Back to the Future: Use of Percentage Fee Arrangements in Common Fund Litigation

• Publication year: 1988
• Citation: Vol. 12 No. 01

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 12, No. 1FALL 1988

Back to the Future: Use of Percentage Fee Arrangements in Common Fund Litigation

Bennet A. McConaughy (fn*)

One court observed several years ago: "To the old adage that death and taxes share an inevitable character, federal judges may be excused for adding attorney's fees cases."(fn1) Under the "common fund" doctrine, one accepting the benefits of litigation prosecuted by another is equitably bound to share proportionately in the costs of the litigation.(fn2) The doctrine most commonly applies in class action cases involving a monetary recovery.(fn3) Although attorney fees are usually the most significant charge against a common fund, the early cases largely ignored the method for calculating fees.(fn4) Recently, the methodology for calculating fees has become increasingly controversial.

Historically, common fund attorney fees were calculated as a percentage of the fund.(fn5) Attorney fees were thus determined almost exclusively by reference to the result obtained by the lawyer. In response to criticisms that this method of setting fees resulted in awards disproportionate to the efforts expended in generating the recovery,(fn6) trial courts shifted to fee methodologies that instead focused on the efforts of counsel in obtaining the recovery.(fn7) Under these methodologies, effort was measured by hours expended by counsel.

A growing perception exists that hourly based fee methodologies have their problems as well. Recently, the United States Courts of Appeal for the Third and Ninth Circuits evaluated alternative fee methodologies.(fn8) In evaluating hourly based fee methodologies, the reports cited excessive hours, duplicative or unjustifiable work, early settlement disincentive, lack of flexibility and predictability, and an increased burden on the judicial system as disadvantages to this method of setting fees.(fn9) Both reports approved the use of percentage fee arrangements in common fund cases.

It is well known that class counsel truly manage the prosecution and/or settlement of class litigation. Furthermore, class clients seldom are advised of the level of fees incurred during the course of the litigation.(fn10) The only review of the hours expended over years of litigation is at the end of the process, when the fee applications are submitted to the court.

The premise of this Article is that common fund litigation will be most efficiently and beneficially prosecuted if attorney fees are awarded under a methodology that makes parallel the interests of counsel in the fee award and of the class in the recovery. The Article examines the historical uses of the percentage fee, the development of and problems with, hourly based methods of computing fees, and the renewed trend toward the use of percentage fee awards. It concludes that, unlike hourly based methodologies, percentage fee arrangements align the interests of counsel with the interests of both the class and the judicial system. The judicial return to percentage fee arrangements is a good idea that will result in prompt, efficient, and economic disposition of class action litigation.

I. Percentage Fees in the Unregulated Marketplace and the Search for Alternatives

A. The Problem and the Shift to Hourly based Methodologies

Under a contingent percentage fee arrangement, a lawyer takes a percentage of the recovery as his compensation.(fn11) Such an arrangement is entrepreneurial and focuses on the results obtained for the client, without direct consideration of the efforts expended by counsel. Although the lawyer's efforts are not explicitly considered in calculating the fee, an implicit premise of percentage arrangements is that the lawyer's efforts will be reflected in the results obtained, and by virtue of the lawyer's self-interest, these efforts will be proportionate to the potential recovery.(fn12)

Under the percentage fee method, fees in class action litigation generally ranged from 20-25 percent of the recovery.(fn13) The percentage method of setting fees was simple in application and also provided a measure of certainty. However, it was perceived that percentage fee arrangements provided recoveries disproportionate to the efforts expended.(fn14) Such disproportion resulted from several factors, including a percentage that was too high in light of the difficulty, risk, amount at stake, or anticipated length of the litigation.(fn15) A prompt disposition of the case could create the impression that counsel labored neither long nor hard on the case, while still collecting a substantial fee.

The courts reacted to the perception that percentage fee awards resulted in unreasonable fees by adopting alternative fee methodologies. These approaches are called the "Lindy" (or "lodestar") method(fn16) and the "Screen Extras" method.(fn17) Because the primary concern was that the awards were out of proportion to the efforts expended by counsel, courts devised fee methodologies measured by the time-value(fn18) of those efforts.

B. Application of Hourly Rate Methodologies

Under the Lindy formulation, the court begins the calculation of a "reasonable fee" by determining a lodestar amount. This amount consists of the hours reasonably incurred, multiplied by a reasonable hourly rate. This lodestar historically was adjusted through "multipliers" to reflect special circumstances of the case, including factors such as the contingent nature of the agreement, risk of the case, quality of work, exceptional results, and the delay in receipt of payment. Multipliers were positive (increasing the lodestar) or negative (decreasing the lodestar).

Screen Extras involved consideration of many of the Lindy factors, but differed somewhat in its application. No mathematical formula was used; rather, the court considered the following factors:

(1) Time and labor required;

(2) novelty and difficulty of the questions involved;

(3) skill requisite to perform the legal service properly;

(4) preclusion of other employment by the attorney due to acceptance of the case;

(5) customary fee;

(6) whether the fee is fixed or contingent;

(7) time limitations imposed by the client or the circumstances;

(8) amount involved and the results obtained;

(9) experience, reputation and ability of the attorneys;

(10) undesirability of the case;

(11) nature and the length of the professional relationship with the client; and

(12) awards in similar cases.(fn19)

Based on these factors, the court sets the fee

Although phrased differently, the Screen Extras methodology operated much like the Lindy/lodestar approach. The first and most important consideration under Screen Extras is the "time and labor required."(fn20) This factor closely parallels the lodestar under Lindy. Under Screen Extras, enhancements or reductions of the fee that reflect the remaining factors are then made from this base.(fn21)

Courts have traditionally ignored the distinctions between fee shifting claims, by which the fee is recovered from the opposing party in addition to the substantive recovery, and common fund fees, where the fee is paid from the fund recovered. There are, in fact, substantial differences.(fn22) Common fund fees are based on equitable notions of sharing litigation costs that benefit a group of people. Statutory fee schemes, on the other hand, are intended to encourage private enforcement of statutory rights.(fn23) Statutory fee shifting cases are thus not always "group" actions, as common fund cases necessarily are.(fn24) In the statutory fee shifting case, there is an adversary- the defendant-from whom the fee is sought. This is not so in the common fund, by which the case is managed by the plaintiffs' counsel and the defendant has little interest in or knowledge of how much of a fee is paid from the fund.(fn25) The amount of the common fund sets a limit on a common fund recovery, but is also a measure of the success obtained. Statutory fees, on the other hand, may exceed the amount recovered; the amount recovered may not be an indicator of success in cases of intangible rights. Although the courts have not always distinguished the two fee situations,(fn26) this Article deals only with the common fund fee awards.

Recently, the U.S. Supreme Court formulated a hybrid of Lindy and Screen Extras for calculating a "reasonable" fee in statutory fee shifting cases.(fn27) Under this hybrid, the lodestar is the initial calculation; this amount "is presumed to be the reasonable fee."(fn28) The presumption is a "strong" one,(fn29) from which the court should depart only in "rare" or "exceptional" cases.(fn30) Adjustments to the fee should apparently occur under the Screen Extras methodology, reflecting the Court's concern with the use of multipliers.

II. Hourly Based Fee Methodologies-All That Glitters is Not Gold

In common fund cases, use of hourly based methodologies has generated problems more serious than those they were designed to resolve. These problems arise from the following: (i) The high degree of control that counsel has over the management and disposition of class litigation; and (ii) the fact that no client typically pays or advances the fees of counsel during the conduct of such litigation.(fn31)

Because hourly based fee methodologies focus on the hours devoted by counsel, counsel's interest in managing the litigation can result in...