Waste & Inefficiency: Court wades into the class action fee morass

citigroup logos

Citigroup Logos Evolved

I rarely comment here about cases on which I’ve worked — it’s not the purpose of the “Civilian’s Guide” — but the stories out so far about one such case have only focused on the large numbers involved, not so much on the underlying issues.  This was another example of a consumer class action in which the class members will benefit only slightly, as the lawyers who nominally represented them are paid tens of millions of dollars for services of dubious value.

The case is known as In re Citigroup Inc. Securities Litigation, and the federal judge cut over $26 million in fees, leaving over $70 million, however.  You would think the plaintiff lawyers would be satisfied with that result — it is many times what they invested in the case, especially when you consider some of the games that were played to inflate the claims — yet the fact that their fees were cut so substantially is the headline.  In fact and law, the judge was still giving the firms substantial leeway beyond what the law and normal burdens “legally” require.

Typically, everyone, including the press, can see just on their face that the legal fees sought seem quite high, but the difference in this case was that one particular class member was determined to make a serious objection.  The result was a substantial reduction in the fees claimed, by roughly 50% of the “lodestar” (hourly rate times hours) the firms claimed to have expended, yet the remaining fees awarded are still excessive.

The “lodestar” analysis used here was a fictional operation — no client was actually paying the nominal hourly bills produced.  Ironically, this mixed analysis is supposed to inject some rationality into what is otherwise a naked fee grab.  The “lodestar” was supposed to provide a reality check against the attorneys’ claims that they should be paid a percentage contingent fee — yielding a fee over $100 million.  The “lodestar,” even before being cut, was around $50 million — roughly half of their goal.  And, even after the judge chopped the lodestar more or less in half, he made up some of the difference simply by multiplying the remainder by a factor that made it equal a compromise figure which the judge arrived at as a reasonable fee.  Sorry, but this sort of illogic is par for the course when it comes to fee calculations.  (As I’ve noted before, you can see why so few lawyers do well in mathematics or economics.)

The case is, at most, a preliminary, tentative step toward applying the existing rules on legal fees to this aberrational cottage industry, among others.

As many of the posts in this blog have discussed before, consumer class actions, which this essentially was, have created a dysfunctional system with skewed incentives and no serious mechanism for oversight.  Normally, the interests of individual class members are so dispersed, and the procedural deck so stacked against taking class member objections seriously, that the few class members who object are simply inventoried and ignored by courts.  Judges are left to figure out the reasonable fee after the defendant has settled out and the plaintiffs’ nominal lawyers have a profound conflict because they must be paid by diminishing the amounts that remain for their nominal clients.

My firm reviews many legal bills in all sorts of situations, but in this particular situation there is usually no mechanism — no party with the incentive and the means — to raise a serious objection, let alone spend money for a serious review of the documentation supporting the fee claim.

But the twist in this case was that Ted Frank, pejoratively labeled as a “serial objector” by the lawyers whose fees he challenged, was willing to step forward and object, at his own expense, to the fees.  Mr. Frank, who founded the Center for Class Action Fairness, has objected to fees and other class action issues, in many cases, with considerable success.  He hired my firm to assist in this case.

Although he saved his class peers over $26 million, Mr. Frank will receive at most reimbursement for some of his expenses.  Perhaps one option for reform should be to place a bounty on excessive fees — then you would have the same kind of feeding frenzy over excess fees that consumer class action laws created in the first place.

The Forbes article continued:

A federal judge approved a $590 million settlement of a securities class action against Citigroup, but only after slashing the fees plaintiff lawyers were seeking by 27%, citing “waste and inefficiency” and “significantly inflated” hourly rates. …

The law firm’s request for nearly $100million in fees drew a spirited objection from attorney Ted Frank of the Center for Class Action Fairness, …

A large part of the alleged work for which the firm sought compensation was done by contract or temporary lawyers supposedly doing “document review” work, for which the firm paid a small fraction of the high hourly rates at which they sought to be compensated for their services.  This type of expense should only be recovered at the firm’s actual cost.  Firms argue, however, that, because these are “lawyers,” even though not real employees and not necessarily doing the work of lawyers, they can be market up to the same hourly rates as lawyers the same number of years out of law school, with or without real experience and regardless of the nature of their work.

Plaintiffs in class actions are not the only lawyers hiring batches of these “semi-lawyers” to take advantage of this game.  It’s commonly attempted wherever there’s no fee-paying client to manage the law firm and question its bills.  This includes fee-shifting cases (where the loser pays the winner’s fees) and many instances where someone else is paying the fees, like an insurance company or employer.  Temp agencies undoubtedly advertise this opportunity as part of providing the temps — money can be no object as long as it’s someone else’s money.

The judge compromised on this point, allowing the firm to obtain substantial markups over cost because the lawyers were nominally lawyers — but not nearly as much as they claimed.  This is an issue on which we do not agree, even though the reduction the judge made was quite substantial.

The judge … criticized the tens of thousands of hours [the firm] racked up on the case after it had agreed to a settlement with Citi. That’s when many of the contract attorneys put in serious hours reviewing documents, including 239 hours at a requested $89,625 reviewing one deposition and 94 hours on another. [At that point, compensation of the lawyers was a sure thing and Citigroup had no incentive to object, so this was just a ploy to enhance their fee claim with a 1000% or so markup over cost.]  The judge struck 16,000 hours worth $7.5 million from the request because they “serve only to inflate the lodestar.” He cut it another 10% because of the “waste and inefficiency that a paying client would not accept.”…

A more fundamental question for us is whether any of this document review work is really necessary.  The work they are supposedly doing, on behalf of a plaintiff ingesting documents produced by a defendant, is to examine each document to facilitate retrieval and analysis later on.  But that work is often wasted and botched — so few of these cases actually go to trial that the whole effort is a billable hours exercise.

And, with current technology — for ten or so years at least — this can all be done much more efficiently, accurately, and consistently using automated technology, which is also far cheaper.  But until computers can get licensed as lawyers, there just wouldn’t be any profit in doing these things right, so underemployed lawyers will continue to go through the motions of doing work as a means to enhance profits, regardless of necessity or value.

Some of the press apparently didn’t understand that, at this point, Citigroup had settled out of the case and its liability had been set — but that’s why these fee requests are rarely given serious review because the defendant, with the resources to object, has been settled out.  (Many press reports sought comments from Citigroup, which was indifferent and was contractually out of the picture, even if it might be rooting to reduce such fee awards to discourage such litigation the next time around.)  All these fees are coming out of the class members’ take, so this battle is between the class members and the lawyers who nominally represented them — a fundamental conflict of interest.

The case is certainly, in context, a major victory for class members.  And many of the absurd arguments made to excuse the fees and expenses requested were debunked.  But the result is still far beyond a reasonable fee — there’s no danger that consumer class action litigation will suddenly become economically or legally rational.

For clients:  Beware of any suggestion that your lawyer needs to hire temps or contract lawyers — this is a very bad sign, even if you really have that much paper to deal with.  Watch your “fee agreement” or similar document from the firm, too:  Some firms try to slip in terms waiving your right to object or even allowing the firm to hire temps or contract lawyers without your knowing approval.  Have the firm give you the resume for each timekeeper, identify the credentials and rate for each person, and justify their involvement.  Sometimes it’s just easier to ignore the haystack without worrying about a stray needle or two that might not be worth finding.

Forbes:  Judge Cuts Fees In Citigroup Settlement, Citing `Waste And Inefficiency’

About JWT

John Toothman founded The Devil's Advocate, the legal fee management and litigation consulting firm, in 1993. He graduated from Harvard Law School, with honors, in 1981. John has been a lawyer with large and small law firms and the US Dept. of Justice. He's tried over sixty cases. He has testified as an expert witness in over seventy more. ... He is the author of several books and dozens of articles about lawyers, law firms, legal fees, ethics, litigation and trial practice, and related issues. Books include: Trial Practice Checklists 2d (West), Legal Fees: Law & Management (Carolina Acad. Press), and the Civilian's Guide to Lawyers series. His pro bono activities include teaching and speaking at seminars. ... John is admitted to practice law in DC, Maryland, and Virginia. More information: http://www.DevilsAdvocate.com
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