Lafitte v. Robert Half: CA Supreme Court Upholds Percentage of the Recovery Method for Calculating Fee Awards

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In Laffitte v. Robert Half International Inc., No. S222996 (Cal. Aug. 11, 2016) (slip op. available here), the California Supreme Court joined “the overwhelming majority” of the nation’s courts in holding that judges may award fees in class actions as a percentage of a common fund created for the class’ benefit (the “percentage of the recovery method”). Slip op. at 27. Prior to Laffitte, some litigants—often class settlement objectors—had argued that the high court’s earlier ruling in Serrano v. Priest required judges to use only the “lodestar method” for calculating fees: “The starting point of every fee award . . . must be a calculation of the attorney’s services [measured by] the time he has expended on the case.” Serrano v. Priest, 20 Cal.3d 25, 26 (1977) (“Serrano III”). However, the California Supreme Court had not directly addressed on the issue before Laffitte.

Laffitte involved a $19 million common fund that was established to settle the claims of a class of staffing professionals who had been misclassified by their staffing agency, Robert Half, as exempt under the Labor Code, and thereby were disentitled to overtime, meal breaks, rest breaks, and other benefits guaranteed to non-exempt employees. As part of the settlement, plaintiffs’ counsel requested one-third of the common fund ($6,333,333) as a contingency fee. One class member, David Brennan, filed several objections to the settlement, including an objection to the requested fee. Brennan claimed that the fee request was unreasonable because it exceeded the contingency fee plaintiffs’ counsel would be entitled to under the lodestar method (counsel’s lodestar was $2,968,620).

The trial court overruled Brennan’s objections to the settlement. With respect to fees, the court found that the requested contingency fee was reasonable under both the percentage of the recovery and lodestar methods. On appeal, Brennan claimed that the trial court had erred by using the percentage of the recovery method to calculate the fee, and made mistakes in its application of the lodestar method, such as relying only on summaries of counsel’s billing records (rather than the actual billing records) and by awarding more than double counsel’s lodestar. The California Court of Appeal rejected these arguments, finding that the trial court had not abused its discretion by awarding a percentage of the common fund in attorneys’ fees, nor by performing a lodestar calculation based on the declarations of counsel to confirm the reasonableness of the fee as a percentage of the recovery.

On appeal to the California Supreme Court, Brennan again argued that calculating the fee award as a percentage of the settlement ran afoul of Serrano III. The court disagreed, finding that Serrano III was factually distinguishable:

The quoted text [from Serrano III] . . . concern[s] calculation of a fee awarded under the private attorney general theory. In Serrano III, this court simply did not address the question of what methods of calculating a fee award may or should be used when the fee is to be drawn from a common fund created or preserved by the litigation. For this reason, the passages quoted cannot fairly be taken as prohibiting the percentage method’s use in a common fund case . . . . Since Serrano III, we have several times, in fee shifting cases, endorsed the lodestar . . . method of calculating an attorney fee award; none of our decisions involved a case where the fee was to be awarded from a common fund created or preserved by the litigation.

Id. at 20-22 (internal citations omitted; emphasis in original).

The California Supreme Court ultimately found that “whatever doubts may have been created by Serrano III,” use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion. “The recognized advantages of the percentage method . . . convince us [that it] is a valuable tool that should not be denied our trial courts.” Id. at 27 (internal citations omitted). Turning to the facts of the case, the California Supreme Court held that the trial court had not abused its discretion by awarding one-third of the common fund as a contingency fee, nor by double-checking the reasonableness of the percentage fee through a lodestar/multiplier calculation based on billing summaries, stating, “[a] lodestar cross-check [] provides a mechanism for bringing an objective measure of the work performed into the calculation of a reasonable attorney fee. If a comparison between the percentage and lodestar calculations produces an imputed multiplier far outside the normal range, . . . the trial court will have reason to reexamine its choice of a percentage.” Id. at 28-29 (internal citations omitted).

Of particular interest for practitioners is the California Supreme Court’s ruling that the lodestar cross-check “does not override the trial court’s primary determination of the fee as a percentage of the common fund and thus does not impose an absolute maximum or minimum on the potential fee award.” Id. at 30. Rather, “[i]f the multiplier calculated by means of a lodestar cross-check is extraordinarily high or low, the trial court should consider whether the percentage used should be adjusted so as to bring the imputed multiplier within a justifiable range, but the court is not necessarily required to make such an adjustment.” Id. In so holding, Laffitte ensures that the application of the lodestar method to cross-check the percentage fee will not undercut the reasons for applying the percentage of the recovery method in the first instance; namely, the “alignment of incentives between counsel and the class, a better approximation of market conditions in a contingency case, and the encouragement it provides counsel to seek an early settlement and avoid unnecessarily prolonging the litigation.” Id. at 27.

Authored by: 
Eduardo Santos, Associate