Volkswagen Group of America, Inc. v. Peter J. McNulty Law Firm , 692 F.3d 4 ( 2012 )

United States Court of Appeals
For the First Circuit
Nos. 11-1438, 11-1857
IN RE: VOLKSWAGEN AND AUDI WARRANTY
EXTENSION LITIGATION
-----------------------------------------------------------
VOLKSWAGEN GROUP OF AMERICA, INC.; VOLKSWAGEN AG; AUDI AG,
Defendants, Appellants,
v.
PETER J. MCNULTY LAW FIRM; IRWIN & BOESEN, P.C.;
BERGER & MONTAGUE,
Interested Parties, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya and Boudin, Circuit Judges.
Kenneth S. Geller, with whom Michael B. Kimberly, Mayer Brown
LLP, Michael Hoenig, Jeffrey L. Chase, Daniel V. Gsovski, Miriam
Skolnik, Michael B. Gallub, Herzfeld & Rubin, P.C., David A. Barry,
and Sugarman, Rogers, Barshak & Cohen, PC were on brief, for
appellants.
Michael B. Bogdanow, with whom Victoria M. Santoro and Meehan,
Boyle, Black & Bogdanow, P.C. were on brief, for appellees.
July 27, 2012
LYNCH, Chief Judge. This appeal is from the district
court's award of $30 million in attorneys' fees to several groups
of plaintiffs' attorneys who achieved a class action settlement
agreement. It presents the question of what source of law governs
the award of such fees in a diversity suit, where the parties'
settlement agreement contains, inter alia, a provision expressly
stating that the parties have not agreed on the source of law to
apply to the fee award. We hold that under these circumstances,
where there is an agreement that the defendants will pay reasonable
fees, state law governs the award of fees. We vacate the fee
award, which was based on federal sources of law, and remand for a
new determination of the proper reasonable fee award under the
relevant state law.
I.
A. The Lawsuit
This suit arises out of alleged engine defects in certain
Volkswagen and Audi vehicles, which plaintiffs asserted were prone
to the formation of damaging engine sludge unless particular types
of motor oil were used. Five putative statewide class actions were
filed in five federal district courts, alleging, among other
claims, consumer fraud and unfair and deceptive trade practices.
In Re Volkswagen & Audi Warranty Extension Litig., 452 F. Supp. 2d
1354, 1355-56 (J.P.M.L. 2006). On August 29, 2006, these suits
were consolidated by the Judicial Panel on Multidistrict Litigation
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and, as multidistrict litigation (MDL) cases, were transferred to
the District of Massachusetts for pretrial proceedings.1 Id. at
1356. The Massachusetts district court ordered the plaintiffs to
file and serve a consolidated amended complaint. In re Volkswagen
& Audi Warranty Extension Litig., No. 07-1790 (D. Mass. Feb. 7,
2007).
Plaintiffs filed their second amended consolidated
complaint on October 15, 2007. The factual allegations underlying
the complaint were that the 1.8 liter turbo-charged engines
contained in 1997 to 2004 model Audi vehicles and 1998 to 2004
model Volkswagen Passat vehicles were defectively designed, and
that the defendants concealed this defect. The plaintiffs sought
to bring claims "on behalf of all persons or entities in the United
States who are current or former owners and/or lessees" of those
particular vehicles. The complaint named as defendants Volkswagen
of America, Inc., a New Jersey corporation, Volkswagen of America,
Inc., d/b/a Audi of America, Inc., a New Jersey corporation, the
domestic distributors of the vehicles, as well as Volkswagen AG and
Audi AG, two German corporations.
The second amended complaint raised a number of legal
theories of recovery, including that defendants had violated the
New Jersey Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1 et seq.,
1
Two additional cases were later transferred and
consolidated.
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and other state consumer fraud statutes that are "the same or
substantially similar to the New Jersey" law. The complaint also
alleged breach of contract, breach of implied warranty of
merchantability, unjust enrichment, and violation of certain
California laws. The complaint stated that diversity subject
matter jurisdiction was proper under the Class Action Fairness Act
of 2005, 28 U.S.C. § 1332(d)(2), (d)(6), and sought a declaratory
judgment, injunctive relief, actual and treble damages,
restitution, and an award of costs, including attorneys' fees.2
On October 23, 2008, a special master was appointed to
"supervise all aspects of discovery," to "decide all nondispositive
pretrial motions," to make recommendations as to all dispositive
motions, and to assist the parties in any settlement efforts. In
re Volkswagen & Audi Warranty Extension Litig., No. 07-1790 (D.
Mass. Oct. 23, 2008).
2
On January 30, 2008, the defendants moved to dismiss the
complaint under Rule 12(b)(6). Among other arguments, the
defendants argued that application of New Jersey law to all claims
in the case would violate relevant choice of law rules as well as
the Constitution, and New Jersey law could only apply where the
relevant sale or lease transaction took place in New Jersey.
Plaintiffs' response to the choice of law argument was that it was
premature and required discovery to determine what law ought to
apply, and in any event New Jersey law could properly apply to all
claims.
On June 9, 2008, the district court denied the motion to
dismiss in a one-sentence order which stated that the motion was
"denied without prejudice to be resubmitted as a Motion for Summary
Judgment." In re Volkswagen & Audi Warranty Extension Litig., No.
07-1790 (D. Mass. June 9, 2008) (emphasis omitted). Discovery
began shortly thereafter.
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At some point, serious settlement discussions between the
parties began, and on December 14, 2009, the special master
reported that the parties "seem[ed] very close to reaching an
agreement." In re Volkswagen & Audi Warranty Extension Litig., No.
07-1790 (D. Mass. Dec. 14, 2009). On May 12, 2010, the special
master reported that the parties had begun drafting a proposed
settlement agreement and associated documents. In re Volkswagen &
Audi Warranty Extension Litig., No. 07-1790 (D. Mass. May 12,
2010).
B. The Settlement Agreement
On September 13, 2010, a proposed settlement agreement
was submitted to the district court, along with a motion requesting
conditional approval of the settlement and certification of a class
for settlement purposes. The final settlement as approved by the
court did not change the terms of the proposed settlement. So we
discuss several material portions of the proposed settlement: the
benefits obtained by the class, the appointment of a settlement
administrator, the terms as to attorneys' fees, and the choice of
law provision.
The settlement stated it was not "an admission by
Defendants of any liability or wrongdoing whatsoever." The
settlement class consisted of all current and former owners and
lessees of model year 1997-2004 Audi A4 vehicles or model year
1998-2004 Volkswagen Passat vehicles equipped with 1.8 liter turbo
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engines, comprising a total of 479,768 vehicles. The proposed
settlement offered several benefits to the class, including (1)
payment for engine repair or replacement costs, (2) a warranty
extension for a subset of the vehicles, (3) a one-time $25 oil
change discount for a subset of the vehicles, and (4) an education
and information program designed to inform class members of the
risks to their engines and means to prevent those risks. The
proposed settlement did not place a monetary value on these
benefits.
The proposed settlement created an "Oil Sludge Settlement
Administrator" to oversee the claims process for class members.
The administrator was to record every claim for reimbursement, to
determine whether the claim was to be allowed or denied, and to
explain the basis for any claim that was denied.
The proposed settlement contained a procedure for
providing notice to all settlement class members of the
certification and fairness hearing and the settlement agreement.
Notice of the proposed settlement was to be prepared by defendants,
reviewed and approved by class counsel, and disseminated by the
settlement administrator.
The proposed settlement also "reserve[d] to the
[district] [c]ourt exclusive and continuing jurisdiction over this
action, the [p]arties, . . . and this Settlement Agreement for
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purposes of administering, supervising, construing, and enforcing
this Settlement Agreement."
Most relevant to this appeal, the proposed settlement
contained a section regarding "Attorney Fees and Costs." It
provided:
1. Class Counsel will submit an application
to the Court for an award of reasonable
attorneys' fees and expenses on or before a
date to be set by the Court ("Fee
Application"). Each Settling Party reserves
all rights to appeal from a Class Counsel fees
and expenses award if that Party files a
timely and proper objection with the Court.
The Class Counsel fees and expenses award and
Final Judicial Approval shall be separate so
that the appeal of one shall not constitute an
appeal from the other.
2. Subject to Section VI.A.2 above, Class
Counsel fees and expenses shall be paid
entirely and exclusively by Defendants and
shall not diminish, invade, or reduce, or be
derived from, benefits afforded to Settlement
Class Members under this Settlement Agreement.
3. Any Class Counsel fees and expenses
awarded shall be paid by Defendants to Class
Counsel within thirty (30) days of the entry
of a final judgment or order by the Court with
respect to Class Counsel fees and expenses,
except in the event of an appeal, . . . . All
matters pertaining to an award of Class
Counsel fees and expenses including, but not
limited to, any dispute amongst
class/plaintiffs' counsel as to their
respective attorneys fees and expenses, have
been referred to the [special master]. [The
special master's] recommendation with respect
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to Class Counsel fees and expenses shall be
made to the Court.3
Section VI.A.2 of the proposed agreement provided:
It is expressly understood and confirmed that
the parties have not agreed to any choice,
selection or waiver of state or federal law to
be applied to any aspect of the construction,
preliminary or final approval, or application
of any provision of this Agreement of
Settlement, including but not limited to
attorney fees and costs.
The attorneys' fees provision expressly states that it is "subject
to" this section.
C. Notice of the Proposed Settlement with Statement About
Attorneys' Fees
On September 22, 2010, the special master issued a
recommendation that the district court (1) conditionally approve a
class for settlement purposes only and (2) conditionally approve
the proposed settlement agreement, with a hearing on the final
agreement to be held on March 11, 2011, after notice of the
settlement was sent to class members. In re Volkswagen & Audi
Warranty Extension Litig., No. 07-1790, 2010 WL 3769259, at *1, *7
(D. Mass. Sept. 22, 2010).4 The district court adopted this
3
See Fed. R. Civ. P. 23(h)(4) ("The court may refer issues
related to the amount of the award to a special master or a
magistrate judge, as provided in Rule 54(d)(2)(D).").
4
As to conditional approval of the class for settlement
purposes, the special master found that the requirements of Federal
Rule of Civil Procedure 23(a) and (b)(3) were satisfied. In re
Volkswagen & Audi Warranty Extension Litig., No. 07-1790, 2010 WL
3769259, at *2-4 (D. Mass. Sept. 22, 2010). The special master
found that the proposed notice to the class satisfied the
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recommendation in full. In re Volkswagen & Audi Warranty Extension
Litig., No. 07-1790, 2010 WL 3810625 (D. Mass. Sept. 24, 2010).
On December 20, 2010, notice of the proposed settlement
was mailed to 1,603,013 class members, see Fed. R. Civ. P.
23(e)(1), whose names and addresses were determined by use of
Volkswagen and Audi Vehicle Identification Numbers on record in
each state registry of motor vehicles throughout the United States.
The proposed settlement agreement provided that the notice was to
be drafted by the defendants and reviewed and approved by class
counsel, and this procedure appears to have been followed. The
notice contained a section addressing the question "How will the
lawyers be paid?"5 That section stated:
Class Counsel will ask the Court for up to
$37.5 Million for attorneys' fees and up to
approximately $1.75 Million for reimbursement
of costs and expenses incurred in the
prosecution and settlement of these actions.
The Defendants do not dispute Class Counsel's
entitlement to an appropriate fee and
reimbursement for cost and expenses, but may
oppose the amounts requested by Class Counsel.
The Defendants will pay whatever attorneys'
fees and costs and expenses that the Court
awards without reducing or limiting any of the
requirements of Rule 23(c) and (e). Id. at *5. As to conditional
approval of the settlement, the special master found that the
settlement was entered into after extensive negotiation and was
reasonable in light of the claims raised and the litigation risks.
Id. at *1.
5
See Fed. R. Civ. P. 23(h)(1) (notice of motions requesting
attorneys' fees for class counsel must be "directed to class
members in a reasonable manner").
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benefits available to Settlement Class
Members.
D. The Request for Attorneys' Fees
On December 20, 2010, class counsel submitted a request
for $37.5 million in attorneys' fees, for all attorneys working for
plaintiffs,6 as well as costs not to exceed $1.75 million, under
Federal Rule of Civil Procedure 23(h). Class counsel argued that
federal law governed the award of fees. See Fed. R. Civ. P. 23(h)
("In a certified class action, the court may award reasonable
attorney's fees and nontaxable costs that are authorized by law or
by the parties' agreement."). The argument was that the court
should apply the percentage of fund methodology7 for determining
the size of an appropriate fee award, the settlement value was at
least $414 million, and $37.5 million was a reasonable percentage
6
The procedure established by the special master for
awarding attorneys' fees provided that class counsel would file
"[a] motion for all fees and all counsels' costs." In re
Volkswagen & Audi Warranty Extension Litig., No. 07-1790, 2010 WL
6334859, at *1 (D. Mass. Dec. 22, 2010). Class counsel would bear
initial responsibility for distributing the award of attorneys'
fees among all plaintiffs' counsel, based on their contribution to
the litigation. Id. Only after such an initial distribution was
made, and after all appeals as to the fee award itself were
resolved, would the special master address any disputes by "non-
Class Counsel" as to the distribution of attorneys' fees. Id. The
district court's opinion awarding attorneys' fees approved this
procedure. In re Volkswagen & Audi Warranty Extension Litig., 784
F. Supp. 2d 35, 47 (D. Mass. 2011).
7
Under the percentage of fund method, "the court shapes the
counsel fee based on what it determines is a reasonable percentage
of the fund recovered for those benefitted by the litigation." In
re Thirteen Appeals Arising out of the San Juan Dupont Plaza Hotel
Fire Litig., 56 F.3d 295, 305 (1st Cir. 1995).
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of the value of the settlement. An exhibit outlining the hours
expended by class counsel on the suit was provided so that the
court could perform a lodestar8 cross check. Based on the 23,191
hours that class counsel spent on the case,9 they argued that a fee
award of $37.5 million would be reasonable under the lodestar
method.
The defendants did not argue that the court should award
no attorneys' fees at all but strongly opposed the argument that
federal law could apply, arguing that any fee award would only be
proper under New Jersey's fee-shifting statute, not federal law.
Defendants also opposed class counsel's fee calculation
methodology. They argued that the settlement value could not be
determined until after June 27, 2011, when certain reimbursement
claims would be due. Defendants that said this was particularly
necessary as their expert valued the settlement at only
approximately $50 million, as opposed to the over $400 million
valuation of plaintiffs' expert.
On February 18, 2011, the special master issued a report
and recommendation which, after finding that federal law governed
the attorneys' fees award and that the New Jersey statute was
8
Under the lodestar method, the court determines the fee
award by "ascertain[ing] the number of hours productively expended
and multiply[ing] that time by reasonable hourly rates." Spooner
v. EEN, Inc., 644 F.3d 62, 68 (1st Cir. 2011).
9
While the fee request covered all attorneys working for
plaintiffs, not just class counsel, the hours submitted for the
lodestar calculation were those of class counsel only.
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irrelevant, recommended an award of $30 million in attorneys' fees
and approximately $1.2 million in costs. In re Volkswagen & Audi
Warranty Extension Litig., No. 07-1790, 2011 WL 721970, at *2-3,
*11 (D. Mass. Feb. 18, 2011). On March 4, 2011, the defendants
duly filed objections to the recommended fee award and preserved
all of the arguments they make on appeal.
The district court held a hearing on both the proposed
settlement agreement and the attorneys' fees award on March 11,
2011, see Fed. R. Civ. P. 23(e)(2), (h)(3), where defendants again
argued that state law must govern the fee award.
On March 24, 2011, the district court issued two
opinions. In the first opinion, the district court approved the
proposed settlement.10 In re Volkswagen & Audi Warranty Extension
Litig., 273 F.R.D. 349 (D. Mass. 2011). No appeal has been taken
from the approval of the settlement.
In the second opinion, the district court adopted,
virtually verbatim, the special master's recommendation that the
court award $30 million in attorneys' fees and approximately $1.2
10
The district court found that the certification
requirements of Rule 23(a) and 23(b) were met, and that the
settlement was fair, reasonable, and adequate. In re Volkswagen &
Audi Warranty Extension Litig., 273 F.R.D. 349, 354 (D. Mass.
2011). The district court entered judgment approving the
settlement and stating that "each and every term and provision of
the Agreement for Settlement shall be deemed incorporated into this
Final Approval Order and Judgment as if expressly set forth and
shall have the full force and effect of an Order of the Court."
Id. at 356.
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million in costs and expenses. In re Volkswagen & Audi Warranty
Extension Litig., 784 F. Supp. 2d 35 (D. Mass. 2011).
The district court applied federal law to determine the
amount of fees to award, for two reasons. First, the district
court found that "where, as here, a fee award is a result of the
parties' private agreement, federal law governs the decision." Id.
at 40. Second, the court explained that a fee award pursuant to
the state fee-shifting statutes would not be appropriate because
plaintiffs would not be "prevailing parties" within the meaning of
those statutes. Id. at 41. The district court also noted that
"[i]n the context of a class action settlement in the First
Circuit, however, fees may be awarded, as part of the court's
equitable powers over such settlement agreements, from a fund
created to benefit the class." Id. at 39.
The district court then applied the percentage of fund
method, finding that a $30 million award would be a reasonable
percentage of the value of the settlement, against the parties'
experts' estimation at somewhere between $50 million (defendants'
expert) and $223 million (class counsel's expert's revised
estimate). Id. at 43-44, 47. The court did not determine the
value of the settlement.
The district court also said it applied a lodestar cross
check, taking the 23,191 hours spent by class counsel, reducing
those hours by one-third for unnecessary hours, and multiplying the
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remaining hours by $500 per hour to produce a base lodestar value
of $7,734,000.11 Id. at 46-47. The district court then "[a]ssum[ed]
a multiplier of 2.50," which would result in a lodestar value of
$19,335,000, which the district court said supported its
determination that $30 million in fees was a reasonable percentage
of the value of the settlement. Id. at 47.
Defendants appealed the award of fees. They also filed
a motion to vacate, alter, or amend the fee award under Rules
52(b), 59(e), and 60(b), which again argued, among other points,
that the district court should have applied New Jersey rather than
federal law to determine the value of the fee award. The district
court denied the motion, In re Volkswagen & Audi Warranty Extension
Litig., No. 07-1790 (D. Mass. July 11, 2011), and the defendants
separately appealed that order.
II.
"We review a district court's determination regarding
attorney's fees for abuse of discretion." Airframe Sys., Inc. v.
L-3 Commc'ns Corp., 658 F.3d 100, 108 (1st Cir. 2011). That said,
"mistakes of law . . . always constitute abuses of a court's
discretion," and in addition, "we will set aside a fee
[determination] . . . if it clearly appears that the trial court
ignored a factor deserving significant weight, relied upon an
11
The district court's math was slightly incorrect; a one-
third reduction in hours should have resulted in 15,461 hours, not
15,468 hours; the resulting dollar figure would be $7,730,500.
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improper factor, or evaluated all the proper factors (and no
improper ones), but made a serious mistake in weighing them." Id.(alteration in original) (quoting Gay Officers Action League v.
Puerto Rico, 247 F.3d 288, 292–93 (1st Cir. 2001)) (internal
quotation marks omitted). "The issue of whether a district court
may use a given methodology in structuring an award of attorneys'
fees is one of law, and, thus, is subject to de novo review." In
re Thirteen Appeals Arising out of the San Juan Dupont Plaza Hotel
Fire Litig., 56 F.3d 295, 304 (1st Cir. 1995).
Defendants raise two primary arguments in challenging the
attorneys' fees award.12 First, defendants claim that the district
court erred in applying general federal-law principles, rather than
state law, to determine the amount of attorneys' fees to which
class counsel were entitled. Second, defendants claim that even if
federal law applied, the district court made a number of errors of
law and fact in its determination of the fee award.
Because the court erred as a matter of law in applying
federal-law principles instead of the relevant state's law, we do
not reach the defendants' other claim of error. We vacate the fee
award and remand for application of Massachusetts law principles,
as described below.
A. The Settlement Agreement and Choice of Law
12
Defendants do not challenge the award of approximately $1.2
million in costs, so we do not address that award.
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We typically review the district court's interpretation
of a settlement agreement de novo, and do so here. See Ricci v.
Patrick, 544 F.3d 8, 17 (1st Cir. 2008); F.A.C., Inc. v.
Cooperativa de Seguros de Vida de P.R., 449 F.3d 185, 192 (1st Cir.
2006). We also review choice of law issues de novo. See Robidoux
v. Muholland, 642 F.3d 20, 22 (1st Cir. 2011) ("Choice of law
determinations are questions of law, which we also review de
novo."); see also Torre v. Brickey, 278 F.3d 917, 919 (9th Cir.
2002) (per curiam) ("Whether state or federal law applies to a
particular issue in a diversity action is a question of law which
we also review de novo.").
1. The Settlement Agreement
It is axiomatic that, under the "American Rule," "[e]ach
litigant pays his own attorney's fees, win or lose, unless a
statute or contract provides otherwise." Hardt v. Reliance
Standard Life Ins. Co., 130 S. Ct. 2149, 2157 (2010); see also
Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257-
59 (1975) (discussing exceptions to the American Rule).
Here, the defendants agreed to pay reasonable attorneys'
fees as part of the settlement agreement. The agreement first
provides that "Class Counsel will submit an application to the
Court for an award of reasonable attorneys' fees and expenses."
The agreement goes on to provide that "Class Counsel fees and
expenses shall be paid entirely and exclusively by Defendants and
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shall not diminish, invade, or reduce, or be derived from, benefits
afforded to Settlement Class Members under this Settlement
Agreement." The agreement further states that "[a]ny Class Counsel
fees and expenses awarded shall be paid by Defendants to Class
Counsel within thirty (30) days of the entry of a final judgment or
order by the Court with respect to Class Counsel fees and
expenses."
This language makes clear that the defendants agreed to
pay "reasonable attorneys' fees and expenses;" further, the notice
sent to the class made clear that "[t]he Defendants do not dispute
Class Counsel's entitlement to an appropriate fee and reimbursement
for cost and expenses."
However, the settlement agreement expressly disclaims any
agreement between the parties as to what choice of law governs the
award of attorneys' fees:
It is expressly understood and confirmed that
the parties have not agreed to any choice,
selection or waiver of state or federal law to
be applied to any aspect of the construction,
preliminary or final approval, or application
of any provision of this Agreement of
Settlement, including but not limited to
attorney fees and costs.
The fee award here is based on the agreement and not on any
statute, federal or state. The question then is what source of law
governs the fee award. The district court incorrectly concluded
that federal law governed.
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To determine the source of law that governs the
settlement agreement in this diversity case, we engage in a two-
part inquiry. First, we evaluate whether under the Erie doctrine,
see Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), federal or state
law governs the matter. This assessment is made first because
"[a]lthough state law generally supplies the rules of decision in
federal diversity cases, it does not control the resolution of
issues governed by federal statute." Budinich v. Becton Dickinson
& Co., 486 U.S. 196, 198 (1988) (citations omitted); see also U.S.
Const. art. VI, cl. 2 (Supremacy Clause); Sun Oil Co. v. Wortman,
486 U.S. 717, 727 (1988) ("It is never the case under Erie that
either federal or state law -- if the two differ -- can properly be
applied to a particular issue . . . ."); Erie, 304 U.S. at 78("Except in matters governed by the Federal Constitution or by Acts
of Congress, the law to be applied in any case is the law of the
State.").
Second, if state law governs, and a choice of law must be
made, we determine which state's law applies by applying the choice
of law rules of the forum state (subject to the complexities of MDL
litigation). See Servicios Comerciales Andinos, S.A. v. Gen. Elec.
del Caribe, Inc., 145 F.3d 463, 479 (1st Cir. 1998) (a federal
court sitting in diversity first "determines whether a particular
matter is procedural or substantive for Erie purposes;" only if the
matter is procedural does federal law apply; "if substantive, the
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court follows the law of the forum state;" and "if a choice of law
must be made," the federal court "applies the law that would be
applied under the conflict of laws rules of the forum state").
2. Federal Law Does Not Govern the Award of
Reasonable Attorneys' Fees
State law, rather than federal law, governs the
determination of the award of attorneys' fees in this case.
As a general matter, "interpreting [settlement]
agreements and their scope is a matter of state contract law."
Fábrica de Muebles J.J. Álvarez, Inc. v. Inversiones Mendoza, Inc.,
682 F.3d 26, 33 (1st Cir. 2012); see also, e.g., Fanning v. Potter,
614 F.3d 845, 848 n.2 (8th Cir. 2010) (same); In Re: Chira, 567
F.3d 1307, 1311 (11th Cir. 2009) (same); Howmedica Osteonics Corp.
v. Wright Med. Tech., Inc., 540 F.3d 1337, 1347 (Fed. Cir. 2008)
(same).13
We also start with the basic premise that the issue of
attorneys' fees has long been considered for Erie purposes to be
substantive and not procedural, and so state-law principles
normally govern the award of fees. See IOM Corp. v. Brown Forman
Corp., 627 F.3d 440, 451 (1st Cir. 2010) ("Where, as here, the
13
Because this is a diversity suit, and the settlement
agreement involved only state-law claims, we have no occasion to
address the question of when federal-law principles govern the
construction of settlement agreements disposing of federal claims.
Cf. Michaud v. Michaud, 932 F.2d 77, 80 n.3 (1st Cir. 1991)
(applying "federal law to the issue of an attorney's authority to
settle a civil action brought under federal law").
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court's jurisdiction is based on diversity of the parties, a
district court's award of attorneys' fees is governed by relevant
state law . . . ."); Titan Holdings Syndicate, Inc. v. City of
Keene, 898 F.2d 265, 273 (1st Cir. 1990) (same); N. Heel Corp. v.
Compo Indus., Inc., 851 F.2d 456, 475 (1st Cir. 1988) (same); see
also, e.g., Northon v. Rule, 637 F.3d 937, 938 (9th Cir. 2011) (per
curiam) (same); Scottsdale Ins. Co. v. Tolliver, 636 F.3d 1273,
1280 (10th Cir. 2011) (same); Chin v. Chrysler LLC, 538 F.3d 272,
279 (3d Cir. 2008) (same).
Class counsel defend the choice of federal-law principles
on two grounds: first, that Rule 23(h)(3), Fed. R. Civ. P.,
provides a basis for federal law governing the award of attorneys'
fees; and second, in a qualitatively different argument, that
federal courts' inherent equitable powers provide a basis for
applying federal-law principles to the award of attorneys' fees.
We reject each argument and hold that state law applies to
interpretation of the settlement agreement.
a. Rule 23(h), Fed. R. Civ. P.
Apparently attempting to argue in this case that the
award is "procedural" under Erie, class counsel point to Rule
23(h). We reject the argument that Rule 23(h) provides a basis for
applying federal-law principles to the award of attorneys' fees
here. Rule 23(h) provides: "In a certified class action, the court
may award reasonable attorney's fees and nontaxable costs that are
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authorized by law or by the parties' agreement." Fed. R. Civ. P.
23(h). The Advisory Committee's notes make plain that "[t]his
subdivision does not undertake to create new grounds for an award
of attorney fees or nontaxable costs. Instead, it applies when
such awards are authorized by law or by agreement of the parties."
Fed. R. Civ. P. 23 advisory committee's notes on the 2003
amendment. The text does not say such awards have to be governed
by federal fee award principles.
Rule 23(h) does not provide a free-floating grant of
authority to apply federal law to award attorneys' fees in class
actions; rather it allows the federal court to make fee awards
where they "are authorized by law or by the parties' agreement."
Fed. R. Civ. P. 23(h); see also 7B Wright, Miller, & Kane, Federal
Practice & Procedure § 1803, at 325 (3d ed. 2005) (noting that "the
power of the court to award attorney fees in a class action does
not derive from the rule itself"). The first portion is of no help
to class counsel; other than certain equitable doctrines, discussed
below, they do not claim any federal law authorizes an award of
fees here. The portion of Rule 23(h) authorizing fee awards
pursuant to the parties' agreement does not here provide a federal-
law basis governing the award. The settlement agreement itself has
no agreement that federal law applies.
It is clear that Rule 23(h) does not "undertake to create
new grounds for an award of attorney fees or nontaxable costs."
-22-
Fed. R. Civ. P. 23 advisory committee's notes on the 2003
amendment. As a result, Rule 23(h) is not "'sufficently broad' to
cause a 'direct collision' with the state law or, implicitly, to
'control the issue' before the court, thereby leaving no room for
the operation of that law."14 Burlington N. R.R. Co. v. Woods, 480
U.S. 1, 4-5 (1987) (quoting Walker v. Armco Steel Corp., 446 U.S.
740, 749-50 & n.9 (1980)). Because there is no conflict between
Rule 23(h) and application of state-law principles to determine the
award, class counsel's reliance on Shady Grove Orthopedic
Associates, P.A. v. Allstate Insurance Co., 130 S. Ct. 1431 (2010),
is inapposite.
b. No Inherent Federal Equitable Powers
The district court erred in finding that it had inherent
federal equitable powers to fashion an attorneys' fee award.
This based on inherent equitable powers argument is not
an argument, like the Rule 23 argument, that the determination of
the award is a matter of procedural law. Further, the argument is
based on a series of cases which rest on federal question
jurisdiction, not diversity jurisdiction. See Boeing Co. v. Van
Gemert, 444 U.S. 472 (1980); Alyeska, 421 U.S. 240; Hall v. Cole,
14
As made clear in Stewart Organization, Inc. v. Ricoh Corp.,
487 U.S. 22 (1988), the "direct collision" language does not
"mandate that federal law and state law be perfectly coextensive
and equally applicable to the issue at hand" but rather "expresses
the requirement that the federal statute be sufficiently broad to
cover the point in dispute." Id. at 26 n.4.
-23-
412 U.S. 1 (1973); Mills v. Elec. Auto-Lite Co., 396 U.S. 375(1970).
The basis for the award here is the agreement itself, a
contract under state law, and not federal law. The fact that
attorneys' fees are provided for by the settlement agreement is one
of several reasons why there is no basis to resort to these federal
equitable doctrines. Cf. United States ex rel. Bogart v. King
Pharm., 493 F.3d 323, 331 (3d Cir. 2007) (where plaintiffs'
attorneys are awarded fees under statutory fee-shifting regime,
there is no need to resort to the common fund doctrine because
"there is no iniquity to redress" given that the defendants paid
attorneys' fees).
Beyond that, this is not a common fund or a common
benefit case, and so equitable powers to award attorneys' fees are
unavailable under those theories. The common fund method should
apply only where attorneys seek compensation from a discernable pot
of money won by the plaintiffs. See In re Thirteen Appeals, 56
F.3d at 305; see also Boeing, 444 U.S. at 478-79 (explaining that
the common fund doctrine may apply where "each member of a
certified class has an undisputed and mathematically ascertainable
claim to part of a lump-sum judgment recovered on his behalf," and
noting that the doctrine rests on the court's "[j]urisdiction over
the fund involved in the litigation" (emphasis added)). Here,
there is no discernable pot.
-24-
In any event, the reasonable fees class counsel will
receive come not out of the settlement proceeds but are in addition
to the settlement proceeds,15 rendering the common fund method
inapplicable. See Boeing, 444 U.S. at 479 (for the common fund
doctrine to apply, there must be "reason for confidence that the
costs [of litigation] could indeed be shifted with some exactitude
to those benefiting" from the litigation (alteration in original)
(quoting Alyeska, 421 U.S. at 264 n.39) (internal quotation mark
omitted)).
By the same token, the common benefit method is
unavailable here because this is not a case in which the cost of
the fees is being "spread around" among the parties benefitted; the
fees are on top of the class-wide benefits. See Alyeska, 421 U.S.
at 264 n.39 (noting that "[i]n this Court's common-fund and
common-benefit decisions . . . there was reason for confidence that
the costs could indeed be shifted with some exactitude to those
benefiting"); Mills, 396 U.S. at 393-94 (stating that the
substantial benefit doctrine applies where "the court's
jurisdiction over the subject matter of the suit makes possible an
award that will operate to spread the costs proportionately among"
the class members); see also Savoie v. Merchants Bank, 84 F.3d 52,
15
The settlement agreement provides that "Class Counsel fees
and expenses shall be paid entirely and exclusively by Defendants
and shall not diminish, invade, or reduce, or be derived from,
benefits afforded to Settlement Class Members under this Settlement
Agreement."
-25-
56 (2d Cir. 1996) ("The common fund doctrine does not apply,
however, when fees are sought from the assets of the losing party,
and the fee award would not come from a common fund nor be assessed
against persons who have derived benefit from the lawsuit.").
3. Horizontal Choice of State Law
Having concluded that state law governs, we turn to the
question of which state's choice of law principles law applies to
determine which state's attorneys' fees law applies.
In a diversity case, "[u]nder Klaxon v. Stentor Electric
Mfg. Co., 313 U.S. 487 (1941), a court ordinarily must apply the
choice-of-law rules of the State in which it sits." Piper Aircraft
Co. v. Reyno, 454 U.S. 235, 243 n.8 (1981); see also Auto Eur., LLC
v. Conn. Indem. Co., 321 F.3d 60, 64 (1st Cir. 2003) ("A federal
court sitting in diversity jurisdiction must employ the
choice-of-law principles of the forum state . . . .").
Special rules apply in MDL cases as to determining the
forum state. Here, the litigation in Massachusetts was
consolidated from suits filed in federal district courts in
multiple states and transferred to the District of Massachusetts
under 28 U.S.C. § 1407. In Re Volkswagen, 452 F. Supp. 2d at 1356.
Where a suit is consolidated and transferred under § 1407, courts
-26-
typically apply the choice of law rules of each of the transferor
courts.16 See Chang v. Baxter Healthcare Corp., 599 F.3d 728, 732
(7th Cir. 2010) ("When a diversity case is transferred by the
multidistrict litigation panel, the law applied is that of the
jurisdiction from which the case was transferred . . . ."); In re
Air Disaster at Ramstein Air Base, Ger. v. Lockheed Corp., 81 F.3d
570, 576 (5th Cir. 1996) ("Where a transferee court presides over
several diversity actions consolidated under the multidistrict
rules, the choice of law rules of each jurisdiction in which the
transferred actions were originally filed must be applied."); In re
Korean Air Lines Disaster of Sept. 1, 1983, 932 F.2d 1475, 1496
(D.C. Cir. 1991) (Mikva, J., dissenting) ("When a case is
transferred pursuant to 28 U.S.C. § 1407(a) by the Panel on
Multi-District Litigation, the transferee court must apply the
choice of law rules of the states where the transferor courts
sit."); Phelps v. Cont'l Ill. Nat'l Bank & Trust Co. of Chi. (In re
Nucorp Energy Sec. Litig.), 772 F.2d 1486, 1492 (9th Cir. 1985)
("In this case, however, we must apply the choice of law rules of
16
We assume that this rule applies here without deciding the
question. Given that all of the transferor jurisdictions' choice
of law rules would result in application of Massachusetts law, we
need not decide the matter here, because there is no conflict
between the results of the various transferor jurisdictions' choice
of law rules. See Okmyansky v. Herbalife Int'l of Am., Inc., 415
F.3d 154, 158 (1st Cir. 2005) ("[W]hen the resolution of a
choice-of-law determination would not alter the disposition of a
legal question, a reviewing court need not decide which body of law
controls.").
-27-
Illinois because the claims were originally filed in district court
in Illinois before they were transferred to California by the
Judicial Panel on Multidistrict Litigation."); see also 19 Wright,
Miller, & Cooper, Federal Practice & Procedure § 4506, at 114-15
(2d ed. 1996) ("In actions transferred under Section 1407 for
consolidated pretrial discovery, . . . the transferee court should
apply the substantive law of the transferor state, including its
choice-of-law rules.").
This approach is consistent with the Supreme Court's
holding that "where a case is transferred pursuant to 28 U.S.C.
§ 1404(a), [a court] must apply the choice-of-law rules of the
State from which the case was transferred." Piper Aircraft Co.,
454 U.S. at 243 n.8; see also Ferens v. John Deere Co., 494 U.S.
516, 519 (1990) (holding that the choice of law rules of the
transferor court apply regardless of whether the defendant or the
plaintiff moves for the transfer under 28 U.S.C. § 1404(a)).
Here, a total of seven cases were ultimately transferred
to and consolidated in the district of Massachusetts, from the
following jurisdictions: California, Florida, Illinois,17 New
Jersey, Ohio, and Pennsylvania. One additional case was filed
directly with the district court, in Massachusetts.
Most of the states in which the suits originated (the
exceptions are Florida and California) follow the "most significant
17
Two separate cases were transferred from Illinois.
-28-
relationship" test for determining the source of law that applies
to contracts that do not contain choice of law provisions, based on
Section 188 of the Restatement (Second) of Conflict of Laws. See
Safeco Ins. Co. v. Jelen, 886 N.E.2d 555, 558 (Ill. App. Ct. 2008)
("If the claim raised is a contract, the most significant contacts
test is used.") (citing § 188);18 Nile v. Nile, 734 N.E.2d 1153,
1161 (Mass. 2000) ("The settlement agreement did not express a
choice of law so we look to factors such as those enumerated in
Restatement (Second) of Conflicts of Laws § 188(2).");19 Pfizer,
Inc. v. Emp'rs Ins. of Wausau, 712 A.2d 634, 637 (N.J. 1998)
(noting that "section 188 sets forth the general rule governing
choice of law in contract actions");20 Ohayon v. Safeco Ins. Co. of
Ill., 747 N.E.2d 206, 209 (Ohio 2001) (noting that Ohio has
"expressly adopted Section 188");21 Guy v. Liederbach, 459 A.2d 744,
748 n.5 (Pa. 1983) (noting that Pennsylvania "follow[s] a flexible
18
See also Eclipse Mfg. Co. v. U.S. Compliance Co., 886
N.E.2d 349, 357-58 (Ill. App. Ct. 2007) (applying § 188 to
contractual choice of law determination); Emp'rs Ins. of Wausau v.
Ehlco Liquidating Trust, 723 N.E.2d 687, 694 (Ill. App. Ct. 1999)
(same).
19
See also Bushkin Assocs., Inc. v. Raytheon Co., 473 N.E.2d
662, 669 (Mass. 1985) (applying § 188 to contractual choice of law
determination); Clarendon Nat'l Ins. Co. v. Arbella Mut. Ins. Co.,
803 N.E.2d 750, 753 (Mass. App. Ct. 2004) (same).
20
See also Gilbert Spruance Co. v. Pa. Manufacturers' Ass'n
Ins. Co., 629 A.2d 885, 888 (N.J. 1993) (applying § 188 to
contractual choice of law determination).
21
See also Gries Sports Enters., Inc. v. Modell, 473 N.E.2d
807, 810 (Ohio 1984) (applying § 188 to contractual choice of law
determination).
-29-
conflicts methodology combining interest analysis and the
Restatement (Second) of Conflicts," and citing § 188).22
Under this approach, "[t]he rights and duties of the
parties with respect to an issue in contract are determined by the
local law of the state which, with respect to that issue, has the
most significant relationship to the transaction and the parties."
Restatement (Second) of Conflict of Laws § 188(1) (1971). The
Restatement enumerates several factors to consider in making this
determination:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the
contract, and
(e) the domicil, residence, nationality, place
of incorporation and place of business of the
parties.
Id. § 188(2). The Restatement notes that the contacts are to be
assessed in the context of the principles of § 6 of the
Restatement. Id. § 188(1). The Restatement further provides that
"[t]hese contacts are to be evaluated according to their relative
importance with respect to the particular issue." Id. § 188(2).
The Restatement also explains that "[i]f the place of negotiating
22
See also Gillan v. Gillan, 345 A.2d 742, 744 (Pa. Super.
Ct. 1975) (applying § 188 to contractual choice of law
determination).
-30-
the contract and the place of performance are in the same state,
the local law of this state will usually be applied." Id.
§ 188(3).
Under the Restatement's approach, it is clear that
Massachusetts law would be applied in this case. The settlement
agreement was drafted to settle litigation that was ongoing in the
District of Massachusetts. Many of the settlement negotiations
took place in Boston, at settlement conferences with the special
master. The agreement was entered into "subject to Final Judicial
Approval," and so required approval by the district court in
Massachusetts. The agreement provided that the district court
retained "exclusive and continuing jurisdiction over this action,
the Parties, . . . and this Settlement Agreement for purposes of
administering, supervising, construing, and enforcing this
Settlement Agreement." The district court approved the settlement
agreement, which was incorporated into the judgment and possessed
"the full force and effect of an Order of the Court." In re
Volkswagen, 273 F.R.D. at 356.
The substance of the litigation also has significant
contacts with Massachusetts. One of the suits was filed directly
in the District of Massachusetts. One of the class representatives
resides in Massachusetts. Moreover, the Judicial Panel on
Multidistrict Litigation found that transfer of the suits to the
District of Massachusetts would "serve the convenience of the
-31-
parties and witnesses and promote the just and efficient conduct of
the litigation." In Re Volkswagen, 452 F. Supp. 2d at 1355.
As a result, the weight of the relevant factors indicates
that Massachusetts has the most substantial relationship to the
issue of attorneys' fees under the settlement agreement, and so
these five states would apply Massachusetts law.
Florida applies the "lex loci contractus" rule, which
"provides that the law of the jurisdiction where the contract was
executed governs the rights and liabilities of the parties." State
Farm Mut. Auto. Ins. Co. v. Roach, 945 So.2d 1160, 1163 (Fla.
2006); see also Shaps v. Provident Life & Accident Ins. Co., 826
So.2d 250, 254 n.3 (Fla. 2002) ("This Court has held that under lex
loci contractus, the law of the jurisdiction where the contract was
executed governs substantive issues regarding the contract.").
Under this rule, Massachusetts law would also apply: the settlement
is properly viewed as having been executed in Massachusetts,23 as
that was the location where the settlement agreement was judicially
approved, which was an express condition of the effectiveness of
the settlement agreement.
Under the law of the last transferor jurisdiction,
California, "[a] contract is to be interpreted according to the law
and usage of the place where it is to be performed; or, if it does
23
The settlement agreement states that it was "duly executed"
on September 2, 2010, but does not state a location of execution.
-32-
not indicate a place of performance, according to the law and usage
of the place where it is made." Cal. Civ. Code § 1646; see also
Frontier Oil Corp. v. RLI Ins. Co., 63 Cal. Rptr. 3d 816, 821 (Cal.
Ct. App. 2007) ("We conclude that notwithstanding the application
of the governmental interest analysis to other choice-of-law
issues, Civil Code section 1646 is the choice-of-law rule that
determines the law governing the interpretation of a contract.").
Given that the settlement agreement provided that the district
court is to maintain jurisdiction over the settlement "for purposes
of administering, supervising, construing, and enforcing this
Settlement Agreement," the settlement agreement is properly
construed as to be performed in Massachusetts. Even if it were
decided that the state of performance is indeterminable, for the
reasons given above it is properly viewed as having been "made" in
Massachusetts. Either way, under California's choice of law rules,
Massachusetts law would apply to the interpretation of the
settlement agreement.
As a result, we conclude that all of the transferor
jurisdictions would apply Massachusetts law to determine what
constitutes "reasonable attorneys' fees and expenses" under the
settlement agreement.24 The district court's conclusion that state
24
Because all of the transferor courts would apply
Massachusetts law, we do not assess what would occur if fewer than
all of the transferor jurisdictions would apply Massachusetts law.
No party has briefed this issue and in this case the concern is
hypothetical.
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law did not govern was error. We vacate the district court's award
of fees and remand for resolution of the remaining issues under
Massachusetts law.
B. Application of Massachusetts Law
"Massachusetts generally follows the 'American Rule' and
denies recovery of attorney's fees absent a contract or statute to
the contrary." Police Comm'r of Bos. v. Gows, 705 N.E.2d 1126,
1128 (Mass. 1999). Under Massachusetts law, there appear to be two
permissible approaches to determining attorneys' fees pursuant to
a contractual agreement.
First, the lodestar approach is permissible in
contractual fee cases. See WHTR Real Estate Ltd. P'ship v. Venture
Distrib., Inc., 825 N.E.2d 105, 111 (Mass. App. Ct. 2005); see also
Raymond Leasing Corp. v. Callico Distribs., Inc., 820 N.E.2d 267,
271 (Mass. App. Ct. 2005) (affirming attorneys' fees award based on
an adjusted "number of hours expended" multiplied by "the hourly
rate customarily charged by attorneys with experience and expertise
in this particular area of the law"). It has been used in some
contractual fee cases.
Under Massachusetts's lodestar approach, attorneys' fees
are "calculated by multiplying the number of hours reasonably spent
on the case times a reasonable hourly rate." Fontaine v. Ebtec
Corp., 613 N.E.2d 881, 890 (Mass. 1993). This figure is "the basic
measure of a reasonable attorney's fee" under this approach. Id.-34-
at 891. After the base lodestar figure is calculated, "[i]n
limited circumstances" it may be "enhanced to compensate for the
risk of nonpayment." Id.; see also WHTR, 825 N.E.2d at 111. The
Supreme Judicial Court has held that no enhancement was appropriate
where the case was "not complex," "raised no novel issues of law,"
and did not have "significance . . . for a wider class of persons"
beyond the particular plaintiff. Fontaine, 613 N.E.2d at 892.
The second permissible approach is a multi-factor
analysis. Under this approach, a court may consider a number of
factors, originally outlined in Cummings v. National Shawmut Bank
of Boston, 188 N.E. 489 (Mass. 1934), to arrive at a determination
of reasonable attorneys' fees,
including the ability and reputation of the
attorney, the demand for his services by
others, the amount and importance of the
matter involved, the time spent, the prices
usually charged for similar services by other
attorneys in the same neighborhood, the amount
of money or the value of the property affected
by [the] controversy, and the results secured.
Id. at 492 (quoted in WHTR, 825 N.E.2d at 111-12); see
also Margolies v. Hopkins, 514 N.E.2d 1079, 1082 (Mass. 1987)
(considering these factors where parties agreed to pay counsel fees
as part of a settlement); Citizens Bank of Mass. v. Travers, 866
N.E.2d 974, 977 (Mass. App. Ct. 2007) (holding that these factors
govern reasonableness of attorneys' fees awarded under a contract).
-35-
The district court on remand should determine which
method Massachusetts would apply here. It is clear that the
present award cannot stand.
If under Massachusetts law the lodestar approach is
called for, or if it is highly relevant under the multi-factor
approach, the litigation on remand may be simplified. In this
case, the district court calculated a base lodestar figure of
$7,734,000 (encompassing only class counsel), and neither side
mounted a real challenge to the figure, as a pre-award figure, on
appeal. Class counsel agreed at oral argument that the base
lodestar value would only need to be increased to the extent that
it did not include additional work, undertaken after the district
court's award of fees, and even then "would not be an appreciably
different number." That claim of increase due to additional work
is preserved for remand. The defendants likewise agreed at oral
argument that remand for consideration of only the increase for
additional work and any lodestar multiplier would be acceptable.
Given the absence of any direct challenge to this figure,
the base lodestar figure of $7,734,000 shall be the base figure
used on remand as to class counsel, save for an increase for extra
work. The use of this figure is appropriate given the courts'
"interest in avoiding burdensome satellite litigation" over
attorneys' fees. City of Burlington v. Dague, 505 U.S. 557, 566
(1992). Because no lodestar calculation was performed as to
-36-
plaintiffs' attorneys who were not class counsel, the district
court will need to perform a separate lodestar calculation as to
those attorneys.
Under both methods used by Massachusetts law, a question
remaining on remand is the question of the appropriate contingency
enhancement, if any. The district court's choice of a multiplier
figure was not based on Massachusetts law nor justified by the
record, and it is therefore vacated. We understand the parties to
have agreed, at oral argument, that if there were a remand, the
issues open on remand would include, inter alia, the further time
remaining to be spent by all counsel, not just class counsel; the
risks undertaken; and the value of the settlement. As to this last
question, the actual claims data collected by the settlement
administrator is relevant to the enhancement question and in
determining the appropriate fee. We also urge the parties to
attempt to resolve the remaining issues between them.
III.
We reverse the district court's decision for legal error
and vacate the award of attorneys' fees. We remand for calculation
of an appropriate fee under Massachusetts law, consistent with this
opinion.25
No costs are awarded.
25
We also remand the motion of class counsel requesting that
they be paid the award of costs without further delay.
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