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May 9, 2002


The opinion of the court was delivered by: Elaine E. Bucklo, Judge.


On August 5, 2000, I approved, a new settlement proposal creating a common fund of over $150 million to be divided between the two classes. See 110 F. Supp.2d 676 (N.D. Ill. 2000). The part of my opinion approving the settlement was affirmed by the Seventh Circuit, 264 F.3d 712 (7th Cir. 2001). That court, however, remanded those portions of my order that dealt with attorneys' fees and costs. Consumer class counsel renew their request for 29% of the consumer settlement amount, as of October 2001, about $96,200,000 (including interest), and around $1,500,000 in costs. Again, I give them less than they ask for, but a lot of money nonetheless. Counsel for the third party payer ("TPP") class has again asked for attorneys' fees in the amount of about 22% of the class settlement funds (principal amount plus interest), which fund, as of October 2001, stood at about $48,500,000 as well as for around $620,100 in expenses. I approve this fee petition. Objectors' counsel also asks for attorneys' fees, and I deny these.

I. Procedural Background

In my previous opinion, I noted that attorneys' fees in a class action require court approval, in part because at this stage of the case, the role of class counsel now changes from that of fiduciaries to claimants against the fund created for the clients' benefit. 110 F. Supp. 2d at 683 (citing Cook v. Niedert, 142 F.3d 1004, 1011 (7th Cir. 1998)). In awarding fees, a court must protect the clients' interests without undermining the incentive for attorneys to bring meritorious class actions on an inescapably contingent basis. Id. (citing Florin v. Nationsbank of Georgia, N.A., 60 F.3d 1245, 1247 (3d Cir. 1995)). Referring to the factors that bear on attorneys' fees that are discussed in the Manual for Complex Litigation (Third) § 24.121, at 190 (1995), I noted that this settlement created two large funds and benefitted many people; the objections were insubstantial; class counsel were able and efficient; the litigation was complex but fairly brief; and class counsel devoted much time to the case, but not a lot in view of the size of the settlement. Id. at 684.

As the Manual suggests, I also considered the awards in similar cases. I noted that there are few so-called "megafund" cases with settlements of over $100 million, but that in such cases, courts have been reluctant to award class counsel attorneys' fees in the range of 22% or 29%, see id. 684-85 (citing cases), first, because, other things being equal, such awards would be "an indefensible windfall," id. (citing In the Matter of Superior Beverage, 133 F.R.D. 119, 124 (N.D. Ill. 1990)), or "manifestly unjust," id. (citing In re Unisys Corp. Retirement Med. Benefits ERISA Litig., 886 F. Supp. 445, 462 (E.D. Pa. 1995)).*fn1 Second, courts have thought that economies of scale kick in with additional recoveries on work expended, id. at 684 (citing In re Domestic Air Transp. Antitrust Litig., 148 F.R.D. 297, 351 (N.D. Ga. 1993)), meaning that in a case of this size, lesser amounts of legal work are required for each additional dollar in the recovery. So I agreed with the Third Circuit Task Force on Court Awarded Attorney Fees that "absent unusual circumstances, the percentage will decrease as the size of the fund increases." Id. (citing In re Chambers Dev. Sec. Litig., 912 F. Supp. 852, 861 (W.D. Pa. 1995)). Accordingly, I observed, most awards in cases involving very large settlements had been in the 4-10% range. Id. (citing Unisys., 886 F. Supp. at 462).

I did not, however, state that the existence of this range implied a percentage cap as a matter of law on an attorneys' fee award in a large settlement. Rather the rationale was an economic analysis. My reasoning was similar to that of the District of Wyoming, which said that when "a common fund is extraordinarily large, the application of a benchmark or standard percentage may result in a fee that is unreasonably large for the benefits conferred." In re Copley Pharm., Inc., 1 F. Supp.2d 1407, 1413 (D. Wyo. 1998) (citing Herbert P. Newberg, Attorney Fee Awards § 2.09 (1986). As that court found, "empirical research . . . reveals that courts are sensitive to this problem, reducing percentage awards as the size of the recovery increases." Id. (citing William J. Lynk, The Courts and the Plaintiff's Bar: Awarding the Attorney's Fee in Class-Action Litigation, 23 J. Legal Stud. 185, 201 (1994)). The issue is mainly one of economies of scale and diminishing marginal returns:

It is not one hundred fifty times more difficult to prepare, try, and settle a $150 million case than it is to try a $1 million case, but application of a percentage comparable to that in a smaller case [may] yield an award 150 times greater. Thus where fund recoveries range from $51-$75 million, fee awards usually fall in the 13-20% range. In megafund cases like this one, wherein a class recovers $75-$200 million (or more), courts most stringently weigh the economies of scale inherent in class actions in fixing a percentage yielding a recovery of reasonable fees. Accordingly, fees in the range of 6-10% and even lower are common in mega-common fund cases.

Id. (citing Newberg, at § 2.09; Lynk, 23 J. Legal Stud. at 201). Naturally, in a competitive market, economies of scale should be reflected in the market rate. Because my research had indicated that courts had concluded that this was the market rate for legal work leading to recoveries of that size, I awarded counsel fox each class 10% recovery for their respective classes, coming to about $9 million for the consumer class counsel and about $4.5 million for the third party payer class counsel. I said that this was "at the high end of the megafund range." Id. at 685.

Class counsel moved for reconsideration, arguing, as I wrote in a minute order of September 7, 2000 (here quoted virtually in full) that "setting attorneys' fees in a megafund case at a flat 10% risks creating perverse incentives for attorneys to settle for a lower amount at a higher percentage. If there is a set cutoff at which a lower `inegafund' attorney fee rate kicks in, say $40 million, an irresponsible and greedy class counsel might be tempted to settle for $39 million to get 25% rather than 10%." I agreed with that argument, but said, "[o]f course, no responsible judge would approve such a settlement, nor would any honest attorney propose it, and in any case this is an argument against a fixed cutoff for what counts as a megafund settlement, which I did not use, rather than against a flat 10% fee award." Id. Therefore I denied the motion to reconsider. I did not state that the flat 10% fee award here was derived from a 10% cap imposed as a matter of law on any "megafund" recovery, but only that it represented the high end of the range of what courts had in fact awarded in recoveries of that size.

Class counsel (among others) appealed, and won a remand on the issue of attorneys' fees. The Seventh Circuit stated that "when deciding on appropriate fee levels in common-fund cases, courts must do their best to award counsel the market price for legal services, in light of the risk of nonpayment and the normal rate of compensation in the market at the time." 264 F.3d at 718. Furthermore, the Seventh Circuit interpreted my statements in the opinion approving the settlement about "the high end of the megafund range" as imposing, as a matter of law, a cap of 10% on any "megafund" recoveries. Although I rejected, in the order of September 7, 2000, the idea that there is a cutoff for what counts as a megafund, see supra, the Seventh Circuit said that I had defined "megafunds" as settlements of at least $75 million. Id. at 718. The Seventh Circuit stated that a fixed cap plus a cutoff for what counts as a megafund recovery, creates a perverse incentive for attorneys to settle for less to get more for themselves; that is true, indeed, that is why, in the order of September 7, I rejected any such caps and cutoffs.

The appeals court stated that there is no "`meg afund rule' [that] trumps thell] market rates" and that it is not the case that "as a matter of law no recovery can exceed 10% of a `megafund.'" Id. Very large recoveries, then, are not to be treated differently merely because they are very large, although if the market treats them differently, the courts may also. I do not take this as a directive that an award of attorneys' fees in a large settlement cannot be 10% or less, just that the award is to reflect market rates insofar as these can be determined. Although the Seventh Circuit has made it clear that bigger awards are permitted even with very large settlements, I do not take the court of appeals to hold that I am to ignore economic factors such as economies of scale and diminishing marginal returns in ascertaining the market value of services; on the contrary, see 264 F.3d at 721; accord In the Matter of Continental Illinois Sec. Litig., 962 F.2d 566, 572 (7th Cir. 1992). Anything that goes into ascertaining the market rate is to be taken into consideration. Considerations of fairness are not precluded, however, as long as the award mimics market outcomes.

The Seventh Circuit pointed to three kinds of guideposts or benchmarks that can be used to mimic ex post what the market might have produced ex ante: (1) "the fee contracts some [third party payers] signed with their attorneys; (2) data from large common-pool cases where fees were privately negotiated; and (3) information on class — counsel auctions, [instances] where judges have entertained bids from different attorneys seeking the right to represent a class." 264 F.3d at 719. I proceed by going through each benchmark indicated by the Seventh Circuit in the order indicated. I am to bring to bear the factors that the Seventh Circuit did list for each separate group of class counsel (consumer and third party payer), based solely on its own settlement and not the total amount recovered by the two classes, and I am to make this determination in view of each group's own risk and productivity. Id. at 722. The Court of Appeals did not expressly direct any particular assignment of weight to the two factors of risk versus productivity, but its statement that, ideally, fees are to be determined ex ante, and its emphasis on the need to maintain incentives to bring risky lawsuits suggests that risk is more important. Id. at 720. However, productivity also matters. See, e.g., In re Folding Carton Antitrust Litig., 84 F.R.D. 245, 257-58 (N.D. Ill. 1979) (appropriate to reward efficiency). The Seventh Circuit did not say which of the benchmarks I am to weight most heavily or indicate how to reconcile any conflicts that might arise among them. This will occupy me at some length in the following. Finally, I may select a fee structure that awards a "percentagel] of the recovery to cover for litigation expenses as well," and if I do, I should not separately reimburse expenses. 264 F.3d at 720. Accord In re Fidelity/Micron Securities Litigation, 167 F.3d 735, 737 (1st Cir. 1999).

II. Award to Consumer Class Counsel

A. Evidence from Fee Contracts in the Case

I begin, therefore, with the attorneys' fees for consumer class counsel. As of October 31, 2001, the consumer class fund was, for purposes of this motion, about $96.2 million; the 29% award that consumer class counsel request would come to about $27.9 million. Consumer class counsel request about $1.5 million in litigation expenses as well. Consumer class counsel's first argument for this award is that the actual agreements that exist in the case support a "floor" of more than 25%, and thus support the 29% class counsel requests. I am to take into account the risk of nonrecovery faced by the counsel at the outset of the case. The contingent fee agreements with two law firms of some of the third party payers who chose to be individually represented (the Health Benefit Payers, a group of more than 100 insurers) reached before joining the class provided for contingent fees of 25%. The Porter Wright Group (a group of 18 third party payers) negotiated an agreement that provided, among other options, for the client to pay monthly costs plus 15% of the final settlement. Because these insurers were "sophisticated purchasers of legal services," their agreements "define[d] the market." 264 F.3d at 720 (emphasis in original). However, these parties became involved with the litigation at a later stage when the risk of loss was slight, see id., and therefore needed less incentive to be involved than consumer class counsel did at the start when the risk of loss was high.

Consumer class counsel argue that the Seventh Circuit established as "the law of the case" that I am to disregard the lower fee arrangements (15% rather than 25%) made with the Porter Wright Group, see id. (the Porter Wright contracts "provide little guidancet' because consumer class counsel were not paid on an ongoing basis), but the Seventh Circuit said of both sets of agreements, the lower Porter Wright and the higher Health Benefit Payers contracts, that they are of "limited utility." Id. Nonetheless, the appeals court discussed both sets of agreements (and no others) as examples of the "actual agreements" I should consider, see id., and most of its opinion involved explaining the limitations of various ex post methods for guessing at what an ex ante result might be. I cannot treat the Porter Wright figures as conclusive, but if I give much weight to actual agreements at all, I cannot disregard them either, nor can I treat the Health Benefit Payers' figures as the last word, rather than as a benchmark of some real but limited utility.

Consumer class counsel also point to their fee agreements with the representative parties, the named individual plaintiffs, which provided (as usual) for one third to 40% of the net settlement. They cite no authority that this is a relevant consideration, and contracts with the representative parties are not listed by the Seventh Circuit as examples of actual agreements that I should consider. It does not follow from the fact that some people agreed to such a percentage rate that their agreements reflect the market rate for all — lawyers have an incentive to list as the named parties those who agree to the highest contingent attorneys fees. Long ago the Seventh Circuit rejected such agreements "as wholly immaterial to the issue before the court," the determination of "a fair and reasonable fee." Milwaukee Towne Corp. v. Loew's, Inc., 190 F.2d 561, 570 (7th Cir. 1951). More recently, several courts in this district have rejected the use of such contracts to set class fees. See In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1194-95 (N.D. Ill. 1996) (Shadur, J.) ("An individual named plaintiff — who may be . . . perfectly competent to make judgments for itself and to have the necessary economic interest and leverage to do that — cannot fairly be permitted to impose its own determination, made on its own behalf, as a decision that automatically will bind Lothers]."); State of Ill. v. Harper & Row Publishers, Inc., 55 F.R.D. 221, 223 (N.D. Ill. 1972) (not "fair to the class members who were unrepresented when the fee contracts were made"). Therefore I set aside the higher percentage agreements in the contracts with the named parties.

I now turn to the issue of the level of risk. Dramatically illustrating how, at the fee petition stage, the role of class counsel shifts from fiduciary to competitor, consumer class counsel argue that their risk of loss ex ante was high because their case was extremely weak. They cite several reasons provided by the Seventh Circuit why "the plaintiffs would have had a headache" with the case, 264 F.3d at 716-17,*fn2 some of which could have been known ex ante and therefore factored into a market-based fee agreement: the fraud claim was doubtful because "it would be hard to say" that a disclosure in the Dong report that there were interchangeable drugs was "compelled" in view of the existence of some contrary studies; winning on the merits would be dicey on the antitrust and RICO claims because of the indirect nature of the consumers' injuries. Id.; see also 100 F. Supp. 2d at 680, and damages would be hard to prove when many consumers are insured, 264 F.3d at 716.

Consumer class counsel's denigration of their own case is to be taken with a quantity of salt at this stage of the litigation. That defendants would offer to settle the case fairly quickly for a lot of money was not known beforehand, but I agree with the defendants' professional judgment that there was ex ante a serious chance of a recovery had the case gone to trial. The antitrust claim was a long shot for the consumers in view of the fact that many of them were probably indirect purchasers, and the RICO claim was colorable but difficult. See 110 F. Supp. at 681. The fraud claim was much less problematic. Although there were studies contradicting the Dong report about whether there existed bioequivalents to Synthroid, see 264 F.3d at 716-17, a jury might well have concluded that it was fraud to bury a reputable report that suggested that there were such bioequivalents. Showing damages would have involved a long but not hopeless causal chain. See 110 F. Supp. at 681 (noting that Synthroid sales fell significantly after the publication of the study). The case was not that weak. The risk of loss (whatever it was) was indeed greater at the beginning of the litigation than the risk faced of third party payers who entered the case in the middle of litigation, when settlement negotiations were ...

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