UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT STUART HANLON, et al., Plaintiffs-Appelles, and KENNETH & NANCY EDWARDS, et al., Objectors/Intervenors-Appellants, v. CHRYSLER CORPORATION, Defendant-Appellee Nos. 96-15043, 96-16027
BRIEF FOR APPELLANTS This appeal challenges a final judgment approving a nationwide consumer class action settlement and awarding class counsel $5.2 million in attorneys' fees and costs. In their briefs, class counsel and Chrysler both try to explain how the settlement provides adequate value to the class. However, not only are key factual assertions largely contradicted by the record, but the parties really fail to address our significant claims of legal error. These errors fall into three categories: the failure of the district court to analyze the Rule 23 factors in approving certification of a nationwide settlement class, the lack of value to the class members from the settlement, and the district court's abdication of its duty to independently review the negotiated fee award for reasonableness. This brief addresses each of these issues in turn. Apart from a half-hearted response from Chrysler, there is no serious rebuttal to the initial point in our opening brief, namely, that the district court erred in certifying a nationwide class for settlement without determining that the criteria of Rule 23, Fed. R. Civ. P. had been met. The Third Circuit has held in In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir.) cert. denied, 116 S. Ct. 88 (1995), that such an examination is mandatory. See also Georgine v. Anchem Prods., Inc., 83 F.3d 610, 624-26 (3d Cir. 1996), cert. granted, --- U.S.L.W. --- (U.S. Nov. 1, 1996). No such inquiry was performed here. That omission was error and this case may be reversed on that ground alone. (See Footnote 1) To understand the need for such an inquiry, it is important to recall that this class action purported to settle common law and statutory claims under the laws of all fifty states, the District of Columbia, and Puerto Rico on behalf of a class of over four million Chrysler minivan owners. No federal cause of action was asserted and the amounts in dispute were too small to satisfy diversity jurisdiction; indeed, the only reason why this case could be filed in federal court was the special jurisdictional provision of the Magnuson Moss Warranty Act, which creates federal jurisdiction to adjudicate consumer complaints arising under state law if one hundred plaintiffs are named. 15 U.S.C. Sec. 2310(d)(1). Notwithstanding the size of the class and serious questions about its suitability for resolution in a federal court, the district judge held only a brief hearing, mainly dedicated to scheduling dates, before authorizing the mailing of millions of settlement notices. Supp. E.R. 8/18/95 Transcript. No witnesses testified and, although there had been no adversarial briefing of the issue of class certification, the district court did not inquire into the propriety of nationwide class certification or the value of the settlement. Id. Nonetheless, the district court signed a pro forma order drafted by counsel reciting that the Rule 23 criteria had been satisfied. This lack of inquiry into the elements of Rule 23 requires reversal here, as it did in General Motors, where the Third Circuit concluded that a comparably large, nationwide class was not adequately represented. Had the district court made the requisite inquiry at the outset, it would have been required to confront the following issues that bear on adequacy element. 1. The parties did not advise the district court at the August 1995 hearing that independent of the lawsuit, Chrysler planned to provide its customers with the substantive relief prescribed in the settlement, namely a replacement latch and the customer awareness campaign. 2. Class counsel would have had to explain (as it now argues) how the handful of state court lawsuits that precipitated this federal lawsuit were (a) so substantial that they forced Chrysler to replace the minivan latches and yet, (b) so insubstantial that it was reasonable to settle the substantive claims on the basis of nothing more solid than a court order binding Chrysler to do what it has already told its regulators and the public it will do. Class counsel would have also been obliged to explain how the state court cases brought about the results they claim even though they failed to perform the investigation and discovery described in our opening brief at pages 32-33. Indeed, class counsels' lengthy recitation of the proceedings in the state court actions suggests that much of the activity by the lawyers in the state court actions was devoted to formulating discovery questions that may or may not have been answered, responding to Chrysler's discovery requests, and procedural skirmishes over whether the state court actions could be removed to federal court. Class Counsel's Opposition Brief at 11-24. Rather class counsel seeks to justify the settlement by arguing that the claims of the class are insubstantial, implying that this lack of merit for the claims of many class members justifies the results. Class Counsel's Opposition Brief at 38-46. This demeaning of the claims of the class only underscores the problem with not performing an adequacy of representation analysis. This is not to say that class counsel do not have the ability or expertise to bring a successful consumer class action. They undoubtedly do. Yet what class counsel (and Chrysler) would have this Court believe is that counsel was compelled to initiate this federal action alleging virtually worthless claims so that they could enter into a settlement garnering little or no benefit to the class and that for this they are entitled to a handsome fee. In fact, much of the argument in the opposition brief echoes the general theme of "what was a poor plaintiffs lawyer to do" once Chrysler announced the Spring 1995 Service Action. See, e.g., Chrysler's Opposition Brief at 31 n.18. If there had been an inquiry into class certification at the preliminary approval stage, these flaws might not have passed unnoticed. 3. Consideration of the propriety of class certification at the time of preliminary approval would also have required class counsel to explain how the common law and statutory claims of the various states are so similar that they can treated as though there is a national consumer law, and why no subclasses to account for the laws of the different states are appropriate. Rule 23(b)(3) directs federal courts to evaluate whether there is a predominance of common questions of law and whether class treatment is superior before certification. Therefore, the court must analyze variations in state law to avoid trading off the rights of class members from state with strong laws against class members from states with weaker laws. Common questions of law must predominate in a settlement class as surely in a litigation class, because courts must look to the strengths and weaknesses of the plaintiffs' case when considering whether a class settlement is fair, adequate and reasonable. Officers for Justice v. Civil Serv. Comm'n of San Francisco, 688 F.2d 615, 625 (9th Cir. 1982), cert. denied, 459 U.S. 1217 (1983). Ironically, class counsel cite Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996) and Georgine, 83 F.3d 610, as supporting the settlement, but those cases buttress our point that overly ambitious class actions resting solely on state law claims cannot often be maintained and that district courts must adhere unerringly to Rule 23's requirements. Similarly, in In re Rhone-Poulenc Rohrer, Inc., 51 F.3d 1293 (7th Cir. 1995), the Seventh Circuit reversed the ruling that a national class action on state law negligence claims could be maintained on the notion that the law of negligence in fifty states and the District of Columbia could be abstracted to one jury instruction. Id. at 1300. See also Walsh v. Ford Motor Co, 807 F.2d 1000, 1017 (D.C. Cir. 1986), cert. denied, 482 U.S. 915 (1987). Castano, Rhone-Poulenc, and Walsh were litigation classes, but the same analysis should apply with equal force in certifying settlement classes. See Georgine, 83 F.3d at 624-25; In re General Motors, 55 F.3d at 799-800; Bloyed v. General Motors, 916 S.W.2d 949 (Tex. 1996); see also Mars Steel Corp. v. Continental Illinois Nat'l Bank & Trust Co., 834 F.2d 677, 681 (7th Cir. 1987); Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982), cert. denied, 464 U.S. 818 (1983). (See Footnote 2) Notably, class counsel have never explained whether some class members under the laws of their states could recover for fraud or misrepresentation or statutory damages for consumer claims separate and apart from the breach of warranty claims even though such allegations were set forth in the federal complaint. Moreover, they have never addressed the contentions from the Georgia objectors that Georgia civil RICO laws would have allowed greater recovery for a subclass of Georgia residents. D.E. 110. Instead, they continue to rely primarily on the law of California, emphasizing that a significant number of class members may not have valid warranty claims. See American Suzuki Motor Corp. v. Superior Court, 44 Cal. Rptr. 2d 526 (Ct. App. 1995) (implied warranty claims). The foregoing points explain why Chrysler is wrong when it attempts to distinguish General Motors on the grounds that the settlement in that case provided no value to the class for the vehicle defect created significant intra-class conflicts. Chrysler's Opposition Brief at 23-26. First of all, as discussed in Objectors' Opening Brief and in Part II infra, this settlement provides even less value for class members than that in General Motors because the claims are being released for the identical relief minivan owners are entitled to receive independent of the settlement. Second, even though each class member receives equal value, for class members who might have received greater value if considered as a subclass, there are risks of the same intra-class conflicts as in General Motors. The failure of class counsel to make an adequate proffer for class certification and the failure of the district court to undertake the Rule 23 analysis raises the substantive question of whether adequate representation was provided and whether subgroups of class members received an approximate value for the worth of their claims. This Court should reject the notion that the adequacy of representation factor is as lacking in substantive content as Chrysler and class counsel would ask this Court to so hold. Vigor of prosecution is an essential element. See Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir.) (listing factors required for adequate representation), cert. denied, 498 U.S. 1012 (1990). Moreover, although Chrysler is undoubtedly right that all class members in this case receive approximately equal value from the settlement, there was no effort to ensure that class members with comparatively better state law rights and remedies have not been sacrificed for those with weaker laws. Failure to perform the Rule 23 inquiry is legal error and this Court should explicitly hold that a settlement class cannot be certified without determining that Rule 23's requirements are satisfied. If this Court determines that certification of a nationwide settlement class was proper, however, there is still a separate question of the fairness of the settlement. A district judge may not approve a class action settlement unless he or she determines that it is a "fair, reasonable and adequate" disposition of the claims of the class. See Officers for Justice, 688 F.2d at 625. Rule 23(e) explicitly involves the court in evaluating the merits of the settlement. (See Footnote 3) "The primary touchstone . . . is the economic valuation of the proposed settlement." General Motors, 55 F.3d at 806. To defend the value of the settlement, class counsel and Chrysler have taken two different approaches. Neither approach squarely addresses Objectors primary claim of error, a settlement that, as a practical matter, provides nothing more to class members that what they would receive independent of the settlement is not fundamentally fair, reasonable and adequate. For example, neither party disputes that all class members are entitled to receive a free replacement latch independent of the settlement. E.R. 53. And neither party denies that the $14 million identified in the Settlement Agreement for Customer Awareness and Satisfaction Efforts is nothing other than the money independently being spent under the Service Action. E.R. 579. So too, neither party asserts that, as a practical matter, Chrysler had any intention of halting the Service Action after its announcement in March 1995. Quite the contrary. Chrysler even terms its commitment to the Service Action "a sincere pronouncement." Chrysler's Opposition Brief at 31. Instead, class counsel defends the settlement on the grounds that the state court class actions catalyzed Chrysler and the National Highway Traffic Safety Administration (NHTSA) into negotiating the Service Action. Class Counsel's Opposition Brief at 3-18. Chrysler defends the settlement as providing more for the class than what they would receive under the Service Action alone. Chrysler's Opposition Brief at 29-40. Both proponents emphasize that the true value of the settlement lies in its judicial enforceability, transforming Chrysler's promise to replace the latches into a binding contract. For the reasons set forth below and in Objectors' Opening Brief at pages 38-52, none of these arguments withstands close scrutiny. 1. At the outset, we respond to what is truly an astounding assertion raised for the first time in court filings two days before the second Fairness Hearing on November 30, 1995. D.E. 127-40. Class counsel suggest that they were the decisive factor that forced Chrysler into the Service Action. Class Counsel's Opposition Brief at 2-24. Contrary to class counsels' assertion, however, the district judge did not find that class counsel catalyzed the Service Action announced in March 1995. Although the district judge noted that the state court actions led to Chrysler "agreeing to stop fighting NHTSA," that statement was made in the context of adopting Chrysler's argument that it had surrendered its right to fight NHTSA over the redesign of the latches and its right to back out of the Service Action. E.R. 484. In fact, at one point the district judge observed that he did not know whether the latch replacement had come about "by this litigation or . . . by NHTSA or . . . by Chrysler's own goodwill," a statement clearly at odds with any alleged finding that class counsel were the catalyst. E.R. 480-82. Moreover, there is absolutely no basis for class counsels' suggestion that the pendency of the state court actions impelled NHTSA and Chrysler to negotiate the Service Action. Class counsel attempts to argue circumstantially that because "nothing in the record shows that Chrysler and NHTSA began negotiating a resolution before any of the state court class actions were filed," Class Counsels' Opposition Brief at 19, it must be that the state court class actions were the impetus. This post hoc assertion defies logic. The record does not support the proposition that either Chrysler or NHTSA viewed the state court class actions as having any bearing on their negotiations. It is presumptuous at best to attribute a cause and effect relationship between the pendency of six state court actions seeking minimal damages and an investigation conducted by a federal regulatory agency with the power to order a recall, seek fines, and generate significant negative publicity. Finally, in their "catalyst" argument, class counsel repeatedly overstate and mischaracterize the record. For example, on page 19 of their Opposition brief, they state that Objectors rely upon the November 17, 1994 meeting between Chrysler and NHTSA as dispositive and suggest that Objectors misunderstand that several of the state court class actions were filed before November 17. Not so. Objectors are well aware that three state court class actions had been filed before November 1994, but it is quite a leap for class counsel to attribute significant causation to a handful of cases that had not proceeded beyond the early stages of discovery, and where key depositions for Chrysler officials had not been taken. In addition, class counsel exaggerates their own role in settlement implementation by suggesting that they obtained expedition of latch replacement for class members without providing any concrete examples. They also state that they forced Chrysler to change language in its communications with class members but, in fact, their only example consists of edits on Chrysler's draft of a cover letter accompanying the notice of class action settlement. Class Counsels' Opposition Brief at 38 (citing Supp. E.R. 127). Even assuming arguendo that Judge Legge had found that the state court class actions had catalyzed or contributed to catalyzing the Service Action, this begs the question of whether the settlement itself is fair and reasonable. Class counsel struggle with this dichotomy in their brief by alternately arguing that the benefit to the class was achieving the March 1995 Service Action, making this a pure catalyst case, Opposition Brief at 18, or defending the settlement as providing more value to the class than Chrysler's previously-announced Service Action. Id. at 30-36. Defending the settlement on its merits, however, the only affirmative evidence to which class counsel refer consists of their own affidavits summarizing the work some of them performed in the state court actions, the same evidence they put forth to support their catalyst theory. Class Counsels' Opposition Brief at 25-26. This is not the kind of evidence sufficient to support a contention that a settlement agreement confers benefits on a class. Compare General Motors, 55 F.3d at 806-10 (evidence of likely coupon redemption). The settling parties must offer evidence to demonstrate the fairness and adequacy of a settlement. See Newberg on Class Actions (3d ed. 1992) Sec. 11.42 at 11-94; C. Wright, A. Miller, & M. Kane, 7B Federal Practice and Procedure Sec. 1797.1, at 392 (1986); In re Domestic Air Transp. Antitrust Litig., 148 F.R.D. 297, 320-22 (N.D. Ga. 1993). Evidence might include, for example, a specific valuation of the likelihood that class members would use the "judicial enforcement mechanism" touted by the parties. This neither proponent has done. 2. Leaving aside the question of whether class counsel catalyzed the Service Action and turning to the legal question of whether the settlement provided adequate consideration to merit approval, Chrysler pulls the heavier oar. Chrysler identifies four primary features of the settlement as the value added to the Service Action by the settlement: Chrysler's contractual commitment to complete the Service Action, the "customer awareness and satisfaction" efforts, judicial enforcement, and NHTSA's approval of the latch redesign. Objectors anticipated each of these arguments in their opening brief at pages 38-52 and offer only a few words in response: A. Chrysler's contractual commitment does not add sufficient value to the class because there is no evidence in the record that Chrysler intended to back out on the Service Action after announcing it in March 1995. (See Footnote 4) In fact, all of the evidence points the other way. In the Spring of 1995, Chrysler spent millions of dollars on advertising, letters to minivan owners, and the 1-800-MINI-VAN hotline to promote the Service Action. E.R. 56-57, 180-81, 184-229. Chrysler's March 1995 letter to NHTSA outlines the principal features of the Service Action. E.R. 66-69, 176-78. Chrysler admitted in discovery that even minivan owners who opt out are entitled to the free liftgate latch. E.R. 53. And repeated statements of Chrysler's counsel and principals underscore that Chrysler had no realistic intention of backing out on the Service Action. See, e.g., E.R. 515 ("an irrevocable commitment"); Chrysler's Opposition Brief at 31 ("a sincere pronouncement"). Although the district judge stated that Chrysler's contractual obligation was "worth something," E.R. 475, it was error to hold that the contractual form was adequate consideration to justify the release of claims and award of fees. B. The $14 million in Customer Awareness and Satisfaction efforts does not add sufficient value to Chrysler's commitment under the Service Action. Chrysler states that because the $14 million figure is not stated in its letters with NHTSA, its inclusion in the settlement agreement therefore confers a benefit upon the class. But this argument is belied by the record. When Chrysler exchanged letters with NHTSA in March 1995, it detailed the exact features of the Service Action upon which money has been spent. There is no evidence that the $14 million represents an independent sum that Chrysler had not already undertaken to spend on the exact same customer awareness efforts. In fact, in discovery Chrysler admitted that it intended to deduct costs of the Service Action against the $14 million. E.R. 50. That the letters with NHTSA do not specify $14 million is irrelevant because by the time Chrysler negotiated the settlement agreement it knew its approximate costs under the Service Action. Thus, the inclusion of the $14 million does not merit settlement approval. C. The speculative prospect of judicial enforcement of the settlement agreement does not confer sufficient value above and beyond Chrysler's Service Action. As a practical matter, the vast majority of class members are unlikely to seek specific enforcement through class counsel or the district court, particularly when they never received either notice that the settlement had been approved or a notice advising them that they could contact the district judge or class counsel if they were having trouble obtaining their replacement latch. Objectors' Opening Brief at 46-50. Moreover, the plain language of the settlement agreement speaks for itself. Chrysler is not obligated to provide the latches in any time frame under the settlement, Par. 8.1.1, and thus even seeking enforcement could be a futile or uncertain exercise. Also, even if a few minivan owners do use the "judicial enforcement" mechanism, this incidental value must be weighed against the burdens on the entire class in terms of surrender of claims and the award of fees. Finally, approving the settlement on these grounds would create a dangerous precedent, encouraging corporate defendants to arrange "voluntary" deals with federal regulators and then immunize themselves from liability through sweetheart class action settlements. D. Finally, Chrysler argues that the settlement provided value to the class because it waived its right to challenge NHTSA on redesign of the latches. This is wrong for three reasons. First, the settlement does not require Chrysler to reach an accord with NHTSA over latch redesign within any particular time frame. Par. 8.1.1. Thus, Chrysler and NHTSA could have become entangled in the same administrative processes that Chrysler identifies even with the settlement agreement. Chrysler's Opposition Brief at 32. Second, after April 1995 when Chrysler announced that it would redesign the latches under the Service Action, there is no reason to believe that Chrysler intended to do so without obtaining NHTSA approval of the latch design. After all, the entire Service Action including redesign of the latches was a quid pro quo for NHTSA eventually closing the investigation. NHTSA announced that it had kept the investigation open after the Spring 1995 announcement of the Service Action to ensure the adequacy of the replacement latch. E.R. 182-83. Both the Declarations of Clarence Ditlow and Joan Claybrook, provided by Objectors, explain that NHTSA and Chrysler negotiated the Service Action because, in certain respects, the agreement imposes obligations on Chrysler above and beyond a statutory recall and because NHTSA had confidence that Chrysler would carry our these obligations. E.R. 230-41 Par. 4, 276-80 Par. 3. Finally, even assuming that Chrysler is correct and that "upon execution of the Agreement, Chrysler waived all rights to challenge NHTSA's determination regarding the design of the replacement latch," Chrysler's Opposition Brief at 18-19, this begs the question of whether such a "waiver" is adequate consideration. Given that there is no evidence to support the proposition that Chrysler intended to fight NHTSA over latch redesign and there is contrary evidence that Chrysler needed to obtain NHTSA approval on latch redesign for the closure of NHTSA's investigation, it was an abuse of discretion for the district court to hold that this "waiver" conferred sufficient benefit upon the class. Looking to the other side of the equation, the value of the claims, particularly for class members living in states with favorable consumer law, are not lacking in value as class counsel, if not Chrysler, insist. The difficulties in using state lemon laws that the proponents identify do not eliminate the possibility that some class members would have resorted to lemon law procedures, particularly for those with extended warranties, those living in states with "safety" lemon laws, and those who have experienced considerable delays in obtaining their latch replacement under Chrysler's Service Action. See Objectors' Opening Brief at 50-52. Some states make incidental (See Footnote 5) and consequential (See Footnote 6) damages available for lemon law claims. In addition, as explained previously, violation of the lemon law may state a claim under state Unfair and Deceptive Acts and Trade Practices statute under which may allow recovery for incidental and consequential damages, mental anguish and penalties payable to plaintiff. See, e.g. Texas Deceptive Trade Practices--Consumer Protection Act, Tex. Bus. & Com. Code Ann. Secs. 17.30-17.826; see also Luna v. North Star Dodge Sales Inc., 667 S.W. 2d 115, 117 (Tex. 1984) (recovery for mental anguish); Volkswagen of America, Inc. v. Dillard, 579 So.2d 1301 (Ala. 1991) (damages recoverable for mental anguish arising from breach of express warranty in sale of new auto). There is no question that the value of the state law claims for members of the class are likely to range dramatically and it may be that under our federal system that only a minority of class members would pursue individual or state court class actions and recover money damages beyond latch replacement, but this does not excuse using a federal forum to extinguish even a minority of class members' rights under state law. Rule 23 was specifically designed to counter the perverse incentives for class counsel of trading off valuable claims for cheap settlements with large fee awards or using worthless claims as a means of extorting fees from a defendant. There can be no question that the claims of the class had some value--certainly class counsel warranted as such by signing the complaint in this federal action in June 1995--even if it turned out to be only the value represented by the fee award, the only real money being distributed under the settlement. This settlement is not a fair or adequate resolution of those claims. Both class counsel and Chrysler defend the award of $5.2 million in fees and costs by arguing that there was nothing wrong with the process by which the fee award was reached. The settling parties contend that because they mediated the fees in front of a third party, a retired judge, and achieved a settlement between what Chrysler wished to pay and what class counsel wished to obtain, the process by which the fees have been awarded is "beyond reproach." Chrysler's Opposition Brief at 47. The problem with this emphasis on the mediation process is that regardless of the amount of fees the parties or a mediator may recommend, Rule 23 and the applicable case law requires the district judge in a class action to make an independent fee determination, in light of all the facts and circumstances. This was not done here, and the district court erred by deferring to the mediator and accepting as conclusive the fact that the parties had agreed upon a mediated sum. The district judge concluded: "[s]ince the amount of fees has been agreed to by both sides, and since the amount was conducted in arms' length negotiation under the supervision of Judge Fannon, I don't see any reason to substitute my personal values or personal opinions on what has been done by those. I think it's within the realm of reason." E.R. 485. This deference to mediation was error for several reasons. First, the mediator's task was not to make a recommendation to the district judge about what would be a "fair" fee under Rule 23. There was no referral, such as to a Special Master or Magistrate Judge, with instructions to that effect. To the extent that the record sheds light on this issue, it seems that the mediator's task charge was limited to finding a figure that would be acceptable to the parties, without reference to whether that figure was "fair" for purposes of Rule 23, using either the lodestar or the percentage approach. Supp. E.R. 47, 149. Thus, the mediation process may have been beyond reproach, but that begs the question of whether the end product of the mediation met the Rule 23 criteria. Independent scrutiny of class counsels' fee request is required for a separate reason as well, namely, that there was no benchmark here against which the $5 million request could be measured. Contrary to the parties' vehement insistence, this was not a "common fund" case. Unlike, say, a securities action which is settled by agreeing to pay a fixed amount to the class, with fees coming out of that fund, there was no fund created by the settlement from which fees were paid. See also Awarding Attorneys' Fees and Managing Fee Litigation 49 (Federal Judicial Center) (1994) ("Not all class actions are common fund cases."). Thus, it was not possible for the district court to award a reasonable percentage out of the fund created by the plaintiffs' efforts. If this Court approves the settlement, the correct analytical approach here would be as a "common benefit" case. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 3922-96 (1970); see also Alyeska Pipeline Service Corp. v. Wilderness Society, 421 U.S. 240, 263-69 (1975). The parties have aggressively claimed throughout this litigation that fees somehow come out of a separate pocket than the relief on the merits. Indeed, there was no effort to quantify the present value of the settlement, other than plaintiffs' self-aggrandizing effort to claim that their efforts were entirely responsible for all remedial actions Chrysler has taken and all money Chrysler has spent. Why does the distinction between common fund and common benefit matter? The difficulty in quantifying the benefits in common benefit cases has prompted courts generally to use lodestar as the proper method of computing fees in such cases, and the district court did not do that here. A lodestar methodology is superior because it compensates counsel for the time which they spent on the case, and if a separate case can be made for a risk multiplier or quality-of-representation multiplier, counsel can make those arguments. See In re Chambers Develop. Sec. Litig, 912 F. Supp. 852, 864 (W.D. Pa. 1995); Lake v. First Nationwide Bank, 900 F. Supp. 726 (E.D. Pa. 1995); Edelman v. PSI Associates II, Inc., 147 F.R.D. 217, 219-23 (C.D. Cal. 1993) (lodestar should be used where unclear that settlement provided substantial benefit to class); Cooperstock v. Pennwalt Corp., 820 F. Supp. 921, 9226 (E.D. Pa. 1993) (applying lodestar method where benefits to class were "unquantifiable"); cf. Rosenbaum v. MacAllister, 64 F.3d 1439, 1444-48 (10th Cir. 1995). The lodestar rationale "has appeal where, as here, the nature of the settlement evades the precise evaluation needed for the percentage of recovery method." In re General Motors, 55 F.3d at 821; see also Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1311 (3d Cir. 1993); Shlensky v. Dorsey, 574 F.2d 131, 150 (3d Cir. 1978). As an additional consideration, the lodestar method is the one commonly used in awards under fee-shifting statutes, such as the one that establishes federal jurisdiction here. To the extent that the fee award in this case resembles the classic fee-shifting situation, either because class counsel relies on the Magnuson Moss Warranty Act for the federal cause of action, or if this Court accepts class counsels' argument that the fee award is somehow separate from the benefits under the settlement agreement, then only lodestar would be the appropriate method. See 15 U.S.C. Sec. 2310(d)(2) ("attorneys fees based on actual time expended"); see also Samuels v. American Motors Sales Corp., 969 F.2d 573 (7th Cir. 1992) (applying lodestar under Magnuson Moss Warranty Act); Dunk v. Ford Motor Co., 56 Cal. Rptr. 483 (Ct. App. 1996) (remanding for determination of fees on a lodestar basis in class action settlement producing not a fund, but coupons for the class and cash fees for the lawyers). In this case, however, the district court used no established fee award method. Although the court stated at the November 3, 1995 Fairness Hearing that it intended to use a percentage method, it never determined an overall value of the settlement such that one would know what the $5 million in fees represented as a percentage of total recovery. In fact, the district court observed that it did not give much credence to the $115 million figure bandied about by class counsel for a settlement value. E.R. 485. (See Footnote 7) Thus, class counsel misstate the record by arguing that the district court found that their actions conferred a benefit of $115 million upon the class. Class Counsels' Opposition Brief at 48-49. Instead, the district court simply deferred to the recommendation of the private mediator hired by the parties. In this way, the district court's acceptance of the $5 million award was equivalent to "picking a number out of the air," a method specifically disapproved by this Court. See In re Washington Public Power Supply Sys. Securities Lit., 19 F.3d 1291, 1297 (9th Cir. 1994). The method used by the district court creates a dangerous precedent for attorneys' fees awards in class actions. For many years, courts have recognized the dangers of allowing side-settlements of attorneys' fees. See Weinberger v. Great Northern Nekoosa Corp., 925 F.2d 518, 522 (1st Cir. 1991). Judicial scrutiny serves as a crucial monitor of excessive or undeserved fee awards in class actions. Id. at 524 (citing Furtado v. Bishop, 635 F.2d 915, 919 (1st Cir. 1980). Such conflicts of interest between class members and their attorneys "may be most stark when a common fund is created . . . [but] there is also a conflict inherent in cases like this one, where fees are paid by [an] adversary from its own funds." Great Northern Nekoosa, 925 F.2d at 524. The risk, of course, is that lawyers might urge a low-ball class settlement in exchange for optimal advantage on fee negotiations. Id.; see also John C. Coffee, Understanding the Plaintiff's Attorney: The Implication of Economic Theory For Private Enforcement of Law Through Class and Derivative Actions, 86 Colum. L. Rev. 669, 671-72 (1986); John C. Coffee, The Unfaithful Champion: The Plaintiff as Monitor in Shareholder Litigation, 48 Law & Contemp. Prob. 5, 26-33 (1985). Thus, because of this risk, Rule 23(e) requires scrutiny of both settlement and fee awards. Cf. Ficalora v. Lockheed California Co., 751 F.2d 995, 997 (9th Cir. 1985) (judicial review protects class members against conflicts of interest). Settlements that provide only non-pecuniary relief to the class are prime suspects for such cheap settlements. See In re General Motors, 55 F.3d at 802; see also Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorneys Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 45 n.10 (1991). In sum, there is an important public interest component to the judicial role in monitoring class action fee awards as a means of policing attorney conduct that will be cast away if the mediation procedure approved in the district court is countenanced by this Court. (See Footnote 8) Because of the risks that the interests of absent class members will be sacrificed in exchange for a large fee award and the public interest in ensuring that class action settlements not become a vehicle for extorting fees with cheap settlements, there can be no substitute for judicial scrutiny and application of an accepted fee method. This the district court did not do and this error calls out for review. FOOTNOTES
CONCLUSION For the reasons stated above, and in Appellants' Opening Brief, we respectfully request that this Court reverse the district court's certification of a nationwide class, approval of the class action settlement, and the award of attorneys' fees and costs. Respectfully submitted, Colette G. Matzzie
ROBERT GRAHAM
Michael Rubin
CERTIFICATE OF COMPLIANCE Pursuant to the Ninth Circuit Rule 32(e)(4), I certify that the reply brief is proportionally spaced with Times Roman typeface of 14 points and contains 6191 words. Colette G. Matzzie |