase. “Barry is one of the nation’s outstanding antitrust lawyers,” according to Joseph Goldberg, a member of the Private Antitrust Enforcement Hall of Fame. Named among Texas’s top ten antitrust lawyers of 2023, Business Today calls Barnett a “trailblazer” among the “distinguished legal minds” who “dedicate their skill and expertise to the maintenance of healthy competition in various sectors” of the Lone Star State’s booming economy. Barnett is also adept in energy and intellectual property matters and has battled for clients against a Who’s Who list of corporate behemoths, including Abbott Labs, Alcoa, Apple, AT&T, BlackBerry, Broadcom, Comcast, Dow, JPMorgan Chase, Samsung, and Visa.

Barnett commands a courtroom with calm and credibility and “is the perfect lawyer for bet the company litigation,” said Scott Regan, General Counsel of former client Whiting Petroleum. His performance before the Supreme Court in Comcast Corp. v. Behrend prompted the Court to withdraw the question on which it had granted review. The judge in a trial involving mobile phone technology called Barnett “one of the best” and that his opening statement the finest he had ever seen. Another trial judge told Barnett minutes after a jury returned a favorable verdict against the county’s biggest employer that he was one of the two best trial lawyers he’d ever come across—adding that the other one was dead.

A versatile trial lawyer, Barnett knows how to handle a case all the way from strategic pre-suit planning to affirmance on appeal. He’s tried cases to verdict and then briefed and argued them when they went before appellate courts, including the Second, Third, Fifth, and Tenth Circuits, the Supreme Court of Louisiana, and (in the case of Comcast Corp. v. Behrend) the Supreme Court of the United States.

Barnett is a sought-after public speaker, often serving on panels and talking about topics like the trials of antitrust class actions and techniques for streamlining complex litigation. He also comments on trends in commercial litigation and the implications of major rulings for outlets such as NPR, Reuters, Law360, Corporate Counsel, and The Dallas Morning News. He’s even appeared in a Frontline program about underfunding of state pensions, authored chapters on “Fee Arrangements” and “Techniques for Expediting and Streamlining Litigation” (the latter with Steve Susman) in the ABA’s definitive treatise on Business and Commercial Litigation in Federal Courts, 5th, and commented on How Antitrust Enforcers Might Think Like Plaintiffs’ Lawyers.

Clients and other hard graders have praised Barnett for his courtroom skills and legal acumen.

A client in a $100 million oil and gas case, which Barnett’s team won at trial and held on appeal, said Barnett and his team “presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom.” David McCombs at Haynes and Boone said Barnett “has a natural presence that goes over well with juries and judges.”

Even former adversaries give Barnett high marks. Lead opposing counsel in a decade-long antitrust slugfest said “Barry is a highly skilled advocate. He understands what really matters in telling a narrative and does so in a very compelling manner.”

Barnett relishes opportunities to collaborate with all kinds of people. At the Center for American and International Law (CAIL), founded by a former prosecutor at Nuremberg in 1947 and headquartered in the Dallas area, he has served on the Executive Committee, co-chaired the committee that produced CAIL’s first-ever strategic plan, supported CAIL’s Institute for Law Enforcement Administration and other development efforts, and proposed formation of a new Institute for Social Justice Law. CAIL’s former President David Beck said “Barry is extremely bright” and is “very well prepared in every lawsuit or professional task he undertakes.”

Barnett is also a Trustee of the New-York Historical Society, a Sterling Fellow at Yale, a member of the Yale University Art Gallery’s Governing Board, a winner of the Class Award for his work on behalf of his college class, and a proud contributor to the Yellow Ribbon Program at Harvard Law. Barnett’s pro bono work includes leading the trial team representing people who are at greatest risk of severe illness and death as a result of being exposed to the novel coronavirus SARS-CoV-2 while being detained in the Dallas County jail—work for which he received the NGAN Legal Advocacy Fund RBG Award.

At Susman Godfrey, Barnett has served on the firm’s Executive Committee, Employment Committee, and ad hoc committees on partner compensation, succession of leadership, and revision of the firm’s partnership agreement. He also twice chaired the Practice Development Committee.

Barnett understands that clients face many pressures. Managing the stress is important, especially in matters that take years to resolve. He encourages clients to call him whenever they have a question or concern and to keep the inevitable ups and downs in perspective. He wants them to know that he will do his level best to help them achieve their goals. He also strives to foster trust and to make working with him a pleasure.

Cyrus “Skip” Marter, the General Counsel of Bonanza Creek in Denver and a former Susman Godfrey partner and client, said Barnett is “excellent about communicating with clients in a full and honest manner” and can “negotiate for his clients from a position of strength, because he is not afraid to take a case through a full trial on the merits.” Stacey Doré, the President of Hunt Utility Services and a former client, said that Barnett is “an excellent trial lawyer and the person you want to hire for your bet-the-company cases. He is client focused, responsive, and uniquely savvy about trial and settlement strategy.” A New York colleague said, “Barry is a joy to work with as co-counsel. He tackles complex procedural and factual hurdles capably, efficiently, and without drama.”

Barnett’s wide-ranging experience and calm, down-to-earth approach enable him to connect with clients, judges, jurors, witnesses, and even opposing counsel. He grew up in Nacogdoches, Texas. He co-captained his high school varsity football team as an All-East Texas middle linebacker while also serving as the Editor of Key Club’s Texas-Oklahoma District, won the Best Typist award, took the History Team to glory, and sang in the East Texas All Region Choir. As Dan Kelly of client Vistra Corp. put it, Barnett is “a great person to be around.”

Barnett is steady and loyal. He has practiced at Susman Godfrey his entire career. He and his wife Nancy live in Dallas and enjoy spending time in Houston and New York. Their daughter works for H-E-B in Houston, and their son is a Haynes and Boone transactions lawyer in Dallas.

As a member of Ivy League championship football teams in his junior and senior years at Yale and a parent of two Yalies, Barnett has no trouble choosing sides for “The Game” in November. And he knows how important fighting all the way to the end is. On his last play from scrimmage, in the waning minutes of The Game on Nov. 22, 1980, he recovered a Crimson fumble.

Yale won, 14-0.