APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil Action No. 41774-SC).
Seitz, Chief Judge, and Aldisert, Gibbons, Rosenn, Hunter and Weis, Circuit Judges. Gibbons, concurring in part and dissenting in part (with whom Chief Judge Seitz joins).
The question presented is whether the district court properly applied the guidelines for awarding attorneys' fees we set forth when this matter was previously before us. 487 F.2d 161 (3d Cir. 1973) (Lindy I). We affirm in part, but vacate the judgment and remand for entry of an order in accordance with this opinion.
This protracted litigation emanates from the plumbing fixtures cases.*fn1 In connection with final court approval of the settlement of claims by the national class*fn2 of builder owners, the district court awarded attorneys' fees to Harold E. Kohn and David Berger, and their respective firms.*fn3 Those participating in the settlement fund may be categorized into three groups: appellees Kohn and Berger represented the first category; other lawyers, not implicated in this appeal, represented those in the second category; the third consisted of class members not represented by counsel until after court approval of the settlement. Two members of this third category -- Friendswood Development Company and Humble Oil & Refining Company -- objected to the fee award to Kohn and Berger, and appealed. The award was vacated and the cause remanded, fees were awarded again, and Friendswood and Humble have appealed again. Although the three categories were not formally denominated as subclasses, see F.R. Civ. P. 23(c)(4), appellants advance arguments which obtain unerringly for all members of the third category. Accordingly, we treat the contentions as applicable to all members of the third category.*fn4
In its opinion on remand, the district court determined that appellees were entitled to attorneys' fees of $1,134,765.45 from the settlement fund then valued at $29.3 million. Of this amount, the district court ordered members in the third category -- the previously unrepresented claimants -- to pay $925,968.61. Thus, the district court ordered members of the third category to pay 81.6 per cent of the attorneys' fee from the settlement fund, even though their aliquot share of the fund was only about $8,145,400 or 27.8 per cent. The district court ordered no further payment of attorneys' fees from the settlement fund, but appellees were to receive $861,191 under private contracts with their clients, the members of the first claimant category.
Any understanding of the specific issues in this appeal must start with the rules we enunciated when these proceedings were here before. The district court has properly summarized what we said:
In discussing the proper standards which would govern the award of fees in a case of this sort, . . . the first inquiry of the Court should be into the hours spent by the attorneys, including how many hours were spent in what manner by which attorneys. 487 F.2d at 167. After determining the time spent, the district court should then undertake to fix an hourly rate of compensation to be applied to the hours worked. While the amount thus found to constitute reasonable compensation should be the "lodestar" of the Court's fee determination, at least two other factors should be taken into account in computing the value of attorneys' services, namely the contingent nature of success and the extent, if any, to which the quality of an attorney's work mandates either increasing or decreasing the amount to which the Court has found the attorney reasonably entitled. 487 F.2d at 168. Finally, after determining the total reasonable value of an attorney's services in securing recovery of a fund for the class, the Court should determine what portion of that amount should be paid by the unrepresented claimants. [Absent extraordinary circumstances, the unrepresented claimants should pay for the attorneys' services in proportion to their benefit from them -- that is, the unrepresented claimants should pay a percentage of the reasonable value of the attorneys' services to the class equal to their percentage of the class' recovery.] 487 F.2d at 169.
The appellants press four contentions: (1) The district court should have made no award for services performed by the Berger firm; (2) The district court should have excluded certain specific services performed by appellees from the "lodestar" defined in Lindy I ; (3) The district court should not have doubled the "lodestar" to reflect (a) contingency and (b) quality factors; and (4) The district court required category three claimants to pay a disproportionate share of the attorneys' fees from the settlement fund.
Appellants' contention that the Berger firm should not participate at all in the attorneys' fee awarded from the fund rests on two premises: (a) that Berger and his firm contributed nothing to the creation of the settlement fund, and (b) that, in any event, Berger and his firm will be adequately compensated for their services in connection with this litigation.
In support, appellants marshal several subsidiary points. First, Berger claimed only one hour's time related to settlement work. See ibid. at 1007. Second, although Berger signed the settlement agreement with the defendants, he only did so because Kohn asked that Berger's name be included and no defendant objected. Brief for Appellants at 33-34. Third, the district court concluded that the reasonable value of all work performed by the Berger firm was $139,186.85. However, as a result of a 50-50 fee splitting agreement between Kohn and Berger, the Berger firm stood to gross about $893,500 from the litigation. See 382 F. Supp. at 1028 n.34. Finally, the Berger firm did not support its application with accurate, contemporaneously-made time records. Instead, it relied on a "reconstruction" of the hours expended.
The district court was confronted with, and rejected, the identical arguments. We agree with its disposition. Ibid. at 1009-11. In summary, the district court found that the time expended by Berger and his firm "contributed materially to the creation of the settlement fund"; that Berger consulted with Kohn "at every stage of the proceedings"; that Kohn valued Berger's judgment and advice; and that Berger's firm reviewed briefs and pleadings for the Kohn firm during the early stages of the litigation. Upon a review of the record, we conclude that these findings of the district court were not clearly erroneous. Krasnov v. Dinan, 465 F.2d 1298, 1302 (3d Cir. 1972). With respect to the "reconstruction" of time expended, the district court stated:
The evidence here discloses that the reconstruction was carefully and accurately done. . . . Indeed, from the record as a whole, it appears that petitioner Berger and his firm probably spent more time than they are claiming in connection with this litigation.
382 F. Supp. at 1011. Finding the basic facts not clearly erroneous, and determining that there is no error either in the court's reasoning or in its application of the proper legal precept, we affirm the district court on this point. Implicit in this conclusion is the understanding that the agreement between Kohn and Berger to split fees is simply irrelevant to the considerations mandated by Lindy I.
Insofar as appellants urge that the Berger firm not receive an attorney's fee from the fund because Berger was not counsel for a court-appointed Class Representative, we reject the argument. We do not read the appellees' original petition as being on behalf of Kohn and Berger qua counsel for class representatives; rather, they petitioned "jointly as counsel for the plaintiffs and intervenor plaintiffs . . [where] the plaintiffs were designated by the Court as class representatives. . . ." App. at 77. In addition, we are faced with the district court's findings of fact -- that the Berger firm benefited the fund -- which we will not upset.
The district court excluded from its "lodestar" determination the time spent by appellees in negotiating fee arrangements with, and in preparing claim forms for, privately retained claimants. Although Kohn and Berger filed a cross appeal, they do not contest the propriety of this ruling. In any event, we would agree with the district court.
Appellants contend that the court also should have excluded from the "lodestar" time expended (A) relating to appellees' application for attorneys' fees and (B) on interventions. The district court fixed the reasonable value of appellees services relating to the fee application at $29,806.25. In addition, the district court made an award in the amount of $40,654.00 for "time spent since March 20, 1974", all of which was time spent in connection with the fee application.*fn5 Finally, with respect to fee application work, the district court awarded $320 to appellees for the services of paraprofessionals and law students. The reasonable value of work on interventions was $13,085, which figure the district court ultimately doubled, so as to award appellees $26,170 for interventions. 382 F. Supp. at 1024. We now address these contentions.
A. Fee Application and Appeal
The propriety vel non of an award from the fund for services relating to the fee application itself*fn6 turns on considerations of the basis for, and the nature of, the award from the settlement fund.
Federal courts have long recognized "the historic power of equity to permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover his costs, including his attorneys' fees, from the fund or property itself or directly from the other parties enjoying the benefit." Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 257, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975); see, e.g., Sprague v. Ticonic National Bank, 307 U.S. 161, 83 L. Ed. 1184, 59 S. Ct. 777 (1939); Central Railroad & Banking Co. v. Pettus, 113 U.S. 116, 28 L. Ed. 915, 5 S. Ct. 387 (1885); Trustees v. Greenough, 105 U.S. (15 Otto) 527, 26 L. Ed. 1157 (1881). See generally 7A C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1803 (1972); Dawson, Lawyers and Involuntary Clients: Attorney Fees from Funds, 87 HARV. L. REV. 1597 (1974) [hereinafter cited as Dawson]. As we said in Lindy I, "the award of fees under the equitable fund doctrine is analogous to an action in quantum meruit: the individual seeking compensation has, by his actions, benefited another and seeks payment for the value of the service performed." 487 F.2d at 165. Accordingly, "a benefit to the fund is supposedly required. . . . The standard formula [of benefit]. . . mix[es] together three distinct ideas: that a fund can be benefited by being 'created, increased or protected' (or 'preserved')." Dawson at 1626. Generally, where litigation involves the competing interests of claimants to a common fund, no attorneys' fees should be awarded. The reason is that, "if the interests are in conflict, success for one side means no benefit for the other and for a charge against a fund a benefit is required." Ibid. at 1638 (footnote omitted).
We subscribed to these general views in Lindy I, where we said:
There are two possible "causes of action" that may be urged as the basis for award of attorneys' fees. One of these "causes" belongs to the plaintiff who brought the underlying suit. His claim is that by instituting the suit he has performed a service benefiting other class members. . . .
The second "cause of action" for award of attorneys' fees under the equitable fund doctrine belongs to the attorney. The attorney's claim is that his conduct of the suit conferred a benefit on all the class members, that one or more class members has agreed by contract to pay for the benefit the attorney conferred upon him, and that the remaining class members should pay what the court determines to be the reasonable value of the services benefiting them.
487 F.2d at 165; *fn7 see SEC v. Aberdeen Securities Co., 526 F.2d 603, 607 (3d Cir. 1975); cf. Merola v. Atlantic Richfield Co., 515 F.2d 165 (3d Cir. 1975) (Merola II) (discussing non-pecuniary benefit as factor affecting "lodestar" award).
The district court concluded that time spent in pursuing the fee application was "a part of the administrative expense necessarily incurred in administering the fund. . . . Services performed in this connection are indeed of benefit to the class as a whole because they enable the Court to make its determination on the basis of a full and accurate presentation of all relevant facts." 382 F. Supp. at 1012.
Services performed in connection with the fee application are necessary to the attorney's recovery.They benefit him, for without them, the attorney cannot, since Lindy I, recover. But such services do not benefit the fund -- they do not create, increase, protect or preserve it. Accordingly and in the circumstances of this case, we accept the prevailing rule for litigation involving the competing interests of claimants to a common fund. See page 110, supra. There being no benefit to the fund from services performed by appellees in connection with their fee application, there should be no attorneys' fee award from the fund for those services. The district court, therefore, erred in awarding $29,806.25 for the fee application work prior to March 20, 1974, in awarding $40,654 for work after March 20, 1974, and in awarding $320 for fee application work by paraprofessionals and law students.
Having made a determination of the applicable rule of law for the case before us, it is important to emphasize that which is not before us. We do not decide today what the rule should be where the fee application is pressed by the client himself, and competing interests among claimants surface. Cf. Dawson 1634 n.126. Nor do we decide the rule for the situation where a competing claimant to a common fund persuades the court in the first instance to set an attorney's fee inadequate under Lindy I, thereby necessitating an appeal.*fn8 We specifically reserve these issues.
Appellants challenge the district court's award for time expended on interventions contending that this work in no way benefited the class. They argue that there was no reason to intervene in this multidistrict class action because class members dissatisfied with the representation of the class might opt out and thereby avoid the binding effect of a 23(b)(3) action. F.R. Civ. P. 23(c)(2).
The district court considered and rejected appellants' argument. It found that time spent on interventions "was beneficial to the class as a whole", and continued:
Faced with many additional litigants with sufficient financial resources to finance the cost of notice to the class and also the cost of a protracted trial, defendants in this case were under much more pressure to settle than otherwise. In its recent decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S. Ct. 2140, 40 L. Ed. 2d 732 (1974), the Supreme Court held that class representatives must pay the cost of the notice required by Rule 23 in a case such as this one. The cost of notice in this case was approximately $150,000, a sum which was paid from the settlement fund. Had there been no settlement, plaintiffs and intervenors would have been required to advance this sum if this litigation were to go ahead as a national class action.
382 F. Supp. at 1013; see ibid. at 1010.
We agree with appellants that, since the 1966 amendments to Rule 23, there is no necessity for intervention in a 23(b)(3) class action. Indeed, Berger admitted as much during his deposition. But this truism cannot end the analysis. While intervention may no longer be necessary, it is certainly still permissible. The federal rules allow intervention "of right" when an applicant's interest is not "adequately represented by existing parties." F.R. Civ. P. 24(a). Moreover, Rule 23 itself states that the district court may make appropriate orders, inter alia, "requiring, for the protection of the members of the class or otherwise for the fair conduct of the action, that notice be given . . . of the opportunity of members to signify whether they consider the representation fair and adequate, to intervene and present claims or defenses, or otherwise to come into the action." F.R. Civ. P. 23(d)(2) (emphasis added).
As rehearsed previously, the propriety of a particular award for an attorney's services from a common fund depends on whether the specific services benefited the fund -- whether they tended to create, increase, protect or preserve the fund. Appellants argue that, because intervenors did not advance the costs of notice, their presence in the case did not benefit the fund. This argument misses the mark. The point is, and the district court so found, that, when confronted by the intervenors and the financial strength they added to the plaintiff class, "defendants . . . were under much more pressure to settle." This finding was not clearly erroneous. Krasnov v. Dinan, supra. We must conclude, therefore, that the services performed on intervention helped to create the fund -- they helped to force the settlement.
In the instant case, there was never a formal class certification. Brief for Appellants at 7; see n.2 supra. Thus, the interests of those that intervened were not formally represented by the named plaintiffs who sought to be class representatives. In these circumstances, it may not be said that the interventions served only to clutter the action. Accordingly, the district court did not err when it awarded Kohn and Berger fees for services performed on interventions.
We express no opinion on whether attorneys' fees for services on interventions should be awarded from an equitable fund where the interventions occur after a class certification. In such circumstances, it might be argued that intervention serves no essential purpose, for class certification requires a finding of adequate representation. See F.R. Civ. P. 23(a)(4), 23(c)(2)(C), 23(d)(2), 24; 7A C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1799 (1972).
Lindy I instructs that, in addition to the "lodestar", the court's computation of the value of attorneys' services should reflect two other factors -- the contingent nature of success and the quality of the attorney's work. 487 F.2d at 168. In Merola II we observed that the second factor is "evidenced by the work observed, the complexity of the issues and the recovery obtained. In settled cases, the second additional factor [quality] is reflected largely in the benefit produced. It permits the court to recognize and reward achievements of a particularly resourceful attorney who secures a substantial benefit for his clients with a minimum of time invested, or to reduce the objectively determined fee where the benefit produced does not warrant awarding the full value of the time expended." 515 F.2d at 168-69.
Although the district court did not have the benefit of Merola II, its analysis generally followed these lines. With certain exceptions*fn9 that need not detain us, the district court doubled the amounts deemed reasonable compensation on the basis of hourly rates "because of the contingency and quality factors". 382 F. Supp. at 1024. In reaching this determination, the district court relied on the complexity of the litigation, the skill and experience of appellees Kohn and Berger, and the $29 million recovery.
Appellants argue that Lindy I resolved the contingency issue adversely to the attorneys.*fn10 They also question the quality of the work performed. On these bases, they urge that the district court erred in increasing, by any amount, the sum deemed a reasonable hourly compensation for attorneys' services.
When appellants argue that Lindy I forecloses the contingency issue they not only misread the language of Lindy I upon which they rely, but they also belittle the district court's painstaking comparison between the limited effect of the criminal prosecutions and the breadth of the civil litigation.
Chief Judge Seitz said in Lindy I : "The court may find that the contingency was so slight . . . that an increased allowance for the contingent nature of the fee would be minimal." 487 F.2d at 168 (emphasis added). The language was permissive, not mandatory.
The district court specifically found the contingency factor was not slight, but rather justified "a substantial increased allowance". 382 F. Supp. at 1017. Success of the civil suits, the district court stated, depended on several contingencies:
(1) the uncertainy of the class members' ability to prove liability and damages;
(2) the existence of other categories of claimants in this litigation contending that they and not the builder-owners were entitled to any recovery against the defendants;
(3) this Court's prior decision in Maricopa County v. American Radiator & Standard Sanitary Corp., 323 F. Supp. 381 (E.D. Pa. 1970), and Mangano v. American Radiator & Standard Sanitary Corp., 50 F.R.D. 13 (E.D. Pa. 1970), aff'd, 438 F.2d 1187 (3d Cir. 1971);
(4) the fact that the time period and range of products encompassed within the government's evidence in the criminal case was drastically more limited than the allegations in the complaints herein; and
(5) the settling defendants' denials of any violation of the antitrust laws and any overcharges, and the fact that they could have been expected to litigate all issues fully, including appeals if necessary.
Ibid. at 1015. Thus, assuming plaintiffs could prove that defendants had violated the antitrust laws, plaintiffs would have had to prove they, as distinguished from an alternate potential class of claimants in the distribution scheme, were entitled to collect damages. Moreover, at the outset of the civil litigation, defendants challenged the propriety of a national class action on the ground that it was unmanageable. Perhaps most important, however, and as more specifically set forth by the district court, ibid. at 1015-16, only three of the 16 defendants were convicted after original not guilty pleas. The 13 other defendants pleaded nolo contendere, thus imposing on plaintiffs the evidentiary burdens to which Chief Judge Seitz alluded in his footnote 12 to Lindy I, supra at n.10. This analysis led the district court to conclude:
Thus, this was not a case where plaintiffs received from the government on a silver platter the evidence necessary to prove their claims against the three convicted defendants, much less against the thirteen which had entered pleas of nolo contendere. Substantial problems of proof were present as to both liability and damages. Yet petitioners were able to negotiate settlements with all defendants which yielded funds producing $10.75 for each bathroom unit purchased by claimants during the full four-year period.
Appellants contend further: that "the bulk of the time claimed in this case was on routine matters", that this "was not a complex antitrust case involving novel substantive issues", and that "the result achieved was not outstanding". Brief for Appellants at 45-46.
The answer to the first argument is that Lindy I does not dictate consideration of the proportion of time spent on routine matters in assaying the quality factor. The "lodestar" concept reflects such considerations, encompassing the amount of time spent on various projects, the status of individual attorneys, and the reasonable ...