Liles v. Motorola Solutions, Inc., No. 12-2339 (7th Cir. 2013)

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Justia Opinion Summary

A class of Motorola investors claimed that, during 2006, the firm made false statements to disguise its inability to deliver a competitive mobile phone that could employ 3G protocols. When the problem became public, the price of Motorola’s stock declined. The parties settled for $200 million. None of the class members contends that the amount is inadequate. Two objected to approval of counsel’s proposal that it receive 27.5 percent of the fund. One objector protested almost a month after the deadline and failed to file a claim to his share of the recovery. The Seventh Circuit dismissed his appeal, stating that he lacks any interest in the amount of fees, since he would not receive a penny from the fund even if counsel’s share were reduced to zero. The other objector claimed that fee schedules should be set at the outset, preferably by an auction in which law firms compete to represent the class. Noting the problems inherent in such a system, the court held that the district judge did not abuse her discretion in approving the award.

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In the United States Court of Appeals For the Seventh Circuit ____________________   Nos.  12-­ 2339  &  12-­ 2354   ERIC  SILVERMAN,  et  al.,   Plaintiffs-­ Appellees,   v.   MOTOROLA  SOLUTIONS,  INC.,  et  al.,   Defendants-­ Appellees.   Appeals  of:     EDWARD  FALKNER  and  PAUL  A.  LILES   ____________________   Appeals  from  the  United  States  District  Court  for  the   Northern  District  of  Illinois,  Eastern  Division.   No.  07  C  4507    Amy  J.  St.  Eve,  Judge.   ____________________   ARGUED  NOVEMBER  1,  2012    DECIDED  AUGUST  14,  2013   ____________________   Before   EASTERBROOK,   Chief   Judge,   and   ROVNER   and   HAMILTON,  Circuit  Judges.   EASTERBROOK,   Chief   Judge.   A   class   of   Motorola s   inves-­ tors  contended  that,  during  the  second  half  of  2006,  the  firm   made  false  statements  in  order  to  disguise  its  inability  to  de-­ liver  a  competitive  mobile  phone  that  could  employ  3G  pro-­ Nos.  12-­ 2339  &  12-­ 2354   2   tocols.   When   the   problem   became   public,   the   price   of   Motorola s   stock   declined.   After   the   suit   had   been   pending   for   four   years,   the   district   court   denied   Motorola s   motion   for  summary  judgment.  798  F.  Supp.  2d  954  (N.D.  Ill.  2011).   The   parties   then   settled   for   $200   million.   None   of   the   class   members  contends  that  this  is  inadequate but  two  contend   that  the  judge  abused  her  discretion  by  approving  counsel s   proposal   that   they   receive   27.5%   of   the   fund.   See   2012   U.S.   Dist.  LEXIS  63477  (N.D.  Ill.  May  7,  2012).   Paul  Liles,  one  of  the  objectors,  protested  almost  a  month   after  the  deadline.  And  although  he  filed  a  belated  objection   to  the  award  of  legal  fees,  he  did  not  file  a  claim  to  his  share   of  the  recovery.  He  thus  lacks  any  interest  in  the  amount  of   fees,  since  he  would  not  receive  a  penny  from  the  fund  even   if  counsel s  take  should  be  reduced  to  zero.  The  class  repre-­ sentatives   appellate   brief   flags   this   problem;   Liles s   reply   brief  ignores  it.  We  dismiss  his  appeal  on  the  ground  that  he   lacks  any  interest  in  the  outcome.   Edward   Falkner,   the   other   objector,   contends   that   the   award  is  improper  because  it  was  fixed  at  the  end  of  the  liti-­ gation.  He  maintains  that  fee  schedules  should  be  set  at  the   outset,  preferably  by  auction  in  which  law  firms  competing   to  represent  the  class  tell  the  judge  how  much  they  will  ac-­ cept,   and   the   judge   picks   the   low   bidder.   We   agree   with   Falkner s  premise  that  attorneys  fees  in  class  actions  should   approximate   the   market   rate   that   prevails   between   willing   buyers   and   willing   sellers   of   legal   services.   See   In   re   Conti-­ nental  Illinois  Securities  Litigation,  962  F.2d  566,  572  (7th  Cir.   1992);  In  re  Synthroid  Marketing  Litigation,  264  F.3d  712,  718   (7th  Cir.  2001)  (Synthroid  I);   In  re  Synthroid  Marketing  Liti-­ gation,   325   F.3d   974,   975   (7th   Cir.   2003)   (Synthroid   II).   In   3   Nos.  12-­ 2339  &  12-­ 2354   many  markets  competition  proceeds  by  auction.  But  we  also   observed  in  Synthroid  II,  325  F.3d  at  979 80,  that  solvent  liti-­ gants   do   not   select   their   own   lawyers   by   holding   auctions,   because  auctions  do  not  work  well  unless  a  standard  unit  of   quality  can  be  defined  and  its  delivery  verified.  There  is  no   standard  quality  of  legal  services,  and  verification  is  diffi-­ cult  if  not  impossible.   The  two  Synthroid  decisions  observed  that  establishing  a   fee   structure   at   the   outset   of   a   suit   is   desirable;   unlike   auc-­ tions,  which  private  markets  in  legal  services  do  not  use,   ex   ante  fee  structures  are  common  and  beneficial  to  clients.  But   neither   Synthroid   nor   any   other   decision   of   which   we   are   aware  holds  that  fee  schedules  set  ex  ante  are  the  only  lawful   means  to  compensate  class  counsel  in  common-­ fund  cases.  It   is   unfortunate   that   the   district   judge   originally   assigned   to   this  case  did  not  consider  the  possibility  of  establishing  a  fee   schedule   when   he   appointed   a   lead   plaintiff   and   approved   that   party s   choice   of   counsel.   By   the   time   that   judge   died,   and  the  case  had  been  reassigned  to  the  judge  who  awarded   the   fees,   it   was   not   possible   to   recreate   the   conditions   that   existed   at   the   case s   outset.   Too   much   legal   time   had   been   sunk  into  the  litigation,  and  it  would  have  been  counterpro-­ ductive  to  invite  other  law  firms  to  make  other  offers  and,  if   selected,  start  over.   When   reviewing   awards   set   after   the   fact,   the   court   of   appeals   asks   whether   the   district   judge   has   abused   her   dis-­ cretion.   Harman   v.   Lyphomed,   Inc.,   945   F.2d   969,   973   (7th   Cir.   1991).   Falkner   contends   that   the   judge   abused   her   dis-­ cretion   here   because   fees   substantially   less   than   27.5%   have   been   awarded   in   other   cases.   Data   show   that   27.5%   is   well   above   the   norm   for   cases   in   which   $100   million   or   more   Nos.  12-­ 2339  &  12-­ 2354   4   changes  hands.  See  Brian  T.  Fitzpatrick,   An  Empirical  Study   of  Class  Action  Settlements  and  Their  Fee  Awards,  7  J.  Em-­ pirical  Legal  Studies  811  (2010);  Theodore  Eisenberg  &  Geof-­ frey   P.   Miller,   Attorney   Fees   and   Expenses   in   Class   Action   Settlements:   1993 2008,   7   J.   Empirical   Legal   Studies   248   (2010);   Theodore   Eisenberg   &   Geoffrey   P.   Miller,   Attorney   Fees   in   Class   Action   Settlements:   An   Empirical   Study,   1   J.   Empirical  Legal  Studies  27  (2004).  Eisenberg  and  Miller  find   that   the   mean   award   from   settlements   in   the   $100   to   $250   million  range  is  12%  and  the  median  10.2%.  All  three  articles   find  that  the  percentage  of  the  fund  awarded  to  counsel  de-­ clines   as   the   size   of   the   fund   increases.   An   award   fixed   at   27.5%  of  a  $200  million  fund  is  exceptionally  high.   It  does  not  necessarily  follow  that  27.5%  is  legally  exces-­ sive.   Contingent   fees   compensate   lawyers   for   the   risk   of   nonpayment.   The   greater   the   risk   of   walking   away   empty-­ handed,   the   higher   the   award   must   be   to   attract   competent   and   energetic   counsel.   See   Kirchoff   v.   Flynn,   786   F.2d   320   (7th  Cir.  1986).  The  district  court  received  a  report  from  Pro-­ fessor  Charles  Silver,  who  concluded  that  this  suit  was  unu-­ sually   risky.   Defendants   prevail   outright   in   many   securities   suits.  This  one  took  more  than  four  years,  and  more  than  $5   million  in  out-­ of-­ pocket  expenses  by  counsel  to  conduct  dis-­ covery   and   engage   experts,   before   reaching   the   summary-­ judgment   stage.   Only   after   the   district   court   denied   its   mo-­ tion   for   summary   judgment   was   Motorola   willing   to   settle   for   a   substantial   sum and   Motorola   might   well   have   pre-­ vailed   on   summary   judgment   but   for   some   unanticipated   facts   plaintiffs   lawyers   turned   up   in   discovery.   When   this   suit  got  under  way,  no  other  law  firm  was  willing  to  serve  as   lead  counsel.  Lack  of  competition  not  only  implies  a  higher   fee  but  also  suggests  that  most  members  of  the  securities  bar   5   Nos.  12-­ 2339  &  12-­ 2354   saw  this  litigation  as  too  risky  for  their  practices.  The  district   judge   did   not   abuse   her   discretion   in   concluding   that   the   risks   of   this   suit   justified   a   substantial   award,   even   though   compensation  in  most  other  suits  has  been  lower.   Our   concern   is   less   with   the   absolute   level   of   fees   than   with   the   structure   of   the   award.   The   articles   we   have   cited   reinforce  the  observation  in  the  Synthroid  opinions  that  ne-­ gotiated  fee  agreements  regularly  provide  for  a  recovery  that   increases   at   a   decreasing   rate.   In   Synthroid   II,   for   example,   the   award   was   30%   of   the   first   $10   million,   25%   of   the   next   $10   million,   22%   of   the   band   from   $20   to   $46   million,   and   15%  of  everything  else.   Many  costs  of  litigation  do  not  depend  on  the  outcome;  it   is  almost  as  expensive  to  conduct  discovery  in  a  $100  million   case  as  in  a  $200  million  case.  Much  of  the  expense  must  be   devoted  to  determining  liability,  which  does  not  depend  on   the   amount   of   damages;   in   securities   litigation   damages   of-­ ten  can  be  calculated  mechanically  from  movements  in  stock   prices.   There   may   be   some   marginal   costs   of   bumping   the   recovery  from  $100  million  to  $200  million,  but  as  a  percent-­ age  of  the  incremental  recovery  these  costs  are  bound  to  be   low.   It   is   accordingly   hard   to   justify   awarding   counsel   as   much  of  the  second  hundred  million  as  of  the  first.  The  justi-­ fication  for  diminishing  marginal  rates  applies  to  $50  million   and  $500  million  cases  too,  not  just  to  $200  million  cases.   Awarding  counsel  a  decreasing  percentage  of  the  higher   tiers  of  recovery  enables  them  to  recover  the  principal  costs   of   litigation   from   the   first   bands   of   the   award,   while   allow-­ ing  the  clients  to  reap  more  of  the  benefit  at  the  margin  (yet   still  preserving  some  incentive  for  lawyers  to  strive  for  these   higher   awards).   Professor   Silver s   report   does   not   identify   Nos.  12-­ 2339  &  12-­ 2354   6   suits  seeking  more  than  $100  million  in  which  solvent  clients   agree   ex  ante  to  pay  their  lawyers  a  flat  portion  of  all  recov-­ eries,   as   opposed   to   a   rate   that   declines   as   the   recovery   in-­ creases.  The  district  judge  did  not  discuss  whether  a  market-­ based   rate   would   include   different   portions   of   different   bands   of   the   recovery.   There s   a   reason   for   that   omission:   Falkner   did   not   raise   this   subject   in   the   district   court.   (Nor   did  he  call  the  judge s  attention  to  data  showing  that  27.5%   substantially  exceeds  the  norm  for  large  settlements.  Falkner   pointed  to  three  cases  where  the  rates  were  low,  but  the  dis-­ trict  court  needed  data  rather  than  cherry-­ picked  examples.)   A   district   judge,   looking   out   for   the   interests   of   all   class   members,  sometimes  must  consider  issues  that  the  class  rep-­ resentatives   and   their   lawyers   prefer   to   let   pass.   This   is   not   such   a   situation,   however.   Institutional   investors   such   as   pension   funds   and   university   endowments   hold   claims   to   more   than   70%   of   the   settlement   fund.   These   institutional   investors  have  in-­ house  counsel  with  fiduciary  duties  to  pro-­ tect  the  beneficiaries.  That  these  large  investors,  looking  out   for  themselves,  help  to  protect  the  interests  of  class  members   with   smaller   stakes   is   a   premise   of   several   rules   in   the   Pri-­ vate  Securities  Litigation  Reform  Act  of  1995.  The  difference   between  27.5%  of  $200  million  and  a  smaller  award  (say,  one   averaging   20%)   could   be   a   tidy   sum   for   institutional   inves-­ tors  (including  this  suit s  lead  plaintiff,  a  pension  fund),  one   worth   a   complaint   to   the   district   judge   if   the   lawyers   cut   seems   too   high.   Yet   none   of   the   institutional   investors   has   protested either   by   filing   a   motion   asking   the   judge   to   re-­ duce   the   fees   or   by   supporting   Falkner s   position   in   this   court.   This   award   may   be   at   the   outer   limit   of   reasonable-­ ness,  but,  given  the  way  the  subject  was  litigated  in  the  dis-­ 7   Nos.  12-­ 2339  &  12-­ 2354   trict  court,  deferential  appellate  review  means  that  the  deci-­ sion  must  stand.   Appeal   No.   12-­ 2339   is   dismissed   for   lack   of   a   justiciable   controversy.  In  appeal  No.  12-­ 2354,  the  decision  is  affirmed.