Brought to you by the Real Law Editorial Team

There’s a murder of crows, a kindle of kittens, a parliament of owls, and a cackle of hyenas. What do you call 300,000 scorned lawyers?*

It started with the federal suit Rodriguez v. West Publishing Corp. (2010 U.S. Dist. LEXIS 24155), and went on to touch on the passions that many attorneys share: taking the bar, ethics, winning cases, and getting paid. Filed in 2007, the suit alleged that bar review course giant BARBRI, and the largest LSAT preparation course company, Kaplan, conspired in anti-competitive behavior, minimizing competition and inflating the costs of bar review courses as a result. In 2009, the Ninth Circuit approved a settlement shortly before trial, with West Publishing, owner of BARBRI, and Kaplan agreeing to pay $49 million.

You Won; What Could Go Wrong?

When the case was settled, class counsel sought attorney’s fees and incentive awards. The latter were quite typical: the five representative plaintiffs had authorized counsel to seek incentive compensation that varied with the size of the settlement or verdict. The agreements had a graduated reward structure, where if the settlement amount was equal to or greater than $500,000, class counsel would seek an award of $10,000 for the five representative plaintiffs. The reward scaled up to $75,000 for a settlement of $10 million or more. The district court approved the class action settlement and made an award of attorney’s fees to class counsel.

Multiple unnamed members of the class then challenged the fairness, reasonableness, and adequacy of the settlement pursuant to Federal Rule of Civil Procedure 23(e), and objected to both the incentive awards and class counsel’s fee request. The appeal, now Rodriguez v. Disner (2012 U.S. App. LEXIS 16698), went to the Ninth Circuit a few years later. Although there were several objectors who appealed both the approval of the settlement and the attorney’s fees award on a wide variety of grounds, approval of the settlement was affirmed on appeal.

Answer: Everything Could Go Wrong

The only one of the plaintiffs’ arguments that was successful was that the incentive award agreements created conflicts of interest affecting the propriety of an award of attorney’s fees. In its judgment, the appeals court noted the conflict of interest relating to the ex ante incentive agreement between the representative plaintiffs and their counsel. The appeals court reversed the award of attorney’s fees and remanded the matter to the district court, with an order that the initial fee award be reconsidered in light of this conflict of interest.

The Plot Thickens

The attorney who had built the original successful case, Eliot G. Disner, was fired by McGuireWoods LLP (which had acquired Disner’s original firm, Van Etten Suzumoto & Becket). Disner had disagreed publicly with the settlement, saying it should have been 10 times the amount. The unnamed plaintiff group also indicated that he had promised the breakup of BARBRI as a goal of the suit. It seems that Disner was let go for damaging his firm’s reputation, that he was acting in favor of the class, and that his reputation as an excellent trial lawyer has been preserved. This cast a shadow over the class counsel’s motivation. Was it acting in favor of the class, or itself?

On remand, Judge Manuel L. Real’s district court barred all fees for services on the grounds that the incentive agreements entered into between class counsel and five of the named plaintiffs breached the California Rules of Professional Conduct by creating conflicts of interest between the class representatives and the rest of the class. The only fees allowed were those few services rendered after the court approved the incentive awards, which eliminated the conflict.

If It Doesn’t Hurt, Can It Still Be Wrong?

The class counsel, now McGuireWoods, appealed to the Ninth Circuit Court, arguing that it couldn’t be denied its fees unless it had knowingly or willfully violated an ethical rule. It also suggested that “harm” would need to have occurred for it to be denied its fees.

On August 10, the Ninth Circuit affirmed the district court’s ruling that the attorneys who formed those incentive agreements had forfeited almost all of their fees. It also reversed the district court’s order denying fees to the objectors who were the first to bring the conflict of interest to the court’s attention.

A Special Class of Nightmare

In the end, it was a complete nightmare for McGuireWoods, which was denied a $7 million fee for five years of work on a sizable antitrust class action that it successfully closed. Judge Sandra S. Ikuta of the Ninth Circuit Court said that the incentive agreement failed ethical standards because it “put class counsel and the contracting class representatives into a conflict position from day one.”

The Ninth Circuit Court: Reasonable or Unreasonable?

On further examination, it seems that it could have gone the other way. Judge Ikuta acknowledged McGuireWoods’ arguments, noting that the class representatives went far beyond their maximum recompense when they agreed to the $49 million settlement. She wrote that the district court could very well have ruled differently, considering the firm’s efforts and success in the case. Still, Judge Ikuta deferred to the decision of the district court, since it had primary responsibility for fee awards.

It’s possible that plaintiff’s counsel brought the outcome on itself. Apparently, the district judge felt burned by the original incentive and fee awards. No judge likes getting reversed on appeal, and Judge Real plainly felt set up for the reversal by the fact that plaintiff’s counsel failed to fully disclose the true nature of the incentive award agreements.

There’s also the fact that this happened in the Ninth Circuit. It has an interesting place among the appeals courts. There is a very real possibility that SCOTUS will review this case and shoot down the decision. Maybe there will be another appeal. Either way, the denial of fees means that the overwhelming majority of the settlement goes to class. With the economy being what it is, those new lawyers can probably use all the help they can get.