Volkswagen Group of America, Inc. v. Peter J. McNulty Law Firm

United States Court of Appeals

For the First Circuit

Nos. 11-1438, 11-1857

IN RE: VOLKSWAGEN AND AUDI WARRANTY

EXTENSION LITIGATION

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VOLKSWAGEN GROUP OF AMERICA, INC.; VOLKSWAGEN AG; AUDI AG,

Defendants, Appellants,

v.

PETER J. MCNULTY LAW FIRM; IRWIN & BOESEN, P.C.;

BERGER & MONTAGUE,

Interested Parties, Appellees.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Joseph L. Tauro, U.S. District Judge]

Before

Lynch, Chief Judge,

Selya and Boudin, Circuit Judges.

Kenneth S. Geller, with whom Michael B. Kimberly, Mayer Brown

LLP, Michael Hoenig, Jeffrey L. Chase, Daniel V. Gsovski, Miriam

Skolnik, Michael B. Gallub, Herzfeld & Rubin, P.C., David A. Barry,

and Sugarman, Rogers, Barshak & Cohen, PC were on brief, for

appellants.

Michael B. Bogdanow, with whom Victoria M. Santoro and Meehan,

Boyle, Black & Bogdanow, P.C. were on brief, for appellees.

July 27, 2012

LYNCH, Chief Judge. This appeal is from the district

court's award of $30 million in attorneys' fees to several groups

of plaintiffs' attorneys who achieved a class action settlement

agreement. It presents the question of what source of law governs

the award of such fees in a diversity suit, where the parties'

settlement agreement contains, inter alia, a provision expressly

stating that the parties have not agreed on the source of law to

apply to the fee award. We hold that under these circumstances,

where there is an agreement that the defendants will pay reasonable

fees, state law governs the award of fees. We vacate the fee

award, which was based on federal sources of law, and remand for a

new determination of the proper reasonable fee award under the

relevant state law.

I.

A. The Lawsuit

This suit arises out of alleged engine defects in certain

Volkswagen and Audi vehicles, which plaintiffs asserted were prone

to the formation of damaging engine sludge unless particular types

of motor oil were used. Five putative statewide class actions were

filed in five federal district courts, alleging, among other

claims, consumer fraud and unfair and deceptive trade practices.

In Re Volkswagen & Audi Warranty Extension Litig., 452 F. Supp. 2d

1354, 1355-56 (J.P.M.L. 2006). On August 29, 2006, these suits

were consolidated by the Judicial Panel on Multidistrict Litigation

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and, as multidistrict litigation (MDL) cases, were transferred to

the District of Massachusetts for pretrial proceedings.1 Id. at

1356. The Massachusetts district court ordered the plaintiffs to

file and serve a consolidated amended complaint. In re Volkswagen

& Audi Warranty Extension Litig., No. 07-1790 (D. Mass. Feb. 7,

2007).

Plaintiffs filed their second amended consolidated

complaint on October 15, 2007. The factual allegations underlying

the complaint were that the 1.8 liter turbo-charged engines

contained in 1997 to 2004 model Audi vehicles and 1998 to 2004

model Volkswagen Passat vehicles were defectively designed, and

that the defendants concealed this defect. The plaintiffs sought

to bring claims "on behalf of all persons or entities in the United

States who are current or former owners and/or lessees" of those

particular vehicles. The complaint named as defendants Volkswagen

of America, Inc., a New Jersey corporation, Volkswagen of America,

Inc., d/b/a Audi of America, Inc., a New Jersey corporation, the

domestic distributors of the vehicles, as well as Volkswagen AG and

Audi AG, two German corporations.

The second amended complaint raised a number of legal

theories of recovery, including that defendants had violated the

New Jersey Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1 et seq.,

1

Two additional cases were later transferred and

consolidated.

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and other state consumer fraud statutes that are "the same or

substantially similar to the New Jersey" law. The complaint also

alleged breach of contract, breach of implied warranty of

merchantability, unjust enrichment, and violation of certain

California laws. The complaint stated that diversity subject

matter jurisdiction was proper under the Class Action Fairness Act

of 2005, 28 U.S.C. § 1332(d)(2), (d)(6), and sought a declaratory

judgment, injunctive relief, actual and treble damages,

restitution, and an award of costs, including attorneys' fees.2

On October 23, 2008, a special master was appointed to

"supervise all aspects of discovery," to "decide all nondispositive

pretrial motions," to make recommendations as to all dispositive

motions, and to assist the parties in any settlement efforts. In

re Volkswagen & Audi Warranty Extension Litig., No. 07-1790 (D.

Mass. Oct. 23, 2008).

2

On January 30, 2008, the defendants moved to dismiss the

complaint under Rule 12(b)(6). Among other arguments, the

defendants argued that application of New Jersey law to all claims

in the case would violate relevant choice of law rules as well as

the Constitution, and New Jersey law could only apply where the

relevant sale or lease transaction took place in New Jersey.

Plaintiffs' response to the choice of law argument was that it was

premature and required discovery to determine what law ought to

apply, and in any event New Jersey law could properly apply to all

claims.

On June 9, 2008, the district court denied the motion to

dismiss in a one-sentence order which stated that the motion was

"denied without prejudice to be resubmitted as a Motion for Summary

Judgment." In re Volkswagen & Audi Warranty Extension Litig., No.

07-1790 (D. Mass. June 9, 2008) (emphasis omitted). Discovery

began shortly thereafter.

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At some point, serious settlement discussions between the

parties began, and on December 14, 2009, the special master

reported that the parties "seem[ed] very close to reaching an

agreement." In re Volkswagen & Audi Warranty Extension Litig., No.

07-1790 (D. Mass. Dec. 14, 2009). On May 12, 2010, the special

master reported that the parties had begun drafting a proposed

settlement agreement and associated documents. In re Volkswagen &

Audi Warranty Extension Litig., No. 07-1790 (D. Mass. May 12,

2010).

B. The Settlement Agreement

On September 13, 2010, a proposed settlement agreement

was submitted to the district court, along with a motion requesting

conditional approval of the settlement and certification of a class

for settlement purposes. The final settlement as approved by the

court did not change the terms of the proposed settlement. So we

discuss several material portions of the proposed settlement: the

benefits obtained by the class, the appointment of a settlement

administrator, the terms as to attorneys' fees, and the choice of

law provision.

The settlement stated it was not "an admission by

Defendants of any liability or wrongdoing whatsoever." The

settlement class consisted of all current and former owners and

lessees of model year 1997-2004 Audi A4 vehicles or model year

1998-2004 Volkswagen Passat vehicles equipped with 1.8 liter turbo

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engines, comprising a total of 479,768 vehicles. The proposed

settlement offered several benefits to the class, including (1)

payment for engine repair or replacement costs, (2) a warranty

extension for a subset of the vehicles, (3) a one-time $25 oil

change discount for a subset of the vehicles, and (4) an education

and information program designed to inform class members of the

risks to their engines and means to prevent those risks. The

proposed settlement did not place a monetary value on these

benefits.

The proposed settlement created an "Oil Sludge Settlement

Administrator" to oversee the claims process for class members.

The administrator was to record every claim for reimbursement, to

determine whether the claim was to be allowed or denied, and to

explain the basis for any claim that was denied.

The proposed settlement contained a procedure for

providing notice to all settlement class members of the

certification and fairness hearing and the settlement agreement.

Notice of the proposed settlement was to be prepared by defendants,

reviewed and approved by class counsel, and disseminated by the

settlement administrator.

The proposed settlement also "reserve[d] to the

[district] [c]ourt exclusive and continuing jurisdiction over this

action, the [p]arties, . . . and this Settlement Agreement for

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purposes of administering, supervising, construing, and enforcing

this Settlement Agreement."

Most relevant to this appeal, the proposed settlement

contained a section regarding "Attorney Fees and Costs." It

provided:

1. Class Counsel will submit an application

to the Court for an award of reasonable

attorneys' fees and expenses on or before a

date to be set by the Court ("Fee

Application"). Each Settling Party reserves

all rights to appeal from a Class Counsel fees

and expenses award if that Party files a

timely and proper objection with the Court.

The Class Counsel fees and expenses award and

Final Judicial Approval shall be separate so

that the appeal of one shall not constitute an

appeal from the other.

2. Subject to Section VI.A.2 above, Class

Counsel fees and expenses shall be paid

entirely and exclusively by Defendants and

shall not diminish, invade, or reduce, or be

derived from, benefits afforded to Settlement

Class Members under this Settlement Agreement.

3. Any Class Counsel fees and expenses

awarded shall be paid by Defendants to Class

Counsel within thirty (30) days of the entry

of a final judgment or order by the Court with

respect to Class Counsel fees and expenses,

except in the event of an appeal, . . . . All

matters pertaining to an award of Class

Counsel fees and expenses including, but not

limited to, any dispute amongst

class/plaintiffs' counsel as to their

respective attorneys fees and expenses, have

been referred to the [special master]. [The

special master's] recommendation with respect

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to Class Counsel fees and expenses shall be

made to the Court.3

Section VI.A.2 of the proposed agreement provided:

It is expressly understood and confirmed that

the parties have not agreed to any choice,

selection or waiver of state or federal law to

be applied to any aspect of the construction,

preliminary or final approval, or application

of any provision of this Agreement of

Settlement, including but not limited to

attorney fees and costs.

The attorneys' fees provision expressly states that it is "subject

to" this section.

C. Notice of the Proposed Settlement with Statement About

Attorneys' Fees

On September 22, 2010, the special master issued a

recommendation that the district court (1) conditionally approve a

class for settlement purposes only and (2) conditionally approve

the proposed settlement agreement, with a hearing on the final

agreement to be held on March 11, 2011, after notice of the

settlement was sent to class members. In re Volkswagen & Audi

Warranty Extension Litig., No. 07-1790, 2010 WL 3769259, at *1, *7

(D. Mass. Sept. 22, 2010).4 The district court adopted this

3

See Fed. R. Civ. P. 23(h)(4) ("The court may refer issues

related to the amount of the award to a special master or a

magistrate judge, as provided in Rule 54(d)(2)(D).").

4

As to conditional approval of the class for settlement

purposes, the special master found that the requirements of Federal

Rule of Civil Procedure 23(a) and (b)(3) were satisfied. In re

Volkswagen & Audi Warranty Extension Litig., No. 07-1790, 2010 WL

3769259, at *2-4 (D. Mass. Sept. 22, 2010). The special master

found that the proposed notice to the class satisfied the

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recommendation in full. In re Volkswagen & Audi Warranty Extension

Litig., No. 07-1790, 2010 WL 3810625 (D. Mass. Sept. 24, 2010).

On December 20, 2010, notice of the proposed settlement

was mailed to 1,603,013 class members, see Fed. R. Civ. P.

23(e)(1), whose names and addresses were determined by use of

Volkswagen and Audi Vehicle Identification Numbers on record in

each state registry of motor vehicles throughout the United States.

The proposed settlement agreement provided that the notice was to

be drafted by the defendants and reviewed and approved by class

counsel, and this procedure appears to have been followed. The

notice contained a section addressing the question "How will the

lawyers be paid?"5 That section stated:

Class Counsel will ask the Court for up to

$37.5 Million for attorneys' fees and up to

approximately $1.75 Million for reimbursement

of costs and expenses incurred in the

prosecution and settlement of these actions.

The Defendants do not dispute Class Counsel's

entitlement to an appropriate fee and

reimbursement for cost and expenses, but may

oppose the amounts requested by Class Counsel.

The Defendants will pay whatever attorneys'

fees and costs and expenses that the Court

awards without reducing or limiting any of the

requirements of Rule 23(c) and (e). Id. at *5. As to conditional

approval of the settlement, the special master found that the

settlement was entered into after extensive negotiation and was

reasonable in light of the claims raised and the litigation risks.

Id. at *1.

5

See Fed. R. Civ. P. 23(h)(1) (notice of motions requesting

attorneys' fees for class counsel must be "directed to class

members in a reasonable manner").

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benefits available to Settlement Class

Members.

D. The Request for Attorneys' Fees

On December 20, 2010, class counsel submitted a request

for $37.5 million in attorneys' fees, for all attorneys working for

plaintiffs,6 as well as costs not to exceed $1.75 million, under

Federal Rule of Civil Procedure 23(h). Class counsel argued that

federal law governed the award of fees. See Fed. R. Civ. P. 23(h)

("In a certified class action, the court may award reasonable

attorney's fees and nontaxable costs that are authorized by law or

by the parties' agreement."). The argument was that the court

should apply the percentage of fund methodology7 for determining

the size of an appropriate fee award, the settlement value was at

least $414 million, and $37.5 million was a reasonable percentage

6

The procedure established by the special master for

awarding attorneys' fees provided that class counsel would file

"[a] motion for all fees and all counsels' costs." In re

Volkswagen & Audi Warranty Extension Litig., No. 07-1790, 2010 WL

6334859, at *1 (D. Mass. Dec. 22, 2010). Class counsel would bear

initial responsibility for distributing the award of attorneys'

fees among all plaintiffs' counsel, based on their contribution to

the litigation. Id. Only after such an initial distribution was

made, and after all appeals as to the fee award itself were

resolved, would the special master address any disputes by "non-

Class Counsel" as to the distribution of attorneys' fees. Id. The

district court's opinion awarding attorneys' fees approved this

procedure. In re Volkswagen & Audi Warranty Extension Litig., 784

F. Supp. 2d 35, 47 (D. Mass. 2011).

7

Under the percentage of fund method, "the court shapes the

counsel fee based on what it determines is a reasonable percentage

of the fund recovered for those benefitted by the litigation." In

re Thirteen Appeals Arising out of the San Juan Dupont Plaza Hotel

Fire Litig., 56 F.3d 295, 305 (1st Cir. 1995).

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of the value of the settlement. An exhibit outlining the hours

expended by class counsel on the suit was provided so that the

court could perform a lodestar8 cross check. Based on the 23,191

hours that class counsel spent on the case,9 they argued that a fee

award of $37.5 million would be reasonable under the lodestar

method.

The defendants did not argue that the court should award

no attorneys' fees at all but strongly opposed the argument that

federal law could apply, arguing that any fee award would only be

proper under New Jersey's fee-shifting statute, not federal law.

Defendants also opposed class counsel's fee calculation

methodology. They argued that the settlement value could not be

determined until after June 27, 2011, when certain reimbursement

claims would be due. Defendants that said this was particularly

necessary as their expert valued the settlement at only

approximately $50 million, as opposed to the over $400 million

valuation of plaintiffs' expert.

On February 18, 2011, the special master issued a report

and recommendation which, after finding that federal law governed

the attorneys' fees award and that the New Jersey statute was

8

Under the lodestar method, the court determines the fee

award by "ascertain[ing] the number of hours productively expended

and multiply[ing] that time by reasonable hourly rates." Spooner

v. EEN, Inc., 644 F.3d 62, 68 (1st Cir. 2011).

9

While the fee request covered all attorneys working for

plaintiffs, not just class counsel, the hours submitted for the

lodestar calculation were those of class counsel only.

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irrelevant, recommended an award of $30 million in attorneys' fees

and approximately $1.2 million in costs. In re Volkswagen & Audi

Warranty Extension Litig., No. 07-1790, 2011 WL 721970, at *2-3,

*11 (D. Mass. Feb. 18, 2011). On March 4, 2011, the defendants

duly filed objections to the recommended fee award and preserved

all of the arguments they make on appeal.

The district court held a hearing on both the proposed

settlement agreement and the attorneys' fees award on March 11,

2011, see Fed. R. Civ. P. 23(e)(2), (h)(3), where defendants again

argued that state law must govern the fee award.

On March 24, 2011, the district court issued two

opinions. In the first opinion, the district court approved the

proposed settlement.10 In re Volkswagen & Audi Warranty Extension

Litig., 273 F.R.D. 349 (D. Mass. 2011). No appeal has been taken

from the approval of the settlement.

In the second opinion, the district court adopted,

virtually verbatim, the special master's recommendation that the

court award $30 million in attorneys' fees and approximately $1.2

10

The district court found that the certification

requirements of Rule 23(a) and 23(b) were met, and that the

settlement was fair, reasonable, and adequate. In re Volkswagen &

Audi Warranty Extension Litig., 273 F.R.D. 349, 354 (D. Mass.

2011). The district court entered judgment approving the

settlement and stating that "each and every term and provision of

the Agreement for Settlement shall be deemed incorporated into this

Final Approval Order and Judgment as if expressly set forth and

shall have the full force and effect of an Order of the Court."

Id. at 356.

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million in costs and expenses. In re Volkswagen & Audi Warranty

Extension Litig., 784 F. Supp. 2d 35 (D. Mass. 2011).

The district court applied federal law to determine the

amount of fees to award, for two reasons. First, the district

court found that "where, as here, a fee award is a result of the

parties' private agreement, federal law governs the decision." Id.

at 40. Second, the court explained that a fee award pursuant to

the state fee-shifting statutes would not be appropriate because

plaintiffs would not be "prevailing parties" within the meaning of

those statutes. Id. at 41. The district court also noted that

"[i]n the context of a class action settlement in the First

Circuit, however, fees may be awarded, as part of the court's

equitable powers over such settlement agreements, from a fund

created to benefit the class." Id. at 39.

The district court then applied the percentage of fund

method, finding that a $30 million award would be a reasonable

percentage of the value of the settlement, against the parties'

experts' estimation at somewhere between $50 million (defendants'

expert) and $223 million (class counsel's expert's revised

estimate). Id. at 43-44, 47. The court did not determine the

value of the settlement.

The district court also said it applied a lodestar cross

check, taking the 23,191 hours spent by class counsel, reducing

those hours by one-third for unnecessary hours, and multiplying the

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remaining hours by $500 per hour to produce a base lodestar value

of $7,734,000.11 Id. at 46-47. The district court then "[a]ssum[ed]

a multiplier of 2.50," which would result in a lodestar value of

$19,335,000, which the district court said supported its

determination that $30 million in fees was a reasonable percentage

of the value of the settlement. Id. at 47.

Defendants appealed the award of fees. They also filed

a motion to vacate, alter, or amend the fee award under Rules

52(b), 59(e), and 60(b), which again argued, among other points,

that the district court should have applied New Jersey rather than

federal law to determine the value of the fee award. The district

court denied the motion, In re Volkswagen & Audi Warranty Extension

Litig., No. 07-1790 (D. Mass. July 11, 2011), and the defendants

separately appealed that order.

II.

"We review a district court's determination regarding

attorney's fees for abuse of discretion." Airframe Sys., Inc. v.

L-3 Commc'ns Corp., 658 F.3d 100, 108 (1st Cir. 2011). That said,

"mistakes of law . . . always constitute abuses of a court's

discretion," and in addition, "we will set aside a fee

[determination] . . . if it clearly appears that the trial court

ignored a factor deserving significant weight, relied upon an

11

The district court's math was slightly incorrect; a one-

third reduction in hours should have resulted in 15,461 hours, not

15,468 hours; the resulting dollar figure would be $7,730,500.

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improper factor, or evaluated all the proper factors (and no

improper ones), but made a serious mistake in weighing them." Id.

(alteration in original) (quoting Gay Officers Action League v.

Puerto Rico, 247 F.3d 288, 292–93 (1st Cir. 2001)) (internal

quotation marks omitted). "The issue of whether a district court

may use a given methodology in structuring an award of attorneys'

fees is one of law, and, thus, is subject to de novo review." In

re Thirteen Appeals Arising out of the San Juan Dupont Plaza Hotel

Fire Litig., 56 F.3d 295, 304 (1st Cir. 1995).

Defendants raise two primary arguments in challenging the

attorneys' fees award.12 First, defendants claim that the district

court erred in applying general federal-law principles, rather than

state law, to determine the amount of attorneys' fees to which

class counsel were entitled. Second, defendants claim that even if

federal law applied, the district court made a number of errors of

law and fact in its determination of the fee award.

Because the court erred as a matter of law in applying

federal-law principles instead of the relevant state's law, we do

not reach the defendants' other claim of error. We vacate the fee

award and remand for application of Massachusetts law principles,

as described below.

A. The Settlement Agreement and Choice of Law

12

Defendants do not challenge the award of approximately $1.2

million in costs, so we do not address that award.

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We typically review the district court's interpretation

of a settlement agreement de novo, and do so here. See Ricci v.

Patrick, 544 F.3d 8, 17 (1st Cir. 2008); F.A.C., Inc. v.

Cooperativa de Seguros de Vida de P.R., 449 F.3d 185, 192 (1st Cir.

2006). We also review choice of law issues de novo. See Robidoux

v. Muholland, 642 F.3d 20, 22 (1st Cir. 2011) ("Choice of law

determinations are questions of law, which we also review de

novo."); see also Torre v. Brickey, 278 F.3d 917, 919 (9th Cir.

2002) (per curiam) ("Whether state or federal law applies to a

particular issue in a diversity action is a question of law which

we also review de novo.").

1. The Settlement Agreement

It is axiomatic that, under the "American Rule," "[e]ach

litigant pays his own attorney's fees, win or lose, unless a

statute or contract provides otherwise." Hardt v. Reliance

Standard Life Ins. Co., 130 S. Ct. 2149, 2157 (2010); see also

Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257-

59 (1975) (discussing exceptions to the American Rule).

Here, the defendants agreed to pay reasonable attorneys'

fees as part of the settlement agreement. The agreement first

provides that "Class Counsel will submit an application to the

Court for an award of reasonable attorneys' fees and expenses."

The agreement goes on to provide that "Class Counsel fees and

expenses shall be paid entirely and exclusively by Defendants and

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shall not diminish, invade, or reduce, or be derived from, benefits

afforded to Settlement Class Members under this Settlement

Agreement." The agreement further states that "[a]ny Class Counsel

fees and expenses awarded shall be paid by Defendants to Class

Counsel within thirty (30) days of the entry of a final judgment or

order by the Court with respect to Class Counsel fees and

expenses."

This language makes clear that the defendants agreed to

pay "reasonable attorneys' fees and expenses;" further, the notice

sent to the class made clear that "[t]he Defendants do not dispute

Class Counsel's entitlement to an appropriate fee and reimbursement

for cost and expenses."

However, the settlement agreement expressly disclaims any

agreement between the parties as to what choice of law governs the

award of attorneys' fees:

It is expressly understood and confirmed that

the parties have not agreed to any choice,

selection or waiver of state or federal law to

be applied to any aspect of the construction,

preliminary or final approval, or application

of any provision of this Agreement of

Settlement, including but not limited to

attorney fees and costs.

The fee award here is based on the agreement and not on any

statute, federal or state. The question then is what source of law

governs the fee award. The district court incorrectly concluded

that federal law governed.

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To determine the source of law that governs the

settlement agreement in this diversity case, we engage in a two-

part inquiry. First, we evaluate whether under the Erie doctrine,

see Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), federal or state

law governs the matter. This assessment is made first because

"[a]lthough state law generally supplies the rules of decision in

federal diversity cases, it does not control the resolution of

issues governed by federal statute." Budinich v. Becton Dickinson

& Co., 486 U.S. 196, 198 (1988) (citations omitted); see also U.S.

Const. art. VI, cl. 2 (Supremacy Clause); Sun Oil Co. v. Wortman,

486 U.S. 717, 727 (1988) ("It is never the case under Erie that

either federal or state law -- if the two differ -- can properly be

applied to a particular issue . . . ."); Erie, 304 U.S. at 78

("Except in matters governed by the Federal Constitution or by Acts

of Congress, the law to be applied in any case is the law of the

State.").

Second, if state law governs, and a choice of law must be

made, we determine which state's law applies by applying the choice

of law rules of the forum state (subject to the complexities of MDL

litigation). See Servicios Comerciales Andinos, S.A. v. Gen. Elec.

del Caribe, Inc., 145 F.3d 463, 479 (1st Cir. 1998) (a federal

court sitting in diversity first "determines whether a particular

matter is procedural or substantive for Erie purposes;" only if the

matter is procedural does federal law apply; "if substantive, the

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court follows the law of the forum state;" and "if a choice of law

must be made," the federal court "applies the law that would be

applied under the conflict of laws rules of the forum state").

2. Federal Law Does Not Govern the Award of

Reasonable Attorneys' Fees

State law, rather than federal law, governs the

determination of the award of attorneys' fees in this case.

As a general matter, "interpreting [settlement]

agreements and their scope is a matter of state contract law."

Fábrica de Muebles J.J. Álvarez, Inc. v. Inversiones Mendoza, Inc.,

682 F.3d 26, 33 (1st Cir. 2012); see also, e.g., Fanning v. Potter,

614 F.3d 845, 848 n.2 (8th Cir. 2010) (same); In Re: Chira, 567

F.3d 1307, 1311 (11th Cir. 2009) (same); Howmedica Osteonics Corp.

v. Wright Med. Tech., Inc., 540 F.3d 1337, 1347 (Fed. Cir. 2008)

(same).13

We also start with the basic premise that the issue of

attorneys' fees has long been considered for Erie purposes to be

substantive and not procedural, and so state-law principles

normally govern the award of fees. See IOM Corp. v. Brown Forman

Corp., 627 F.3d 440, 451 (1st Cir. 2010) ("Where, as here, the

13

Because this is a diversity suit, and the settlement

agreement involved only state-law claims, we have no occasion to

address the question of when federal-law principles govern the

construction of settlement agreements disposing of federal claims.

Cf. Michaud v. Michaud, 932 F.2d 77, 80 n.3 (1st Cir. 1991)

(applying "federal law to the issue of an attorney's authority to

settle a civil action brought under federal law").

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court's jurisdiction is based on diversity of the parties, a

district court's award of attorneys' fees is governed by relevant

state law . . . ."); Titan Holdings Syndicate, Inc. v. City of

Keene, 898 F.2d 265, 273 (1st Cir. 1990) (same); N. Heel Corp. v.

Compo Indus., Inc., 851 F.2d 456, 475 (1st Cir. 1988) (same); see

also, e.g., Northon v. Rule, 637 F.3d 937, 938 (9th Cir. 2011) (per

curiam) (same); Scottsdale Ins. Co. v. Tolliver, 636 F.3d 1273,

1280 (10th Cir. 2011) (same); Chin v. Chrysler LLC, 538 F.3d 272,

279 (3d Cir. 2008) (same).

Class counsel defend the choice of federal-law principles

on two grounds: first, that Rule 23(h)(3), Fed. R. Civ. P.,

provides a basis for federal law governing the award of attorneys'

fees; and second, in a qualitatively different argument, that

federal courts' inherent equitable powers provide a basis for

applying federal-law principles to the award of attorneys' fees.

We reject each argument and hold that state law applies to

interpretation of the settlement agreement.

a. Rule 23(h), Fed. R. Civ. P.

Apparently attempting to argue in this case that the

award is "procedural" under Erie, class counsel point to Rule

23(h). We reject the argument that Rule 23(h) provides a basis for

applying federal-law principles to the award of attorneys' fees

here. Rule 23(h) provides: "In a certified class action, the court

may award reasonable attorney's fees and nontaxable costs that are

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authorized by law or by the parties' agreement." Fed. R. Civ. P.

23(h). The Advisory Committee's notes make plain that "[t]his

subdivision does not undertake to create new grounds for an award

of attorney fees or nontaxable costs. Instead, it applies when

such awards are authorized by law or by agreement of the parties."

Fed. R. Civ. P. 23 advisory committee's notes on the 2003

amendment. The text does not say such awards have to be governed

by federal fee award principles.

Rule 23(h) does not provide a free-floating grant of

authority to apply federal law to award attorneys' fees in class

actions; rather it allows the federal court to make fee awards

where they "are authorized by law or by the parties' agreement."

Fed. R. Civ. P. 23(h); see also 7B Wright, Miller, & Kane, Federal

Practice & Procedure § 1803, at 325 (3d ed. 2005) (noting that "the

power of the court to award attorney fees in a class action does

not derive from the rule itself"). The first portion is of no help

to class counsel; other than certain equitable doctrines, discussed

below, they do not claim any federal law authorizes an award of

fees here. The portion of Rule 23(h) authorizing fee awards

pursuant to the parties' agreement does not here provide a federal-

law basis governing the award. The settlement agreement itself has

no agreement that federal law applies.

It is clear that Rule 23(h) does not "undertake to create

new grounds for an award of attorney fees or nontaxable costs."

-22-

Fed. R. Civ. P. 23 advisory committee's notes on the 2003

amendment. As a result, Rule 23(h) is not "'sufficently broad' to

cause a 'direct collision' with the state law or, implicitly, to

'control the issue' before the court, thereby leaving no room for

the operation of that law."14 Burlington N. R.R. Co. v. Woods, 480

U.S. 1, 4-5 (1987) (quoting Walker v. Armco Steel Corp., 446 U.S.

740, 749-50 & n.9 (1980)). Because there is no conflict between

Rule 23(h) and application of state-law principles to determine the

award, class counsel's reliance on Shady Grove Orthopedic

Associates, P.A. v. Allstate Insurance Co., 130 S. Ct. 1431 (2010),

is inapposite.

b. No Inherent Federal Equitable Powers

The district court erred in finding that it had inherent

federal equitable powers to fashion an attorneys' fee award.

This based on inherent equitable powers argument is not

an argument, like the Rule 23 argument, that the determination of

the award is a matter of procedural law. Further, the argument is

based on a series of cases which rest on federal question

jurisdiction, not diversity jurisdiction. See Boeing Co. v. Van

Gemert, 444 U.S. 472 (1980); Alyeska, 421 U.S. 240; Hall v. Cole,

14

As made clear in Stewart Organization, Inc. v. Ricoh Corp.,

487 U.S. 22 (1988), the "direct collision" language does not

"mandate that federal law and state law be perfectly coextensive

and equally applicable to the issue at hand" but rather "expresses

the requirement that the federal statute be sufficiently broad to

cover the point in dispute." Id. at 26 n.4.

-23-

412 U.S. 1 (1973); Mills v. Elec. Auto-Lite Co., 396 U.S. 375

(1970).

The basis for the award here is the agreement itself, a

contract under state law, and not federal law. The fact that

attorneys' fees are provided for by the settlement agreement is one

of several reasons why there is no basis to resort to these federal

equitable doctrines. Cf. United States ex rel. Bogart v. King

Pharm., 493 F.3d 323, 331 (3d Cir. 2007) (where plaintiffs'

attorneys are awarded fees under statutory fee-shifting regime,

there is no need to resort to the common fund doctrine because

"there is no iniquity to redress" given that the defendants paid

attorneys' fees).

Beyond that, this is not a common fund or a common

benefit case, and so equitable powers to award attorneys' fees are

unavailable under those theories. The common fund method should

apply only where attorneys seek compensation from a discernable pot

of money won by the plaintiffs. See In re Thirteen Appeals, 56

F.3d at 305; see also Boeing, 444 U.S. at 478-79 (explaining that

the common fund doctrine may apply where "each member of a

certified class has an undisputed and mathematically ascertainable

claim to part of a lump-sum judgment recovered on his behalf," and

noting that the doctrine rests on the court's "[j]urisdiction over

the fund involved in the litigation" (emphasis added)). Here,

there is no discernable pot.

-24-

In any event, the reasonable fees class counsel will

receive come not out of the settlement proceeds but are in addition

to the settlement proceeds,15 rendering the common fund method

inapplicable. See Boeing, 444 U.S. at 479 (for the common fund

doctrine to apply, there must be "reason for confidence that the

costs [of litigation] could indeed be shifted with some exactitude

to those benefiting" from the litigation (alteration in original)

(quoting Alyeska, 421 U.S. at 264 n.39) (internal quotation mark

omitted)).

By the same token, the common benefit method is

unavailable here because this is not a case in which the cost of

the fees is being "spread around" among the parties benefitted; the

fees are on top of the class-wide benefits. See Alyeska, 421 U.S.

at 264 n.39 (noting that "[i]n this Court's common-fund and

common-benefit decisions . . . there was reason for confidence that

the costs could indeed be shifted with some exactitude to those

benefiting"); Mills, 396 U.S. at 393-94 (stating that the

substantial benefit doctrine applies where "the court's

jurisdiction over the subject matter of the suit makes possible an

award that will operate to spread the costs proportionately among"

the class members); see also Savoie v. Merchants Bank, 84 F.3d 52,

15

The settlement agreement provides that "Class Counsel fees

and expenses shall be paid entirely and exclusively by Defendants

and shall not diminish, invade, or reduce, or be derived from,

benefits afforded to Settlement Class Members under this Settlement

Agreement."

-25-

56 (2d Cir. 1996) ("The common fund doctrine does not apply,

however, when fees are sought from the assets of the losing party,

and the fee award would not come from a common fund nor be assessed

against persons who have derived benefit from the lawsuit.").

3. Horizontal Choice of State Law

Having concluded that state law governs, we turn to the

question of which state's choice of law principles law applies to

determine which state's attorneys' fees law applies.

In a diversity case, "[u]nder Klaxon v. Stentor Electric

Mfg. Co., 313 U.S. 487 (1941), a court ordinarily must apply the

choice-of-law rules of the State in which it sits." Piper Aircraft

Co. v. Reyno, 454 U.S. 235, 243 n.8 (1981); see also Auto Eur., LLC

v. Conn. Indem. Co., 321 F.3d 60, 64 (1st Cir. 2003) ("A federal

court sitting in diversity jurisdiction must employ the

choice-of-law principles of the forum state . . . .").

Special rules apply in MDL cases as to determining the

forum state. Here, the litigation in Massachusetts was

consolidated from suits filed in federal district courts in

multiple states and transferred to the District of Massachusetts

under 28 U.S.C. § 1407. In Re Volkswagen, 452 F. Supp. 2d at 1356.

Where a suit is consolidated and transferred under § 1407, courts

-26-

typically apply the choice of law rules of each of the transferor

courts.16 See Chang v. Baxter Healthcare Corp., 599 F.3d 728, 732

(7th Cir. 2010) ("When a diversity case is transferred by the

multidistrict litigation panel, the law applied is that of the

jurisdiction from which the case was transferred . . . ."); In re

Air Disaster at Ramstein Air Base, Ger. v. Lockheed Corp., 81 F.3d

570, 576 (5th Cir. 1996) ("Where a transferee court presides over

several diversity actions consolidated under the multidistrict

rules, the choice of law rules of each jurisdiction in which the

transferred actions were originally filed must be applied."); In re

Korean Air Lines Disaster of Sept. 1, 1983, 932 F.2d 1475, 1496

(D.C. Cir. 1991) (Mikva, J., dissenting) ("When a case is

transferred pursuant to 28 U.S.C. § 1407(a) by the Panel on

Multi-District Litigation, the transferee court must apply the

choice of law rules of the states where the transferor courts

sit."); Phelps v. Cont'l Ill. Nat'l Bank & Trust Co. of Chi. (In re

Nucorp Energy Sec. Litig.), 772 F.2d 1486, 1492 (9th Cir. 1985)

("In this case, however, we must apply the choice of law rules of

16

We assume that this rule applies here without deciding the

question. Given that all of the transferor jurisdictions' choice

of law rules would result in application of Massachusetts law, we

need not decide the matter here, because there is no conflict

between the results of the various transferor jurisdictions' choice

of law rules. See Okmyansky v. Herbalife Int'l of Am., Inc., 415

F.3d 154, 158 (1st Cir. 2005) ("[W]hen the resolution of a

choice-of-law determination would not alter the disposition of a

legal question, a reviewing court need not decide which body of law

controls.").

-27-

Illinois because the claims were originally filed in district court

in Illinois before they were transferred to California by the

Judicial Panel on Multidistrict Litigation."); see also 19 Wright,

Miller, & Cooper, Federal Practice & Procedure § 4506, at 114-15

(2d ed. 1996) ("In actions transferred under Section 1407 for

consolidated pretrial discovery, . . . the transferee court should

apply the substantive law of the transferor state, including its

choice-of-law rules.").

This approach is consistent with the Supreme Court's

holding that "where a case is transferred pursuant to 28 U.S.C.

§ 1404(a), [a court] must apply the choice-of-law rules of the

State from which the case was transferred." Piper Aircraft Co.,

454 U.S. at 243 n.8; see also Ferens v. John Deere Co., 494 U.S.

516, 519 (1990) (holding that the choice of law rules of the

transferor court apply regardless of whether the defendant or the

plaintiff moves for the transfer under 28 U.S.C. § 1404(a)).

Here, a total of seven cases were ultimately transferred

to and consolidated in the district of Massachusetts, from the

following jurisdictions: California, Florida, Illinois,17 New

Jersey, Ohio, and Pennsylvania. One additional case was filed

directly with the district court, in Massachusetts.

Most of the states in which the suits originated (the

exceptions are Florida and California) follow the "most significant

17

Two separate cases were transferred from Illinois.

-28-

relationship" test for determining the source of law that applies

to contracts that do not contain choice of law provisions, based on

Section 188 of the Restatement (Second) of Conflict of Laws. See

Safeco Ins. Co. v. Jelen, 886 N.E.2d 555, 558 (Ill. App. Ct. 2008)

("If the claim raised is a contract, the most significant contacts

test is used.") (citing § 188);18 Nile v. Nile, 734 N.E.2d 1153,

1161 (Mass. 2000) ("The settlement agreement did not express a

choice of law so we look to factors such as those enumerated in

Restatement (Second) of Conflicts of Laws § 188(2).");19 Pfizer,

Inc. v. Emp'rs Ins. of Wausau, 712 A.2d 634, 637 (N.J. 1998)

(noting that "section 188 sets forth the general rule governing

choice of law in contract actions");20 Ohayon v. Safeco Ins. Co. of

Ill., 747 N.E.2d 206, 209 (Ohio 2001) (noting that Ohio has

"expressly adopted Section 188");21 Guy v. Liederbach, 459 A.2d 744,

748 n.5 (Pa. 1983) (noting that Pennsylvania "follow[s] a flexible

18

See also Eclipse Mfg. Co. v. U.S. Compliance Co., 886

N.E.2d 349, 357-58 (Ill. App. Ct. 2007) (applying § 188 to

contractual choice of law determination); Emp'rs Ins. of Wausau v.

Ehlco Liquidating Trust, 723 N.E.2d 687, 694 (Ill. App. Ct. 1999)

(same).

19

See also Bushkin Assocs., Inc. v. Raytheon Co., 473 N.E.2d

662, 669 (Mass. 1985) (applying § 188 to contractual choice of law

determination); Clarendon Nat'l Ins. Co. v. Arbella Mut. Ins. Co.,

803 N.E.2d 750, 753 (Mass. App. Ct. 2004) (same).

20

See also Gilbert Spruance Co. v. Pa. Manufacturers' Ass'n

Ins. Co., 629 A.2d 885, 888 (N.J. 1993) (applying § 188 to

contractual choice of law determination).

21

See also Gries Sports Enters., Inc. v. Modell, 473 N.E.2d

807, 810 (Ohio 1984) (applying § 188 to contractual choice of law

determination).

-29-

conflicts methodology combining interest analysis and the

Restatement (Second) of Conflicts," and citing § 188).22

Under this approach, "[t]he rights and duties of the

parties with respect to an issue in contract are determined by the

local law of the state which, with respect to that issue, has the

most significant relationship to the transaction and the parties."

Restatement (Second) of Conflict of Laws § 188(1) (1971). The

Restatement enumerates several factors to consider in making this

determination:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the

contract, and

(e) the domicil, residence, nationality, place

of incorporation and place of business of the

parties.

Id. § 188(2). The Restatement notes that the contacts are to be

assessed in the context of the principles of § 6 of the

Restatement. Id. § 188(1). The Restatement further provides that

"[t]hese contacts are to be evaluated according to their relative

importance with respect to the particular issue." Id. § 188(2).

The Restatement also explains that "[i]f the place of negotiating

22

See also Gillan v. Gillan, 345 A.2d 742, 744 (Pa. Super.

Ct. 1975) (applying § 188 to contractual choice of law

determination).

-30-

the contract and the place of performance are in the same state,

the local law of this state will usually be applied." Id.

§ 188(3).

Under the Restatement's approach, it is clear that

Massachusetts law would be applied in this case. The settlement

agreement was drafted to settle litigation that was ongoing in the

District of Massachusetts. Many of the settlement negotiations

took place in Boston, at settlement conferences with the special

master. The agreement was entered into "subject to Final Judicial

Approval," and so required approval by the district court in

Massachusetts. The agreement provided that the district court

retained "exclusive and continuing jurisdiction over this action,

the Parties, . . . and this Settlement Agreement for purposes of

administering, supervising, construing, and enforcing this

Settlement Agreement." The district court approved the settlement

agreement, which was incorporated into the judgment and possessed

"the full force and effect of an Order of the Court." In re

Volkswagen, 273 F.R.D. at 356.

The substance of the litigation also has significant

contacts with Massachusetts. One of the suits was filed directly

in the District of Massachusetts. One of the class representatives

resides in Massachusetts. Moreover, the Judicial Panel on

Multidistrict Litigation found that transfer of the suits to the

District of Massachusetts would "serve the convenience of the

-31-

parties and witnesses and promote the just and efficient conduct of

the litigation." In Re Volkswagen, 452 F. Supp. 2d at 1355.

As a result, the weight of the relevant factors indicates

that Massachusetts has the most substantial relationship to the

issue of attorneys' fees under the settlement agreement, and so

these five states would apply Massachusetts law.

Florida applies the "lex loci contractus" rule, which

"provides that the law of the jurisdiction where the contract was

executed governs the rights and liabilities of the parties." State

Farm Mut. Auto. Ins. Co. v. Roach, 945 So.2d 1160, 1163 (Fla.

2006); see also Shaps v. Provident Life & Accident Ins. Co., 826

So.2d 250, 254 n.3 (Fla. 2002) ("This Court has held that under lex

loci contractus, the law of the jurisdiction where the contract was

executed governs substantive issues regarding the contract.").

Under this rule, Massachusetts law would also apply: the settlement

is properly viewed as having been executed in Massachusetts,23 as

that was the location where the settlement agreement was judicially

approved, which was an express condition of the effectiveness of

the settlement agreement.

Under the law of the last transferor jurisdiction,

California, "[a] contract is to be interpreted according to the law

and usage of the place where it is to be performed; or, if it does

23

The settlement agreement states that it was "duly executed"

on September 2, 2010, but does not state a location of execution.

-32-

not indicate a place of performance, according to the law and usage

of the place where it is made." Cal. Civ. Code § 1646; see also

Frontier Oil Corp. v. RLI Ins. Co., 63 Cal. Rptr. 3d 816, 821 (Cal.

Ct. App. 2007) ("We conclude that notwithstanding the application

of the governmental interest analysis to other choice-of-law

issues, Civil Code section 1646 is the choice-of-law rule that

determines the law governing the interpretation of a contract.").

Given that the settlement agreement provided that the district

court is to maintain jurisdiction over the settlement "for purposes

of administering, supervising, construing, and enforcing this

Settlement Agreement," the settlement agreement is properly

construed as to be performed in Massachusetts. Even if it were

decided that the state of performance is indeterminable, for the

reasons given above it is properly viewed as having been "made" in

Massachusetts. Either way, under California's choice of law rules,

Massachusetts law would apply to the interpretation of the

settlement agreement.

As a result, we conclude that all of the transferor

jurisdictions would apply Massachusetts law to determine what

constitutes "reasonable attorneys' fees and expenses" under the

settlement agreement.24 The district court's conclusion that state

24

Because all of the transferor courts would apply

Massachusetts law, we do not assess what would occur if fewer than

all of the transferor jurisdictions would apply Massachusetts law.

No party has briefed this issue and in this case the concern is

hypothetical.

-33-

law did not govern was error. We vacate the district court's award

of fees and remand for resolution of the remaining issues under

Massachusetts law.

B. Application of Massachusetts Law

"Massachusetts generally follows the 'American Rule' and

denies recovery of attorney's fees absent a contract or statute to

the contrary." Police Comm'r of Bos. v. Gows, 705 N.E.2d 1126,

1128 (Mass. 1999). Under Massachusetts law, there appear to be two

permissible approaches to determining attorneys' fees pursuant to

a contractual agreement.

First, the lodestar approach is permissible in

contractual fee cases. See WHTR Real Estate Ltd. P'ship v. Venture

Distrib., Inc., 825 N.E.2d 105, 111 (Mass. App. Ct. 2005); see also

Raymond Leasing Corp. v. Callico Distribs., Inc., 820 N.E.2d 267,

271 (Mass. App. Ct. 2005) (affirming attorneys' fees award based on

an adjusted "number of hours expended" multiplied by "the hourly

rate customarily charged by attorneys with experience and expertise

in this particular area of the law"). It has been used in some

contractual fee cases.

Under Massachusetts's lodestar approach, attorneys' fees

are "calculated by multiplying the number of hours reasonably spent

on the case times a reasonable hourly rate." Fontaine v. Ebtec

Corp., 613 N.E.2d 881, 890 (Mass. 1993). This figure is "the basic

measure of a reasonable attorney's fee" under this approach. Id.

-34-

at 891. After the base lodestar figure is calculated, "[i]n

limited circumstances" it may be "enhanced to compensate for the

risk of nonpayment." Id.; see also WHTR, 825 N.E.2d at 111. The

Supreme Judicial Court has held that no enhancement was appropriate

where the case was "not complex," "raised no novel issues of law,"

and did not have "significance . . . for a wider class of persons"

beyond the particular plaintiff. Fontaine, 613 N.E.2d at 892.

The second permissible approach is a multi-factor

analysis. Under this approach, a court may consider a number of

factors, originally outlined in Cummings v. National Shawmut Bank

of Boston, 188 N.E. 489 (Mass. 1934), to arrive at a determination

of reasonable attorneys' fees,

including the ability and reputation of the

attorney, the demand for his services by

others, the amount and importance of the

matter involved, the time spent, the prices

usually charged for similar services by other

attorneys in the same neighborhood, the amount

of money or the value of the property affected

by [the] controversy, and the results secured.

Id. at 492 (quoted in WHTR, 825 N.E.2d at 111-12); see

also Margolies v. Hopkins, 514 N.E.2d 1079, 1082 (Mass. 1987)

(considering these factors where parties agreed to pay counsel fees

as part of a settlement); Citizens Bank of Mass. v. Travers, 866

N.E.2d 974, 977 (Mass. App. Ct. 2007) (holding that these factors

govern reasonableness of attorneys' fees awarded under a contract).

-35-

The district court on remand should determine which

method Massachusetts would apply here. It is clear that the

present award cannot stand.

If under Massachusetts law the lodestar approach is

called for, or if it is highly relevant under the multi-factor

approach, the litigation on remand may be simplified. In this

case, the district court calculated a base lodestar figure of

$7,734,000 (encompassing only class counsel), and neither side

mounted a real challenge to the figure, as a pre-award figure, on

appeal. Class counsel agreed at oral argument that the base

lodestar value would only need to be increased to the extent that

it did not include additional work, undertaken after the district

court's award of fees, and even then "would not be an appreciably

different number." That claim of increase due to additional work

is preserved for remand. The defendants likewise agreed at oral

argument that remand for consideration of only the increase for

additional work and any lodestar multiplier would be acceptable.

Given the absence of any direct challenge to this figure,

the base lodestar figure of $7,734,000 shall be the base figure

used on remand as to class counsel, save for an increase for extra

work. The use of this figure is appropriate given the courts'

"interest in avoiding burdensome satellite litigation" over

attorneys' fees. City of Burlington v. Dague, 505 U.S. 557, 566

(1992). Because no lodestar calculation was performed as to

-36-

plaintiffs' attorneys who were not class counsel, the district

court will need to perform a separate lodestar calculation as to

those attorneys.

Under both methods used by Massachusetts law, a question

remaining on remand is the question of the appropriate contingency

enhancement, if any. The district court's choice of a multiplier

figure was not based on Massachusetts law nor justified by the

record, and it is therefore vacated. We understand the parties to

have agreed, at oral argument, that if there were a remand, the

issues open on remand would include, inter alia, the further time

remaining to be spent by all counsel, not just class counsel; the

risks undertaken; and the value of the settlement. As to this last

question, the actual claims data collected by the settlement

administrator is relevant to the enhancement question and in

determining the appropriate fee. We also urge the parties to

attempt to resolve the remaining issues between them.

III.

We reverse the district court's decision for legal error

and vacate the award of attorneys' fees. We remand for calculation

of an appropriate fee under Massachusetts law, consistent with this

opinion.25

No costs are awarded.

25

We also remand the motion of class counsel requesting that

they be paid the award of costs without further delay.

-37-