On Appeal from the United States District Court for the District of New Jersey MDL Docket No.1399 D.C. Civil Action Master File No. 00-cv-5364 (Honorable Garrett E. Brown, Jr.).
The opinion of the court was delivered by: Scirica, Chief Judge
Before: SCIRICA, Chief Judge, NYGAARD, Circuit Judge, and YOHN, District Judge*fn1
This is a consolidated appeal by four objectors to an award of attorneys' fees in the settlement of a securities fraud class action. The District Court approved the settlement agreement, including the attorneys' fees provisions. We will affirm.
On October 27, 2000, several plaintiffs filed federal securities fraud actions, alleging the AT&T Corporation and its principal executives violated Securities and Exchange Commission Rule 10b-5 and §§ 10(b) and 20(a) of the Securities Exchange Act of 1934. They alleged defendants made knowingly false statements between October 25, 1999, and May 1, 2000, about AT&T's anticipated performance for the year 2000 to artificially inflate the company's stock price. The District Court appointed the New Hampshire Retirement System, Secure Holdings, Inc., Robert Baker, Mohammed Karkanawi, and Mauline Coon as lead plaintiffs,*fn2 and approved their retained counsel as lead counsel. Plaintiffs filed a consolidated complaint on February 14, 2001.
Defendants filed a motion to dismiss. On January 30, 2002, the District Court denied the motion with respect to the § 10(b) claims against AT&T and its Chief Executive Officer and Board Chairman, C. Michael Armstrong, granted the motion with respect to all claims against other individual defendants, and certified a class. After two years of discovery, including 80 depositions, the District Court granted partial summary judgment for defendants, but concluded a disputed issue of fact existed with respect to whether Armstrong's statements made at a December 6, 1999 analyst conference-projecting 9% to 11% revenue growth for AT&T's Business Services Unit in 2000-were made with actual knowledge of their falsity.
Trial began on October 5, 2004. The jury was selected and impaneled, the parties gave opening statements, and plaintiffs called eleven witnesses. After eight days of jury trial, at the suggestion of the District Judge, the parties began discussing settlement options. Negotiations were successful and the parties entered a tentative settlement agreement. Under the agreement, AT&T agreed to pay the class $100 million by May 1, 2005, in return for complete release of the class's claims. As soon as the funds were deposited into escrow, attorneys' fees and expenses would be paid to class counsel in an amount equal to 21.25% of the settlement fund ($21.25 million), in addition to costs and expenses of $5,465,996.79. The 21.25% fee resulted from a sliding scale formula negotiated between lead counsel and the lead plaintiff New Hampshire Retirement Systems at the beginning of the case. The formula provided attorneys' fees would equal 15% of any settlement amount up to $25 million, 20% of any settlement amount between $25 million and $50 million, and 25% of any settlement amount over $50 million. The plan of allocation required class members to submit claim forms by March 9, 2005. Neither the settlement agreement nor the plan of allocation specified a timeline for payments to class members. Class members have not yet been paid.
On October 26, 2004, the District Court granted preliminary approval of the settlement agreement. Notice was mailed to more than one million potential class members, eight of whom filed objections, including appellants Marion Washburn, William A. Hoffman III, Jacquelynn D. Frame, and Donald J. Frame. The objections related to the attorneys' fees provisions, the form of notice, and certain ERISA claims. There were no objections to the settlement amount. On February 28, 2005, the District Court held a fairness hearing and on April 25, 2005, issued a memorandum opinion granting final approval of the settlement agreement, including the attorneys' fees provisions. The District Court denied objectors' motion for reconsideration.
Washburn, Hoffman, and the Frames now appeal,*fn3 contending the award of attorneys' fees and expenses is unfair and unreasonable because (1) it is excessive, (2) it employs a sliding scale that provides for the fee percentage to increase rather than decrease as the settlement amount increases, and (3) it provides for payment of the full amount of attorneys' fees before class members will receive payment. Objectors ask that fees be reduced to 15% of the settlement fund, in addition to requested costs and expenses, and that the pay-out be staged, with the final installment withheld until class members have been paid.
The District Court exercised jurisdiction over this federal securities fraud action under 28 U.S.C. § 1331. We have jurisdiction to review the District Court's decision under 28 U.S.C. § 1291.
We review a district court's award of attorneys' fees in a securities class action for abuse of discretion. In re Rite Aid Corp. Sec. Litig., 396 F.3d 294, 299 (3d Cir. 2005). "The standards employed calculating attorneys' fees awards are legal questions subject to plenary review, but '[t]he amount of a fee award . . . is within the district court's discretion so long as it employs correct standards and procedures and makes findings of fact not clearly erroneous.'" Id. (quoting Pub. Interest Research Group of N.J., Inc. v. Windall, 51 F.3d 1179, 1184 (3d Cir. 1995)). We require district courts "to clearly set forth their reasoning for fee awards so that we will have a sufficient basis to review for abuse of discretion." Rite Aid, 396 F.3d at 301.
Attorneys' fees are typically assessed through the percentage-of-recovery method or through the lodestar method. See id. at 300. The percentage-of-recovery method applies a certain percentage to the settlement fund. See In re Cendant Corp. PRIDES Litig., 243 F.3d 722, 732 n.10 (3d Cir. 2001). The lodestar method multiplies the number of hours class counsel worked on a case by a reasonable hourly billing rate for such services.*fn4 See id. at 732 n.11.
In common fund cases such as this one, the percentage-of-recovery method is generally favored because "it allows courts to award fees from the fund 'in a manner that rewards counsel for success and penalizes it for failure.'" Rite Aid, 396 F.3d.at 300 (quoting In re The Prudential Ins. Co. of Am., 148 F.3d 283, 333 (3d Cir. 1998)). But we have recommended that district courts use the lodestar method to cross-check the reasonableness of a percentage-of-recovery fee award. See Rite Aid, 396 F.3d at 305; Prudential, 148 F.3d at 333. The cross-check is performed by dividing the proposed fee award by the lodestar calculation, resulting in a lodestar multiplier.*fn5 "[W]hen the multiplier is too great, the court should reconsider its calculation under the percentage-of-recovery method, with an eye toward reducing the award." Rite Aid, 396 F.3d at 306.The lodestar cross-check, while useful, should not displace a district court's primary reliance on the percentage-of-recovery method. See id. at 307.
In Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975), we set forth factors a district court should consider when reviewing a proposed class action settlement. The Girsh factors are:
(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining a class action through the trial; (7) the ability of defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best recovery; and (9) ...