The opinion of the court was delivered by: Vaughn R Walker United States District Chief Judge
By an order and judgments filed March 11, 2005 (Doc ##164-166), the court granted final approval to two settlements and a plan of allocation in this securities fraud class action. In the same order, the court reserved decision on lead plaintiff's motion for an award of attorneys' fees and expenses to lead counsel. Doc #164 at 9-12. The award of fees and expenses is to be paid out of a common fund of $17 million and 7 million shares of HPL Technologies common stock ("HPL stock") -- the combined settlement consideration from all defendants. Under the proposed fee award, lead counsel would receive an award of 15% of the common fund (taken in both cash and stock), plus lead counsel's reasonable expenses. The requested 15% award translates to $2.55 million and 1.05 million shares of HPL stock.
At first glance, such a percentage seems reasonable because fee awards in other cases have captured a larger portion of common fund recoveries (although in still other cases, lower percentage fee awards have been made). Furthermore, the fee here is below what has, in some decisions, been characterized as the 25% "benchmark" for common fund fee awards. See Paul, Johnson, Alston & Hunt v Graulty, 886 F2d 268, 273 (9th Cir 1989).
For the reasons set forth here, the court rejects reliance solely on a comparison of the percentage fee requested here with other percentage awards or with a so-called benchmark percentage. Merely comparing percentages overlooks the factors that may make a certain percentage fee reasonable in one case and unreasonable in another. And "a theoretical construct as flexible as a 'benchmark' seems to offer an all too tempting substitute for the searching assessment that should properly be performed in each case." Goldberger v Integrated Resources, Inc, 209 F3d 43, 52 (2d Cir 2000). Moreover, the court has been admonished that "the benchmark percentage should be adjusted, or replaced by a lodestar calculation, when special circumstances indicate that the percentage recovery would be either too small or too large in light of the hours devoted to the case or other relevant factors." Six (6) Mexican Workers v Arizona Citrus Growers, 904 F2d 1301, 1311 (9th Cir 1990). So the circumstances that require adjusting the percentage need to be considered.
Percentage awards are not meant to be a windfall for class counsel at the expense of the class. Nor should "[a] lawyer's fee * * * be likened to a case of salvage, where reward is given to the successful finder, * * * with little regard to how much or how little effort the finder expended." Klein ex rel SICOR, Inc v Salvi, 2004 WL 596109 at *11 (S D NY). An inspection of the circumstances in this case indicates that the requested fee is "too large in light of the hours devoted" and "other relevant factors." This conclusion -- based on the circumstances and facts of this case -- is bolstered by the court's review of the literature which suggests that percentage-based fees in common fund class actions systematically exceed lodestar-based fees. See, e g, Theodore Eisenberg & Geoffrey P Miller, Attorney Fees in Class Action Settlements: An Empirical Study, 1 J Empirical Legal Stud 27 (2004) (concluding that, controlling for other variables, lodestar-based fees in common fund class actions are about 89% as much as percentage-based fees).
The court can envision no defensible normative reason in this case -- or indeed in common fund cases generally -- that the amount of the fee ought to depend on the method used to compute it. Both methods should result in a "reasonable" fee, and reasonableness cannot logically depend on whether the fee is expressed as a percentage of the recovery or the product of hours and rates. Hence, when counsel apply for a fee award on a percentage basis, the requested award should approximate the fee counsel would have claimed on a lodestar basis. The two fee computations can be compared by a multiplier that, in the context of lodestar fee awards, is thought to represent a premium on counsel's services reflecting the ex ante risk of taking the case and the superior results achieved in the face of that risk.
Stated another way, a proposed percentage fee can (and, for the reasons hereafter explained, should) be compared against the fee that lead counsel would have been awarded on a lodestar basis. If the multiplier implied by that comparison is reasonable, then the percentage-based fee request is reasonable as well; if the implied multiplier is unreasonably high, then so is the proposed percentage fee award. See, e g, In re GMC Pick-Up Tuck Fuel Tank Prods Liability Litig, 55 F3d 768, 820-21 & n40 (3d Cir 1995) (Becker, J) (describing the lodestar cross-check); Vizcaino v Microsoft Corp, 290 F3d 1043, 1050-51 (9th Cir 2002) (approving a district court's use of a lodestar cross-check).
A lodestar cross-check of this type is now in common use in district courts elsewhere in the country. See, e g, In re Cendant Corp Securities Litigation, 109 F Supp 2d 285, 302 (D NJ 2000) ("Traditionally, the 'appropriate' percentage [fee award] is * * * subjected to a cross-check."), vacated and remanded by In re Cendant Corp Litigation, 264 F3d 201 (3d Cir 2001); In re Bristol-Myers Squibb Securities Litigation, 2005 WL 447189 at *3 (S D NY) (citing Goldberger, 209 F3d at 50) ("Typically, courts utilize the percentage method and then 'cross-check' the adequacy of the resulting fee by applying the lodestar method."). The Manual for Complex Litigation (Fourth) endorses the lodestar cross-check. Manual for Complex Litigation (Fourth) § 14.122 (FJC, 2004) ("The lodestar is at least useful as a cross-check on the percentage method by estimating the number of hours spent on the litigation and the hourly rate * * *."); id § 21.724. The court heeds these authorities.
To that end, the court requested at the final approval hearing on February 24, 2005, a lodestar computation from lead counsel. Lead counsel complied the very next day. Barton Decl (Doc #162). Upon review of the Barton declaration, which establishes a base lodestar fee of approximately $900,000, the court requested more detailed information about the breakdown of hours and billing rates of the attorneys at lead counsel's firm. Because it was deferring decision on the attorney fee issue, the court also requested further detail about the proposed award of expenses. Lead counsel has satisfied both of the court's requests, Sidener Decl (Doc #167), and lead plaintiff's motion for an award of attorneys' fees and expenses (Doc #142) is now ripe for decision. These inquiries, and class counsel's quick responses, greatly aided the court's consideration of what information is necessary to make a lodestar cross-check work. It is apparent that a fairly systematic, although not terribly difficult assessment of the time devoted to a case and the value to be attached to that time is required to enable a lodestar cross-check of a percentage fee to comply with the Federal Rules' mandate of reasonableness. See FRCP 23(h).
This case is governed by the Private Securities Litigation Reform Act of 1995 (PSLRA). Accordingly, the court must first determine what discretion (if any) it has under the PSLRA to depart from an award of fees and expenses that is proposed by a lead plaintiff. There is apparently no Ninth Circuit authority on whether the court retains its usual authority under FRCP 23(h) to fix an award of attorneys fees and expenses in a common fund class action. Lead counsel have not contended that the court lacks its usual authority, apparently assuming that the court possesses such authority. The court has nevertheless considered the matter.
Here, lead plaintiff did not negotiate a fee arrangement with lead counsel immediately after lead plaintiff was selected. (By "fee arrangement," the court refers to an agreement, such as an individual plaintiff would make with an attorney, that provides for compensation for the attorney's work and an allocation of the outof-pocket expenses of litigation.) Rather, Frederick Stanske (a Senior Vice President, Portfolio Manager and board member of lead plaintiff) "personally approved of [l]ead [c]counsel's fee request of fifteen percent (15%) of the settlement recovery." Stanske Decl (Doc #128) ¶8. Lead plaintiff has not weighed in on the proposed award of expenses, and no further evidence on lead plaintiff's negotiation for or approval of the requested fee is before the court. Such a superficial fee arrangement is apparently permitted under the PSLRA, which with respect to fee arrangements requires only that the lead plaintiff "shall, subject to the approval of the court, select and retain counsel to represent the class." 15 USC § 78u-4(a)(3)(B)(v) (emphasis added). The PSLRA says nothing about when retention must occur; nor, for that matter, does "retain[ing] counsel" necessarily involve concluding a fee arrangement.
As a matter of first principles, the earlier a fee arrangement is concluded between lead plaintiff and lead counsel, the more deference the court should pay to that fee agreement. This is because fee agreements set early in the litigation -- ex ante, so to speak -- are more likely than ex post fee agreements to be the product of market forces (i e, competition among counsel proposing to represent the class). See, e g, In re Synthroid Marketing Litigation, 264 F3d 712, 718-19 (7th Cir 2001) (Easterbrook, J). Those same market forces are thought to result in reasonable fee agreements between attorneys and clients in individual (i e, non-class) cases. The PSLRA's lead plaintiff provisions are largely built around an ideal of private ordering and client-driven class-action litigation; it is therefore plausible that the PSLRA implicitly counsels deference to fee arrangements concluded early in the litigation. There is also Judge Shadur's wise observation that it is inappropriate -- indeed, downright unfair to class counsel -- to take a fee arrived at by a market-based mechanism (such as by a court-administered auction or by arms' length negotiation between lead plaintiff and lead counsel) and subject it to further review by the court; such a process will often leave class counsel with the worst of both worlds. See In re Comdisco Securities Litigation, 150 F Supp 2d 943, 947-49 (ND Ill 2001).
But deference to lead plaintiff is unwarranted here because of the lack of evidence that lead plaintiff and lead counsel negotiated a fee agreement early in this litigation in a way that reflects the market value of lawyer services. Rather, lead plaintiff's involvement seems to have been confined to an endorsement of lead counsel's proposed fee. (Of course, lead counsel's desire to secure that endorsement may have constrained the fee requested here, but the court has no evidence of that before it.)
In any event, even if lead plaintiff had shopped around for lawyer services and concluded a market-based fee arrangement, there is no textual indication in the PSLRA that it supplants FRCP 23(h), which obligates the court to evaluate and approve all fee awards in class actions. If anything, certain provisions of the PSLRA affirmatively command the court to remain involved in approving lead counsel and lead counsel's fees. See 15 USC § 78u-4(a)(3)(B)(v) (requiring that lead plaintiff "shall, subject to the approval of the court, select and retain counsel"); 15 USC § 78u-4(a)(6) ("[A]ttorneys' fees * * * awarded by the court * * * shall not exceed a reasonable percentage [of recovery]."). The Ninth Circuit has recognized this in dictum:
[A] lead plaintiff's retainer agreement is far from the final word on what counsel will actually get paid, because class counsel must first be appointed, "subject to the approval of the court," 15 USC § 78u-4-(a)(3)(B)(v), and in the normal case (virtually the universal case) where there is a settlement, the court must approve the actual fees paid, subject to the [PSLRA's] lmitations. See 15 USC § 78u-4(a)(6).
In re Cavanaugh, 306 F3d 726, 733 (9th Cir 2002).
Likewise, the Third Circuit's attorney fee opinions arising out of the Cendant Corp securities litigation recognize that even under the PSLRA courts must still play the central role in making fee awards. In In re Cendant Corp Litigation, 264 F3d 201, 285 (3d Cir 2001) (Becker, CJ), the court rejected the district court's use of an auction to select class counsel and remanded for consideration of the presumptively reasonable fee arrangement negotiated by lead plaintiff with lead counsel. Yet the court noted that the fee under the retainer agreement was "staggering in [its] size," and mandated that "the possibility of rebuttal of the presumption of reasonableness" attaching to the negotiated fee arrangement "must be seriously considered * * * on remand." Id. Such an evaluation would be made "according to the standards * * * previous cases have set down for class actions not governed by the PSLRA." Id. And the most recent Cendant opinion explained:
[W]hile the PSLRA certainly represents a shift toward the traditional attorney-client relationship, it has not wholly adopted that paradigm. Securities class actions are still class actions, and the court retains the power to award fees. See Fed R Civ P 23(h) ("In an action certified as a class action, the court may award reasonable attorney fees * * * ."). And courts would be remiss if they abdicated all responsibility to the lead plaintiffs. The lead plaintiff is not the sole client in a PSLRA class action; instead, the lead plaintiff serves as a fiduciary for the entire class. A court must therefore retain oversight over lead plaintiff's compensation decisions in order to ensure that the lead plaintiff has fulfilled its fiduciary duties.
In re Cendant Corp Securities Litigation, --- F3d ---, ---, 2005 WL 820592 at *18 (3d Cir) (Becker, J). The court will attempt to follow this wise guidance.
The court concludes that even if the PSLRA requires deference to lead plaintiff's negotiated fee arrangement with lead counsel, no deference is owed here. Furthermore, even when deference is owed, lead plaintiff's deal with counsel must still square with objectively reasonable fees and expenses.
Deference or no deference, the award of expenses in this case poses no problem. Lead counsel's detailed breakdown of the expenses incurred in this case, Sidener Decl (Doc #167) Ex B, and their quite modest amount make it easy to conclude that counsel's expenses are reasonable. Accordingly, the court GRANTS lead counsel an award of $59,434.57 in expenses, to be paid from the cash portion of the common fund.
Turning to the question of a fee award, the court previously indicated that a fee of 15% of the common fund appears at first impression reasonable. Doc #164 at 9; Doc #131 at 13. In its order preliminarily ...