The opinion of the court was delivered by: WOLIN
The Court here decides the petition for attorneys' fees and expenses jointly submitted by plaintiffs' counsel in the class action lawsuit (the "Class Action") against the Prudential Insurance Company of America ("Prudential"). All interested parties have had the opportunity to submit written arguments with respect to the fee petition, and on March 17, 1997, the Court held a public hearing (the "Fee Hearing") at which all interested parties were provided the opportunity to voice either their support or opposition to the fee petition.
At the heart of the Class Action complaint are allegations that, during the time period between 1982 and 1995, Prudential defrauded millions of policyholders by selling them life insurance products through improper sales tactics. In October 1996, plaintiffs and Prudential agreed on the terms of a proposed settlement of the Class Action (the "Settlement Agreement"). The Court recently reviewed and approved the Settlement Agreement as fair, adequate and reasonable. See In re The Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 572, 1997 U.S. Dist. LEXIS 3848 (D.N.J. 1997) (the "Fairness Opinion").
Section K of the Settlement Agreement is entitled "Attorneys' Fees, Costs and Expenses." Pursuant to Section K, the parties agreed, subject to Court approval, that plaintiffs' counsel would make, and Prudential would not oppose, an application for an award of attorneys' fees and expenses not to exceed $ 90 million. Settlement Agreement P K.1.
Under the Settlement Agreement, Prudential is responsible for paying the entire award; payment of the attorneys' fees and expenses will not directly or indirectly reduce, limit or modify the remedies provided to class members through the Alternative Dispute Resolution ("ADR") Process or Basic Claim Relief ("BCR") -- the two remedial options established under the Settlement Agreement.
Id. PP K.1, K.4.
Section K further provides that one-half of the fees awarded, plus all reasonable and documented expenses incurred as of the date of the Fairness Hearing (February 24, 1997), shall be paid within five business days after the Court files an Order approving the Settlement Agreement. Id. P K.2. The parties, therefore, contemplated that once the Court approved the Settlement Agreement and the $ 90 million fee petition, Prudential would immediately pay to plaintiffs' counsel $ 45 million plus expenses. Section K provides that the balance of the attorneys' fees award becomes payable only after all appeals of the Fairness Opinion and fee decision have been adjudicated fully. Id. Finally, Section K provides that lead counsel for the class will be responsible for the allocation and distribution of the attorneys' fees among the various counsel representing plaintiffs. Id.
To establish the value of the benefits or "fund" created under the Settlement Agreement, from which a percentage award could be calculated, plaintiffs' counsel submitted with the Fee Petition the affidavit of Robert Hoyer, the Managing Partner of Arthur Andersen LLP's Life & Health Actuarial Services Group (the "Hoyer Affidavit"). In his affidavit, Hoyer values the settlement at $ 1.987 billion. Hoyer Aff. P 19. Based on this valuation, the requested $ 90 million fee would equal 4.5% of the total fund.
Of the $ 1.987 billion, Hoyer attributes $ 863.7 million to the Task Force plan
and $ 1,123,300,000 to the enhancements built into the plan negotiated by plaintiffs' counsel. Id. P 19. Moreover, Hoyer estimates the value of the BCR at $ 799.6 million and, based on a projected remediation rate of 3% (330,000 remediated claims), calculates the approximate value of the ADR Process at $ 1,187,400,000. Id. PP 6, 11, 15.
Hoyer, however, points out that his valuations are estimates: "The ultimate remediation rate is a key assumption relative to the costs to Prudential of the ADR program. The extent and form of communications to the owners of the 10.7 million eligible policies will influence the actual results." Id. P 13. Later in his affidavit, Hoyer again emphasizes that his valuations are largely based on projections: "The nature of these proceedings is unique and the opinions provided in this affidavit relate to future events which are not under the control of Arthur Andersen LLP and can be influenced not only by the involved parties, but also by external factors. As a result, all values shown in this affidavit should be considered approximations." Id. P 18.
As contemplated by Section K of the Settlement Agreement, Prudential has not opposed plaintiffs' counsel's Fee Petition. See Fee Hr'g Tr. at 13. Additionally, no state's insurance commissioner has opposed the Fee Petition. A few class members, however, have filed objections to the Fee Petition.
The Court will discuss these objections, as necessary and relevant, throughout this Opinion.
In anticipation of the Fee Petition and in order to assist the Court in determining an appropriate award of attorneys' fees, the Court, by Order dated November 6, 1996, appointed an independent fee examiner, Stephen Greenberg (the "Fee Examiner"), to review the Fee Petition and to render a Report and Recommendation.
Pursuant to this Order, the Fee Examiner was given the authority to examine all materials he deemed pertinent to the Fee Petition. The Fee Examiner filed his seventy page Report and Recommendation on February 13, 1997 (the "Fee Report").
Without delving into the reasoning of the Fee Report, the Fee Examiner concluded that the $ 90 million fee request is fair and reasonable and should be awarded to plaintiffs' counsel as contemplated under Section K of the Settlement Agreement. Fee Report at 70.
Krell was the only objector to the Fee Report. As with the objections to the Fee Petition generally, the Court, as necessary, will discuss below Krell's objections to the Fee Report.
For the reasons expressed below, the Court will deny the Fee Petition, as proposed, and will not adopt the Report and Recommendation of the Fee Examiner.
Instead, the Court will award plaintiffs' counsel a bifurcated attorneys' fee that will total no less than $ 45 million and no more than $ 90 million. The fee will be equal to the sum of (1) 11% of the value of Prudential's guaranteed minimum payout under the Settlement Agreement -- $ 410 million, and (2) either (a) in the event that 330,000 election forms are filed requesting relief under the ADR program by June 1, 1997, $ 45 million (less expenses already paid) or (b) in the event the 330,000 ADR elections threshold is not satisfied, 5% of the total actual value of the settlement in excess of $ 410 million. As discussed below, this fee award reflects the structure of the Settlement Agreement and is fair and reasonable under the circumstances of this Class Action.
Finally, the Court will deny the fee petitions brought by the attorneys for objectors Treadway, Parnell and Ginsberg and for objector Beauvias.
II. Judicial Review of Fee Requests / Legal Standards for Assessing a Fee
A district court must thoroughly review the fee application in any class action settlement. See In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 819 (3d Cir.) ("GM Trucks "), cert. denied, 133 L. Ed. 2d 45, 116 S. Ct. 88 (1995). This is true even where the parties to the class action have agreed on an award of attorneys' fees because there exists the "danger . . . that the lawyers might urge a class settlement at a low figure or on a less-than-optimal basis in exchange for red-carpet treatment for fees." Id. 55 F.3d 768 at 820 (quoting Weinberger v. Great N. Nekoosa Corp., 925 F.2d 518, 524 (1st Cir. 1991)). The self-interest of a defendant who is paying both the settlement amount and the attorneys' fees often fails to protect against this danger because "a defendant is interested only in disposing of the total claim asserted against it; . . . the allocation between the class payment and the attorneys' fees is of little or no interest to the defense." GM Trucks, 55 F.3d at 820 (quoting Prandini v. National Tea Co., 557 F.2d 1015, 1020 (3d Cir. 1977)). Accordingly, the Third Circuit has warned that "the 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." Id.
Here, the parties obviated the danger of an actual or apparent conflict of interest on the part of class counsel by negotiating in a manner expressly recommended by the Third Circuit in Prandini and by a Task Force appointed by the Third Circuit to report on the subject of court awarded attorneys' fees. Court Awarded Attorneys' Fees, Report of the Third Circuit Task Force 108 F.R.D. 218, 237 (Oct. 8, 1985).
In Prandini, the Third Circuit rejected a settlement agreement specifying the plaintiff's attorneys' fees. The Court held that class action counsel should not simultaneously negotiate both a settlement and attorneys' fees. Prandini, 557 F.2d at 1021.
The Third Circuit Task Force, however, recognized that the rule established in Prandini "may well tend to discourage settlement . . . [by] making it difficult for the defendant to ascertain precisely what its liability will be, thereby eliminating the very certainty that makes settlement attractive to the defendant." Court Awarded Attorneys' Fees, 108 F.R.D. at 267. Consequently, the Third Circuit Task Force recommended, among other approaches, the following:
The defendant should be permitted to make an offer of settlement that is conditional on a subsequent satisfactory resolution of the question of fees. This type of offer, assuming the fee question is pursued in good faith, usually separates the issues of settlement of the merits and resolution of the fees in a way that should minimize the defendant's reluctance to negotiate. Once again, the theory and objectives of Prandini are preserved and its inhibiting side effects minimized.
The Third Circuit Task Force also suggested that, under certain circumstances, the Court may go so far as to lift the Prandini limitation and to allow the parties to negotiate simultaneously the settlement terms and the attorneys' fees: "The risk of liminal or even subliminal conflicts of interest arising seems to be extremely low when the parties approach the court and request a waiver of Prandini under the trial judge's supervision." Id.
The parties in this case followed the proper procedure. Plaintiffs' counsel and Prudential entered into fee negotiations only after the Settlement Agreement was otherwise negotiated (September 22, 1996) and this Court had authorized a discussion of the fee question (October 11, 1996). Weiss Aff. PP 129, 132, 225; Ashinoff Aff. P 16. Under these circumstances, there is no reason to believe that Prudential's counsel -- having already fixed the other terms of the Settlement Agreement and reserved Prudential's right to back out of the settlement absent satisfactory resolution of the fee issue -- consented to the requested fee for any reason other than their belief in its reasonableness under all of the circumstances of this case.
B. Entitlement to Benefits
The amount of the award of attorneys' fees and expenses is controlled by the Court and is within its sound discretion.
See GM Trucks, 55 F.3d at 783, 821 (citing Lindy Bros. Builders, Inc. v. American Radiator & Standard Sanitary Corp., 540 F.2d 102, 115 (3d Cir. 1976)). Determining an appropriate fee is "far from an exact science." In re Unisys Corp. Retiree Med. Benefits ERISA Litig., 886 F. Supp. 445, 467 (E.D. Pa. 1995); see id. at 467-68 n.46 (quoting Matter of Superior Beverage/Glass Container, 133 F.R.D. 119, 128 (N.D. Ill. 1990) ("The best short statement may be that an award should be reasonably arbitrary -- meaning that there is no magic in the precise final numbers but that they must be reasonable, which is to say, the result of considered, articulated and fair judgments.")). Accordingly, the amount of any fee must be determined upon the facts of each particular case.
Id. at 460 & n.28 (quoting Mashburn v. National Healthcare, Inc., 684 F. Supp. 679, 692 (M.D. Ala. 1988)); id. 886 F. Supp. 445 at 463 (quoting Camden I Condominium Ass'n v. Dunkle, 946 F.2d 768, 775 (11th Cir. 1991)); 1A Conte, Attorney Fee Awards 44 (1993) (citing Hensley v. Eckerhart, 461 U.S. 424, 76 L. Ed. 2d 40, 103 S. Ct. 1933 (1983), and Boeing Co. v. Van Gemert, 444 U.S. 472, 62 L. Ed. 2d 676, 100 S. Ct. 745 (1980) ("The controlling standard for determining attorneys' fees is one of reasonableness under the circumstances of the particular case in light of the results or success obtained . . . . [Such determinations] are incapable of mathematical precision because of the intangible factors that must be resolved in the court's discretion.)).
C. Method for Determining the Fee Award
Relevant law evidences two basic methods for evaluating the reasonableness of a particular attorneys' fee request -- the lodestar approach and the percentage-of-recovery approach. Each has distinct attributes suiting it to particular types of cases. See GM Trucks, 55 F.3d at 821 (citing Court Awarded Attorneys' Fees, 108 F.R.D. at 250-53)). In determining a fee award, the Court must first establish the type of action it is adjudicating and then primarily rely on the corresponding method of awarding fees. See id. While either the lodestar or percentage-of-recovery method should ordinarily serve as the primary basis for determining the fee, the Third Circuit has instructed that it is sensible to use the alternative method to double check the reasonableness of the fee. See id. 55 F.3d at 820, 821.
Courts generally regard the lodestar method, which uses the number of hours reasonably expended as its starting point, as the appropriate method in statutory fee-shifting cases. See id. 55 F.3d at 821. Because the lodestar award is de-coupled from the class recovery, the lodestar assures counsel undertaking socially beneficial litigation an adequate fee regardless of the monetary value of the final relief obtained for the class. See id. The lodestar approach may also be used outside the pure statutory fee case where "the nature of the settlement evades the precise evaluation that is needed for the percentage-of-recovery method." Id. "On the other hand, the lodestar method has been criticized as giving class counsel the incentive to delay settlement in order to run up fees, while still failing to align the interests of the class and its counsel, and for not rewarding counsel incrementally for undertaking the risk of going to trial." Id. (citing John C. Coffee, Jr., Understanding the Plaintiff's Attorney, 86 Colum. L. Rev. 669, 691 (1986)).
The percentage-of-recovery method is used in common fund cases on the theory that the class would be unjustly enriched if it did not compensate the counsel responsible for generating the fund. See id. at 821 (citing Court Awarded Attorneys' Fees, 108 F.R.D. at 250). In the typical case, the Court should apportion the fund between the class and its counsel in a manner that rewards counsel for success and penalizes it for failure. See id. This method resembles a contingency fee in that it awards counsel a variable percentage of the amount recovered for the class. See id. 108 F.R.D. at 819 & n.38.
Notably, courts have relied on "common fund" principles and the inherent management powers of the court to award fees to lead counsel in cases that do not actually generate a common fund. See id. at 821; see also FJC Fees at 52 ("The requirement of a common fund, however, is not applied mechanically."). The rationale behind the percentage-of-recovery method also applies in situations where, as here, although the fee and settlement are separately negotiated and paid, both come from the same source -- here, Prudential. See GM Trucks, 55 F.3d at 821. While the Third Circuit has expressed a preference for use of the percentage-of-recovery method in common fund cases, neither that Court nor the United States Supreme Court has held that use of that method is exclusive or mandated in such cases. See id. ("The ultimate choice of methodology will rest within the district court's sound discretion.").
Here, as in GM Trucks, the attorneys' fees sought are more closely aligned with the common fund paradigm than with the statutory fee paradigm; although the settlement and the attorneys' fees were separately negotiated and will be separately bestowed, Prudential will pay for both. See id. Moreover, as discussed below, a true common fund exists in this case in the form of the guaranteed minimum payout by Prudential. Accordingly, in assessing the requested fee, the Court will rely primarily upon the ...