Class Action Litigation: Avoiding Attorney Fee Recovery Pitfalls Plaintiff and Defense Best Practices Regarding Reasonableness of Fees, Tax Consequences, and Ethical Considerations Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. THURSDAY, JULY 19, 2012 Presenting a live 90-minute webinar with interactive Q&A Elizabeth Erickson, Partner, McDermott Will & Emery LLP, Washington, D.C. Jeffrey S. Jacobson, Partner, Debevoise & Plimpton LLP, New York Amanda Arnold Sansone, Carlton Fields, Tampa, Fla.
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Class Action Litigation:
Avoiding Attorney Fee Recovery Pitfalls Plaintiff and Defense Best Practices Regarding Reasonableness of Fees,
– True “common fund” cases with actual cash distributed
– Cases portrayed as common funds that actually aren’t
• “Lodestar” of hours worked X reasonable hourly rate
– Can be used as stand-alone method or “cross check”
– Often increased by a “multiplier” to compensate for risk
– Courts differ widely on propriety and amount of multiplier
• Reasonableness of fee “determined primarily by reference to the
level of success achieved by the plaintiff.” (9th Cir. 2009)
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Lodestar Multiplier Factors
• Time & labor required
• Novelty & difficulty of issues
• Skill required
• Preclusion of other employment while working on case
• Customary fee for similar work in the community
• Whether fee is fixed or contingent
• Time limits imposed by client or circumstances
• Amount involved and results obtained
• Experience, reputation and ability of attorneys
• Undesirability of the case
• Nature and length of relationship with client
• Awards in similar cases
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From the Defense Perspective
• True common fund cases:
– Fee taken from common fund
– Defendant cares little or nothing about the amount
– Fund can be paid out to class members or charities
• “Fake” common fund cases/claims-made settlements:
– Defendant pays fee separately from class relief
– Fee often is largest item paid by defendant
– Defendant sensitive to fee amount and rationale
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What is a “Fake” Common Fund?
• First scenario:
– Defendant agrees to pay “maximum” amount
– Any funds not claimed revert to defendant
– No different from a claims-made settlement
• Second scenario:
– Plaintiff attempts to value injunctive relief or other non-cash
– Seeks fee based on that value
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What is a “Fake” Common Fund? • Real-world example/Scenario 1:
– Settlement over unwanted text messages providing for $10 per submitted claim, with “maximum” $63 million payment
• Real-world examples/Scenario 2:
– Frosted Mini-Wheats: Donation of $5.5 million “worth” of food items; no indication of how “worth” valued or whether Kellogg would count food it planned to donate anyway
– Nutella spread: $2.5 million made available for cash pmts to class members; “injunctive relief” valued at $3 million
– Sirius XM satellite radio: Sirius agreed not to raise prices for 5 months, assigned $180 million value to this promise
• Courts may not see, or want to see, the sleight-of-hand
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Ninth Circuit Changes the Game
• Prodded by objectors, including the Center for Class Action
Fairness, the Ninth Circuit has closely scrutinized settlements
– Set 25% benchmark (really a cap) on common-fund fees
– In Bluetooth Headsets, refused to grant even a half-lodestar
fee when the fee greatly exceeded the class recovery
– Last week, in Dennis v. Kellogg, Ninth Circuit blasted a fee
request of $2 million in a (mostly) fake-fund case
• Hard to argue with any of these rulings, BUT
• Decisions like this make it harder to resolve “cheap” cases
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9th Cir Case #1: In re Bluetooth Headset
• Claim: Insufficient disclosures that prolonged loud-volume use
The IRS is starting to notice - which affects mostly claimants and defendants.
All parties should understand the law before settling.
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Unless a very specific exception applies, all settlement payments, including attorney fees, are taxable to the claimant.
All payments that are taxable to the claimant must be reported on Form W-2 and/or Form 1099 issued to the claimant. Attorney fees = Form 1099.
Payments are taxable to the claimant even if the check is written out to the attorney, and even if the claimant never receives the money.
Additional Forms 1099 may need to be issued to the attorney, resulting in Forms 1099 totaling more than the settlement amount.
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• As a general rule, settlement payments for attorney fees and costs are taxable to claimants. •Fee structure does not matter. •Even if the claimant owes these amounts to
another. •Even if the claimant never gets the amounts.
• “Assignment of Income” doctrine - attorney fees are the obligation of the claimants, who receive a benefit when they are paid.
• Comm’r v. Banks - 2005 Supreme Court case.
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Physical injury cases - I.R.C. § 104.
◦ Very narrow, must be physical injury or medical expenses.
◦ Damages for emotional distress do not qualify (even if accompanied by physical symptoms). (Did you lose an arm?)
◦ If a non-taxable recovery, attorney fees are also excluded.
Cases where a claimant is not liable for attorney fees.
◦ Again, very narrow.
◦ Fees must actually be the expenses of another person or entity. (Not an attorney!)
◦ Based on IRS Revenue Ruling 80-364, example 3.
◦ In the class action context, this translates to: Opt-out class actions, with no fee agreement.
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Companies must also issue a Form 1099 to the attorney whenever the check is written in a manner that gives the attorney the right to endorse the check.
This may result in the issuance of Forms 1099 to the claimant and the attorney for more than the total settlement amount.