On Appeal from the United States District Court for the Eastern District of Pennsylvania D.C. MDL No. 10-md-01360 and D.C. Civil Action No. 99-cv-01349 (Honorable Stewart Dalzell)
Before: Scirica, Chief Judge,
Fisher and ALARCON*fn1, Circuit Judges
The opinion of the court was delivered by: Scirica, Chief Judge
At issue is whether the District Court abused its discretion in assessing the reasonableness of attorneys' fees requested by class counsel in a § 10(b) securities class action. In all respects but one, the trial judge performed an exemplary analysis. But this factor requires that we vacate and remand.
This is an appeal in the Rite Aid Corporation securities litigation, filed under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq. Class counsel in this complex § 10(b) class action were successful in obtaining a settlement of $126.6 million from outside auditors KPMG LLP and former executives of Rite Aid. The KPMG settlement was one of the highest ever obtained from an accounting firm in a securities class action and resulted in the withdrawal of appeals from the previously negotiated $193 million Rite Aid settlement.
The District Court awarded class counsel, consisting of co-lead counsel Berger & Montague, P.C., Milberg Weiss Bershad & Schulman LLP and other firms representing the class, $31.6 million or 25% of the KPMG settlement fund. The trial judge, who presided over both the Rite Aid and KPMG settlements, believed "it would be hard to equal the skill class counsel demonstrated here." In re Rite Aid Corp. Secs. Litig., 269 F. Supp. 2d 603, 611 (E.D. Pa. 2003) (" Rite Aid II "). The class appeared to agree. Only two of the more than 300,000 class members objected to the fee award. Moreover, studies of comparable cases confirmed the requested fee percentage was within a reasonable range. For those reasons, the District Court denied objector and unnamed class member Walter Kaufmann's challenge to the requested fee award of $31.6 million. Id. at 610-12.
In the course of the litigation, there were two distinct, but inter-related settlements—one with Rite Aid as the primary defendant, see In re Rite Aid Corp. Secs. Litig., 146 F. Supp. 2d 706 (E.D. Pa. 2001) (" Rite Aid I "), and one with KPMG as the primary defendant. See Rite Aid II, 269 F. Supp. 2d 603. The fee award in Rite Aid II is under review, but Rite Aid I provides the necessary context, so we detail it briefly.
The Rite Aid litigation commenced after public disclosures of disappointing earnings and a resulting drop in Rite Aid's share price on March 12, 1999. Thirty-six law firms filed class actions against Rite Aid, its officers and directors, alleging, inter alia, violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Eventually on October 11, 1999, Rite Aid announced that its 1997, 1998, and 1999 financial statements could no longer be relied upon, resulting in a reduction of Rite Aid's previously reported pre-tax earnings.
In June 1999, the trial court appointed lead plaintiffs for the class and approved their selection of class counsel. The court also permitted the class to add Rite Aid's outside auditor, KPMG, as a defendant. The complaint alleged Rite Aid published materially false financial statements, which KPMG erroneously stated were in accordance with generally accepted accounting principles. After the suit was filed, the Department of Justice began its own investigation of Rite Aid's accounting practices which, eighteen months later, resulted in criminal indictments against some Rite Aid officers. The Securities and Exchange Commission also commenced an investigation of KPMG, although no criminal or civil charges were ever brought.
In December 2000, class counsel negotiated a $193 million cash and non-cash settlement with Rite Aid.*fn2 The settlement included Rite Aid and all its former officers and directors except former Chief Executive Officer Martin L. Grass, former Chief Operating Officer Timothy J. Noonan, and former Chief Financial Officer Frank M. Bergonzi. The settlement reserved claims of the class and of Rite Aid against Grass, Noonan, and Bergonzi, as well as against KPMG.
The notice of settlement, disseminated to 300,000 potential class members, advised that class counsel would seek attorneys' fees up to 33 a % of the total recovery. There were no objections to the fee request. At the settlement fairness hearing, class counsel petitioned for a reduced fee award of 25% of the total recovery. In June 2001, the District Court approved the settlement and a fee award of 25%, or $48.25 million. See Rite Aid I, 146 F. Supp. 2d at 734-37.
In September 2001, defendants KPMG and non-settling former Rite Aid officers appealed the Rite Aid I settlement, contending a provision of the settlement barring claims by non-settling parties against the settling defendants was overbroad. The appeal effectively halted distribution of the $193 million partial settlement to class members. Class counsel commenced protracted settlement negotiations with KPMG and the non-settling officers in early to mid-2002. These negotiations culminated in the signing of a memorandum of understanding with KPMG in September 2002 and with the non-settling officers immediately before scheduled oral argument on the Rite Aid I appeal on September 19, 2002. Concluding the settlement, however, proved difficult. In January 2003, the District Court ordered the parties to participate in mediation, which culminated in KPMG entering into a Stipulation and Agreement of Settlement on March 11, 2003.*fn3
On March 13, 2003 and April 8, 2003, the District Court gave preliminary approval to the settlements which included cash payments of $126.6 million*fn4 and withdrawal of all appeals in Rite Aid I. Notice of the settlement was mailed to 300,000 class members, advising that class counsel would request a fee of 25% of the settlement fund. No class members objected to the settlement, but two members, including Kaufmann, objected to the fee request.
Following a fairness hearing on May 30, 2003, the District Court overruled the objections and approved the settlement and fee request. See Rite Aid II, 269 F. Supp. 2d at 610-12. Applying the factors announced in Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975), the District Court found the proposed settlement to be "fair and reasonable under all of the circumstances." Rite Aid II, 269 F. Supp. 2d at 609. With respect to class counsel's fee request, the court found the declaration of Professor John C. Coffee, class counsel's attorneys' fees expert, "most helpful" in assessing the fee request's reasonableness against "the factors... established in In re Prudential Ins. Co., 148 F.3d 283 (3d Cir. 1998) and Gunter v. Ridgewood Energy Corp., 223 F.3d 190 (3d Cir. 2000)." Rite Aid II, 269 F. Supp. 2d at 610. Relying on Professor Coffee's findings, the court noted that statistical data from other class action settlements demonstrated: (1) an average percentage recovery of 31% in securities class actions involving settlements greater than $10 million; (2) a range of median rates from 27% to 30% over the course of a two year period in selected federal district courts; and (3) percentage recoveries between 25% to 30% were "fairly standard" in "mega fund" class actions involving settlements between $100 and $200 million. Id. The court also found significant that only two class members objected to the fee amount and noted class counsel bore a risk of nonpayment in the event KPMG went out of business. Id. at 610-11. The court found class counsel's skill and efficiency in obtaining the settlement weighed in favor of approving the fee request, finding class counsel to be ...