CASE NOS. 96-3568/3740/3744/3774
IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
ARTHUR RAY BOWLING, et al.,
STANLEY M. CHESLEY, et al.,
SIDKOFF, PINCUS & GREEN, P.C., et al.,
ELIZABETH W. RIDGEWAY, et 9al.,
JEFFREY A. CRANE; GENE RANDALL; GERARD BENEDIK,
PFIZER, INC.; SHILEY, INC.,
On Appeal from the United States District Court
BRIEF OF APPELLANTS JEFFREY A. CRANE, GENE RANDALL,
STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION
The district court had jurisdiction over this case on the basis of diversity of citizenship under 28 U.S.C. 1332. This is an appeal from a post-judgment Order of the district court entered on April 22, 1996, denying appellants access to class counsel's fee-sharing agreements with other lawyers. (R. 848, Order Denying Motion for Reconsideration). (See Footnote 1)
The Notice of Appeal was filed on May 17, 1996 (R. 870). In an Order filed on August 15, 1996, this Court denied appellees'/cross-appellants' motion to dismiss the appeal in No. 96-3568, holding that the district court's order denying access to the fee-sharing agreements was a final appealable order. (A related appeal in No. 96-3849 was dismissed as unnecessary and untimely.) Therefore, this Court has jurisdiction under 28 U.S.C. 1291.
STATEMENT REGARDING ORAL ARGUMENT
By Order filed on August 15, 1996, the Court has already determined that this appeal, and three related appeals with which this appeal has been consolidated, will be argued before Circuit Judges Martin, Krupansky, and Daughtrey during the week of November 18, 1996.
STATEMENT OF ISSUE FOR REVIEW
In a case in which class counsel requests $33 million in attorney's fees to be awarded from a common-fund class action settlement, should the fee-sharing agreements between class counsel and other plaintiffs' counsel be disclosed to absent class members who have filed objections to the fee request, where the other plaintiffs' counsel had originally objected to the settlement negotiated by class counsel but later withdrew their objections and agreed to share in class counsel's fee award?
STATEMENT OF THE CASE
Intervenors Jeffrey A. Crane, Gene Randall, and Gerard Benedik (hereafter collectively "Crane") are absent class members who intervened below to challenge what they believed to be class counsel's grossly excessive $33 million fee request. The district court, per the Honorable John F. Nangle, largely agreed with Crane's objections and significantly reduced the fee request. The court awarded $10.2 million for work performed, stating that "$33 million is entirely too much money for legal fees given the facts and circumstances of this case," and granted counsel the right to seek additional fees of up to $625,000 per year for future work over the next 10 years. Bowling v. Pfizer, 922 F. Supp. 1261, 1283-84 (S.D. Ohio 1996), on reconsideration, 927 F. Supp. 1036 (S.D. Ohio 1996). Compared to the fee requested by class counsel, the net result of Judge Nangle's decision is a very significant increase in the amount of funds available for the benefit of the class members, including Crane.
In Appeal No. 96-3744, one of the consolidated appeals before this Court, class counsel has appealed the fee award and will argue that the district court should have awarded him the full $33 million. Crane, as appellee in that appeal, will argue that Judge Nangle's award, although generous, was not an abuse of discretion and should be affirmed.
The appeal that is the subject of this Brief (No. 96-3568) challenges the district court's decision denying Crane discovery of class counsel's fee-sharing agreements. Specifically, Crane sought access to the agreements between class counsel and other counsel who had originally objected to the settlement, but later withdrew their objections and entered into agreements providing that class counsel would pay them undisclosed amounts out of his fee award. Crane argued that the class members--who, after all, are class counsel's clients--are entitled to know what their lawyers will be paid. Moreover, Crane argued that fee-sharing agreements in class actions carry with them the potential for abuse. Unless class counsel's payments to other counsel have some rational relationship to the work those counsel have performed, Crane maintained, the payments serve to bloat the overall fee request and unfairly diminish the funds otherwise available to the class.
Although Crane does not challenge the $10.2 million award, Crane's appeal seeking access to the fee agreements is still of considerable import to Crane and other class members for two reasons. First, under Judge Nangle's decision below, counsel who perform future work are permitted to request fees over the next 10 years, during which time the defendants will deposit an additional $62.5 million into the common fund. Bowling, 922 F. Supp. at 1283-84. Class members, including specifically Crane, are granted the right to object to future fee requests, id. at 1284, and class counsel's fee-sharing agreements plainly have a bearing on the proper amount of future fees to be awarded. For instance, one of the attorneys with whom class counsel has a fee agreement has acknowledged that the amount he will be paid by class counsel is "tied to the overall amount of the award, not merely the first payment." (R. 865, at 2, Motion by Special Counsel Lewis J. Saul). Second, if this Court reverses the district court's fee decision for any reason, Crane and other class members should be permitted to review the fee-sharing agreements and make argument regarding whether the agreements have served to unfairly inflate the fees sought on remand.
This appeal arises out of a worldwide class action settlement involving the claims of thousands of individuals implanted with the Bjork-Shiley Convexo-Concave ("BSCC") heart valve manufactured and sold by the defendants. Because of manufacturing and design defects, the BSCC valve has a tendency to fracture. Fractures cause uncontrolled blood flow to the body tissues and have resulted in deaths and serious injuries to hundreds of valve patients. See Michael v. Shiley, 46 F.3d 1316, 1319-21, 1333-36 (3d Cir.), cert. denied, 116 S. Ct. 67 (1995)(describing history of BSCC valve tragedy). In early 1992, a settlement was reached between class counsel, Stanley M. Chesley, and the defendants. See Bowling, 922 F. Supp. at 1264. Numerous class members and amici filed objections to that settlement in the district court, pointing out its serious deficiencies and suggesting modifications, many of which were made. See Bowling v. Pfizer, 143 F.R.D. 141, 146 n.1, 168, 170 (S.D. Ohio 1992). Prior to the district court's approval of the settlement, most of the objectors formally dismissed their objections. See id. at 146 n.1. Four of the attorneys who had represented the objectors--Lewis Saul, Brian Magaña, John Johnson, and Charles Wolfson--then entered into secret fee-sharing agreements with class counsel. As far as the record reflects, counsel did not disclose these fee-sharing agreements to the Court, to the class members, or even to their own individual clients. (See Footnote 2)
Two other sets of objectors were also involved in the case. First, the Pennsylvania Class Objectors ("PCO"), represented by attorneys Gary Green and Morton Wapner, continued to press their objections on appeal to this Court. Therefore, the PCO filed only what they called a "pro forma" fee application, which stated that the PCO would continue to press its objections on the merits, but wished to preserve their rights to fees on the ground that they had played a role in enhancing the settlement terms. (R. 280, Pro Forma Motion).
The PCO continue to pursue two appeals that were argued to this Court on August 13, 1996. One seeks to upset the settlement that became final in 1992. Appeal No. 94-4322. The other seeks reversal of a series of district court orders which effectively held that the PCO were not entitled to a fee because they had not contributed value to the settlement, and barred the PCO from participation in the September 14, 1995 fee hearings. Appeal No. 95-4054.
However, in late December 1992, shortly after the PCO first appealed approval of the settlement, the PCO's attorneys also struck a deal for attorney's fees, which, so far as we are aware, was never formally disclosed to the class or to other objectors' counsel although it was brought to Judge Spiegel's attention at an in-chambers hearing held on December 28, 1992. (R. 310, In-Chambers Transcript). The PCO's attorneys went before a common pleas court in Pennsylvania, where, for years, they had been counsel for a putative class of BSCC victims who resided in, or had their valves implanted in, Pennsylvania. (See R. 334, Transcript in Taylor v. Shiley, Case No. 2087 (Ct. Common Pleas Pa.)). The PCO's putative class action sought the same kind of forward-looking relief for BSCC patients as had been provided in the settlement below. See also Bowling, 143 F.R.D. at 152 & n.9, 155 (discussing Taylor). The PCO's attorneys told the Pennsylvania court that the national settlement provided the class members with substantial benefits, that the causes of action of the Pennsylvania class had become quite weak and subject to probable dismissal on their merits, and that, in any event, the claims of the putative Pennsylvania class members, who had not opted out of the Cincinnati settlement, were res judicata as a consequence of Judge Spiegel's judgment approving the settlement. (R. 334, Exhibit to Taylor v. Shiley Transcript (Letter from Gary Green, Esq. to Hon. G. Craig Lord)). (See Footnote 3)
The PCO attorneys, along with attorneys for defendants Shiley and Pfizer, then went on to explain to the Pennsylvania judge that the defendants had agreed to pay the lawyers for the PCO $3.25 million to dismiss their Sixth Circuit appeal. (R. 344, at 36-37, Taylor v. Shiley Transcript). In addition, the attorneys told the Pennsylvania court that Mr. Chesley--who now claims that the PCO's attorneys provided no benefit to the class--had agreed to pay the PCO's attorneys an additional $750,000. (Id. at 38; see also R. 310, at 15, In-Chambers Transcript). The only "benefit" obtained by class counsel and the defendants in exchange for the $4 million payment to the PCO's attorneys was dismissal of the PCO's Sixth Circuit appeals; the settlement was not enhanced in any way, either for the class as a whole or for the PCO in particular. (See generally R. 344, Taylor v. Shiley Transcript; R. 310, at 13-16, In-Chambers Transcript). (See Footnote 4)
In any event, the fee agreement was met with considerable skepticism from the Pennsylvania court for two related reasons. First, the court severely questioned why, if the PCO had enhanced the nationwide settlement, it, rather than the Cincinnati court, was being asked to bless the defendants' payment of $3.25 million to the PCO's attorneys. (R. 344, at 37-39, Taylor v. Shiley Transcript). Second, the court was unable to fathom why the $3.25 million was not being shared with the putative Pennsylvania class members who had opted out of the Cincinnati settlement, rather than going only to their attorneys. (Id. at 45-53). The Pennsylvania court thus apparently rejected the fee agreement, and the PCO thereafter continued their efforts to overturn the class settlement which, as this Court is well aware, continue to this day. (See Footnote 5)
The other objector was amicus Public Citizen, later joined by Crane, which vigorously opposed the original settlement and appealed the settlement approval, but settled the appeal in exchange for additional enhancements to the settlement. Bowling, 143 F.R.D. at 167-70; Bowling, 922 F. Supp at 1276. As noted above, Public Citizen and Crane were also the principal objectors to class counsel's $33 million fee request. (See generally R. 652, Memorandum in Partial Opposition to Fee Applications of Class Counsel and Special Counsel James Capretz). In addition, they filed their own fee request for approximately $105,000, to which no party objected and which was approved by Judge Nangle in its entirety. Bowling, 922 F. Supp. at 1285.
As modified, the settlement provides the class members with modest cash payments, free valve replacement surgery in certain circumstances, a fracture compensation system for both U.S. and foreign class members, and miscellaneous other benefits. Id. at 1265-76. We will outline the settlement--its strengths and its shortcomings--in greater detail in our brief as appellee in No. 96-3744. For present purposes, it is sufficient to note that the settlement provides substantial benefits to the class members and that those attorneys whose work led to the settlement as approved by the district court were entitled to a reasonable fee.
Proceedings Below Regarding Attorney's Fees
Motions for attorney's fees were filed in October 1992, shortly after the district court issued its judgment approving the settlement (see, e.g., R. 276, Motion for Attorney's Fees of Class Counsel and Attorneys Johnson, Magaña, Saul & Wolfson). Crane immediately served discovery including, among other things, access to the fee sharing agreements between class counsel Chesley and his associated counsel. (See R. 443, at Exhibits A-F, Motion for Limitations Upon Discovery). Shortly thereafter, however, the district court stayed all matters concerning attorney's fees until the completion of the PCO's initial appeal on the merits (R. 297, Memorandum). After the PCO's initial appeals were dismissed by the Court, and the Supreme Court denied certiorari, Ridgeway v. Pfizer, 115 S. Ct. 294 (1994), Judge Spiegel issued an Order granting a lengthy period for fee-related discovery, and requiring fee applications to be filed by a certain date. (R. 430, at 14, Order Granting Motion for Discovery). Thereafter, Crane renewed, among other things, his demand that class counsel and his associate counsel divulge their fee-sharing agreements.
Two counsel, Mr. Saul and Mr. Magaña, disclosed to Crane the terms of their agreements with Mr. Chesley, but not the agreements themselves. Mr. Saul testified at deposition that he was to receive between $400,000 and $500,000, depending on the overall fee to be awarded. (R. 652, at Exhibit 3, Memorandum in Partial Opposition to Fee Applications of Class Counsel and Special Counsel James Capretz). Mr. Magaña disclosed in a letter that he was to receive $250,000 from Mr. Chesley. (Id., at Exhibit 4). All other counsel refused to provide any information regarding any aspect of their fee-sharing agreements, and Crane filed motions to compel production by each of them. (See, e.g., R. 553, Motion to Compel). This appeal therefore seeks disclosure of Mr. Chesley's agreements with Messrs. Johnson, Wolfson, Magaña, Capretz, and Mr. Capretz' former law firm, Capretz & Kasdan (now in dissolution). (See Footnote 6)
In support of the motion to compel, Crane explained that he could not fully evaluate the reasonableness of class counsel's $33 million fee request without understanding its constituent parts. If cooperating counsel were being rewarded for their cooperation rather than their work, then these deals were bloating the total fee request beyond the value conferred upon the class. In this regard, Crane principally relied on the Second Circuit's decision in In re Agent Orange Prod. Liab. Litig., 818 F.2d 216 (2d Cir. 1987), cert. denied, 484 U.S. 926 (1988), which held that, because of the potential for conflicts of interest between counsel and the absent class members, counsel are obligated in every class action to disclose all of their fee-sharing agreements.
The motion to compel was heard before Magistrate Judge Jack Sherman who, in an Order entered on July 26, 1995, required counsel to submit their fee sharing arrangements in camera, but held that the agreements did not have to be made public in any fashion or otherwise be disclosed to Crane or even to counsel's own clients. (R. 601, Order Denying Motion to Compel Discovery). Crane promptly filed objections to the Magistrate Judge's decision (R. 613, Partial Objections to Magistrate Judge's Order). Many months passed without a ruling from the district court, and Crane therefore requested a ruling to enable him to review the fee-sharing agreements prior to a decision regarding attorney's fees (R. 799, Request for Ruling).
The district court did not rule until almost two months after Judge Nangle's March 1, 1996 decision awarding attorney's fees. In a brief Order filed on April 22, 1996, signed by Judge Spiegel, the district court denied access to the fee-sharing agreements on the ground that Judge Nangle's Order awarded only one fee to class counsel, rather than separate fees to each participating counsel. (R. 848, Order Denying Motion For Reconsideration). The district court did not mention that Judge Nangle, in his Order awarding fees did, in fact, individually assess each counsel's entitlement to fees. Bowling, 922 F. Supp. at 1270-73. Nor did the district court consider the Second Circuit's Agent Orange decision, which, as noted above, required disclosure of fee-sharing agreements in all class actions.
SUMMARY OF ARGUMENT
Disclosure of class counsel's fee-sharing agreements should be made under general discovery requirements, Rule 23 class action principles, and precepts embodied in the Code of Professional Responsibility. Under the rules of discovery, all relevant, non-privileged materials must be disclosed to a party, like Crane, who serves a proper discovery request. Fee-sharing agreements are not subject to any privilege, and neither the Magistrate Judge nor district court below suggested otherwise. Class counsel argues only that his agreements should be kept secret because they are "private," but that only states his conclusion and does not provided a reason--let alone a lawful reason--for avoiding Crane's legitimate discovery requests.
Moreover, the fee agreements are relevant to the fee issues before the district court. To the extent that the agreements are excessive, and reward counsel in a manner inconsistent with the work performed, they are likely to inflate class counsel's overall fee requests to the detriment of the class. Indeed, both Mr. Chesley and the Magistrate Judge recognized their relevance since they acknowledge that the district court should review such agreements in camera.
The case law has recognized not only the relevance of such agreements to the district court's fee determination, but also that, under Rule 23, class members must be fully apprised of fee-sharing agreements, among other reasons, in order to avoid public misunderstanding about class actions in general and their fee components in particular. See, e.g., In re Agent Orange Prod. Liab. Litig., 818 F.2d 216 (2d Cir. 1987), cert. denied, 484 U.S. 926 (1988). As one court has put it, full disclosure to the class members is "essential to protect the interests of the public, the class and the honor of the legal profession." In re Agent Orange Prod. Liab. Litig., 611 F. Supp. 1452, 1453-54 (E.D.N.Y. 1985).
The right to disclosure here is further supported by Disciplinary Rule 2-107(A) of the Code of Professional Responsibility, under which lawyers must obtain client consent to enter into fee-sharing agreements with lawyers from other firms. This rule has been used as guide in assessing fees, and denying enforcement of fee-sharing arrangements in class actions, see Kronfield v. Transworld Airlines, Inc., 129 F.R.D. 598 (S.D.N.Y. 1990), and thus provides further support for the disclosure sought by Crane here.
Finally, turning to the particular circumstances of this case, several of the fee-sharing agreements which have been made public, or about which Crane has obtained information, show that class counsel agreed to pay his cooperating counsel very substantial sums that are inconsistent with the work performed. For instance, one agreement appears to reward counsel with a fee of more than $1,000 per hour. These circumstances, set out in more detail below, demonstrate precisely why all fee-sharing agreements should be disclosed in every class action.
THE DISTRICT COURT ABUSED ITS DISCRETION IN ALLOWING COUNSEL'S FEE-SHARING AGREEMENTS TO REMAIN SECRET.
To protect his interest in the common fund, Crane needs to know if the fee-sharing agreements reward formerly objecting counsel for their cooperation rather than, or in addition to, their contributions to the common fund. If these agreements do the former, there is a substantial likelihood that the class members' funds will be unfairly dissipated. More specifically, without disclosure, class members will not be fully informed about whether Mr. Chesley's attempts to "cover" his fee obligations to other counsel, either in his initial fee request or in future fee requests permitted under Judge Nangle's decision, reflect compensation for worked performed or "payoffs" to counsel. Even if there was no improper motive behind the fee-sharing agreements struck in this case, to the extent that the agreements had the effect of compensating other counsel in a manner unrelated to the work they actually performed, they potentially harmed the class members. As one court has aptly put it: "We deal here with class members' money. To the extent that a part of a fee award goes to an attorney who rendered [little or] no service, to that extent the fee award is too high and is unreasonable." Lewis v. Teleprompter Corp., 88 F.R.D. 11, 17 (S.D.N.Y. 1980).
A. General Discovery Rules, Rule 23 Principles, and the Code of Professional Responsibility Require Reversal.
Ordinary principles of civil discovery, Rule 23's demand that the interests of absent class members be protected, and the rules of professional conduct all demonstrate that the district court abused its discretion in denying Crane access to counsel's fee-sharing agreements.
1. General Discovery Rules. Crane sought through interrogatories and requests for production of documents all information concerning counsel's fee-sharing agreements, including copies of the agreements themselves. In the court below, class counsel did not produce any authority--nor are we aware of any--that fee-sharing agreements are subject to any work-product, attorney-client, or other privilege. Mr. Chesley's only argument in support of non-disclosure was that his agreements with other counsel were "private." (See R. 536, Memorandum in Opposition to Motion to Compel). But that argument only begs the question. The agreements are "private" only because counsel has chosen to keep them secret. There are no lawful grounds for holding that a member of the class--one of Mr. Chesley's very own clients--can be kept in the dark about his lawyer's fee arrangements.
Moreover, the discovery sought by Crane was plainly relevant to the fee dispute. See Fed. R. Civ. P. 26(b)(1). Crane sought the information because it was essential to a complete evaluation of the total fee request. Both the initial fee request and Mr. Chesley's annual fee requests permitted under Judge Nangle's Order were (and, we fear, will be) bloated by the substantial commitments he made to other counsel--counsel who had previously represented objectors, but later dropped their objections and joined in class counsel's fee requests. If it is deemed relevant for objectors to be able to scrutinize counsel's time and expense records, and to probe the claimed justifications for the amount requested--which no one disputes--then it is just as relevant for objectors to be able to discover counsel's fee-sharing arrangements, which may have an equally important bearing on the overall fee request.
When information is relevant, it is discoverable unless the party from whom it is sought shows "good cause" for protecting it. Fed. R. Civ. P. 26(c). By requiring in camera disclosure, the magistrate's Order acknowledged that the fee agreements were relevant because of the potential they create for conflicts of interest between the class attorneys and the clients they are duty-bound to serve, but he stopped short of requiring full disclosure. (See Footnote 7) As Magistrate Judge Sherman saw the problem, "[b]alancing these concerns [over conflicts of interest] against the fact that it is the district judge who will determine the fee amount, the Court finds it appropriate to disclose to the district judge the fee information sought, but premature to decide who else, if anyone, should also see that information." (R. 601, at 2, Order Denying Motion to Compel Discovery). This rationale cannot withstand scrutiny and surely does not provide the requisite "good cause" necessary to override Crane's relevant discovery requests. The district court makes the ultimate decision on all litigation disputes and, thus, if that were a proper reason to deny discovery here, it would be a reason to deny discovery in every case. In sum, class counsel's fee-sharing agreements are relevant, non-privileged materials that should have been disclosed.
2. Rule 23 Principles. Under Federal Rule of Civil Procedure 23, all requests for attorney's fees are subject to searching scrutiny by the court. See In re General Motors Fuel Tank Pickup Truck Prod. Liab. Litig., 55 F.3d 768, 819-20 (3d Cir.), cert. denied, 116 S. Ct. 88 (1995). "Because of the potential for a collusive settlement, a sellout of a highly meritorious claim, or a settlement that ignores the interests of minority class members, the district judge has a heavy duty to ensure that . . . the fee awarded plaintiffs' counsel is entirely appropriate." Piambino v. Bailey, 610 F.2d 1306, 1328 (5th Cir.), cert. denied, 449 U.S. 1011 (1980). Moreover, quite apart from whether collusion is present, Rule 23(e) requires careful scrutiny to prevent excessive fees and, thus, public aversion toward the judicial process and class actions in particular. In re Agent Orange Prod. Liab. Litig., 818 F.2d 216, 225 (2d Cir. 1987). As this Court has noted, the need for careful scrutiny is particularly critical in cases like this one in which, rather than the defendant paying the fee pursuant to a fee-shifting statute, there is a common-fund settlement out of which both the class recovery and the fee are to be paid. See Rawlings v. Prudential-Bache Properties, Inc., 9 F.3d 513, 516 (6th Cir. 1993). In short, at the fee stage, "the plaintiffs' attorney's role changes from one of fiduciary for the clients to that of claimant against the fund created for the clients' benefit," id. at 516 (quoting Third Circuit Task Force Report), and thus each dollar paid to counsel means one less dollar for the class members.
In the context of fee-sharing agreements, the special scrutiny required by Rule 23 is well illustrated by the leading case on the subject, Agent Orange. There, the Second Circuit struck down a fee-sharing agreement that rewarded certain plaintiffs' attorneys who had advanced funds for litigation costs with a threefold return on their investment, while reducing the fees of non-investing counsel. The court noted that the practice of allowing plaintiffs' attorneys to distribute a general fee award among themselves was "unexceptional" but held that such agreements "must bear some relationship to the services rendered." 818 F.2d at 223. The agreements, the court held, posed "a clear potential for a conflict of interest" with the client class. Id. Thus, the Second Circuit reversed the district court and invalidated the agreement for being inconsistent with the interests of the class. Id. at 224. And of particular importance to this case, the Second Circuit ruled that, in all future class actions, counsel would be required to inform the court of fee-sharing agreements at the time of their formation to help prevent potential conflicts. Id. at 226. (See Footnote 8) See also General Motors, 55 F.3d at 820 (quoting Agent Orange with approval: "The test to be applied is whether at the time a fee sharing agreement is reached, class counsel are placed in a position that might endanger the fair representation of their clients and whether they will be compensated on some basis other than for legal services performed").
Moreover, there is no authority for the proposition advanced by class counsel below that fee agreements should be disclosed only to the court, but not to the parties. In Agent Orange itself, the fee agreements were disclosed in great detail to the class and to the public. See In re Agent Orange Prod. Liab. Litig., 611 F. Supp. 1452, 1454-55 (E.D.N.Y. 1985). And, although the district court approved the fee arrangement (which the court of appeals later rejected), it specifically demanded what it called an "early fee disclosure rule in future cases," id. at 1462, and further noted that, when disclosures were made to the court before class certification (i.e., before notice to the class), the court would, in turn, notify the class of the fee arrangements. Id. at 1463. As Judge Weinstein put it:
<BLOCKQUOTE>In any future class case in this district such an agreement must be revealed to the court and members of the class as soon as possible. A "sunshine" rule is essential to protect the interests of the public, the class and the honor of the legal profession.</BLOCKQUOTE>
Id. at 1453-54. In this vein, the court discussed with approval a local rule under which class notices are required to include the amount of the fee request and any fee-sharing arrangements. Id. at 1464. Although the timing of the sharing of this information with the class properly may vary depending on the complexity of the case or the fee request, id., the district court made clear that such information must be disclosed at some point, and nothing in the Second Circuit's opinion is to the contrary.
In fact, the whole thrust of the Second Circuit's decision was to remove the shroud of secrecy that often surrounds counsel's fee arrangements in class actions. As had the district court, the Second Circuit openly discussed the contents of the fee agreements, making them public, and expressly took into account the public perception of class counsel's position, stating that "potential public misunderstandings . . . in regard to the interests of class counsel" should be considered when examining a potential conflict of interest. Agent Orange, 818 F.2d at 225; accord Smith v. Josten's American Yearbook Co., 78 F.R.D. 154, 170 n.19 (D. Kan. 1978)("no settlement should be approved without full disclosure of the settlement details, including the amount and allocation of attorney fees and other expenses")(emphasis added); see also General Motors, 55 F.3d at 820 (on remand, "district court must be alert to the presence in the fee agreement of any actual abuse or appearance of abuse capable of creating a public misunderstanding")(emphasis added).
The district court's ruling was also inconsistent with a growing body of Rule 23 jurisprudence calling for class counsel to notify class members of the terms of attorney's fees requests. For instance, in In re Ford Motor Co. Bronco II Prods. Liab. Litig., 1995 U.S. Dist. Lexis 3507 (E.D. La. Mar. 20, 1995), which struck down a proposed class action settlement, the court criticized class counsel's failure to notify class members of the amount of fees to be sought. Id. at *28-*29. In the court's view, the lack of notice made it impossible for "class members to determine the possible influence of attorneys' fees on the settlement." Id. (noting that small number of objectors was likely due to lack of notice; "perhaps more class members would have spoken out had they known of the arrangement between Ford and class counsel regarding attorneys' fees"); see also General Motors, 55 F.3d at 803 & n.23 (castigating class counsel, as in this case, for their failure to disclose any information about fees in the class notice); Piambino v. Bailey, 610 F.2d at 1328 (district court "must require that notice be given to the class of the proposed attorneys' fees"); In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1130 (7th Cir.)(class members "could not determine the possible influence of attorneys' fees on the settlement in considering whether to object to it"), cert. denied 444 U.S. 870 (1979). Here, where the class notice provided class members with no information about the potential amount or other terms of the fee request, it is especially important that an objector who seeks such information be granted full access to it.
3. The Code of Professional Responsibility. The right to disclosure here is further supported by the Code of Professional Responsibility. Disciplinary Rule 2-107(A), which applies to the conduct of counsel in the Southern District of Ohio, provides that attorneys must have the consent of their clients to enter into fee-sharing agreements with lawyers from other firms. Ohio Rev. Code Ann. DR 2-107(A) (Baldwin 1995); see S.D. Ohio Model Federal Rules of Disciplinary Enforcement Rule IVB (applying Code of Professional Responsibility adopted by the highest court of the state in which it sits). The rule also requires that the terms of the division be disclosed in writing to the client. Ohio Rev. Code Ann. DR 2-107(A)(2). If the division of fees is not in proportion to the services performed, a written agreement with the client is necessary. Ohio Rev. Code Ann. DR 2-107(A)(1). (See Footnote 9)
DR 2-107 has been held to be an appropriate guide for courts in discharging their fiduciary responsibilities under Rule 23 to protect the rights of absent class members. See Kronfield v. Transworld Airlines, Inc., 129 F.R.D. 598 (S.D.N.Y. 1990) (applying previous version of DR 2-107 that fees be divided in proportion to work performed to deny enforcement of fee-sharing agreement); see also Agent Orange, 818 F.2d at 222 (noting that, in performing its duty to evaluate the fairness of fees under Rule 23(e), court should look to codes of ethics "as guidelines for judging the conduct of counsel"). Indeed, fee-sharing agreements have been struck down for violating DR 2-107. In Dragelevich v. Kohn, Milstein, Cohen & Hausfield, 755 F. Supp. 189 (N.D. Ohio 1990), the court held a fee agreement to be unenforceable because the allocation of fees was not proportional to work performed and thus violated former DR 2-107(A)(2), which had required the division of fees to be in proportion to services performed. Id. at 191. Noting that DR 2-107(A) was about to be revised to its current form, which allows non-proportional fee splitting with the written agreement of the client, the court declared that the lack of client agreement would have defeated any claim of the agreement's validity even under the proposed DR 2-107(A) now in effect. Id. at 194, n.9.
Of course, since Crane does not have access to the fee-sharing agreements themselves, he does not seek here to challenge the validity of class counsel's agreements on DR 2-107 grounds. However, the Rule's requirements of client notice and consent further demonstrate the error in class counsel's argument that these agreements are "private" or otherwise protected. In short, because the ethical rules contemplate notice of such agreements to clients, there can be no possible "good cause" for deviating from normal discovery requirements and limiting inspection to the court alone. While consent from all class members may not always be practicable in the class action context, that certainly should not prevent class members, such as Crane, who affirmatively seek discovery of the agreements, from being given access to them.
For all of these reasons, the Court should reverse the decision of the district court and grant Crane access to the fee-sharing agreements.
B. The Particular Circumstances of This Case Underscore the Need for Disclosure.
As demonstrated above, all relevant authority supports release of fee-sharing agreements in class litigation, and no logical reason supports keeping them secret, as Mr. Chesley urges. Thus, disclosure of such agreements should, as a matter of law, be required in every class action, as the Second Circuit ruled in Agent Orange. In addition, a brief review of the circumstances surrounding the fee agreements in this case underscores why disclosure is particularly important here.
1. Brian Magaña. Mr. Magaña represented an amicus, the Dutch Consumentenbond, a consumer organization that has been an important advocate for BSCC patients in the Netherlands and elsewhere. Mr. Magaña had developed expertise by representing numerous BSCC fracture victims in personal-injury and wrongful death cases. Mr. Magaña's principal role below was in joining with other objectors--Mr. Saul, Mr. Wolfson, and amicus Public Citizen--in objecting to the treatment of foreign claimants under the fracture compensation scheme contained in Part VII of the settlement agreement. Bowling, 922 F. Supp. at 1272. As far as the record reveals, Mr. Magaña filed a 22-page amicus brief in May 1992 and attended the fairness hearing the next month, along with his Dutch co-counsel, Mr. Beer. (See R. 154, Objections By the Consumentenbond). Although not in the record, we are aware that an associate of Mr. Magaña attended a strategy session prior to the fairness hearing and that Mr. Magaña participated in a negotiation session with the defendants, after the district court suggested that several inadequacies in the original settlement package be cured. See generally Bowling v. Pfizer, 143 F.R.D. 138 (S.D. Ohio 1992). Mr. Magaña has not, to our knowledge, participated in any of the post-settlement enforcement proceedings in this case nor participated in the work of the Supervisory or Foreign Fracture Panels. Indeed, it appears that, after the settlement was approved, Mr. Johnson assumed representation of the Consumentenbond. (See R. 677, at 127-28, Transcript of Hearing Regarding Attorney's Fees; R. 639, at 1, Application for Award of Costs of the Consumentenbond).
Mr. Magaña failed to submit any time or expense records of any sort, as Judge Nangle noted. Bowling, 927 F. Supp. at 1042. Yet, shortly after the settlement was approved, Mr. Magaña revealed that Mr. Chesley had agreed to pay him $250,000 for his work (which Mr. Magaña would in turn share with Mr. Beer). This amount cannot be justified on the present record and appears to be inconsistent with the work performed in this case. A comparison between the amount Mr. Chesley has agreed to pay Mr. Magaña--who had less involvement than any other of the objecting counsel--and the fees of Public Citizen and Crane illustrates this point. Public Citizen and Crane have filed literally dozens of briefs on a wide variety of subjects both pre- and post-settlement, presented argument at numerous hearings, and served as the principal objector to class counsel's $33 million fee request. On that issue, the court below described their work as "invaluable," Bowling, 922 F. Supp. at 1285, "professional, thoughtful and beneficial to the class." Bowling, 927 F. Supp. at 1045. Public Citizen and Crane were awarded $105,037.46, based on their full lodestar plus a multiplier, and their expenses. Bowling, 922 F. Supp. at 1276, 1285.
We do not wish to denigrate Mr. Magaña's excellent work on behalf of BSCC victims both in the court below and in other fora. Nor do we dispute that Mr. Chesley may be under a contractual obligation to pay Mr. Magaña $250,000. However, it is only logical that, after striking such a deal, class counsel would feel a need to "cover" the $250,000 investment, whether or not it was related to the work performed. Obviously, class members had a right to know about this payment and to object to its implicit, if not explicit, inclusion in the overall fee request. Its existence demonstrates that all of the fee-sharing agreements should be released in full.
2. Charles Wolfson. Mr. Wolfson represented objectors from Australia. He filed a brief on their behalf (R. 166), and presented argument at the fairness hearing. He was required, of course, to consult with clients and attend relevant negotiation sessions, and we do not mean to suggest that his work was limited to what is reflected in the docket. Along with other objectors, his work resulted in enhancement of the settlement for foreign claimants. After approval of the settlement, Mr. Wolfson was not involved in enforcement proceedings, with one exception, in which he successfully argued that the Foreign Fracture Panel had improperly capped recoveries for foreign fracture victims. (R. 464, Objections to Approval of Foreign Fracture Panel Compensation Formulae). In sum, Mr. Wolfson's work, although not as extensive as many of the other counsel's, was competent, effective, and beneficial to the class.
Mr. Wolfson submitted an itemization of his time and expenses, in which he claimed 286.6 hours and $10,350 in expenses. (See R. 560, at Exhibit Y, Supplemental Application for Award of Attorney's Fees and Expenses). Although Messrs. Wolfson and Chesley have refused to disclose their fee-sharing agreement, the record contains a hint as to what that agreement provides. Mr. Saul has stated his understanding in a recent pleading that Mr. Wolfson's fee-sharing agreement is substantially similar to his: between $400,000 and $500,000 depending on the amount of the overall fee award. (R. 865, at 4, Motion by Special Counsel Lewis J. Saul). If this is correct, then Mr. Wolfson's fee amounts to between $1359 and $1708 per hour, which would present the same "bloating" problem as Mr. Magaña's fee arrangement if, as is only logical, Mr. Chesley sought to recover his (over)payment to Mr. Wolfson in his fee application. Thus, Mr. Wolfson's situation also illustrates why full disclosure should be required.
3. James Capretz and His Former Law Firm, Capretz &
Kasdan. Mr. Capretz' former law firm, Capretz & Kasdan, represented objectors to the original settlement. Since the dissolution of Capretz & Kasdan, Mr. Capretz, as "Special Counsel," has worked individually on matters concerning implementation of the settlement. Both Capretz & Kasdan and Mr. Capretz filed fee applications for $2 million each. Although each has done substantial work in connection with the settlement, both of these applications were opposed by Crane as excessive. (R. 652, at 43-46, Memorandum in Partial Opposition to Fee Applications of Class Counsel and Special Counsel James Capretz). Capretz & Kasdan's $2 million fee request, by the firm's own calculation, represented their full hourly rates, plus a multiplier of approximately 5.8. (Id.); compare Bowling, 927 F. Supp. at 1042 (noting that fee award to class counsel below representing a multiplier of more than 2 was "generous . . . to put it mildly"). Mr. Capretz' individual fee request was solely for work done after the settlement became final, and thus involved no risk of non-recovery (i.e., no contingency). Mr. Capretz' lodestar, without any deductions, came to approximately $100,000. Thus, his $2 million request represented a multiplier of approximately 20, or, using the number of hours claimed by Mr. Capretz, an hourly rate in excess of $4600. (R. 652, at 46, Memorandum in Partial Opposition to Fee Applications of Class Counsel and Special Counsel James Capretz, citing R. 610, at Exhibit B, Capretz Fee Application).
After the Capretz fee requests were formally challenged by Crane (R. 652, at 43-46, Memorandum in Partial Opposition to Fee Applications of Class Counsel and Special Counsel James Capretz), and the district court held its fee hearing, Mr. Capretz and his former law firm entered into fee-sharing agreements with Mr. Chesley. These agreements remain secret, and, we have been informed by class counsel, were not even provided to the court in camera. Under these circumstances, we believe that the Capretz-Chesley agreements represent some compromise between the immense $4 million requests that counsel felt the need to abandon and an amount bearing some relation to the work performed. Thus, it is imperative that the class members have an opportunity to review these agreements and to evaluate their relationship to the overall fee request.
4. The Pennsylvania Class Objectors. As described more fully above (supra at 5-8), at one juncture, class counsel agreed that the PCO's attorneys, but not the clients themselves, would be paid a whopping $3.25 million by the defendants plus $750,000 by Mr. Chesley, solely in exchange for dropping their objections to the settlement. These developments occurred largely in a Pennsylvania state court, without notice to most of the attorneys of record below (including those representing Crane), or to the class members more generally. While the $4 million fee could only be defended on the ground that the PCO's attorneys contributed to the settlement (see generally R. 334, Transcript in Taylor v. Shiley), Mr. Chesley now argues that the PCO provided no benefit to the class members and that their attorneys are entitled to nothing. (See Footnote 10) Moreover, as the Pennsylvania trial court recognized in severely questioning this arrangement (see R. 334, at 45-53, Transcript in Taylor v. Shiley), any payment to the PCO's attorneys would have been generated by the value of the claims of the putative Pennsylvania class members. Thus, the additional amounts that the defendants and Mr. Chesley were apparently willing to pay many months after the district court had given the settlement final approval should have been considered the property of the class, subject to division between class recovery and attorney's fees by the district court in Cincinnati.
To be blunt, something is quite peculiar about these goings-on. For present purposes, however, Mr. Chesley's decision to pay the PCO's attorneys $750,000 out of his fee--another amount that he would have had to "cover" in his fee request--underscores the need for public disclosure of all the fee-sharing arrangements in this case. In that manner, Crane as well as the other class members from whom class counsel has hidden his fee agreements, will have a full opportunity to comment on class counsel's fee request.
For the foregoing reasons, the decision of the district court denying Crane access to class counsel's fee-sharing agreements should be reversed.
Paul Alan Levy
Public Citizen Litigation Group
1600 20th Street, N.W.
Washington, D.C. 20009
Attorneys for Intervenor-Appellants/Appellees Gary Crane, et al. September 10, 1996
1 For the Court's convenience, citations to record materials that have been designated for the joint appendix in this appeal are underlined. Record materials contained in the joint appendix in the related cases argued on August 13, 1996, Case Nos. 94-4322 and 95-4054, are highlighted in bold type.
2 In addition to the four attorneys listed above, attorney James Capretz and his former law firm of Capretz & Kasdan filed fee applications separate from class counsel, which alone totaled $4 million and which Crane opposed as grossly excessive. (R. 281, Motion by Capretz & Kasdan; R. 610 Supplemental Application). After the hearing on fees, but prior to the district court's decision, Capretz and his former law firm also entered into secret fee-sharing agreements with class counsel, and thus the separate $4 million fee request was withdrawn. Access to the Capretz fee-sharing agreements is also sought in this appeal.
3 The same concerns were raised at the in-chambers conference before Judge Spiegel:
THE COURT: Now, I guess I should ask this question, Mr. Green. You held -- it was your opinion that the settlement was completely inadequate that had been negotiated by Chesley and lead counsel over here in the federal case, but you're satisfied now that it's an adequate settlement for your clients in Pennsylvania? You understand me?
MR. GREEN: Well, Your Honor, let me answer it this way. My opinion must be tempered by other factors including the risk of succeeding on appeal, the risk of what will happen if I didn't succeed on the appeal back in Pennsylvania, plus the impact the delay will have on my clients. Based on these considerations and based on the direction that we were given from the clients, we have decided to withdraw the appeal. (R. 310, at 16-17, In-Chambers Transcript).
4 See also id. at 10 (Mr. Chesley explaining to Judge Spiegel that, once the fee arrangement is approved by the Pennsylvania court, the PCO would be gone forever: "And also one other thing, Your Honor, and I want to make sure it's clear. Mr. Green and Mr. Wapner will have no more dealings in the Bowling case").
5 We say "apparently," because the record does not formally reveal that the $4 million fee arrangement was rejected by the Pennsylvania court. The record reflects that court's skepticism, and contains no indication that the deal was approved. The PCO's continued appeals make clear that the fee arrangement was never consummated. It is also clear that the promised $750,000 payment to the PCO's attorneys from Mr. Chesley's fee, to which Judge Spiegel apparently did not object (see generally R. 310, In-Chambers Transcript), was not sufficient, in itself, to persuade the PCO to drop their appeals.
6 As to Mr. Saul, the issue is moot. Mr. Saul filed a copy of the actual agreement between himself and Mr. Chesley with the Court on May 7, 1996 in support of his motion to enforce that agreement. (R. 865, Motion by Special Counsel Lewis J. Saul). We understand that the dispute between Mr. Saul and Mr. Chesley has been resolved.
7 In addition, by disclosing the fee agreements with the PCO's attorneys to Judge Spiegel and the state court in Pennsylvania, Mr. Chesley himself acknowledged the relevance of fee-sharing agreements in class litigation.
8 In Agent Orange, the district court had not been informed of the fee-sharing agreement until four months after a settlement was reached--ten months after the fee agreement was made. See 818 F.2d at 217-18.
9 Ohio Rev. Code Ann. DR 2-107(A) (Baldwin 1995) provides in full:
(A) Division of fees by lawyers who are not in the same firm may be made only with the prior consent of the client and if all of the following apply:
(1) The division is in proportion to the services performed by each lawyer or, if by written agreement with the client, all lawyers assume responsibility for the representation;
(2) The terms of the division and the identity of all lawyers sharing in the fee are disclosed in writing to the client;
(3) The total fee is reasonable.
10 On the other hand, Crane argued below that the PCO's attorneys were entitled to a more modest fee because, like other objectors' attorneys, their work benefitted the class. (See generally R. 653, Memorandum of Gary Crane, et al., in Partial Opposition to Supplemental Application of Pennsylvania Attorneys for Attorneys Fees and Reimbursement of Costs and Expenses).