Laffitte v. Robert Half International Inc.

Filed 8/11/16

IN THE SUPREME COURT OF CALIFORNIA

MARK LAFFITTE et al., )

)

Plaintiffs and Respondents, )

) S222996

v. )

) Ct.App. 2/7 B249253

ROBERT HALF INTERNATIONAL INC., )

et al., )

) Los Angeles County

Defendants and Respondents; ) Super. Ct. No. BC321317

)

DAVID BRENNAN, )

)

Plaintiff and Appellant. )

____________________________________)

A class action employment lawsuit settled before trial for $19 million, with

the agreement that no more than a third of that recovery would go to class counsel

as attorney fees. In seeking the trial court‘s approval of the settlement, class

counsel sought the maximum fee amount, $6,333,333.33. After considering

information from class counsel on the hours they had worked on the case,

applicable hourly fees, the course of the pretrial litigation, and the potential

recovery and litigation risks involved in the case, the trial court—over the

objection of one class member—approved the settlement and awarded counsel the

requested fee.

The objecting class member contends the trial court‘s award of an attorney

fee calculated as a percentage of the settlement amount violates a holding of this

SEE CONCURRING OPINION

court in Serrano v. Priest (1977) 20 Cal.3d 25 (Serrano III),1 to the effect that

every fee award must be calculated on the basis of time spent by the attorney or

attorneys on the case. (See Serrano III, at p. 48, fn. 23.) We disagree. Our

discussion in Serrano III of how a reasonable attorney fee is calculated was made

in connection with an award under the ―private attorney general‖ doctrine. (See

id. at pp. 43–47.) We clarify today that when an attorney fee is awarded out of a

common fund preserved or recovered by means of litigation (see Serrano III,

supra, at p. 35), the award is not per se unreasonable merely because it is

calculated as a percentage of the common fund.

FACTUAL AND PROCEDURAL BACKGROUND

Three related wage and hour class action lawsuits were filed against Robert

Half International Inc., a staffing firm, and related companies (hereafter

collectively Robert Half) in Los Angeles County Superior Court. In September

2012, the parties jointly moved for an order conditionally certifying a settlement

class and preliminarily approving a settlement. The trial court granted the motion

and preliminarily approved the settlement. With the court‘s permission, the

proposed settlement was amended in November 2012.

Under the settlement agreement as amended, Robert Half would pay a gross

settlement amount of $19 million. It was agreed class counsel would request

attorney fees of not more than $6,333,333.33 (one-third of the gross settlement

amount), to be paid from the settlement amount. Robert Half would not oppose a

1 In Serrano v. Priest (1971) 5 Cal.3d 584 (Serrano I) and Serrano v. Priest

(1977) 18 Cal.3d 728 (Serrano II), we dealt with the merits of the plaintiffs‘

constitutional challenge to California‘s then-existing system for financing public

schools. Serrano III addressed the award of attorney fees to the plaintiffs‘

attorneys. A later decision, Serrano v. Unruh (1982) 32 Cal.3d 621 (Serrano IV),

addressed the propriety of awarding attorney fees for work done to secure an

earlier fee award.

2

fee request up to that amount, and if a smaller amount was approved by the court

the remainder would be retained in the settlement amount for distribution to

claimants, rather than reverting to Robert Half. The settlement agreement further

provided that any unclaimed portion of the net settlement amount (resulting, for

example, from class members choosing not to make claims or failing to qualify for

compensation) would be reallocated to qualified claimants rather than returned to

Robert Half or given to any third party.

Class member David Brennan objected to the proposed settlement on

several grounds, including that the projected $6,333,333.33 attorney fee appeared

to be excessive and class counsel had not provided enough information to evaluate

it.

Class counsel subsequently made the anticipated request for $6,333,333.33

in attorney fees. A fee equal to one-third of the settlement fund recovered for the

class, counsel asserted, is within a historical range of 20 to 50 percent of a

common fund and is also within the range provided in contingent fee agreements

signed by the named plaintiffs. Recovery of any fee was contingent on success in

the litigation, ―and the case presented far more risk than the usual contingent fee

case.‖ The requested fee, counsel also asserted, is also appropriate under the

―lodestar‖ method, in which an attorney fee is based on the hours worked and an

hourly billing rate, sometimes adjusted by a positive or negative multiplier. The

firms acting as class counsel would collectively expend between 4,263 and 4,463

attorney hours, depending on whether the objector appealed approval of the

settlement. Multiplying the individual attorneys‘ hours by rates assertedly tied to

their skill and experience, counsel calculated a lodestar fee amount of between

$2,968,620 and $3,118,620. The multiplier needed to reach the requested fee of

$6,333,333.33 would thus be 2.03 to 2.13.

3

The totals of hours expended, the range of percentages in common fund

cases and in the fee agreements, and the range of hourly rates applicable to class

counsel were supported by data in the fee motion and supporting declarations.

Class counsel Kevin T. Barnes generally described the work performed in ―one of

the most heavily litigated cases I have ever been a part of and the extensive

research and litigation for the past 8½ years. This litigation included extensive

written discovery, extensive law and motion practice, 68 depositions, three

Motions for Summary Judgment, a Class Certification Motion, subsequent

Reconsideration Motion and then another Motion to Decertify, numerous experts,

consultation with an economist regarding potential damage exposure and two full

day mediations.‖

While tentatively approving the settlement and fee request, the trial court

asked counsel for additional information and discussion on certain points. Barnes

submitted a supplemental declaration that, in part, argued the calculated multiplier

over the lodestar amount (2.03 to 2.13) was reasonable in light of counsel‘s ―hard

work and determination‖ in a difficult case and the ―enormous‖ risks of

nonpayment counsel undertook. Barnes‘s declaration detailed the risks that the

actions would fail at the certification stage, would be deemed barred by arbitration

agreements, or would fail on the merits because of findings the class members

were exempt employees.

On April 10, 2013, the trial court overruled Brennan‘s objections and gave

the settlement and attorney fee request its final approval. In its oral ruling the

court stated: ―On the amount of the attorneys fees, the court considers in this case

that there is a contingency case, and so I do a double check on the attorneys fees

by looking at the lodestar amount. I do believe I have sufficient information on

the number of hours that were present and that the hourly rates charged therefore

were within the norm and not overstated. [¶] Given the lodestar, I then also find I

4

have information in the record which supports the multiplier that would be applied

to lodestar if you‘re looking at a strict lodestar calculation, which we‘re not, we‘re

looking at a contingency calculation, the amount of the contingency is not

unreasonable. I‘m considering the novelty and difficulty of the questions

involved, the skill displayed in presenting them, the extent to which the litigation

precluded other employment by the attorneys and the inherent risk whenever there

is a fee award that is contingent. [¶] On that basis, I am granting final approval.‖

On objector Brennan‘s appeal from the judgment entered on the settlement,

the Court of Appeal affirmed. The Court of Appeal held Serrano III did not

preclude award of a percentage fee in a common fund case, that an award of one-

third the common fund was in the range set by other class action lawsuits, and that

the trial court did not abuse its discretion by cross-checking the reasonableness of

the percentage award by calculating a lodestar fee and approving a multiplier over

lodestar of 2.03 to 2.13.

We granted review on the objector‘s petition, which presented a single

issue: whether Serrano III permits a trial court to calculate an attorney fee award

from a class action common fund as a percentage of the fund, while using the

lodestar-multiplier method as a cross-check of the selected percentage.2

DISCUSSION

We review attorney fee awards on an abuse of discretion standard. ―The

‗experienced trial judge is the best judge of the value of professional services

rendered in his court, and while his judgment is of course subject to review, it will

not be disturbed unless the appellate court is convinced that it is clearly wrong.‘ ‖

(Serrano III, supra, 20 Cal.3d at p. 49.) ―Fees approved by the trial court are

2 The request for judicial notice by objector Brennan, filed on July 22, 2015,

is granted.

5

presumed to be reasonable, and the objectors must show error in the award.‖ (In

re Consumer Privacy Cases (2009) 175 Cal.App.4th 545, 556.) We consider here

whether a trial court abuses its discretion, when awarding a fee from a common

fund created or preserved by the litigation, by calculating the fee as a percentage

of the fund and checking the reasonableness of the fee with a lodestar calculation.

California has long recognized, as an exception to the general American

rule that parties bear the costs of their own attorneys, the propriety of awarding an

attorney fee to a party who has recovered or preserved a monetary fund for the

benefit of himself or herself and others. In awarding a fee from the fund or from

the other benefited parties, the trial court acts within its equitable power to prevent

the other parties‘ unjust enrichment. (Serrano IV, supra, 32 Cal.3d at p. 627;

Serrano III, supra, 20 Cal.3d at p. 35; Farmers & Merchants Nat. Bank of Los

Angeles v. Peterson (1936) 5 Cal.2d 601, 607; Fox v. Hale & Norcross Silver Min.

Co. (1895) 108 Cal. 475, 476–477; Lealao v. Beneficial California, Inc. (2000) 82

Cal.App.4th 19, 27 (Lealao).)

Because it distributes the cost of hiring an attorney among all the parties

benefited, a common fund fee award has sometimes been referred to as ―fee

spreading.‖ In contrast, ―fee shifting‖ refers to an award under which a party that

did not prevail in the litigation is ordered to pay fees incurred by the prevailing

party. (Lealao, supra, 82 Cal.App.4th at p. 26; Camden I Condominium Assn. v.

Dunkle (11th Cir. 1991) 946 F.2d 768, 774.) California law permits fee shifting in

favor of the prevailing party on certain statutory causes of action (e.g., Gov. Code,

§§ 12965, subd. (b), 12974, 12989.2), when a plaintiff has acted as a private

attorney general by enforcing an important right affecting the public interest (Code

Civ. Proc., § 1021.5), and in contract cases where the contract provides for an

award of fees to the prevailing party (Civ. Code, § 1717).

6

Class action litigation can result in an attorney fee award pursuant to a

statutory fee shifting provision or through the common fund doctrine when, as in

this case, a class settlement agreement establishes a relief fund from which the

attorney fee is to be drawn. Two primary methods of determining a reasonable

attorney fee in class action litigation have emerged and been elaborated in recent

decades. The percentage method calculates the fee as a percentage share of a

recovered common fund or the monetary value of plaintiffs‘ recovery. The

lodestar method, or more accurately the lodestar-multiplier method, calculates the

fee ―by multiplying the number of hours reasonably expended by counsel by a

reasonable hourly rate. Once the court has fixed the lodestar, it may increase or

decrease that amount by applying a positive or negative ‗multiplier‘ to take into

account a variety of other factors, including the quality of the representation, the

novelty and complexity of the issues, the results obtained, and the contingent risk

presented.‖ (Lealao, supra, 82 Cal.App.4th at p. 26.)

The two approaches to determining a fee contrast in their primary foci:

―The lodestar method better accounts for the amount of work done, while the

percentage of the fund method more accurately reflects the results achieved.‖

(Rawlings v. Prudential-Bache Properties, Inc. (6th Cir. 1993) 9 F.3d 513, 516.)

Each has been championed and criticized for its respective advantages and

disadvantages. The lodestar method has been praised as providing better

accountability and encouraging plaintiffs‘ attorneys to pursue marginal increases

in recovery, but criticized for discouraging early settlement and consuming too

large an amount of judicial resources in its application. (Id. at pp. 516–517; 5

Rubenstein, Newberg on Class Actions (5th ed. 2015) § 15:65, pp. 225–226

(hereafter Newberg on Class Actions).) The percentage method ―is easy to

calculate; it establishes reasonable expectations on the part of plaintiffs‘ attorneys

as to their expected recovery; and it encourages early settlement, which avoids

7

protracted litigation. However, a percentage award may also provide incentives to

attorneys to settle for too low a recovery because an early settlement provides

them with a larger fee in terms of the time invested.‖ (Rawlings v. Prudential-

Bache Properties, Inc., supra, at p. 516.) Where the class settlement is for a very

large amount, a percentage fee may be criticized as providing counsel a windfall in

relation to the amount of work performed. (Brundidge v. Glendale Federal Bank,

F.S.B. (1995) 168 Ill.2d 235, 243; 5 Newberg on Class Actions, supra, § 15:65,

p. 224.)

Before discussing the percentage method‘s use in California, we review the

history of the two fee calculation approaches in class action litigation nationally.

I. Lodestar-multiplier v. Percentage of the Recovery

The history of attorney fee awards in class actions has been one of reaction

and counterreaction, divisible into three major eras. (See Walker & Horwich, The

Ethical Imperative of a Lodestar Cross-check: Judicial Misgivings About

“Reasonable Percentage” Fees in Common Fund Cases (2005) 18 Geo. J. Legal

Ethics 1453, 1453–1454 (hereafter Walker & Horwich).)

In the first period, from the 1966 amendments to rule 23 of the Federal

Rules of Civil Procedure (28 U.S.C.), which ―heralded the advent of the modern

class action‖ (Walker & Horwich, supra, 18 Geo. J. Legal Ethics at p. 1453), to

the middle of the 1970s, awards based on a percentage of the recovery were

common: ―Judges relied on a variety of factors in setting reasonable amounts for

fee awards, but most heavily emphasized was the size of the fund or the amount of

benefit produced for the class. Awards often reflected what the court believed was

a ‗reasonable percentage‘ of the amount recovered, with the percentages varying

considerably from case to case. However, the percentage-of-recovery system

sometimes resulted in strikingly large fee awards in a number of cases. Press

8

reaction to these awards, and criticism from within the profession that the fees

were disproportionate to the actual efforts expended by the attorneys, generated

pressure to shift away from the percentage-of-recovery approach.‖ (Court

Awarded Attorney Fees: Report of the Third Circuit Task Force (1985) 108 F.R.D.

237, 242 (hereafter 1985 Task Force Report); see In re Thirteen Appeals Arising

Out of San Juan Dupont Plaza Hotel Fire Litigation (1st Cir. 1995) 56 F.3d 295,

305 [―Traditionally, counsel fees in common fund cases were computed as a

percentage of the fund, subject, of course, to considerations of reasonableness.‖].)

The second period ran from the Third Circuit‘s Lindy decisions in the

mid-1970s (Lindy Bros. Builders, Inc. v. Am. Radiator & Standard Sanitary Corp.

(3d Cir. 1973) 487 F.2d 161 (Lindy I) and Lindy Bros. Builders, Inc. v. Am.

Radiator & Standard Sanitary Corp. (3d Cir. 1976) 540 F.2d 102), which

described and mandated the use of a lodestar-multiplier method in common fund

class action cases in the Third Circuit, to the middle of the 1980s. In this period,

the lodestar-multiplier method predominated in federal courts in fee spreading as

well as fee shifting cases. The virtue of using a lodestar to determine fees, the

court explained in Lindy I, is its seemingly direct relationship to the value of the

services rendered: ―[W]e stress . . . the importance of deciding, in each case, the

amount to which attorneys would be entitled on the basis of an hourly rate of

compensation applied to the hours worked. This figure provides the only

reasonably objective basis for valuing an attorney‘s services.‖ (Lindy I, supra,

487 F.2d at p. 167.) Quoting from a district court decision, Lindy I expressed the

fear ― ‗that the bar and bench will be brought into disrepute, and that there will be

prejudice to those whose substantive interests are at stake,‘ ‖ if fee awards were

not restrained by reference to the actual time spent and skill displayed by counsel.

(Id. at p. 168.)

9

―The Lindy lodestar approach rather quickly gained acceptance in other

federal courts throughout the country because it was viewed as a more reasonable

approach than the percentage-of-benefit technique for making fee awards in

modern complex litigation.‖ (1985 Task Force Report, supra, 108 F.R.D. at

p. 244.) Several federal appellate courts mandated use of the lodestar-multiplier

method even in cases where class litigation had resulted in establishment of a

common fund. (See, e.g., National Treasury Employees Union v. Nixon (D.C. Cir.

1975) 521 F.2d 317, 322; City of Detroit v. Grinnell Corp. (2d Cir. 1977) 560 F.2d

1093, 1098–1099; Grunin v. International House of Pancakes (8th Cir. 1975) 513

F.3d 114, 127.) In statutory fee shifting cases, where the prevailing party‘s fees

are ordered paid by the nonprevailing party, the lodestar method was generally

adopted, with United States Supreme Court approval. (Hensley v. Eckerhart

(1983) 461 U.S. 424, 433; 5 Newberg on Class Actions, supra, § 15:38, pp. 124–

129.)

The third period, which continues today, began in the mid-1980s. In 1984,

in a statutory fee shifting case involving a lodestar-multiplier calculation, the

United States Supreme Court distinguished common fund cases and indicated a

different method would be used in such a case: ―Unlike the calculation of

attorney‘s fees under the ‗common fund doctrine,‘ where a reasonable fee is based

on a percentage of the fund bestowed on the class, a reasonable fee under [42

U.S.C.] § 1988 reflects the amount of attorney time reasonably expended on the

litigation.‖ (Blum v. Stenson (1984) 465 U.S. 886, 900, fn. 16.)

The next year, the Chief Judge of the Third Circuit convened a ―task force‖

of judges, academics and attorneys from around the country to address ―perceived

deficiencies and abuses‖ that had arisen in the application of the Lindy lodestar

method. (1985 Task Force Report, supra, 108 F.R.D. at p. 253.) The task force

noted the main complaints that had been lodged against the lodestar method of

10

determining an appropriate fee award. Prominent among these were that the

emphasis on the number of hours worked creates a disincentive for the early

settlement of cases and encourages lawyers to expend excessive hours; that the

need for documentation and examination of detailed billing records had greatly

increased the time and effort devoted to fee matters; and that the lodestar-

multiplier method was neither as objective nor as precise as it appears facially

because, for example, many plaintiffs‘ attorneys usually work on a contingency

fee basis, making the assignment of a customary billing rate for lodestar purposes

problematic. (1985 Task Force Report, supra, 108 F.R.D. at pp. 246–248.)

Distinguishing between fee spreading cases in which the fee award is to be

taken from a common fund (including a class action settlement fund involving

absent class members), and statutory fee shifting cases in which the award is a

product of an adversary proceeding between the prevailing and nonprevailing

parties (1985 Task Force Report, supra, 108 F.R.D. at pp. 250–251), the task force

recommended courts generally use a percentage-of-the-fund method in common

fund cases and a lodestar-multiplier method in fee shifting cases. ―Accordingly,

the Task Force recommends that in the traditional common-fund situation and in

those statutory fee cases that are likely to result in a settlement fund from which

adequate counsel fees can be paid, the district court, on motion or its own initiative

and at the earliest practicable moment, should attempt to establish a percentage fee

arrangement agreeable to the Bench and to plaintiff‘s counsel. In statutory fee

cases the negotiated fee would be applied in the event of settlement; in all fully

litigated statutory fee cases the award would continue to be determined in an

adversary manner under the basic Lindy approach,‖ with suggested modifications.

(Id. at pp. 255–256, fn. omitted.)

By making a percentage fee award (which the task force envisioned being

set early in the proceedings) in a common fund case, ―any and all inducement or

11

inclination to increase the number of Lindy hours will be reduced, since the

amount of work performed will not be permitted to alter the contingent fee.‖

(1985 Task Force Report, supra, 108 F.R.D. at p. 258.) Plaintiffs‘ counsel will

have ―a substantial inducement . . . to settle the matter quickly, since the fee scale

will have been established and counsel‘s compensation will not be enhanced by a

delay.‖ (Ibid.) Moreover, the percentage method ―will eliminate the cumbersome,

enervating, and often surrealistic process of preparing and evaluating fee petitions

that now plagues the Bench and Bar under Lindy.‖ (Ibid.) The lodestar method

would, under the task force recommendations, continue to be used in statutory fee

cases in which no common economic benefit, or only a fund insufficient to yield a

reasonable fee, has been or is likely to be produced. (Id. at p. 259.)

In the years since the 1985 Task Force Report was released, the views

expressed in it have gained general acceptance in federal and state courts. (See

Walker & Horwich, supra, 18 Geo. J. Legal Ethics at pp. 1457–1458.) The Third

Circuit itself holds that while both methods of calculating a fee may be used,

―[t]he percentage-of-recovery method is generally favored in common fund cases

because it allows courts to award fees from the fund ‗in a manner that rewards

counsel for success and penalizes it for failure.‘ ‖ (In re Rite Aid Corp. Securities

Litigation (3d Cir. 2005) 396 F.3d 294, 300.) Currently, all the circuit courts

either mandate or allow their district courts to use the percentage method in

common fund cases; none require sole use of the lodestar method. (5 Newberg on

Class Actions, supra, § 15.66, pp. 228–231.)3 Most state courts to consider the

3 See In re Thirteen Appeals Arising Out of San Juan Dupont Plaza Hotel

Fire Litigation, supra, 56 F.3d at page 307 (1st Cir.; permitting use of either

method); McDaniel v. County of Schenectady (2d Cir. 2010) 595 F.3d 411, 417

(permitting either method); Kay Co. v. Equitable Production Co. (S.D.W.Va.

2010) 749 F.Supp.2d 455, 463 (―The Fourth Circuit has neither announced a

(footnote continued on next page)

12

question in recent decades have also concluded the percentage method of

calculating a fee award is either preferred or within the trial court‘s discretion in a

common fund case.4 Thus, ―[i]n the years since the Third Circuit‘s report . . .

(footnote continued from previous page)

preferred method for determining the reasonableness of attorneys‘ fees in common

fund class actions nor identified factors for district courts to apply when using the

percentage method.‖); Union Asset Management Holding A.G. v. Dell, Inc. (5th

Cir. 2012) 669 F.3d 632, 644 (―We join the majority of circuits in allowing our

district courts the flexibility to choose between the percentage and lodestar

methods in common fund cases . . . .‖); Rawlings v. Prudential-Bache Properties,

Inc. (6th Cir. 1993) 9 F.3d 513, 517 (―[W]e conclude that use of either the lodestar

or percentage of the fund method of calculating attorney‘s fees is appropriate in

common fund cases, and that the determination of which method is appropriate in

any given case will depend upon its circumstances.‖); Matter of Continental

Illinois Securities Litigation (7th Cir. 1992) 962 F.2d 566, 572–573 (award should

simulate the market for legal services, which can include a percentage fee award in

a contingent fee suit); Petrovic v. Amoco Oil Co. (8th Cir. 1999) 200 F.3d 1140,

1157 (approving use of percentage method); Powers v. Eichen (9th Cir. 2000) 229

F.3d 1249, 1256 (permitting either method); Brown v. Phillips Petroleum Co.

(10th Cir. 1988) 838 F.2d 451, 454 (holding ―the award of attorneys‘ fees on a

percentage basis in a common fund case is not per se an abuse of discretion.‖);

Camden I Condominium Ass’n, Inc. v. Dunkle, supra, 946 F.2d at page 774 (11th

Cir.; ―Henceforth in this circuit, attorneys‘ fees awarded from a common fund

shall be based upon a reasonable percentage of the fund established for the benefit

of the class.‖); Swedish Hosp. Corp. v. Shalala (D.C. Cir. 1993) 1 F.3d 1261, 1271

(―In sum, we join the Third Circuit Task Force and the Eleventh Circuit, among

others, in concluding that a percentage-of-the-fund method is the appropriate

mechanism for determining the attorney fees award in common fund cases.‖)

4 See, e.g., Edwards v. Alaska Pulp Co. (Alaska 1996) 920 P.2d 751, 758;

Brody v. Hellman (Colo.Ct.App. 2007) 167 P.3d 192, 201–202; Chun v. Board of

Trustees of Employees’ Retirement System of State of Hawaii (2000) 92 Hawai‘i

432, 445; Brundidge v. Glendale Federal Bank, F.S.B., supra, 168 Ill.2d at

pages 243–244; Flemming v. Barnwell Nursing Home and Health Facilities, Inc.

(N.Y.App.Div. 2008) 56 A.D.3d 162, 165, affirmed (2010) 15 N.Y.3d 375; Strawn

v. Farmers Ins. Co. of Oregon (2013) 353 Or. 210, 218–221; General Motors

Corp. v. Bloyed (Tex. 1996) 916 S.W.2d 949, 960–961; Bowles v. Washington

Dept. of Retirement Systems (1993) 121 Wn. 2d 52, 72.) Only Florida appears to

(footnote continued on next page)

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federal and state courts alike have increasingly returned to the percent-of-fund

approach [in common fund cases], either endorsing it as the only approach to use,

or agreeing that a court should have flexibility to choose between it and a lodestar

approach, depending on which method will result in the fairest determination in

the circumstances of a particular case.‖ (Strawn v. Farmers Ins. Co. of Oregon,

supra, 353 Or. at p. 219.)

The American Law Institute has also endorsed the percentage method‘s use

in common fund cases, with the lodestar method reserved mainly for awards under

fee shifting statutes and where the percentage method cannot be applied or would

be unfair due to specific circumstances of the case. (ALI, Principles of the Law of

Aggregate Litigation (2010) § 3.13.) ―Although many courts in common-fund

cases permit use of either a percentage-of-the-fund approach or a lodestar (number

of hours multiplied by a reasonable hourly rate), most courts and commentators

now believe that the percentage method is superior. Critics of the lodestar method

note, for example, the difficulty in applying the method and cite the undesirable

incentives created by that approach—i.e., a financial incentive to extend the

litigation so that the attorneys can accrue additional hours (and thus, additional

fees). Moreover, some courts and commentators have criticized the lodestar

method because it gives counsel less of an incentive to maximize the recovery for

the class.‖ (Id., com. b.)

(footnote continued from previous page)

require use of the lodestar method in common fund cases generally. (Kuhnlein v.

Department of Revenue (Fla. 1995) 662 So.2d 309, 312–313; see also American

Trucking Associations, Inc. v. Secretary of Admin. (1993) 415 Mass. 337, 353

[holding lodestar the appropriate method ―[i]n this case‖].)

14

While the percentage method has been generally approved in common fund

cases, courts have sought to ensure the percentage fee is reasonable by refining the

choice of a percentage or by checking the percentage result against a lodestar-

multiplier calculation. (Walker & Horwich, supra, 18 Geo. J. Legal Ethics at

pp. 1458–1461; 5 Newberg on Class Actions, supra, § 15:72, pp. 247–250.)

Some courts have employed a benchmark percentage, with upward or

downward adjustments justified by a multifactor analysis. The Ninth Circuit has

approved a 25 percent benchmark. (See Vizcaino v. Microsoft Corp. (9th Cir.

2002) 290 F.3d 1043, 1047 [approving 28 percent fee as justified by a benchmark

of 25 percent adjusted according to specified case circumstances]; accord, In re

Bluetooth Headset Products Liability Litigation (9th Cir. 2011) 654 F.3d 935, 942

[district courts in the circuit ―typically calculate 25% of the fund as the

‗benchmark‘ for a reasonable fee award, providing adequate explanation in the

record of any ‗special circumstances‘ justifying a departure‖].) The Eleventh

Circuit, similarly, stated in 1991 that ―district courts are beginning to view the

median of this 20% to 30% range, i.e., 25%, as a ‗bench mark‘ percentage fee

award which may be adjusted in accordance with the individual circumstances of

each case . . . .‖ (Camden I Condominium Ass’n, Inc. v. Dunkle, supra, 946 F.2d

at p. 775; see also Faught v. American Home Shield Corp. (11th Cir. 2011) 668

F.3d 1233, 1242 [―this court has often stated that the majority of fees in these

cases are reasonable where they fall between 20–25% of the claims.‖].)

Other courts have mandated or suggested a sliding scale approach, an idea

suggested by the Third Circuit‘s 1985 task force, in which the award in cases of

larger recoveries is limited to a lower percentage to account for supposed

economies of scale in litigating larger claims. (1985 Task Force Report, supra,

108 F.R.D. at p. 256; see, e.g., In re Cendant Corp. PRIDES Litigation (3d Cir.

2001) 243 F.3d 722, 736 [―[D]istrict courts setting attorneys‘ fees in cases

15

involving large settlements must avoid basing their awards on percentages derived

from cases where the settlement amounts were much smaller.‖].) As the court in

Silverman v. Motorola Solutions, Inc. (7th Cir. 2013) 739 F.3d 956, 959, put the

theory, ―it is almost as expensive to conduct discovery in a $100 million case as in

a $200 million case. . . . There may be some marginal costs of bumping the

recovery from $100 million to $200 million, but as a percentage of the incremental

recovery these costs are bound to be low. It is accordingly hard to justify

awarding counsel as much of the second hundred million as of the first.‖

A further refinement of the sliding scale, championed in the Seventh

Circuit, applies the lower percentages to the marginal amounts of the award over

each step point. ―Awarding counsel a decreasing percentage of the higher tiers of

recovery enables them to recover the principal costs of litigation from the first

bands of the award, while allowing the clients to reap more of the benefit at the

margin (yet still preserving some incentive for lawyers to strive for these higher

awards).‖ (Silverman v. Motorola Solutions, Inc., supra, 739 F.3d at p. 959.)

Even without a well-developed sliding scale approach, some courts have approved

fee awards representing a small percentage of the fund in cases involving very

large settlements, the so-called ―megafunds,‖ in view of the ―windfall‖ that would

otherwise accrue to counsel. (See, e.g., Wal-Mart Stores, Inc. v. Visa U.S.A., Inc.

(2d Cir. 2005) 396 F.3d 96, 103, 123 [where settlement fund was worth $3.05

billion, ―the sheer size of the instant fund makes a smaller percentage

appropriate‖]; In re Bluetooth Headset Products Liability Litigation, supra, 654

F.3d at p. 942 [―[W]here awarding 25% of a ‗megafund‘ would yield windfall

16

profits for class counsel in light of the hours spent on the case, courts should adjust

the benchmark percentage or employ the lodestar method instead.‖].)5

The most significant trend has been a blending of the two fee calculation

methods, an approach in which one method is used to confirm or question the

reasonableness of the other‘s result. Where the court uses the percentage method

as its primary approach, the technique is referred to as a ―lodestar cross-check,‖

and has been described as follows: ―First, the court computes a fee using the

percentage method in the traditional manner, using a benchmark fee and

adjustments as appropriate. Next, the court computes the fee using the lodestar

method (absent any multiplier) in the traditional manner as described in Lindy I.

At this point, the percentage-based fee will typically be larger than the

lodestar-based fee. Assuming that one expects rough parity between the results of

the percentage method and the lodestar method, the difference between the two

computed fees will be attributable solely to a multiplier that has yet to be applied.

Stated another way, the ratio of the percentage-based fee to the lodestar-based fee

implies a multiplier, and that implied multiplier can be evaluated for

reasonableness. If the implied multiplier is reasonable, then the cross-check

confirms the reasonableness of the percentage-based fee; if the implied multiplier

is unreasonable, the court should revisit its assumptions.‖ (Walker & Horwich,

supra, 18 Geo. J. Legal Ethics at p. 1463.)

Many federal circuits encourage or allow their district courts to conduct a

lodestar cross-check on a percentage fee award (5 Newberg on Class Actions,

5 In giving this background on development of the percentage method, we do

not mean to endorse the use of a sliding percentage scale. That issue is not before

us and is not without controversy. (See 5 Newberg on Class Actions, supra,

§ 15:80, pp. 296–299.)

17

supra, § 15:88, pp. 343–344),6 and empirical studies show the percentage method

with a lodestar cross-check ―is the most prevalent form of fee method‖ in practice.

(Id., § 15:89, p. 348; see also Walker & Horwich, supra, 18 Geo. J. Legal Ethics at

pp. 1461–1463.) We will return to the subject of lodestar cross-checks later, in

reviewing the fee calculation in this case, which included such a cross-check.

First, we address the use of the percentage method to calculate class action fee

awards in California courts.

II. California Law After Serrano III

―Prior to 1977, when the California Supreme Court decided Serrano III,

supra, 20 Cal.3d 25, California courts could award a percentage fee in a common

fund case. (See, e.g., Melendres v. City of Los Angeles (1975) 45 Cal.App.3d 267,

284.) After Serrano III, it is not clear whether this may still be done. (See Dunk v.

Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1809 [‗The award of attorney fees

based on a percentage of a ―common fund‖ recovery is of questionable validity in

California.‘].)‖ (Lealao, supra, 82 Cal.App.4th at p. 27.) Below, we clarify that

Serrano III does not preclude award of a percentage fee in a common fund case.

In Serrano III, we reviewed an award of fees to attorneys who had obtained

a judgment, affirmed in our Serrano II decision, that required reform of

California‘s public school financing system to bring it into constitutional

compliance. (Serrano III, supra, 20 Cal.3d at pp. 31–32.) The trial court had

made the award on a private attorney general theory, rejecting reliance on the

common fund and substantial benefit theories. (Id. at p. 33.)

6 See, e.g., In re Thirteen Appeals Arising Out of San Juan Dupont Plaza

Hotel Fire Litigation, supra, 56 F.3d 295, 308 (1st Cir.); Goldberger v. Integrated

Resources, Inc. (2d Cir. 2000) 209 F.3d 43, 50; In re AT & T Corp. (3d Cir. 2006)

455 F.3d 160, 164; Petrovic v. Amoco Oil Co., supra, 200 F.3d at page 1157 (8th

Cir.); Vizcaino v. Microsoft Corp., supra, 290 F.3d at page 1050 (9th Cir.).

18

This court first addressed the common fund theory, under which ― ‗when a

number of persons are entitled in common to a specific fund, and an action

brought by a plaintiff or plaintiffs for the benefit of all results in the creation or

preservation of that fund, such plaintiff or plaintiffs may be awarded attorney‘s

fees out of the fund.‘ ‖ (Serrano III, supra, 20 Cal.3d at p. 34.) We agreed with

the trial court that this equitable theory was inapplicable to the case because the

plaintiffs had not, by their successful litigation efforts, ―created or preserved any

‗fund‘ of money to which they should be allowed recourse for their fees.‖ (Id. at

p. 36.) To the extent the Legislature allocated additional moneys for public

education in order to implement reforms, such expenditures were not required by

the judgment itself and counsel did not propose their fee be paid out of any such

increased expenditures. (Id. at pp. 36–37.) We went on to reject the theory of

substantial benefit on similar grounds, explaining that ―concrete ‗benefits‘ can

accrue to the state or its citizens in the wake of Serrano [I & II] only insofar as the

Legislature, in its implementation of the command of equality which that case

represents, chooses to bestow them.‖ (Id. at p. 41.)

We approved the fee award, however, under the private attorney general

theory. We held that a fee award was within the trial court‘s equitable powers at

least where the litigation had vindicated a public policy grounded in the California

Constitution, the benefits flowed to a large number of Californians, and the nature

of the litigation justified subsidizing the plaintiffs‘ efforts. (Serrano III, supra, 20

Cal.3d at pp. 46–47; see also Code Civ. Proc., § 1021.5 [codifying the private

attorney general doctrine].)

Considering the amount of the fee, we rejected the contention by one of the

firms representing the plaintiffs that it was inadequate in light of the

circumstances. We explained that the trial court had considered the relevant

circumstances in calculating a reasonable fee, using what would now be called a

19

lodestar-multiplier method: ―Fundamental to its determination—and properly

so—was a careful compilation of the time spent and reasonable hourly

compensation of each attorney and certified law student involved in the

presentation of the case. [Fn. omitted]‖ (Serrano III, supra, 20 Cal.3d at p. 48.)7

In the omitted footnote (originally numbered 23), we further addressed fee

calculation: ―We are of the view that the following sentiments of the United

States Court of Appeals for the Second Circuit, although uttered in the context of

an antitrust class action, are wholly apposite here: ‗The starting point of every fee

award, once it is recognized that the court‘s role in equity is to provide just

compensation for the attorney, must be a calculation of the attorney‘s services in

terms of the time he has expended on the case. Anchoring the analysis to this

concept is the only way of approaching the problem that can claim objectivity, a

claim which is obviously vital to the prestige of the bar and the courts.‘ (City of

Detroit v. Grinnell Corp. (2d Cir. 1974) 495 F.2d 448, 470; see also Lindy Bros.

Bldrs., Inc. of Phila. v. American R. & S. San. Corp. (3d Cir. 1973) 487 F.2d 161,

167–169; see generally Dawson, Lawyers and Involuntary Clients in Public

Interest Litigation [(1975)] 88 Harv. L.Rev. 849, especially pp. 925–929.)‖

(Serrano III, supra, 20 Cal.3d at p. 48, fn. 23.)

For his claim that Serrano III mandates primary use of the lodestar method

in every case, the objector relies on these passages, in particular our allusions to

― ‗the court‘s role in equity‘ ‖ in awarding fees, a role that includes awards in

common fund cases, and to the lodestar as the ― ‗starting point of every fee

7 The trial court had then increased that ―touchstone‖ figure to account for a

number of factors, including the novelty and difficulty of the questions involved

and the contingent nature of the fee award. (Serrano III, supra, 20 Cal.3d at

p. 49.)

20

award.‘ ‖ (Serrano III, supra, 20 Cal.3d at p. 48, fn. 23, italics added.) The

quoted text and footnote, however, concern calculation of a fee awarded under the

private attorney general theory. In Serrano III, this court simply did not address

the question of what methods of calculating a fee award may or should be used

when the fee is to be drawn from a common fund created or preserved by the

litigation. For this reason, the passages quoted cannot fairly be taken as

prohibiting the percentage method‘s use in a common fund case.

To the contrary, in its earlier discussion of the common fund doctrine,

Serrano III cited with approval several decisions in which a percentage fee was

awarded. In Fox v. Hale & Norcross Silver Min. Co., supra, 108 Cal. at page 476,

apparently our first case approving a common fund fee award, the award was for

25 percent of the moneys the plaintiff had collected. In Farmers & Merchants

Nat. Bank of Los Angeles v. Peterson, supra, 5 Cal.2d at page 607, we held the

plaintiff in a suit for an accounting was properly awarded ―5 per cent of the

moneys received and recovered herein as an attorney‘s fee.‖ And in Glendale City

Employees’ Assn., Inc. v. City of Glendale (1975) 15 Cal.3d 328, a labor action by

public employees, we upheld ―the portion of the judgment awarding counsel for

plaintiffs 25 percent of all retroactive salaries and wages received.‖ (Id. at p. 341,

fn. 19.) Having cited these decisions, together with a few others, as establishing

and exemplifying the common fund attorney fee doctrine in California (Serrano

III, supra, 20 Cal.3d at p. 35), the Serrano III court observed it could find no such

fund in that case (id. at p. 36). Had we meant, in our later discussion of the

lodestar calculation of a private attorney general fee, to disapprove the percentage

method of calculation used in these common fund cases, we would have said so.

In emphasizing the objectivity provided by a lodestar calculation, Serrano

III, supra, 20 Cal.3d 25, decided in 1977, was typical of its era. (As discussed in

part I, ante, that period is considered to have begun with the Third Circuit‘s 1973

21

decision in Lindy I, supra, 487 F.2d 161, which we cited in the footnote passage

quoted above.) Because the award in Serrano III was not made from a common

fund and did not rest on the common fund theory, we had no occasion there to

consider the comparative disadvantages of the lodestar-multiplier method that

have since led the vast majority of courts nationwide to instead favor, or at least to

allow, use of the percentage-of-the-fund method in common fund cases. As

explained in part I, ante, both the Second and Third Circuits subsequently

retreated from their endorsements, in City of Detroit v. Grinnell Corp., supra, 495

F.2d 448, and Lindy I, supra, 487 F.2d 161—the two decisions cited in Serrano

III‘s footnote 23—of the lodestar method as the preferred or exclusive means of

calculating a reasonable fee. (See Goldberger v. Integrated Resources, Inc.,

supra, 209 F.3d at pp. 48–50 [2d Cir.]; In re Rite Aid Corp. Securities Litigation,

supra, 396 F.3d at p. 300 [3d Cir.].) Presenting as it did no common fund from

which an award could be made, Serrano III was not a case for entertaining the

policy grounds for allowing a common fund fee to be calculated as a percentage of

the fund, considerations that have so heavily influenced later courts‘ decisions on

this issue.

Since Serrano III, we have several times, in fee shifting cases, endorsed the

lodestar or lodestar-multiplier method of calculating an attorney fee award; none

of our decisions involved a case where the fee was to be awarded from a common

fund created or preserved by the litigation. (See Graham v. DaimlerChrysler

Corp. (2004) 34 Cal.4th 553, 579 [award under Code Civ. Proc., § 1021.5];

Ketchum v. Moses (2001) 24 Cal.4th 1122, 1131–1132 [award under Code Civ.

Proc., § 425.16, subd. (c)]; PLCM Group v. Drexler (2000) 22 Cal.4th 1084,

1094–1095 [award under Civ. Code, § 1717]; Maria P. v. Riles (1987) 43 Cal.3d

1281, 1294–1295 [award under Code Civ. Proc., § 1021.5]; Press v. Lucky Stores,

Inc. (1983) 34 Cal.3d 311, 321–322 [same].) And even with regard to such

22

statutory fee shifting cases, we have noted the lodestar-multiplier method of

determining a reasonable fee is not necessarily exclusive: ―We emphasize,

however, that although we are persuaded that the lodestar adjustment approach

should be applied to fee awards under Code of Civil Procedure section 425.16, we

are not mandating a blanket ‗lodestar only‘ approach; every fee-shifting statute

must be construed on its own merits and nothing in Serrano jurisprudence

suggests otherwise.‖ (Ketchum v. Moses, supra, at p. 1136.)

The objector relies on several Court of Appeal decisions, the first being

Jutkowitz v. Bourns (1981) 118 Cal.App.3d 102 (Jutkowitz). A minority

shareholder plaintiff who had filed a putative class action over a proposed

purchase of corporate stock, leading the buyer to increase the price offered, sought

an augmented attorney fee based on the value he had created for shareholders who

sold at the increased price, even though most of them were not members of the

class. (Id. at pp. 106–109.) Although the plaintiff based his fee increase request

on the common fund theory, he neither showed that any fund had been created

from which the increased fee could be awarded nor, as far as the appellate opinion

indicates, sought any particular percentage of the asserted fund as fee. (See id. at

pp. 108–110.)

In rejecting the plaintiff‘s attempt to have the amount of his attorney fee

enhanced, the Jutkowitz court observed: ―While the size of the class may affect

the complexity of counsel‘s task and the size of the fund created may reflect the

quality of his work, the correct amount of compensation cannot be arrived at

objectively by simply taking a percentage of that fund.‖ (Jutkowitz, supra, 118

Cal.App.3d at p. 111, italics added.) Given that no fund had in fact been created

from which an attorney fee could be taken, the italicized remark need not be read

as barring the percentage method of calculating a fee award in a true common fund

23

case. To the extent it could be read broadly as expressing such a general rule,

however, we disapprove Jutkowitz v. Bourns, supra, 118 Cal.App.3d 102.

Salton Bay Marina, Inc. v. Imperial Irrigation Dist. (1985) 172 Cal.App.3d

914 (Salton Bay), an inverse condemnation action, also involved no common fund.

For its conclusion that the plaintiff was only entitled to reimbursement of a

reasonable attorney fee measured by time expended by the attorney, without

regard to the contingency fee agreement between attorney and client, the appellate

court relied in part on the above passages from Serrano III and Jutkowitz. (Salton

Bay, supra, at pp. 953–954.) The decision does not speak to how a fee award

should be calculated in a class action settlement or other common fund case. Nor

does People ex rel. Dept. of Transportation v. Yuki (1995) 31 Cal.App.4th 1754,

1767–1771 (Yuki), an eminent domain case following Salton Bay in disapproving

direct use of a contingency fee agreement to determine a fee award, address the

issue before us today.

In Dunk v. Ford Motor Company, supra, 48 Cal.App.4th 1794, 1809

(Dunk), in the context of a class action settlement, the court disapproved an

attorney fee award the plaintiff attempted to justify as a small percentage of the

settlement‘s value. The court gave two reasons: ―(1) The award of attorney fees

based on a percentage of a ‗common fund‘ recovery is of questionable validity in

California; and (2) even if it is valid, the true value of the fund must be easily

calculated.‖ (Ibid.) On the second point, the court explained that because the

settlement at issue provided class members with coupons for discounts on

purchases of new vehicles, its real value could not be ascertained until the end of

the coupon redemption period. (Ibid.) On the first, the court cited Jutkowitz,

supra, 118 Cal.App.3d 102, Salton Bay, supra, 172 Cal.App.3d 914, and Yuki,

supra, 31 Cal.App.4th 1754, as having ―cast doubt on the use of the percentage

method to determine attorney fees in California class actions.‖ (Dunk, supra, at

24

p. 1809.) The Dunk court, while finding the percentage method inapplicable to the

settlement before it due to the lack of a readily valued common fund, did not

purport to bar its usage generally in common fund cases.

Dunk was, in turn, cited as illustrating the doubt over use of the percentage

method in California, in the passage from Lealao, supra, 82 Cal.App.4th at page

27, quoted at the beginning of this part. Lealao, a consumer class action over

prepayment penalties charged by a lender, was settled by the lender‘s agreement to

pay class members who filed claims 77 percent of the penalties they had paid, a

settlement worth almost $15 million if every class member filed a claim. (Id. at

pp. 22–23.) Though class counsel requested 24 percent of the recovery as a fee

($3.5 million, modified to $1.76 million after claims of only $7.35 million were

filed), the trial court, believing itself precluded from awarding a percentage fee

where no separate fund had been established from which the fee could be drawn,

granted only a fee of $425,000, calculated as a lodestar without multiplier. (Id. at

pp. 24–25.)

Relying on Serrano III, supra, 20 Cal.3d 25, the Lealao appellate court held

a pure percentage fee is improper when, as in the case before it, the settlement

does not establish a separate fund from which the fee is to be paid. (Lealao,

supra, 82 Cal.App.4th at pp. 37–39.)8 But the trial court‘s lodestar fee could

properly be enhanced through a multiplier based on the a percentage of the benefit

obtained (Lealao, at pp. 39–50), employing ―the common federal practice of

8 For this holding, Lealao cited not only footnote 23 from Serrano III, supra,

20 Cal.3d at page 48, which extolled the lodestar method‘s objectivity, but also

our earlier discussion finding the common fund theory inapplicable because the

―plaintiffs‘ efforts have not effected the creation or preservation of an identifiable

‗fund‘ of money out of which they seek to recover their attorneys fees.‖ (Serrano

III, at pp. 37–38; see Lealao, supra, 82 Cal.App.4th at p. 39.)

25

‗cross-checking‘ the lodestar against the value of the class recovery.‖ (Id. at

p. 45.) Such a cross-check is not prohibited by Serrano III, Jutkowitz or Dunk

(Lealao, at pp. 44–45) and helps to determine a reasonable fee because a

percentage-of-the-benefit analysis ―provides a credible measure of the market

value of the legal services provided‖ (id. at p. 49).

The Lealao court expressed doubt as to the wisdom of considering only the

amount of the recovery in determining a fee award, but acknowledged that ―[t]he

federal judicial experience teaches that the ‗reasonableness‘ of a fee in a

representative action will often require some consideration of the amount to be

awarded as a percentage of the class recovery.‖ (Lealao, supra, 82 Cal.App.4th at

p. 53.) Since that decision, several other Court of Appeal panels have approved

some form of percentage fee calculation. (See In re Consumer Privacy Cases,

supra, 175 Cal.App.4th at p. 558 [use of percentage method under common fund

doctrine ―is not an abuse of discretion . . . as long as the method chosen is applied

consistently using percentage figures that accurately reflect the marketplace.‖];

Chavez v. Netflix, Inc. (2008) 162 Cal.App.4th 43, 63 [under reasoning of Lealao,

percentage calculation may be used to determine a lodestar multiplier; it was not

an abuse of discretion ―for the trial court to apply a percentage figure at the low

end of the typical contingency contractual arrangement (21.8 percent) to calculate

the multiplier in the context of this settlement‖]; Apple Computer, Inc. v. Superior

Court (2005) 126 Cal.App.4th 1253, 1270 [observing that ―attorneys‘ fees

awarded under the common fund doctrine are based on a ‗percentage-of-the-

benefit‘ analysis‖]; Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224,

254 [―Courts recognize two methods for calculating attorney fees in civil class

actions: the lodestar/multiplier method and the percentage of recovery method.‖].)

In summary, California decisions from Serrano III forward have shown

some uncertainty as to the role a percentage-of-the-recovery calculation may play

26

in determining court-ordered attorney fees, but have not established any rule

prohibiting such a calculation when the fee is to be drawn from a common fund

created by the litigation.

III. A Percentage Calculation with Lodestar Cross-check Is Permitted

in a Common Fund Case.

Whatever doubts may have been created by Serrano III, supra, 20 Cal.3d

25, or the Court of Appeal cases that followed, we clarify today that use of the

percentage method to calculate a fee in a common fund case, where the award

serves to spread the attorney fee among all the beneficiaries of the fund, does not

in itself constitute an abuse of discretion. We join the overwhelming majority of

federal and state courts in holding that when class action litigation establishes a

monetary fund for the benefit of the class members, and the trial court in its

equitable powers awards class counsel a fee out of that fund, the court may

determine the amount of a reasonable fee by choosing an appropriate percentage

of the fund created. The recognized advantages of the percentage method—

including relative ease of calculation, alignment of incentives between counsel and

the class, a better approximation of market conditions in a contingency case, and

the encouragement it provides counsel to seek an early settlement and avoid

unnecessarily prolonging the litigation (See pt. I, ante; Lealao, supra, 82

Cal.App.4th at pp. 48–49; Rawlings v. Prudential-Bache Properties, Inc., supra, 9

F.3d at p. 516)—convince us the percentage method is a valuable tool that should

not be denied our trial courts.

We do not address here whether or how the use of a percentage method

may be applied when there is no conventional common fund out of which the

award is to be made but only a ― ‗constructive common fund‘ ‖ created by the

defendant‘s agreement to pay claims made by class members and, separately, to

pay class counsel a reasonable fee as determined by the court (see Lealao, supra,

27

82 Cal.App.4th at pp. 23–24, 28), or when a settlement agreement establishes a

fund but provides that portions not distributed in claims revert to the defendant or

be distributed to a third party or the state, making the fund‘s value to the class

depend on how many claims are made and allowed. (See 5 Newberg on Class

Actions, supra, § 15:70, pp. 236–242.) The settlement agreement in this case

provided for a true common fund fixed at $19 million, without any reversion to

defendant and with all settlement proceeds, net of specified fees and costs, going

to pay claims by class members.

The trial court in this case thus did not violate principles established in

Serrano III, supra, 20 Cal.3d 25, or otherwise abuse its discretion, in using a

percentage method for its primary calculation of the fee award. The choice of a

fee calculation method is generally one within the discretion of the trial court, the

goal under either the percentage or lodestar approach being the award of a

reasonable fee to compensate counsel for their efforts. (In re Consumer Privacy

Cases, supra, 175 Cal.App.4th at pp. 557–558.) Before approving the settlement

agreement and percentage fee award in this case, the trial court supplemented its

own familiarity with the case by obtaining additional information from class

counsel on the risks and potential value of the litigation; the court carefully

considered that information on contingency, novelty and difficulty together with

the skill shown by counsel, the number of hours worked and the asserted hourly

rates, which the court found were not overstated. On that basis, the trial court

determined the fee request was for a reasonable percentage of the settlement fund.

Nor do we perceive an abuse of discretion in the court‘s decision to double

check the reasonableness of the percentage fee through a lodestar calculation. As

noted earlier, ―[t]he lodestar method better accounts for the amount of work done,

while the percentage of the fund method more accurately reflects the results

achieved.‖ (Rawlings v. Prudential-Bache Properties, Inc., supra, 9 F.3d at

28

p. 516.) A lodestar cross-check thus provides a mechanism for bringing an

objective measure of the work performed into the calculation of a reasonable

attorney fee. If a comparison between the percentage and lodestar calculations

produces an imputed multiplier far outside the normal range, indicating that the

percentage fee will reward counsel for their services at an extraordinary rate even

accounting for the factors customarily used to enhance a lodestar fee, the trial

court will have reason to reexamine its choice of a percentage. (Walker &

Horwich, supra, 18 Geo. J. Legal Ethics at p. 1463.)

The utility of a lodestar cross-check has been questioned on the ground it

tends to reintroduce the drawbacks the 1985 Task Force Report identified in

primary use of the lodestar method, especially the undue consumption of judicial

resources and the creation of an incentive to prolong the litigation. (See

5 Newberg on Class Actions, supra, § 15:86, pp. 330–334 [describing, but largely

rejecting, objections to cross-check]; Gilles & Friedman, Exploding the Class

Action Agency Costs Myth: The Social Utility of Entrepreneurial Lawyers (2006)

155 U.Pa.L.Rev. 103, 140–142 [use of lodestar method, even as cross-check,

undesirably limits deterrent potential of certain large-damages class actions by

incentivizing pretrial settlement].) We tend to agree with the amicus curiae brief

of Professor William B. Rubenstein that these concerns are likely overstated and

the benefits of having the lodestar cross-check available as a tool outweigh the

problems its use could cause in individual cases.

With regard to expenditure of judicial resources, we note that trial courts

conducting lodestar cross-checks have generally not been required to closely

scrutinize each claimed attorney-hour, but have instead used information on

attorney time spent to ―focus on the general question of whether the fee award

appropriately reflects the degree of time and effort expended by the attorneys.‖ (5

Newberg on Class Actions, supra, § 15:86, p. 331; see, e.g., Goldberger v.

29

Integrated Resources, Inc., supra, 209 F.3d at p. 50 [2d Cir.; ―where used as a

mere cross-check, the hours documented by counsel need not be exhaustively

scrutinized by the district court‖]; In re Prudential Ins. Co. America Sales Practice

Litigation Agent Actions (3d Cir. 1998) 148 F.3d 283, 342 [agreeing with district

court that ―detailed time summaries were unnecessary where, as here, it was

merely using the lodestar calculation to double check its fee award.‖]; Barbosa v.

Cargill Meat Solutions Corp. (E.D.Cal. 2013) 297 F.R.D. 431, 451 [―Where the

lodestar method is used as a cross-check to the percentage method, it can be

performed with a less exhaustive cataloguing and review of counsel‘s hours.‖].)

The trial court in the present case exercised its discretion in this manner,

performing the cross-check using counsel declarations summarizing overall time

spent, rather than demanding and scrutinizing daily time sheets in which the work

performed was broken down by individual task. Of course, trial courts retain the

discretion to consider detailed time sheets as part of a lodestar calculation, even

when performed as a cross-check on a percentage calculation.

As to the incentives a lodestar cross-check might create for class counsel,

we emphasize the lodestar calculation, when used in this manner, does not

override the trial court‘s primary determination of the fee as a percentage of the

common fund and thus does not impose an absolute maximum or minimum on the

potential fee award. If the multiplier calculated by means of a lodestar cross-

check is extraordinarily high or low, the trial court should consider whether the

percentage used should be adjusted so as to bring the imputed multiplier within a

justifiable range, but the court is not necessarily required to make such an

adjustment. Courts using the percentage method have generally weighed the time

counsel spent on the case as an important factor in choosing a reasonable

percentage to apply. (5 Newberg on Class Actions, supra, § 15:86, pp. 332–333;

see, e.g., In re Thirteen Appeals Arising Out of San Juan Dupont Plaza Hotel Fire

30

Litigation, supra, 56 F.3d at p. 307 [―even under the [percentage of fund] method,

time records tend to illuminate the attorneys‘ role in the creation of the fund, and,

thus, inform the court‘s inquiry into the reasonableness of a particular

percentage.‖].) A lodestar cross-check is simply a quantitative method for

bringing a measure of the time spent by counsel into the trial court‘s

reasonableness determination; as such, it is not likely to radically alter the

incentives created by a court‘s use of the percentage method.

We therefore agree with the Court of Appeal below that ―[t]he percentage

of fund method survives in California class action cases, and the trial court did not

abuse its discretion in using it, in part, to approve the fee request in this class

action.‖ We hold further that trial courts have discretion to conduct a lodestar

cross-check on a percentage fee, as the court did here; they also retain the

discretion to forgo a lodestar cross-check and use other means to evaluate the

reasonableness of a requested percentage fee.

31

DISPOSITION

The judgment of the Court of Appeal is affirmed.

WERDEGAR, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.

CHIN, J.

CORRIGAN, J.

LIU, J.

CUÉLLAR, J.

KRUGER, J.

32

CONCURRING OPINION BY LIU, J.

Appellant David Brennan devotes the lion‘s share of his briefing to issues

beyond today‘s holding that trial courts may use the percentage method instead of

the lodestar method to award attorneys‘ fees from a common fund. He argues that

the lodestar method as applied does not comply with Serrano v. Priest (1977) 20

Cal.3d 25 (Serrano III); that courts demand too little documentation of attorney

hours and do not subject such documentation to careful scrutiny; that named

plaintiffs do not adequately monitor class counsel; and that courts using the

percentage method, including the trial court in this case, have applied percentage

numbers drawn from individual contingent fee cases without taking into account

the economies of scale in class representation. To remedy these alleged abuses,

Brennan urges us to explicitly state the requirements of the lodestar methodology,

to require appointment of class guardians to protect absent class members through

adversarial representation, and to appoint fee experts for absent class members

where class counsel retains such an expert.

Although the court declines to address these arguments, I write separately

to suggest practices that may help to promote accuracy, transparency, and public

confidence in the awarding of attorneys‘ fees in class action litigation.

First and foremost, although disputes over attorneys‘ fees often arise in the

context of a proposed settlement as in this case, courts and litigants need not and

generally should not wait until the end of litigation to set the terms of attorney

compensation. Whenever possible, the parties should negotiate, and the court

should review and conditionally approve, the terms of attorney compensation at

the start of litigation. The parties and the court may revisit the arrangement when

the litigation concludes, and the court may make adjustments if unusual or

unforeseen circumstances render the initial terms clearly unreasonable or unfair.

But in general, the parties‘ initial bargain should be given substantial weight in

determining the reasonableness of a fee award.

The Task Force on Selection of Class Counsel convened by the United

States Court of Appeals for the Third Circuit has endorsed a version of this

approach. While acknowledging that ―a precise ex ante determination of fees is

usually unworkable,‖ the task force recommended that ―the topic of attorney fees

should be addressed at the early stages of the case as well as throughout the

prosecution of the case. At the outset of the case, the court may be well-advised to

direct counsel to propose the terms for a potential award of fees; the potential fees

might be established within ranges, with the court making it clear to the parties

that the fee remains open for further review for reasonableness. A preliminary fee

arrangement may provide a helpful structure for the court when it conducts its

reasonableness review at the end of the case.‖ (Third Circuit Task Force,

Selection of Class Counsel (2002) pp. 101−102, fns. omitted, 208 F.R.D. 340,

420–421 (Task Force Report); see Baker et al., Is the Price Right? An Empirical

Study of Fee-Setting in Securities Class Actions (2015) 115 Colum. L.Rev. 1371,

1432 (Baker et al.) [recommending ex ante fee arrangements for class actions

governed by the federal Private Securities Litigation Reform Act (PSLRA) and

urging that ―the district court should apply the agreed terms unless unforeseen

developments have rendered those terms clearly excessive or unfair‖].)

This approach has doctrinal and practical virtues. Doctrinally, a court‘s

authority to award attorneys‘ fees from a common fund stems from its equitable

power to prevent unjust enrichment. (See Serrano v. Unruh (1982) 32 Cal.3d 621,

2

627 [the ―central theory underlying‖ fee awards from a common fund is

― ‗prevention of an unfair advantage to the others who are entitled to share in the

fund and who should bear their share of the burden of its recovery‘ ‖]; Serrano III,

supra, 20 Cal.3d at p. 35 [― ‗one who expends attorneys‘ fees in winning a suit

which creates a fund from which others derive benefits, may require those passive

beneficiaries to bear a fair sharing of the litigation costs‘ ‖].) But a claim for

unjust enrichment typically lies where it is impractical to bargain ex ante for a

good or service in an arms-length negotiation. ―[W]hen it is feasible for parties to

bargain, restitution is typically denied to providers who confer benefits without

negotiating for payment in advance.‖ (Silver, A Restitutionary Theory of

Attorneys’ Fees in Class Actions (1991) 76 Cornell L.Rev. 656, 667.) ―The effect

of withholding compensation in contexts where parties can bargain is to

demonstrate a preference for voluntary exchange.‖ (Id. at p. 669.)

As a practical matter, ―[t]he best time to determine [the rate of attorney

compensation] is the beginning of the case, not the end (when hindsight alters the

perception of the suit‘s riskiness, and sunk costs make it impossible for the

lawyers to walk away if the fee is too low). This is what happens in actual

markets. Individual clients and their lawyers never wait until after recovery is

secured to contract for fees. They strike their bargains before work begins.

Ethically lawyers must do this, but the same thing happens in markets for other

professional services with different (or no) ethical codes. . . . Only ex ante can

bargaining occur in the shadow of the litigation‘s uncertainty; only ex ante can the

costs and benefits of particular systems and risk multipliers be assessed

intelligently. Before the litigation occurs, a judge can design a fee structure that

emulates the incentives a private client would put in place. At the same time, both

counsel and class members can decide whether it is worthwhile to proceed with

that compensation system in place.‖ (In re Synthroid Marketing Litigation (7th

3

Cir. 2001) 264 F.3d 712, 718–719.) Empirical evidence suggests that ex ante fee

negotiation is a key mechanism for reducing agency costs between counsel and the

class they represent. (See Baker et al., supra, 115 Colum. L.Rev. at p. 1394

[studying 431 securities class action settlements from 2007 through 2012, and

finding that ―fee agreements negotiated at the beginning of cases have a

substantial moderating effect on fee requests‖ where public pension funds act as

lead plaintiffs].)

Moreover, ex ante fee arrangements do not present the conflict of interest

that inherently arises when attorneys seek fees from a common fund comprising

their clients‘ recovery. ―At the start of litigation, there is no money to divide.

There is only the prospect of forming a joint venture between a client and a lawyer

that seeks to maximize the parties‘ joint wealth by offering the lawyer

compensation terms that will motivate the lawyer to work hard on behalf of the

client. [¶] When fees are set at the end of litigation, by contrast, the amount to be

recovered is already known. This heightens the conflict between the client and the

attorney because every additional dollar for one means a dollar less for the other.‖

(Baker et al., supra, 115 Colum. L.Rev. at p. 1440.)

Opponents of ex ante fee agreements in the class action context have

argued that (1) there is no ―functioning market‖ for plaintiffs‘ representation and

thus no reliable benchmarks that can provide a ―general solution to the problem of

market failure in setting class counsel fees‖ (ABA Tort Trial and Insurance

Practice Section, Report on Contingent Fees in Class Action Litigation (2006) 25

Rev.Litig. 459, 481, 482); (2) at the early stages of class action litigation, there are

too many uncertainties for bargaining to occur (id. at p. 482); and (3) if fee

arrangements are disclosed to defendants, this might disadvantage plaintiffs in

settlement negotiations (Baker et al., supra, 115 Colum. L.Rev. at p. 1436).

4

As to the first point, courts evaluating ex ante fee arrangements may use ―a

simple benchmark: the percentage or range of percentages prevailing in the

private market in similar contingent fee representations.‖ (Silver, Dissent from

Recommendation to Set Fees Ex Post (2006) 25 Rev.Litig. 497, 499.) ―Plaintiffs

have formed voluntary groups in mass accident cases, pollution cases, defective

product cases, securities fraud cases, and cases of other kinds. Associations,

including homeowners‘ associations, interest groups, unions, partnerships, and

corporations have sued on behalf of their members or owners thousands of

times. . . . All of these lawsuits are examples of aggregate litigation, and in all of

them lawyers‘ fees have been set ex ante via negotiations.‖ (Id. at pp. 499–500;

see In re Synthroid Marketing Litigation, supra, 264 F.3d at p. 719 [―[A] court can

learn about similar bargains. That is at least a starting point.‖].)

As to the second point, the principal virtue of an ex ante fee arrangement is

its allocation of risk between attorney and client in the face of litigation

uncertainty. At the end of litigation, when the amount of recovery and the

outcomes of all other uncertainties are known, perceptions of risk are likely to be

distorted by hindsight bias. (Baker et al., supra, 115 Colum. L.Rev. at pp. 1441–

1444.) Uncertainty is the very reason why it is appropriate for negotiations over

fees to occur at the start of litigation; the market price for legal services can be

more accurately derived through bargaining behind the veil of ignorance. (In re

Synthroid Marketing Litigation, supra, 264 F.3d at p. 719.) Moreover, the initial

terms set by the parties and approved by the court are not etched in stone; as

noted, the court may make adjustments if unusual or unforeseen circumstances

render the initial arrangement clearly unreasonable or unfair.

As to the third point, concerns about disclosure can be alleviated by

allowing plaintiffs and class counsel to submit their fee arrangements to the court

under seal or ―by discussing fees with class counsel in chambers on an ex parte

5

basis.‖ (Baker et al., supra, 115 Colum. L.Rev. at p. 1437.) Such approaches pose

no unfairness to defendants, who ―are indifferent to fee requests because the fees

are paid out of the common fund.‖ (Id. at p. 1419.)

Quite apart from the concerns above, a significant practical challenge to

negotiating attorneys‘ fees in many class actions, whether at the start or end of

litigation, is the lack of an active and interested class representative who can

effectively bargain with and monitor plaintiffs‘ counsel. Some class actions, such

as securities litigation, have managed to attract large institutional investors as lead

plaintiffs. In that role, they closely evaluate and choose high-quality lawyers, and

they actively bargain for favorable fee structures and secure ex ante fee

arrangements more often than do other lead plaintiffs. (Baker et al., supra, 115

Colum. L.Rev. at pp. 1393–1394; see 15 U.S.C. § 78u-4(a)(3) [establishing

process for appointment of lead plaintiff in class actions governed by the

PSLRA].) By contrast, consumer class actions and wage-and-hour disputes often

lack a class representative with sufficient incentive, resources, or expertise to

negotiate with class counsel. Moreover, although Brennan came forward in this

case as an objector, class objectors are too rare to be generally relied upon to

monitor class counsel. (Eisenberg & Miller, The Role of Opt-Outs and Objectors

in Class Action Litigation: Theoretical and Empirical Issues (2004) 57 Vand.

L.Rev. 1529, 1549 [―Across all case types, . . . the median objection rate is zero

and the mean is 1.1 percent of class members.‖].) And the few who do object

have had little to no demonstrable impact on attorneys‘ fees or settlement

amounts. (Id. at p. 1563 [―We found no significant association between the

number of dissenters and either the gross fee or the fee as a percentage of class

recovery.‖].)

Although trial courts can exercise vigilance to ensure fairness in fee

negotiations, doing so puts the judge in the position of ―a fiduciary guarding the

6

rights of absent class members‖ (In re Cendant Corp. Litigation (3d Cir. 2001)

264 F.3d 201, 231) while at the same time serving as a neutral arbiter of counsel‘s

claims concerning the reasonableness of a proposed award. As Brennan puts it,

the trial judge is asked ―to simultaneously assume the conflicting roles of impartial

judge and class advocate.‖

In many cases, trial courts may have no choice but to walk the fine line

between protecting the interests of absent class members and impartially

evaluating the reasonableness of a proposed fee award. In cases involving

substantial sums, however, trial courts may take steps to insulate themselves from

apparent conflicts by appointing a class guardian or ―devil‘s advocate‖ so that

arguments for and against the reasonableness of a fee arrangement may be

presented in a genuinely adversarial process. (Cf. Rubenstein, The Fairness

Hearing: Adversarial and Regulatory Approaches (2006) 53 UCLA L.Rev. 1435,

1454 [proposing court-designated attorney to serve as ―devil‘s advocate‖ in

evaluating class action settlements].) The class guardian would provide

counterpoints to class counsel‘s arguments concerning the risks and difficulty of

litigating the case. Perhaps most importantly, the class guardian or a fee expert

retained by the guardian would provide information on prevailing market rates for

similar litigation. The appointment of a guardian and a full-dress adversarial

process would cost money (from the common fund) and time. But these costs,

which would serve to enhance the accuracy and legitimacy of fee awards, would

―pale[] in comparison to the significant amounts of money‖ to be divided between

plaintiffs and counsel in high-value cases. (Id. at p. 1455.)

7

*

The suggestions above reflect the importance of fairness and

reasonableness in attorney compensation. Ensuring ―objectivity‖ in attorney

compensation ― ‗is obviously vital to the prestige of the bar and the courts.‘ ‖

(Serrano III, supra, 20 Cal.3d at p. 48, fn. 23.) Moreover, ―[p]robably to a unique

degree, American law relies upon private litigants to enforce substantive

provisions of law that in other legal systems are left largely to the discretion of

public enforcement agencies. . . . The key legal rules that make the private

attorney general a reality in American law today . . . [are] those rules that establish

the fee arrangements under which these plaintiff‘s attorneys are compensated.

Inevitably, these rules create an incentive structure that either encourages or chills

private enforcement of law.‖ (Coffee, Understanding the Plaintiff’s Attorney:

The Implications of Economic Theory for Private Enforcement of Law Through

Class and Derivative Actions (1986) 86 Colum. L.Rev. 669, 669−670, fns. omitted

(Coffee).) ―By setting fees too high or too law, judges would incentivize lawyers

to bring too many class actions or too few. Excessive litigation would over-deter

primary conduct that is desirable; insufficient litigation would under-deter

primary conduct that is unwanted.‖ (Baker et al., supra, 115 Colum. L.Rev. at

p. 1375.)

It must be acknowledged that ―there is a perception among a significant

part of the nonlawyer population and even among lawyers and judges that the risk

premium is too high in class action cases and that class action plaintiffs‘ lawyers

are overcompensated for the work that they do.‖ (Task Force Rep., supra, at p. 5,

208 F.R.D. at pp. 343–344.) I express no view on the degree to which this

perception is anchored in reality. (Compare Task Force Rep., supra, at p. 5, 208

F.R.D at p. 344 [―When there is a public reaction to an attorney fee award in a

given case, the public is usually unaware of what the lawyers actually did, what

8

risks they took, what investment they made, and how important their lawyering

was to victory for the class.‖] with Coffee, supra, 86 Colum. L.Rev. at p. 726 [―At

its worst, the settlement process may amount to a covert exchange of a cheap

settlement for a high award of attorney‘s fees.‖].) But the perception itself may

prompt some judges and policymakers to respond by narrowing substantive legal

protections or by curtailing procedural mechanisms of enforcement.

Public confidence in the fairness of attorney compensation in class actions

is vital to the proper enforcement of substantive law. Although there may be no

single ―right answer‖ to how much class counsel should earn in each case, ex ante

fee arrangements with the possibility of ex post modification for unusual

circumstances may provide a useful approach to estimating market rates, reducing

the distortive effects of hindsight bias, and aligning the interests of counsel and the

class they represent. Courts and litigants should be alert to this and other

approaches that may help to promote greater public confidence in a form of

litigation on which many people rely to obtain effective access to justice.

LIU, J.

9

See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Laffitte v. Robert Half International, Inc.

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 231 Cal.App.4th 860

Rehearing Granted

__________________________________________________________________________________

Opinion No. S222996

Date Filed: August 11, 2016

__________________________________________________________________________________

Court: Superior

County: Los Angeles

Judge: Mary Strobel

__________________________________________________________________________________

Counsel:

Law Office of Lawrence W. Schonbrun and Lawrence W. Schonbrun for Plaintiff and Appellant.

Law Offices of Kevin T. Barnes, Kevin T. Barnes, Gregg Lander; Law Offices of Joseph Antonelli, Joseph

Antonelli, Janelle Carney; Hilaire McGriff and Mika M. Hilaire for Plaintiffs and Respondents.

Paul Hastings, Judith M. Kline and M. Kirby C. Wilcox for Defendants and Respondents.

Altshuler Berzon, Michael Rubin; Jocelyn D. Larkin, Robert Schug; and Richard Rothschild for Impact

Fund, Western Center on Law and Poverty, Asian Americans Advancing Justice-Asian Law Caucus, Bet

Tzedek, Centro Legal de la Raza, California Rural Legal Assistant Foundation, Disability Rights Education

and Defense Fund, East Bay Community Law Center, Justice in Aging, Law Foundation of Silicon Valley,

Legal Aid Association of California, Legal Aid Society of San Mateo County, Public Advocates, Public

Counsel, The Public Interest Law Project and Worksafe as Amici Curiae on behalf of Plaintiffs and

Respondents and Defendants and Respondents.

Lieff Cabraser Heiman & Bernstein, Elizabeth J. Cabraser, Jonathan D. Selbin; Girard Gibbs and Jordan

Elias for Professor Christine Bartholomew, Professor Erwin Chemerinsky, Professor John C. Coffee, Jr.,

Professor Joshua P. Davis, Professor Nora Freeman Engstrom, Professor Brian T. Fitzpatrick, Professor

Arthur R. Miller and Professor Charles Silver as Amici Curiae on behalf of Plaintiffs and Respondents and

Defendants and Respondents.

Capstone Law, Glenn A. Danas and Ryan H. Wu for Working Wardrobes as Amicus Curiae on behalf of

Plaintiffs and Respondents and Defendants and Respondents.

Kabateck Brown Kellner, Richard L. Kellner and Brian S. Kabateck for Consumer Attorneys of California

as Amicus Curiae on behalf of Plaintiffs and Respondents and Defendants and Respondents.

Law Offices of Martin N. Buchanan and Martin N. Buchanan for Professor William B. Rubenstein as

Amicus Curiae.

Counsel who argued in Supreme Court (not intended for publication with opinion):

Lawrence W. Schonbrun

Law Office of Lawrence W. Schonbrun

86 Eucalyptus Road

Berkeley, CA 94705

(510) 547-8070

Kevin T. Barnes

Law Offices of Kevin T. Barnes

5670 Wilshire Boulevard, Suite 1460

Los Angeles, CA 90036-5664

(323) 549-9100

Michael Rubin

Altshuler Berzon

177 Post Street, Suite 300

San Francisco, CA 94108

(415) 421-7151