District Court Order Reducing Fee Award from 8.5% Negotiated with Lead Plaintiff to 3% of Value of Securities Class Action Settlement not Subject to Attack on PSLRA Grounds because Argument Waived as not Raised below and Attorney Fee Award is Reasonable Second Circuit Holds
Plaintiffs filed a class action complaint against Nortel Networks alleging violations of federal securities laws; specifically, the class action alleged that defendant “knowingly and recklessly issued false and misleading statements and engaged in various accounting manipulations causing its stock price to be inflated between October 24, 2000 and February 15, 2001.” In re Nortel Networks Corp. Securities Litig., 539 F.3d 129, 130-31 (2d Cir. 2008). After several years of litigation, the parties reached a settlement of the class action (Nortel I); the district court gave final approval to a class action settlement valued at more than $700,000,000. Id., at 131. As part of the settlement, class counsel negotiated a fee award under the Private Securities Litigation Reform Act of 1995 (PSLRA) that provided for an attorney fee award of 8.5%. Id., at 130. At the same time, Nortel settled another class action involving similar securities claims filed on behalf of a separate class of plaintiffs (Nortel II); the value of that class action settlement also was valued at more than $700 million. Id., at 131. Class counsel in each class action sought an award of attorney fees: the district court in Nortel II awarded approximately 8% of the total class recovery in fees; the district court in Nortel I awarded approximately 3% of the total class recovery in fees. Id. Class counsel in Nortel I, Milberg Weiss & Bershad LLP, appealed the fee award, id., at 130, and the Second Circuit affirmed.
The district court based its attorney fee award on its independent analysis of the factors set forth by the Second Circuit in Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000); this analysis led the district court to conclude that an 8.5% fee award would be excessive and that a 3% fee award – amounting to approximately $34 million – would be “fair and reasonable.” In re Nortel Networks, at 131-32. On appeal, “Milberg argues that the district court erred by disregarding the purportedly altered fee-award scheme under the [PSLRA] pursuant to which Milberg’s negotiated fee with the lead plaintiff would have been presumptively reasonable.” Id., at 130. The Second Circuit held that Milberg waived the argument by failing to raise it in the district court. See id., at 132-34. Turning to the reasonableness of the fee award itself, the Second Circuit held that it “will not overturn a district court’s award of attorneys’ fees ‘absent an abuse of discretion, such as a mistake of law or a clearly erroneous factual finding.’” Id., at 134 (citation omitted). The Circuit Court noted that the district court properly considered each of the relevant factors, and that it “carefully weighed” those factors in making its award. Id. The Court rejected Milberg’s argument that “the district court abused its discretion in part because it awarded a fee significantly below those awarded in other cases where we have upheld higher percentage fees and higher lodestar multipliers” and “erred by not using the 8% Nortel II award as a ‘benchmark,’” id. While the award was “toward the lower end of reasonable fee awards,” and while the Circuit Court was “troubled by the district court’s failure to discuss Nortel II and why it believed the fee award here to be more reasonable,” the question on appeal was “not whether we would have awarded a different fee, but rather whether the district court abused its discretion in awarding this fee.” Id. Accordingly, the Circuit Court affirmed the district court’s attorney fee award. Id.
NOTE: The Second Circuit stated, “We leave open the question of how much weight should be given to fees agreed upon by PSLRA lead plaintiffs. We expect, however, that district courts will give serious consideration to negotiated fees because PSLRA lead plaintiffs often have a significant financial stake in the settlement, providing a powerful incentive to ensure that any fees resulting from that settlement are reasonable. In many cases, the agreed-upon fee will offer the best indication of a market rate, thus providing a good starting position for a district court’s fee analysis.” In re Nortel Networks, at 133-34 (citations omitted).