Americana Art China Company, I v. Foxfire Printing and Packaging ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 13-2569
AMERICANA ART CHINA
COMPANY, INC.,
Plaintiff-Appellant,
v.
FOXFIRE PRINTING AND
PACKAGING, INC.,
Defendant-Appellee.
Appeal from the United States District Court for the
Northern District of Illinois, Western Division.
No. 3:08-cv-06992— Frederick J. Kapala, Judge.
ARGUED NOVEMBER 13, 2013—DECIDED FEBRUARY 18, 2014
Before MANION, KANNE, and HAMILTON, Circuit Judges.
KANNE, Circuit Judge. Counsel for the plaintiff contests the
district court’s reduction of an attorney fee award negotiated
2 No. 13-2569
as part of a class action settlement between plaintiff, defendant,
and defendant’s insurance carrier after defendant admitted to
liability for violations of the Telephone Consumer Protection
Act of 1991 (“TCPA”), 47 U.S.C. § 227. The appeal was
uncontested, but plaintiff’s counsel must not have been pleased
with the tenor of oral argument. Roughly a week after
appearing in court, the parties attempted a Rule 42(b)
dismissal. We decline to accept the voluntary dismissal, and
affirm the district court’s fee reduction.
I. BACKGROUND
This is a “fax-blasting” case. In 2008, the defendant faxed
unsolicited advertisements to tens of thousands of recipients in
violation of the TCPA. Plaintiff Americana Art China
Company, Incorporated, is class representative. In October
2011, the defendant tentatively settled for a judgment against
it in the amount of $18 million, provided that its out-of-pocket
expenses were limited to $75,000, with the remainder
recoverable only from its insurance carriers, Hartford and
Continental.
The agreement between Americana and the defendant
prompted Continental (but not Hartford) to intervene. In
October 2012, a second proposed class action settlement was
reached, this time between Americana, the defendant, and
Continental. In it, Continental agreed to make a total of
$6.1 million available to the class members to resolve its own
liability. The total is approximately equal to the number of
faxes sent (110,853) times the per-fax damages figure offered
by Continental ($55.03). The proposed settlement also allowed
No. 13-2569 3
for a fee award to Americana’s attorneys of 1/3 the total
amount available: $2,033,333.33.1
Americana moved the district court for preliminary
approval of the settlement, and Hartford intervened. In
response, Americana edited some recitals contained within the
settlement agreement, but the substance of the terms (and
Hartford’s unresolved liability) remained unchanged. At this
point, the district court preliminarily approved the terms of the
settlement and ordered notice sent to the class.
24,389 of the 28,879 class members were successfully
notified; five requested exclusion, and none objected. Only
1,820 returned a claim form, however, seeking damages for a
total of 7,222 unlawful fax transmissions. That meant
Continental would pay out only $397,426.66 of the $6.1 million
made available to class members, with the remainder, less
attorney fees and incentive awards, to revert.
The district court severed its consideration of the proposed
class settlement, to which it gave final approval, from the issue
of attorney fees. Despite the relatively meager final payout to
class members, Americana’s attorneys continued to demand
over $2 million. Wary of an inequitable distribution, the district
court applied the lodestar method, rather than the percentage
method, to determine an appropriate fee award. The court
accepted the lodestar amount submitted by counsel, and
1
The subtraction of the fee award from the total amount available would
obviously reduce the actual amount recoverable by each class member if all
claims were returned, but that is not an uncommon feature in the class
action landscape.
4 No. 13-2569
applied a risk multiplier of 1.5 to arrive at a final fee award of
$1,147,698.70.
Americana’s attorneys, who are the real party in interest
at this point, took exception to the district court’s fee reduction
and filed this appeal. Although the appeal was uncontested (it
is not clear who, if anybody, would contest it, since all active
parties other than Hartford signed on to the settlement),
counsel experienced a sudden change of heart after oral
argument. On November 21, 2013, counsel, along with
Continental and the defendant, filed a joint motion to dismiss
pursuant to Federal Rule of Appellate Procedure 42(b). We
requested a supplement from the parties explaining what, if
any, effect their dismissal agreement would have on the terms
of the settlement considered by the district court. Counsel
responded that the dismissal of this appeal would have no
effect; the district court judgment would stand in all respects,
and it would be as though the appeal were never brought.
“Rule 42(b) of the appellate rules does not require dismissal
if the rule’s conditions for dismissal are satisfied; it says the
court ‘may’ dismiss if they are.” Safeco Ins. Co. of Am. v. Am.
Intern. Grp., Inc., 710 F.3d 754, 759 (7th Cir. 2013) (Posner, J.,
dissenting). Given the conflicting incentives present in any
class action suit, judicial review of class action settlements is
vital at both the trial and appellate level. Id. We believe that it
would be irresponsible to dismiss this case without review.
Cases like this one are common and are economically
significant. This is an opportunity to provide additional
guidance to the district courts.
No. 13-2569 5
II. ANALYSIS
We review a district court’s fee determination for an abuse
of discretion. Harman v. Lyphomed, Inc., 945 F.2d 969, 973 (7th
Cir. 1991). We will not upset the district court’s decision unless
it “reaches an erroneous conclusion of law, fails to explain a
reduction or reaches a conclusion that no evidence in the
record supports as rational.” Id. As a part of our analysis, we
will also “review de novo the district court’s methodology to
determine whether it reflects procedure approved for
calculating awards.” Id.The district court applied the lodestar method to determine
an appropriate fee award in this case, accepting the lodestar
amount submitted by counsel and applying a risk multiplier of
1.5 to account for the contingent nature of the recovery.
Americana attacks the district court decision in two respects.
First, it argues that the district court’s application of the
lodestar method was erroneous as a matter of law because it
involved an ex post facto, rather than an ex ante, rationalization
of the value of counsel’s services. Second, it argues that
lodestar was the wrong method in the first place, and that the
district court should have stuck with the “percentage” method
derived from common fund cases. Both arguments are off-
base. The district court committed no methodological error and
did not abuse its discretion in reducing the fee award.
A. Lodestar Methodology
Americana’s first argument is that, by factoring in the
amount actually recovered by the fax-blast victims when
calculating an appropriate fee award under the lodestar
method, the district court improperly engaged in ex post facto
6 No. 13-2569
rationalization for a fee reduction. Americana claims, “This
Circuit’s decisions have repeatedly stated that the process for
determining a reasonable attorney fee in a class action requires
an ex ante analysis[.]” (Appellant’s Br. at 11.) That is essentially
true. We have said, for example, that “[o]nly ex ante can
bargaining occur in the shadow of the litigation’s uncertainty;
only ex ante can the costs and benefits of particular systems and
risk multipliers be assessed intelligently.” In re Synthroid Mktg.
Litig., 264 F.3d 712, 719 (7th Cir. 2001). The reality, of course, is
that fees often are not determined ex ante. But because we
always seek to replicate the market value of an attorney’s
services—and because the market would assign value up
front—a district court that leaves the matter of fees until the
end of the litigation process “must set a fee by approximating
the terms that would have been agreed to ex ante, had
negotiations occurred.” Id.That said, Americana’s argument is a non-starter. Why?
Because the district court did not consider the ultimate
outcome at all in calculating at a reasonable fee under the
lodestar method. It considered only the lodestar amount
submitted by counsel and the risk multiplier warranted by the
contingent nature of the case. It did consider the paucity of the
class recovery as compared to the requested fee award when
deciding whether to apply the lodestar method, as opposed to
the percentage method, in the first place. But that is exactly
what we have suggested a district court should do. See Harman,
945 F.2d at 974 (explaining that the lodestar method has an
advantage over the percentage method in that it alleviates
“concerns that a percentage approach resulted in
over-compensation for attorneys”). Moreover, the choice of
No. 13-2569 7
methods is discretionary. Id. at 975 (citing Kirchoff v. Flynn, 786
F.2d 320, 329 n. 1 (7th Cir. 1986)). As we will explain hereafter,
in our circuit, it is legally correct for a district court to choose
either. Doing so is obviously not an abuse of discretion.
We also note that it would not be legal error if the district
court did consider the actual amount recovered. Attorneys and
clients negotiating fee schedules ex ante often, and in some
practice contexts almost exclusively, consider the litigation’s
ultimate degree of success. That is how a contingency fee
works. To our knowledge, we have never forbidden district
courts from considering the outcome when engaging in a
simulated ex ante analysis. We have certainly discouraged
district courts from relying solely on the degree of success in
determining fee awards, see Sutton v. Bernard, 504 F.3d 688, 692
(7th Cir. 2007), but not from considering it at all. And, to be
frank, if the district court in this case truly had solely
considered the ultimate benefit to class members, we doubt
very much that it would have awarded roughly seventy-five
percent of the final payout to Americana’s attorneys, which is
the current state of affairs.
B. Rejection of Percentage Method
Americana’s alternative argument is essentially that the
district court committed legal error by choosing the lodestar
method over the percentage method. This argument is contrary
to the law of our circuit, which allows for either method. In
Florin v. Nationsbank of Ga., N.A., we explained:
[W]e do not believe that the lodestar approach is so
flawed that it should be abandoned. Instead, we are of
the opinion that both the lodestar approach and the
8 No. 13-2569
percentage approach may be appropriate in
determining attorney's fee awards, depending on the
circumstances. We therefore restate the law of this
circuit that in common fund cases, the decision whether
to use a percentage method or a lodestar method
remains in the discretion of the district court.
34 F.3d 560, 566 (7th Cir. 1994). Whatever position our sister
circuits might take, Florin is still good law. The district court
did not err, much less abuse its discretion, by choosing the
lodestar method in this case.
Beyond the foregoing, counsel for Americana advance a
few tangentially relevant arguments, which do not require our
extended consideration. One concerns the “total benefit rule,”
under which a court applying the percentage method to a
common fund recovery should consider the total benefit
available to class members (in this case, $6.1 million) rather than
the total benefit paid (in this case, roughly $400,000) when
fixing attorney fees. See, e.g., Boeing Co. v. Van Gemert, 444 U.S.
472, 478 (1980). Because the district court in this case applied
the lodestar method and not the percentage method, the total
benefit rule is clearly inapplicable, and we need not reach the
issue.
III. CONCLUSION
We decline to accept the parties’ attempt at voluntary
dismissal. The district court committed no abuse of discretion
in its selection of the lodestar method in this case, nor any legal
error in its application of that method. We AFFIRM.