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MCLENDON v. CONTINENTAL GROUP

December 15, 1994

CECIL McLENDON, et al., Plaintiffs,
v.
THE CONTINENTAL GROUP, INC., et al., Defendants. ALBERT J. JAKUB, et al., Plaintiffs, v. THE CONTINENTAL GROUP, INC., et al., Defendants. ROBERT GAVALIK, et al., Plaintiffs, v. THE CONTINENTAL GROUP, INC., et al., Defendants.


H. LEE SAROKIN, U.S. CIRCUIT JUDGE


The opinion of the court was delivered by: H. LEE SAROKIN

Sarokin, Circuit Judge1

 Introduction

 In matters in which the court is permitted by statute to award attorneys' fees, the amount of the award must serve varied and multiple purposes. Counsel who have served and succeeded should be reasonably compensated. The award should serve to induce and encourage other counsel to undertake similar cases. The unsuccessful party should be required to pay such fees in order not to reduce the plaintiffs' award. The compensation received by plaintiffs should make them whole to the extent possible and should not be diminished by the expense of obtaining it. Litigants without the financial resources should have the means to pursue valid claims. The method and formula for determining such fees should be accomplished with the least possible expense and judicial time. And finally, the amount of the award should promote public confidence in the judicial system. It should not be viewed as a windfall to lawyers, but rather as just and reasonable compensation for the time spent, the delays encountered, the risks assumed, and the results obtained.

 This court is in the unique position of having been chair of the Third Circuit Task Force on Court Awarded Attorney Fees, see 108 F.R.D. 237 (1985), cited frequently by the Special Master and all counsel. Many of the conclusions contained in that report are applicable here.

 Initially the Task Force enumerated the deficiencies of the lodestar method of calculating fees. It has created satellite litigation and necessitated time-consuming review of billing records and other documentation. It is virtually impossible for a court in retrospect to determine what work was necessary or reasonable. In this matter the court has had the extraordinary assistance of the Special Master. However, the problem exists even if it is delegable.

 The awards are frequently inconsistent and lack uniformity. Determining market or customary rates is difficult, inefficient, and time-consuming. Most significantly, payment based upon the number of hours devoted discourages early settlement and encourages abuses and unnecessary work. Finally, there is a substantial lack of predictability, leaving counsel uncertain as to how they will be compensated. This case is a prime example of that uncertainty.

 Undoubtedly aware of the foregoing litany of problems arising from the use of the lodestar method, the United States Supreme Court in City of Burlington v. Dague, U.S. , 112 S. Ct. 2638, 120 L. Ed. 2d 449 (1992), nevertheless has recently reaffirmed its applicability in statutory fee cases and has virtually precluded enhancement for the risks undertaken by counsel. Plaintiffs' counsel argue that this ruling has no applicability to common fund cases; that this is a common fund case; and thus they are entitled to enhancement or a percentage of the fund compensating them for the success achieved and the risks endured.

 It is undisputed that defendants faced liability for statutory fees and that the amount paid in settlement included, in part, payment for that potential liability, but not allocated as such. Indeed, any such allocation might be unethical and would be subject to court review and approval in any event. The primary issue before the court is whether the Dague restrictions apply under these circumstances. Should plaintiffs' counsel be entitled to a larger fee if it is the plaintiffs, in effect, who are paying it rather than the defendants? The court believes that the answer to that question is in the affirmative.

 In a statutory fee case, by requiring the defendant to pay fees, the plaintiff is made whole and the recovery is not diminished by the expense incurred in obtaining it. If risk of success were factored into the calculation, the stronger the defense -- the greater the fee. Thus, a defendant who had a greater justification for defending a case would be penalized more than one who had no or a weak defense. Thus, with considerable justification the Supreme Court has reasoned that the risk undertaken by plaintiff's counsel should not be assumed or compensated by the unsuccessful defendant. However, no like concerns exist when the compensation is paid by the plaintiff, even though the original source of the fund comes in part from the settlement of the statutory fee claim.

 To apply the same rule to plaintiffs would infer an agreement by lawyers to work for nothing if they did not succeed, and be paid only for their time, if they did. To the extent possible a fair and reasonable fee should replicate the marketplace. It is difficult to envision any lawyer agreeing to such a bad bargain.

 No one could review the record in this case and help but conclude that the risks were monumental, the dedication and sacrifice of counsel heroic, the quality of performance superb, and the result extraordinary. It is inconceivable to this court that the Supreme Court or Congress intended that after a decade of toil on behalf of this class, counsel should receive compensation solely predicated upon the time devoted without recognition of the risks undertaken, the sacrifices endured and the exceptional result achieved.

 Thus, in the court's view, all that remains is to determine how those factors are to be compensated. The Special Master makes the unique and intriguing suggestion that different enhancement should apply to different time periods -- that the multiplier should diminish as the risk diminished. That suggestion has great appeal, since a substantial amount of the work in this matter was performed when the risk of no recovery was minimal. However, until the settlement was consummated, the amount of recovery was very much at risk. Furthermore, the risk, if any, in trying to replicate the marketplace, should be determined from the outset. Counsel would not have the right to withdraw except in unique circumstances, no matter in what direction the litigation progressed. In any event, the court is satisfied that plaintiffs' counsel are entitled to enhancement at least until the moment of settlement and to their average historic rates plus interest thereafter in implementing the settlement.

 The Third Circuit Task Force strongly recommended the negotiation of a contingent fee at the outset of the litigation with the class represented by independent counsel for that specific purpose. The agreement would be subject to court approval. Such an arrangement would have the obvious advantage of avoiding the calculation and determinations that the lodestar formulation requires. That avenue was not pursued here, because the Report did not exist at the time this action was instituted.

 The question remains whether the court should attempt to arrive at a percentage in retrospect, recognizing that all risks have been resolved and the ultimate recovery is known. The obvious difficulty with such an approach is that it is virtually impossible to envision what agreement the parties would have made a decade ago. Furthermore, with the facts now known, a court may simply adjust the percentage to arrive at a gross fee which the court deems to be fair and reasonable under all of the circumstances. (The same risk, of course, also applies in the choice of a multiplier.) Because plaintiffs' counsel has requested that the court fix a percentage, the court will consider the practicability of this method and its usefulness as a check against the multiplier. However, the order of the court will be based upon the lodestar and multiplier.

 Before the court is the Report of the Special Master Concerning Fees to the Attorneys for the Class, and the objections of the petitioners and the intervenors to that Report. Having discussed the general parameters which must guide the court's consideration of these matters, the court will address the specific recommendations and the objections thereto.

 I. Background

 The factual and procedural background of this litigation is set forth in this court's previous opinions in this matter. See e.g., McLendon v. Continental Group, 802 F. Supp. 1216 (D.N.J. 1992); McLendon v. Continental Group, 749 F. Supp. 582 (D.N.J. 1989). Briefly, this complex class action litigation began with the filing of a number of class actions across the country, among them Gavalik v. Continental Can Co., filed in 1981; Jakub v. Continental Can Co., filed in 1982; and McLendon v. Continental Group, filed in this district in 1983. These cases were all based upon the same general allegation that Continental Can Co. operated a "liability avoidance plan" to prevent employees from becoming eligible for employee benefits, in violation of § 510 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1140, and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et. seq. Two trials were conducted, both followed by appeals. In 1987, the United States Court of Appeals for the Third Circuit held that Continental Can had implemented its Liability Avoidance Plan at Plants 72 and 478 Pittsburgh in violation of ERISA. Gavalik v. Continental Can Co., 812 F.2d 834 (3rd Cir.), cert. denied, 484 U.S. 979, 98 L. Ed. 2d 492, 108 S. Ct. 495 (1987). In 1989, the Third Circuit Court of Appeals affirmed this court's ruling that Continental Can's Liability Avoidance Program was the determining factor in the layoffs of 315 class members in the McLendon suit who were employed at defendant's 73 St. Louis plant. McLendon v. Continental Can Co., 908 F.2d 1171 (3rd Cir. 1990).

 The McLendon, Gavalik, and Jakub cases were consolidated in this district in 1989. In July, 1989, this court appointed Professor George L. Priest of the Yale Law School as Special Master to assist the parties in the settlement of damage claims and remaining issues. In July, 1992, the court approved the Settlement and Distribution Plan the parties had negotiated. McLendon, 802 F. Supp. at 1222-23. Pursuant to the settlement, defendants paid over $ 400 million into a Settlement Fund, extinguishing all liability with respect to all claims. Thus, the Settlement Fund is responsible for payment of all fees to the class attorneys.

 After many years of involvement with this complex litigation and its settlement, the court now turns its attention to the compensation of the attorneys who have labored so long in the representation of the plaintiff class. In 1992, those attorneys filed two fee petitions: that of Plotkin & Jacobs, Ltd. ("Plotkin firm"), attorneys for the McLendon class, and that of Litman Litman Harris and Brown ("Litman firm"), counsel for the Gavalik and Jakub classes. Other attorneys who worked on behalf of the class at various times have submitted their requests for fees through these two petitions. The United Steelworkers of America (USW) has intervened on its own behalf and on behalf of 61 class members (the "intervenors"), in opposition to the petitions.

 The fee petitions were referred to the Special Master (the "Master") for a report and recommendation as to their disposition. On July 19, 1994, the Master submitted to the court the Report Concerning Fees to the Attorneys for the Class (the Report). Thereafter, the petitioners and the intervenors submitted their objections to the Report. Extensions were granted to allow further submissions.

 II. Standard of review

 Pursuant to Rule 53(e) of the Federal Rules of Civil Procedure, the Master's factual findings are entitled to deference and will be accepted unless they are clearly erroneous. Fed. R. Civ. P. 53(e)(2); Kyriazi v. Western Electric Co., 647 F.2d 388, 396 (3rd Cir. 1981). "A district court's review of the master's proposed conclusions of law, however, is plenary." Apex Fountain Sales v. Kleinfeld, 818 F.2d 1089, 1097 (3d Cir. 1987). See also Monmouth County Correctional Institution Inmates v. Lanzaro, 695 F. Supp. 759, 761 (D.N.J. 1988).

 III. The Existence of a Contract

 At the outset, the court must address the intervenors' claim that the USW, through its general counsel Bernard Kleiman, reached an express contract with Robert Plotkin on October 19, 1982 regarding representation in the nation-wide McLendon litigation, and that this contract governs the Plotkin firm fee petition. The USW claims that Mr. Plotkin agreed not to seek compensation on the basis of a percentage of any recovery, and that the USW would have authority to approve any fee request in advance. Declaration of Bernard Kleiman of Sept. 4, 1992, at P 28 (hereinafter "Kleiman Dec."). As evidence purporting to show the existence of this agreement, the USW proffers Mr. Kleiman's notes taken during a meeting on October 19, 1982; its claim that the USW maintains a policy prohibiting percentage contingency awards for outside counsel; and statements by various USW officials following the settlement of the litigation. See Kleiman Dec.; Report at 5.

 Although accepting the authenticity of Mr. Kleiman's notes and the existence of a USW policy against percentage contingency agreements with outside counsel, the Master found that no contract existed with the Plotkin firm with respect to fees for this litigation. Report at 6. The Master concluded that an agreement of great consequence intended to bind the parties far into the future must be memorialized with a firmer expression of the intent of both parties than can be gleaned from the notes taken unilaterally by one of the parties without acknowledgement by the other. In addition, the Master considered relevant the absence of any allegation of a similar agreement with Litman firm regarding fees for the Gavalik/Jakub litigation. Report at 5-6.

 The intervenors object to the finding that no contract existed regarding the McLendon fees. Intervenors Objections to, and Motion to Accept in Part, The Special Master's Report (hereinafter "Intervenors Obj.") at 9-14. The USW argues that it would have had no difficulty in finding other competent outside counsel who would have agreed to take the case on the condition that counsel agree not to seek fees based on a percentage of the recovery. Intervenors Obj. at 11; Kleiman Dec. at PP 13, 25-26, 31-32; Declaration of USWA Associate General Counsel Carl Frankel, P 10-11. Further, the intervenors argue that the Master's conclusion that the evidence they present is insufficient to prove the existence of the alleged contract is based on a misapprehension of the law of contracts. Intervenors Obj. at 12.

 Specifically, the intervenors rely on the principle that a party may be held to have agreed to orally presented terms where that party subsequently acts consistently with the acceptance of those terms. See Ponzoni v. Kraft General Foods, Inc., 774 F. Supp. 299, 315 (D.N.J. 1991), aff'd, 968 F.2d 14 (3rd Cir. 1992) (when acceptance is by conduct, the court must look to the objective circumstances rather than the subjective intent of the party); Project Development Group, Inc. v. O.H. Materials Corp., 766 F. Supp. 1348, 1352 (W.D.Pa. 1991), aff'd, 993 F.2d 225 (3rd Cir. 1993) (existence of oral contract is a question of fact). The intervenors argue that the fact that Mr. Plotkin accepted the case without specifically repudiating the conditions Mr. Kleiman stated is sufficient to bind Mr. Plotkin to those conditions. Intervenors Obj. at 12. However, the intervenors submit no objective evidence that Mr. Plotkin knew or understood that he was binding himself to the specific conditions Mr. Kleiman allegedly proposed. The fact that Mr. Kleiman presents notes from a telephone conversation outlining these conditions does not prove that the conditions were in fact understood and accepted by Mr. Plotkin. Nothing about Mr. Plotkin's actions in accepting the case indicates specific acceptance of these alleged terms. Therefore, the court adopts the Master's finding that no contract existed with Mr. Plotkin as to the McLendon fees. *fn2"

 In the alternative, the intervenors argue that the court should enforce the terms of the alleged agreement under an estoppel theory:

 
Assuming Mr. Kleiman's notes are authentic, as the Special Master found, Mr. Plotkin's failure to reject Mr. Kleiman's conditions expressly, knowing that the USWA would reasonably rely on his silence as acquiescence, must estop petitioners from now disputing that those conditions are controlling.

 Intervenors Obj. at 13-14 (citing Bechtel v. Robinson, 886 F.2d 644, 650-52 (3rd Cir. 1989) ("'[equitable] estoppel may arise when a party by his conduct intentionally or unintentionally leads another, in reliance upon that conduct, to change position to his detriment'") (citation omitted); and Green v. Interstate United Management Services Corp., 748 F.2d 827, 830-31 (3rd Cir. 1984) (outlining Pennsylvania law on promissory estoppel). There is no evidence that the intervenors relied upon any promise made by Mr. Plotkin. Nor is there any evidence that the intervenors performed any services in reliance on any such promises. The services performed, the reliance if any, and the change in position were all on the part of the attorneys. Promissory estoppel is meant to protect those who rely and act based upon an oral promise, not the promisor. Accordingly, the court accepts the Master's finding that no contract existed, and declines to enforce the terms the intervenors allege on the basis of an estoppel theory.

 IV. Intervenors' motion to strike affidavits

 By motion dated August 5, 1994, the intervenors request the court to strike statements contained in affidavits supplementing the petitioners' objections to the Master's Report *fn3" and ask that the parties be afforded an opportunity to respond to the objections. The statements describe comments allegedly made by the Master on March 8, 1994 and May 26, 1994 in discussions concerning the award of fees.

 Intervenors maintain that the alleged statements are untimely, irrelevant, and inadmissible under F.R.E. 408 (statements during settlement discussions) and 801 (hearsay), and that discussions of a specific award of fees was not disclosed to the class before the Fairness Hearing.

 The court's disposition of the fee petitions does not rely on statements allegedly made in settlement discussions as to the anticipated fees, and thus, the issue is moot.

 The motion to strike is denied. Intervenors' request for an opportunity to respond to the objections is also denied. *fn4"

 V. The Statutory Fees/Common Fund Distinction

 The threshold legal issue is whether the instant petitions are more appropriately characterized as ones for statutory fees or for a common fund fee award. This issue depends on whether the underlying proceeding is a "statutory fees" or "common fund" case. The distinction is important because different considerations inform the determination of a reasonable fee in these two types of cases. A brief review of the development of the two types of fee awards and the different considerations applicable to each provides helpful background for the court's analysis.

 A. Fee Awards in Common Fund and Statutory Fee Cases

 Traditionally, litigants in the United States have borne their own legal fees. However, courts began to develop exceptions to this "American Rule," drawing on their equitable powers. See Alyeska Pipeline Service Co. v. Wilderness Soc., 421 U.S. 240, 259, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975). For more that a century, courts have exercised their equitable powers to award fees to attorneys from common funds they created, obtained, preserved or increased for the benefit of others. See Trustees v. Greenough, 105 U.S. 527, 536, 26 L. Ed. 1157 (1882); Sprague v. Ticonic National Bank, 307 U.S. 161, 164, 83 L. Ed. 1184, 59 S. Ct. 777 (1939). This type of "common fund" award was meant to prevent the unjust enrichment of those who benefitted from the fund at the expense of those who helped create it or made it available. See Greenough, 105 U.S. at 536; Task Force Report, 108 F.R.D. at 241.

 The other major exception to the American Rule arises where plaintiffs prevail in cases brought under statutes that specifically grant to successful plaintiffs the right to recover their reasonable attorney's fees from the defendant. Such statutory fee-shifting provisions became increasingly popular after the Supreme Court limited the power of courts to award fees to attorneys who brought cases intended to vindicate important public interests under a "private attorney general" theory. See Alyeska Pipeline, supra; Ruckelshaus v. Sierra Club, 463 U.S. 680, 684, 77 L. Ed. 2d 938, 103 S. Ct. 3274 (1983) (noting the existence of over 150 federal fee-shifting provisions).

 Many cases in which courts were called upon to make reasonable fee awards were class actions such as this one. In determining the amount of a reasonable fee, most courts relied heavily on the size of the fund obtained or the amount of benefit produced for the class, which often resulted in strikingly large fee awards. Task Force Report, 108 F.R.D. at 242. The Third Circuit proposed an alternative to the percentage approach in Lindy Brothers Builders, Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161 (3rd Cir. 1973) ("Lindy I"), which described the now familiar "lodestar" method in which a court multiplies the number of hours reasonably expended on the litigation by a reasonable hourly rate for the attorney(s). This "lodestar" amount may then be increased or decreased based upon features of the particular case, such as the degree of contingent risk. The Fifth Circuit proposed a different alternative involving the evaluation of 12 factors set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974), including the time and labor required; novelty and difficulty of the legal questions; the preclusion of other employment by the attorney due to acceptance of the case; whether the fee is fixed or contingent; the amount involved and the results obtained; and other factors.

 The United State Supreme Court endorsed the Lindy approach in statutory fee-shifting cases, noting that the lodestar provides "an objective basis on which to make an initial estimate of the value of a lawyer's services." Hensley v. Eckerhart, 461 U.S. 424, 433, 76 L. Ed. 2d 40, 103 S. Ct. 1933 (1983). See also Blum v. Stenson, 465 U.S. 886, 897, 79 L. Ed. 2d 891, 104 S. Ct. 1541 (1984) (in fee-shifting case, lodestar is "presumed to be the reasonable fee"). In the years since it has become popular, however, problems with the Lindy method have surfaced. As stated at the outset of this opinion, the Third Circuit Task Force outlined many criticisms of the Lindy approach, including the charge that it requires more work from the already overtaxed judicial system; that its elements are insufficiently objective; that it produces widely disparate results; that it creates an unwarranted impression of mathematical precision; that it is subject to manipulation; that it leads to certain abuses, such as excessive hours spent on tasks and duplicative work; that it creates a disincentive to settle early, and deprives courts of the discretion to structure awards so as to encourage desirable objectives such as early settlement; that it works to the disadvantage of the public interest bar because lodestar figures tend to be set much higher in securities cases and the like than in cases promoting social objectives such as civil rights; and that despite the apparent simplicity of the Lindy formula, confusion and lack of predictability remain in its administration. Task Force Report, 108 F.R.D. at 246-249. While the Lindy approach remains the starting point in statutory fee cases, the Task Force recommended a return to the percentage-of-the-fund approach in common fund cases.

 Since the Task Force issued its report, a number of courts have accepted its recommendation that fees in common fund cases be determined according to a percentage of the fund. See e.g., Camden I Condominium Ass'n v. Dunkle, 946 F.2d 768, 774 (11th Cir. 1991) (establishing rule in Eleventh Circuit that percentage-of-fund approach rather than lodestar would apply in common fund cases); In re Continental Illinois Sec. Litigation, 962 F.2d 566, 572-73 (7th Cir. 1992) (stating preference for percentage method); Weinberger v. Great Northern Nekoosa Corp., 925 F.2d 518, 526 n.10 (1st Cir. 1991) (noting that since there was no common fund, appellate court could not fault lower court's choice of lodestar method). Others have rejected the suggestion, concluding that the lodestar method should be employed in common fund as well as statutory fee-shifting cases. See e.g., In re "Agent Orange" Prod. Liability Litig., 818 F.2d 226, 232 (2nd Cir. 1987). Still more have left the choice of methodology in common fund cases to the discretion of the district court. See, e.g., Harman v. Lyphomed, Inc., 945 F.2d 969, 975 (7th Cir. 1991); Florida v. Dunne, 915 F.2d 542, 545 (9th Cir. 1990); Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 272 (9th Cir. 1989); Brown v. Phillips Petroleum Co., 838 F.2d 451, 454 (10th Cir.), cert. denied, 488 U.S. 822, 102 L. Ed. 2d 43, 109 S. Ct. 66 (1988). Some courts have held that even if a common fund is produced in a case that originated under a fee-shifting statute, courts still may use a percentage-of-the-fund approach. See County of Suffolk v. Long Island Lighting Co. ("LILCO "), 907 F.2d 1295, 1327 (2d Cir. 1990); Evans v. Evanston, 941 F.2d 473, 479 (7th Cir. 1991), cert. denied, U.S. , 112 S. Ct. 3028, 120 L. Ed. 2d 899 (1992). See generally Alan Hirsch and Diane Sheehey, The Award and Management of Attorneys' Fees in the Federal Court, Federal Judicial Center (1993).

 Neither the United States Supreme Court nor the Court of Appeals for the Third Circuit has held that courts must utilize a particular methodology in determining appropriate common fund awards. See Swedish Hospital Corp. v. Shalala, 303 U.S. App. D.C. 94, 1 F.3d 1261, 1267 (D.C.Cir. 1993); In re U.S. Bioscience Sec. Litig., 155 F.R.D. 116, 117-118 (E.D.Pa. 1994). Therefore, if this case is a common fund case, the court has the authority to utilize either the lodestar method or the percentage-of-the-fund method, or some combination thereof.

 No matter which method courts have employed, the question remains whether rules and doctrines developed in the context of statutory fee-shifting cases apply in common fund cases as well, or whether differences between the two types of awards make or should make for different rules and doctrines. It is this question which lies at the heart of the present fee dispute, and to which the court will devote its analysis. Before turning to this question, however, the court will address the preliminary question of whether the present fee petitions should be viewed as petitions for statutory fees or for an award from the common fund.

 B. Characterization of the McLendon Litigation

 The Master concludes that "the McLendon/Gavalik litigation is a statutory fee case." Report at 23. He reaches this conclusion on the basis that the cases were originally brought under federal statutes containing fee-shifting provisions, *fn5" and because the lump sum settlement included an amount intended to cover plaintiffs' attorneys' fees. Id. at 23-25. Indeed, the Master reasons that because the Settlement Agreement specifically incorporates a shifting of attorneys' fees that mirrors the statutory provisions, this case must continue to be viewed as a statutory fee-shifting case, despite its settlement for a lump sum. Id. at 25. *fn6"


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