Nov. 26, 2014 – Class counsel attorneys’ fees averaging $538 per hour was excessive compensation, the U.S. Court of Appeals for the Seventh Circuit has ruled in an appeal from a class action settlement involving makers and distributors of dietary supplements.
In various federal class action lawsuits across the country, more than 30,000 consumers submitted claims against NBTY Inc., Rexall Sundown, and Target, as manufacturers and distributors of a dietary supplement called Glucosamine.
The suits alleged that defendants violated consumer protection laws by making false claims about the supplements’ benefits for people with joint disorders. Ultimately, a nationwide settlement was submitted for court approval in Illinois federal district court.
The district judge ruled that defendants had to pay $5.63 million, which included $1.93 million in fees to class counsel. Another $180,000 went towards attorney expenses. The class members split about $865,000, and six named plaintiffs received $5,000 each.
Class members objected to approval of the settlement by appeal. Class counsel cross-appealed and argued that the judge should not have modified the settlement with respect to fees. Defendants had originally agreed to pay $4.5 million in attorneys’ fees.
The district judge had estimated the overall settlement value at $20.2 million. The judge rejected the $4.5 million attorney fee award agreed to by the parties but said the $1.93 million attorney fee award was reasonable, at 9.6 percent of the overall settlement value. In Pearson et al. v. NBTY Inc. et al, a three-judge appeals panel disagreed.
The panel noted that in determining attorneys’ fees in class actions, the court should look at the ratio between fee and the fee plus what the class members actually receive.
“The class received a meager $865,284. This means the attorneys’ fees represented not 9.6 percent of the aggregate value but an outlandish 69 percent,” wrote Judge Richard Posner. “Had the judge approved class counsel’s request for $4.5 million in attorneys’ fees, those fees would have soared to 84 percent of the pot. …”
At 84 percent, the lawyers would have received $1,254 per hour. “Even the $538 per hour, the average fee allowed by the district judge in cutting the total fees from $4.5 million to $1.93 million, would be excessive,” Judge Posner explained.
The panel suggested that class counsel in consumer class actions should not receive more than one-third or at most one-half of the amount that class members collectively receive. In this case, one-third would have been $436,642.
The panel noted that the settlement was designed to minimize the number of consumer claims and maximize the money that defendants would be willing to pay class counsel, “a selfish deal between class counsel and the defendant” that disserves the class.
Class counsel said class action settlements are negotiated deals between the parties that should not be disturbed by judges. But Posner noted that class actions are often much different than settlements in other cases, and judges retain the gatekeeper role.
“Theodore Frank and the other objectors flagged fatal weaknesses in the proposed settlement. The district judge made significant modifications in the settlement, but not enough,” wrote Judge Posner, reversing the district judge’s settlement approval.
Posner suggested that an independent auditor may be appropriate in a case like this to estimate the attorney billing rates that would be reasonable.