Blawgletter's tag-line says "Contingent business law".

Look at the words just below the big Blawgletter® thingy at the top of this page.  See?

We recalled that this evening when a Google Alert tipped us off to a new 10-K report.  This one disclosed how much the reporting company paid contingent fee lawyers in 2009 v. 2008.  It said:

Total outside legal expenses paid to third-party contingent fee attorneys for the year ended December 31, 2009 were 42.3% of legal cash collections generated by contingent fee attorneys compared to 39.4% for the year ended December 31, 2008.

Portfolio Recovery Assocs., Inc., Form 10-K, Item 7 (Feb. 16, 2010).

Have we learned anything?  Something, yes.  We can tell that the all-in cost of collecting receivables through contingent fee lawyers runs about 40 percent of the recovery for PRA.  We don't know though if the 40 percent included reimbursement of expenses or whether the company instead paid the expenses separately from the contingent fees.

Who fronts the expenses matters, of course.  If the client does, it reduces the lawyer's risk, both because he has to invest less and because it tends to make the client more sensible about how to handle a case. And so we prefer that arrangement.

On Monday, the Second Circuit reversed dismissal of a securities fraud case against Smith Barney/Citigroup for misleading mutual fund investors about the true cost of "transfer agent" services, for which the mutual funds paid an outside vendor.  After a few years, the transfer agent, at SmithBarneyCitigroup's request, started rebating most of the fees to SmithBarney/Citigroup.  SmithBarney/Citigroup nonetheless charged 100 percent of the fees to the mutual funds. 

The Second Circuit rejected arguments that the information wasn't "material" and that SmithBarney/Citigroup's conduct didn't cause any actual losses.  Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, No. 07-5125 (2d Cir. Feb. 16, 2010).

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.

A law professor, a law student, and a lawyer have written a Working Paper on lawsuits that aim to hold greenhouse gas producers liable for global warming.  Laurence H. Tribe, Joshua D. Branson & Tristan L. Duncan, "Too Hot for Courts to Handle:  Fuel Temperatures, Global Warming, and the Political Question Doctrine", Washington Legal Foundation Working Paper No. 169 (Jan. 2010).

They view GHG cases as beyond the courts' proper role:

[C]ourts squander the social and cultural capital they need in order to do what may be politically unpopular in preserving rights and protecting boundaries when they yield to the temptation to treat lawsuits as ubiquitously useful devices for making the world a better place.

Id. at 2.  They criticize judges who see common law claims like nuisance as "constitutionally acceptable and pragmatically useful tools with which to manage temperature's effects.  Like the proverbial carpenter armed with a hammer to whom everything looks like a nail, those judges are wrong."  Id. at 3.

Last September, the Second Circuit upheld a global warming complaint over a "political question" defense.

The ABA Journal this month includes a piece on the "enormous differences" in how federal judges "interpret the facts" of cases involving claims of bias on grounds of race or gender.

What accounts for the juridical variability?

The race or sex of the judge.

The ABA Journal item links to a couple of studies.  One reports that African-American judges rule for plaintiffs in 46 percent of racial harassment cases versus 21 percent pro-plaintiff decisions by their white colleagues.  The other finds that plaintiffs win twice as often in sexual harassment suits if the court of appeals panel includes a female judge.

Blawgletter recalls that Learned Hand believed in relying on the integrity of judges who (because of life tenure) feel little pressure from public opinion.  Yes, they will make mistakes, sometimes bad ones.  But, he felt, they will err honestly.

We agree.  But we can't help thinking that the deciders ought to reflect, at least roughly, the population that trusts them to make fair judgments.

The U.S. Judicial Panel on Multidistrict Litigation convenes every other month to hear argument on motions to centralize or consolidate multidistrict cases for pretrial proceedings in one district court.  The Panel's members hail from around the country and gather for Panel hearings at a variety of places, too.

Last month, the MDL Panel met in Miami and will go next to San Diego on March 25. 

Blawgletter hasn't seen the list of cases for the San Diego session yet, but we've heard that the mass of cases against Toyota over problems with its accelerators and anti-lock brakes tops the agenda.

The Panel has announced its plans for other gatherings this year as follows:

May 27 — Chicago, IL

July 29 — Boise, ID

September 30 — Nashville, TN

November 18 — Durham, NC

The Communications Act of 1934 bars carriers from charging unjust or unreasonable rates.  47 U.S.C. 201(b). 

It also provides that "[a]ny person claiming to be damaged by any common carrier . . . may either make complaint to the Commission . . . or may bring suit for the recovery of the damages for which such common carrier may be liable under the provisions of this chapter, in any district court of the United States of competent jurisdiction . . . ."  47 U.S.C. 207.

But may the person who pays a rate that section 201(b) prohibits jump straight to district court, bypassing the Federal Communications Commission and an FCC ruling on justness and reasonableness?

No.  N. County Comm. Corp. v. Calif. Catalog & Technology, No. 08-55408 (9th Cir. Feb. 10, 2010).

The Judicial Conference Committee on Court Administration and Case Management has come out with "Proposed Model Jury Instructions" on "The Use of Electronic Technology to Conduct Research on or Communicate about a Case".  They follow:

Before Trial:

You, as jurors, must decide this case based solely on the evidence presented here within the four walls of this courtroom. This means that during the trial you must not conduct any independent research about this case, the matters in the case, and the individuals or corporations involved in the case. In other words, you should not consult dictionaries or reference materials, search the internet, websites, blogs, or use any other electronic tools to obtain information about this case or to help you decide the case. Please do not try to find out information from any source outside the confines of this courtroom.

Until you retire to deliberate, you may not discuss this case with anyone, even your fellow jurors. After you retire to deliberate, you may begin discussing the case with your fellow jurors, but you cannot discuss the case with anyone else until you have returned a verdict and the case is at an end. I hope that for all of you this case is interesting and noteworthy. I know that many of you use cell phones, Blackberries, the internet and other tools of technology. You also must not talk to anyone about this case or use these tools to communicate electronically with anyone about the case. This includes your family and friends. You may not communicate with anyone about the case on your cell phone, through e-mail, Blackberry, iPhone, text messaging, or on Twitter, through any blog or website, through any internet chat room, or by way of any other social networking websites, including Facebook, My Space, LinkedIn, and YouTube.

At the Close of the Case:

During your deliberations, you must not communicate with or provide any information to anyone by any means about this case. You may not use any electronic device or media, such as a telephone, cell phone, smart phone, iPhone, Blackberry or computer; the internet, any internet service, or any text or instant messaging service; or any internet chat room, blog, or website such as Facebook, My Space, LinkedIn, YouTube or Twitter, to communicate to anyone any information about this case or to conduct anresearch about this case until I accept your verdict.

The U.S. Judicial Panel on Multidistrict Litigation meets several times a year to hear lawyers explain why cases pending in two or more district courts belong in just one and which district court should handle them during pretrial stages.  Lately, the Panel has rebuffed more than half of the motions to transfer (see here also), holding the multiple cases simple or unlike enough to stay where they started.

But Blawgletter takes keyboard in hand today to type of something else.  Two something elses, in fact.

Both arise often in MDL matters.  And both vex plaintiffs' lawyers who find themselves outside the groups that MDL judges appoint to manage the sprawling litigation.

The first concerns suits that the outsiders file in state court but that the defendants remove to federal court in hopes that they will merge into the mass of MDL cases and thus prove more manageable.  Motions to reverse the removals promptly follow.  But district courts often sit on the motions.

The other something else relates to fees and expenses.  In some MDLs, especially ones involving dozens and even thousands of cases, the MDL judges order all the plaintiffs and their counsel to set aside a percentage of money they receive by settlement or judgment.  The funds in the kitty will pay for the work and reimburse the expenses that members of a plaintiffs leadership committee devote to furthering the common good of all plaintiffs.

You can see why the outsider lawyers don't like these things and why the insiders don't mind them at all.

In In re Zyprexa Products Liability Litig., No. 07-3815-cv (2d Cir. Feb. 3, 2010), one of the outsiders had had enough.  The firm had 2,000 or so individual cases and wanted remands of several dozen.  It also objected to having to contribute three percent of the proceeds from the cases it believed belonged back in state court to the common MDL fund.  The district court lacked jurisdiction, the firm argued, and so lacked juridical power to issue orders in the remand-worthy cases.

The Second Circuit held that it lacked jurisdiction over the appeal because the orders in question had not matured into a final judgment.  It also chose not to take up the firm's complaints by way of mandamus.

One member of the panel, U.S. District Judge Lewis A. Kaplan, concurred.  He opined that the case warranted an "advisory" opinion that, while denying mandamus relief, illuminated the court's views of the important issues at stake.  He went on to advise that, in his view, MDL judges have broad discretion to postpone ruling on motions to remand in favor of tending to more pressing matters of case management and that they also act within their authority by setting up a common fund to compensate lawyers whose work benefits all plaintiffs.

We concur, too.

Blawgletter hails from the state whose official song once noted its status as "largest and grandest, withstanding ev'ry test/O Empire wide and glorious, you stand supremely blest".

The "largest" moved to "boldest" in 1959, when the Union let Alaska in.

Today the Ninth Circuit subdued Texas law's fondness for quelling aggregate litigation.  The panel declared a contractual choice of Texas law unenforceable as contrary to "fundamental policy of California".  Omstead v. Dell, Inc., No. 08-16749, slip op. at 2110 (9th Cir. Feb. 5, 2010). 

The court didn't cite any Texas cases.  It seemed to assume what we all know — that the Supreme Court of Texas would uphold the class action waiver in Dell's contracts with buyers of notebook computers.