The opinion of the court was delivered by: Elaine E. Bucklo, Judge.
MEMORANDUM OPINION AND ORDER
This opinion discusses attorneys' fees and costs in a large class
action lawsuit. Synthroid is the brand name of a synthetic version of
levothyroxine sodium, a drug used to treat thyroid disorders. In 1990,
Betty J. Dong, a pharmacy professor at the University of California, San
wrote a report for Knoll Pharmaceutical Company concluding
that there were cheaper drugs that were bioequivalents. Knoll refused to
allow publication of the report, but when Dong's conclusions were
publicized anyway, Knoll, embarrassed, relented, and the Dong report
appeared in the Journal of the American Medical Association in 1997.
Meanwhile, after the initial release of Dong's conclusions, consumers and
third party payers filed class action lawsuits against various
defendants, including Knoll, BASF Corp., and Boots Pharmaceuticals,
alleging that they had lied about or suppressed the existence of
bioequivalents and overcharged consumers and their insurers for their
brand name product, Synthroid. The various claims were transferred and
consolidated before me under the multi-district litigation statute in
August 1997. The parties came to me with a settlement proposal that I
rejected as inadequate in an order August 17, 1998. I certified two
classes, one of consumers and one of third party payers.
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.
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.
In fashioning an appropriate attorneys' fee award, I am to "estimate
the terms of the contract that private plaintiffs would have negotiated
with their lawyers, had bargaining occurred at the outset of the case
(that is, when the risk of loss still existed)," 264 F.3d at 718, which
is axiomatic, but necessary to state expressly.
The Seventh Circuit
suggests that I should have followed "the private model. by setting fee
schedules at the outset of class litigation-[perhaps] by auction, . . .
[or] negotiation, sometimes for a percentage of recovery, [or] for a
lodestar hourly rate and a multipher for riskbearing." 264 F.3d at 719.
"But in this case the district judge let the opportunity slip away,
turning to fees only ex post." Id. However, ex ante determination was
impossible because the case came to me in a posture ripe for settlement,
indeed, with a proposed settlement for my consideration, as the result
ofa multi-district consolidation, rather than in the form of a filing in
my court from the ground up. So I could not have designed, "[b]efore
litigation occur[red], . . . a fee structure that emulate[d] the
incentives a private client would put in place." Id. I had no choice but
to do what the appeals court designates as a second best choice, to "set
a fee by approximating the terms that would have been agreed to ex ante,
had negotiations occurred." Id.
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.
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
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
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 ...