Louisiana Federal District Court Rejects Fifth Circuit Lodestar Approach to Determining Attorney Fee Award for Class Action Counsel and Utilizes Percentage Method Instead
Plaintiffs filed putative class action lawsuits against Educational Testing Service (ETS) seeking damages caused by its errors in grading state-required tests for teacher’s licenses; ETS erroneously reported more than 4000 “false failures” (reports that a person failed the licensing exam when in fact, upon re-scoring of the exam, they had passed) and 23,000 “low” pass scores (reports that a person passed but with a lower test score than, upon re-scoring, they had actually been entitled to receive). In re Educational Testing Serv. Praxis Principles of Learning & Teaching: Grades 7-12 Litig., 447 F.Supp.2d 612, 613-14 (E.D. La. 2006). After the Judicial Panel on Multidistrict Litigation centralized the various lawsuits in the federal court for the Eastern District of Louisiana, id., at 614-15, defense attorneys and class counsel reached a proposed $11.1 million settlement and sought certification of a class for purposes of settlement, id., at 615. Class counsel sought an attorney fee award of 40% of the settlement fund, id., at 618; the district court concluded that the amount sought was unreasonable and held that a “benchmark percentage” should be the starting point for attorney fee awards following the settlement of a class action rather than a lodestar.
In analyzing the attorney fee request, the district court recognized that it “must independently analyze the reasonableness of the attorneys’ fees proposed in the settlement agreement.” In re Educational Testing, at 628 (citations omitted). It also recognized the inherent conflict of interest when the attorney fees are paid from a common fund: “In a common fund settlement, in which the plaintiffs’ attorneys are paid out of the settlement proceeds, the interests of the attorneys conflict with those of the class. Put simply, the more money the attorneys get, the less the class gets.” Id. In the Fifth Circuit, district courts are instructed to consider 12 factors, essentially based on a “lodestar” approach, but the Louisiana district court refused to do so. It concluded that such an approach should no longer be followed due to “increasing criticism because of the practical difficulties in applying it” and the “‘inherent incentive to prolong the litigation until sufficient hours have been expended.'” Id., at 628-29 (citations omitted). The court also noted that “the vast majority” of sister circuits have rejected the lodestar method in favor of “the use of the percentage method.” Id., at 629 (citing cases from the First, Second, Third, Sixth, Ninth, Tenth, Eleventh and District of Columbia Circuits).
Employing this approach to its attorney fee award analysis, the federal court began by determining an appropriate “benchmark percentage” for the case, concluding that 25% was reasonable. In re Educational Testing, at 630. By happenstance, this figure “is also the ‘typical benchmark’ cited by the Manual for Complex Litigation,” id. (citation omitted). The district court then turned to the “time and labor required in this case” and determined that it did not warrant any adjustment from the benchmark: the case was not complex and was not particularly time-consuming. Id., at 630-31. The court also rejected class counsel’s “anecdotal evidence” of the customary contingency fee rate in class action cases. Id., at 631. The court was impressed by the results obtained by class counsel, and ultimately determined that a 29% fee was warranted, id., at 632.
NOTE: We do not discuss the court’s detailed analysis of the fairness, reasonableness and adequacy of the balance of the proposed settlement terms. See In re Educational Testing, at 619-28.