November 2012 Vol. 9, No. 3

9.3.14

Fee Recovery

Case:

Rodriguez v. Disner  (9th Cir. 2012) 688 F.3d 645

Issue:

Did the district court abuse its discretion in denying attorneys’ fees to class counsel in an antitrust class action suit where:  (1) class counsel contracted to submit a request to the Court for an additional incentive award to the initial five class representatives, thereby excluding the rest of the class plaintiffs, based on the amount of recovery; but (2) where the amount of the settlement negotiated substantially exceeded the settlement sum that would have triggered the maximum incentive payment to the initial class representatives?

Holding:

No.  The district court had “broad discretion to deny fees to an attorney who commit[ted] an ethical violation.”  (688 F.3d at 655.)  “The egregiousness of the violation is often the critical factor.”  (Ibid., citations omitted.)   The Court of Appeals found no case in which a California appellate court had overturned a trial court decision to deny attorney’s fees to an attorney engaged in dual representation of clients with actual conflicts of interest.  (Ibid.) 

Class counsel did not dispute, and the Court of Appeals held, that the arrangement between class counsel and the initial class representatives created, at its inception, a conflict of interest between the interests of the class representatives and the interests of the remainder of the class in violation of California Rule of Professional Conduct 3-310(C).  (688 F.3d at 656-657.)  The class representatives had an interest only to secure a settlement triggering the maximum incentive award and foregoing a trial that would have put that award at risk in return for only a marginal additional gain even if the verdict substantially exceeded the settlement.  (Ibid.)  The rest of the class had an interest in securing the highest recovery possible, even if it meant rejecting a settlement that would have triggered the maximum incentive award to the class representatives and proceeding to trial.   

The Court of Appeals rejected class counsel’s contention that the district court had erred in finding that counsel’s ethical violation warranted “automatic” forfeiture of legal fees.  Class counsel contended that Pringle v. La Chapelle (1999) 73 Cal.App.4th 1000, which allowed a trial court to consider the degree of harm suffered by the client as a result of the ethical violation, justified the award of fees in this case since the class ultimately benefitted handsomely from the attorneys’ work. The Court of Appeals rejected this reasoning, observing that California cases were persuasive authority, but ultimately federal equitable principles guided the decision.  (Id. at 657.)

The Court of Appeals found class counsel’s simultaneous representation of these conflicting interests particularly “egregious” because it was willfully created at the inception of the representation.  (Id. at 657.)  Counsel further violated its fiduciary duties to the class and its duty of candor to the court by not disclosing the agreement it had with the class representatives.  (Id. at 657-658.)

The Court of Appeals agreed with class counsel that the district court could have awarded at least some fees, since the incentive agreements with the class representatives did not actually injure the rest of the class since counsel had achieved a settlement well above the sum at which the maximum incentive award would have been triggered.  But the Court of Appeals’s conclusion that this would have been a reasonable approach for the district court did not make the district court’s decision to deny all fees an abuse of discretion.  (Id. at 658.)

Notes:

This was the second time this settlement was before the Court of Appeals.  In Rodriguez v. W. Publ’g Corp. (Rodriguez I) (9th Cir. 2009) 563 F.3d 948, the Court of Appeals upheld the settlement as fair and reasonable.  The Court of Appeals agreed with the district court’s ruling denying the incentive awards to the class representatives on the ground that it created a conflict of interest between the class representatives and the rest of the class.  The Court of Appeals in Rodriguez I reversed the district court’s order awarding $7 million in attorneys’ fees to class counsel, the full amount requested, and remanded the matter to the district court to consider the impact of the ethical violation on the award of fees.  The district court’s ruling denying fees to class counsel through the time of the approval of the settlement and the rejection of the incentive awards was the subject of the appeal in this case.  The Court of Appeals’s earlier opinion largely controlled the Court’s disposition of this appeal.

The Court of Appeals rejected the contention of certain objectors to the settlement that the district court had abused its discretion on remand in awarding $500,000 to class counsel for work performed after the district court denied the request for incentive awards to class counsel.  “The district court properly determined that its rejection of the incentive awards cured any conflict of interest and that [class counsel’s] services thereafter were properly performed and conferred a benefit on the class.”  (688 F.3d at 660, note 12, citing Jeffry v. Pounds (1977) 67 Cal.App.3d 6, 12, holding that an attorney was entitled to fees for work preceding an ethical breach.)

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