Class Action Attorney Fees: How Lawyers Get Paid in Class Actions

Introduction

When a class action lawsuit settles, the headlines often focus on the total settlement amount and what class members might receive. Less attention is typically paid to another significant aspect of these settlements: attorney fees. Yet understanding how lawyers are compensated in class actions is crucial for both evaluating the fairness of settlements and comprehending the economic incentives that drive this form of litigation.

Class action attorney fees frequently amount to millions of dollars, sometimes representing a substantial percentage of the total settlement fund. These large fee awards occasionally draw criticism from those who question whether attorneys are the primary beneficiaries of the class action system rather than the class members themselves.

This article explains how attorneys are compensated in class action lawsuits, explores the methods used to calculate fees, examines the controversies surrounding these payments, and discusses how courts oversee and approve fee awards to ensure they are reasonable and fair to all parties involved.

How Attorney Fees Are Calculated in Class Actions

Unlike individual lawsuits where clients directly hire and pay their attorneys, class actions operate under a different fee structure. Because most class members are not actively involved in the litigation, they don't enter into traditional fee agreements with class counsel.

Instead, attorneys who represent the class typically work on a contingency basis, advancing all costs of litigation and receiving payment only if the lawsuit succeeds through settlement or trial. When a favorable outcome is achieved, class counsel applies to the court for an award of fees and expense reimbursement, which must receive judicial approval.

Courts generally use one of two primary methods—or a combination of both—to determine reasonable attorney fees in class actions:

1. The percentage-of-recovery method
2. The lodestar method

The choice of method often depends on the jurisdiction, the type of case, the preferences of the presiding judge, and the specific circumstances of the settlement.

The Percentage-of-Recovery Method

The percentage-of-recovery approach is the more straightforward method and is commonly used in cases that result in a common fund—a fixed sum of money from which both class members' compensation and attorney fees are paid. Under this method, attorneys receive a specified percentage of the total recovery.

Key features of the percentage method include:

• Typical ranges: While percentages vary by jurisdiction and case type, fee awards typically range from 15% to 33% of the total recovery. Complex antitrust or securities cases might justify higher percentages, while very large settlements (sometimes called "mega-funds") often result in lower percentage rates due to economies of scale.
• Sliding scales: Some courts apply sliding scales where the percentage decreases as the settlement amount increases. For example, attorneys might receive 25% of the first $10 million, 20% of the next $10 million, and 15% of amounts beyond that.
• Benchmark percentages: Some jurisdictions have established "benchmark" percentages (often 25%) as starting points for fee determinations, which may then be adjusted upward or downward based on specific case factors.

The percentage method is favored in many courts because it aligns the interests of class counsel with those of the class—attorneys are incentivized to maximize the total recovery. It also roughly mirrors what an individual plaintiff might agree to in a standard contingency fee arrangement.

However, this approach has been criticized when applied to very large settlements, where a standard percentage might result in fees that appear disproportionate to the actual work performed. This concern has led many courts to employ the lodestar method as a cross-check, even when primarily using the percentage approach.

The Lodestar Method

The lodestar method takes a more detailed accounting approach to fee calculation. It involves multiplying the reasonable number of hours worked by attorneys and paralegals by their reasonable hourly rates, and then potentially adjusting this figure based on various factors.

The basic lodestar calculation follows this formula:

Lodestar = (Reasonable Hours Worked) × (Reasonable Hourly Rate)

Key aspects of the lodestar method include:

• Reasonable hours: Attorneys must provide detailed time records documenting their work on the case. Courts review these records and may exclude hours deemed excessive, redundant, or unnecessary.
• Reasonable rates: Hourly rates must be consistent with those prevailing in the community for similar services by attorneys of comparable skill and experience. Courts often consider market rates in the geographic region where the case was litigated.
• Multipliers: After calculating the base lodestar figure, courts may apply a multiplier (upward or downward) to account for factors such as exceptional results, unusual risk, case complexity, or quality of representation. Multipliers typically range from 1.0 to 4.0, with most falling between 1.5 and 2.5.

The lodestar method is often preferred in cases involving fee-shifting statutes, where defendants pay the plaintiffs' attorney fees separate from any recovery to class members. It's also commonly used in cases involving primarily injunctive relief (non-monetary remedies) where there is no common fund to take a percentage from.

Critics of the lodestar method argue that it incentivizes inefficiency by rewarding attorneys for spending more hours on a case rather than achieving the best results in the most efficient manner. It also creates significant administrative burden for both attorneys and courts, who must review detailed time records.

Hybrid Approaches and Judicial Discretion

Many courts now employ hybrid approaches that combine elements of both the percentage and lodestar methods. A common practice is to:

1. Calculate fees using the percentage-of-recovery method
2. Perform a lodestar cross-check to ensure the percentage-based fee is reasonable relative to the time invested
3. Adjust the fee if the comparison reveals a significant disconnect between the two methods

When determining appropriate fees, courts consider various factors beyond the raw calculations. These factors, often drawn from precedent cases like Johnson v. Georgia Highway Express or Goldberger v. Integrated Resources, include:

• The time and labor required
• The novelty and difficulty of the questions involved
• The skill required to perform the legal services properly
• The preclusion of other employment due to accepting the case
• The customary fee for similar work in the community
• The contingent nature of the fee arrangement and risk of non-payment
• Time limitations imposed by the client or circumstances
• The amount involved and results obtained
• The experience, reputation, and ability of the attorneys
• The undesirability of the case
• The nature and length of the professional relationship with the client
• Fee awards in similar cases

Courts have considerable discretion in weighing these factors and determining an appropriate fee. This flexibility allows judges to tailor fee awards to the specific circumstances of each case while ensuring the awards are reasonable and fair to class members.

Controversies and Criticisms

Attorney fees in class actions have been the subject of considerable debate and criticism from various quarters. Common critiques include:

• Disproportionate allocations: Critics argue that attorneys sometimes receive a disproportionate share of settlements relative to individual class members. When a multimillion-dollar settlement results in minimal payments to class members but generates substantial fees for attorneys, questions arise about who truly benefits from the litigation.
• Settlement incentives: Some critics suggest that contingency arrangements can create incentives for attorneys to settle cases prematurely to secure guaranteed fees rather than pursuing maximum recovery for the class through extended litigation.
• Coupon settlements: Particularly controversial are settlements where class members receive coupons or non-monetary benefits while attorneys receive cash payments. The Class Action Fairness Act of 2005 addressed this concern by requiring that fees in coupon settlements be based on the value of coupons actually redeemed, not their theoretical value.
• Reverse auctions: When multiple firms file similar class actions in different courts, defendants may seek settlement with the firm willing to accept the lowest amount, potentially undermining class interests in favor of guaranteed attorney fees.
• Cy pres distributions: In cases where settlement funds remain after distribution to class members, the money may go to charitable organizations rather than additional payments to class members. Critics question whether attorneys should receive full percentage-based fees on funds that don't directly benefit the class.

Defenders of the current fee system counter that:

• Contingency risk justifies significant fees: Class action attorneys assume enormous financial risk and invest substantial resources with no guarantee of payment, often over many years.
• Social utility justifies fee structure: Class actions serve important social functions by enabling litigation of claims that would be impractical to pursue individually, and appropriate fees are necessary to incentivize competent counsel to take on these cases.
• Judicial oversight prevents abuse: The requirement for court approval of all fee awards provides a significant check against excessive fees.

Judicial Oversight and Approval

A crucial safeguard in the class action fee process is the requirement for judicial approval. Rule 23(h) of the Federal Rules of Civil Procedure specifically addresses attorney fees in class actions, stating that the court must determine a reasonable fee award and may hold a hearing to do so.

The approval process typically follows these steps:

1. Fee petition: Class counsel submits a detailed motion requesting fees, supported by documentation such as time records, information about attorney qualifications and rates, and arguments justifying the requested amount.
2. Notice to class: Class members receive notice of the fee request and have the opportunity to object.
3. Fairness hearing: The court considers the fee request as part of the overall settlement approval process, often at a "fairness hearing" where objections can be heard.
4. Judicial review: The judge evaluates whether the requested fees are reasonable using the percentage method, lodestar method, or a combination approach.
5. Written opinion: The court issues a written opinion explaining its fee decision, which may approve, reduce, or occasionally increase the requested amount.

In recent years, courts have become increasingly vigilant in scrutinizing fee requests, often appointing special masters or fee experts to assist with the evaluation of complex fee petitions. Some courts have also appointed guardian ad litem to represent class interests specifically with respect to fees.

The judiciary's gatekeeping role is essential to maintaining the integrity of the class action system and ensuring that fee awards serve the interests of justice while providing fair compensation to attorneys who successfully advocate for class members.

How Attorney Fees Impact Class Members

For class members, attorney fees directly impact the net benefits they receive from settlements. The relationship between fees and class recovery varies depending on the settlement structure:

• Common fund cases: In these settlements, attorney fees come directly from the settlement fund, reducing the amount available for distribution to class members. For example, in a $10 million settlement with a 25% fee award, $7.5 million would remain for class members (minus administrative costs).
• Fee-shifting cases: In cases involving fee-shifting statutes, defendants pay attorney fees separately from the class recovery. These arrangements are more common in civil rights, employment, and consumer protection cases where applicable laws provide for fee awards to prevailing plaintiffs.
• Clear sailing provisions: Some settlements include "clear sailing" provisions where defendants agree not to object to attorney fee requests up to a specified amount. While these provisions provide certainty to class counsel, they may raise concerns about potential conflicts of interest if attorneys agree to settlement terms favorable to defendants in exchange for uncontested fee requests.

Class members should understand that:

• The attorney fee information must be clearly disclosed in settlement notices, allowing class members to evaluate how the fees affect their recovery.
• Class members have the right to object to fee requests they consider excessive, though such objections are rarely successful without substantial evidence or legal arguments.
• In evaluating whether a settlement is fair, reasonable, and adequate, courts consider the relationship between the relief provided to the class and the fee award.

While attorney fees reduce the immediate recovery available to class members, the contingency fee system enables litigation that would otherwise be economically unfeasible for most individuals to pursue. In this sense, reasonable attorney fees can be viewed as the cost of access to justice for claims that would otherwise go unaddressed.

Conclusion

Attorney fees are an integral and necessary component of the class action system. They provide the economic incentive for skilled lawyers to undertake risky, complex litigation on behalf of groups who have suffered relatively small individual harms but significant aggregate injuries.

The methods for calculating these fees—whether through percentage-of-recovery, lodestar, or hybrid approaches—aim to balance fair compensation for attorneys with maximizing benefits for class members. While no fee mechanism is perfect, judicial oversight provides a critical check against excessive fees or arrangements that prioritize attorney compensation over class member recovery.

For class members and the public, understanding how attorney fees work in class actions provides important context for evaluating settlement announcements and the overall effectiveness of the class action mechanism as a tool for accountability and compensation. While headlines often focus on large fee awards, these payments should be viewed in the context of the risks assumed, resources invested, results achieved, and alternatives available in the absence of class action litigation.

As the legal landscape continues to evolve, courts will likely continue refining approaches to attorney fees to ensure they serve the dual purposes of fairly compensating class counsel while maximizing the benefits delivered to the class members they represent.