On January 14, 2015, in Kragnes v. Schroeder, No. 13-2065 (Iowa App. Ct. Jan. 14, 2015), the Iowa Appellate Court upheld the district court’s decision to cut the fees of plaintiffs’ counsel in a successful class action from a requested $15 million to $7 million. Though not a workplace class action, the decision in Kragnes is a case study for the grounds to challenge fee awards in class actions.

Case Background

In 1960, the City of Des Moines, Iowa, entered into franchise agreements with its electricity and natural gas providers, providing that each provider would pay Des Moines a percentage of its gross receipts for their sales into Des Moines.  Kragnes v. City of Des Moines, 714 N.W.2d 632, 633 (Iowa 2006). These agreements were then made into ordinances. Id.

On May 6, 2004, then-Iowa Governor Tom Vilsack signed a law phasing out sales and use tax for the sale of gas and electricity for residential use. Id. at 634. Facing budget shortfalls, Des Moines responded by entering into updated franchise agreements with its electric and gas providers that increased the franchise fee. Id. at 635. Lisa Kragnes then filed a class action on behalf of herself and those similarly situated, arguing that the increased franchise fees were illegal taxes. Id. at 636.

Ultimately, the Iowa courts determined that the increased fees were illegal taxes, and that Des Moines had to refund approximately $40 million to its taxpayers. Shroeder at 2. The $40 million was placed into a fund so that it could be remitted to the Des Moines taxpayers after class counsels’ fees were removed.

Class counsel requested $15 million in fees, or approximately 37% of the $40 million fund. Id. The district court determined that this amount was “not fair to the class members” and that an award of $7 million in fees, or approximately 18% of the fund, was appropriate. Id. at 3. Class counsel appealed the award, claiming it was “unreasonably low.” Id.

The Appellate Court’s Decision

The Iowa Appellate Court first considered whether the district court erred in considering criteria other than those laid out in the Iowa Rules of Civil Procedure and Rules of Professional Conduct in deciding to reduce class counsel’s fee award. Specifically, the Appellate Court considered whether the district court’s decision to consider the fact that “[t]he money used to pay the attorneys’ fees and expenses will come from the very residents who have already been wronged in the illegal extraction of franchise fees” was an abuse of discretion. Id. at 6 (emphasis omitted). The Appellate Court held that the district court properly considered this a factor, since the applicable rules do not preclude consideration of additional factors in fixing a fee award. Id.

The Appellate Court further rejected class counsel’s argument that it was entitled to the 37% fee because that was the amount stated in its contingency fee agreement with the class representative and published to the class. Id. at 7. The Appellate Court pointed out that judges are not bound by fee agreements between class counsel and the class representative, and upheld the district court’s decision that the award could be reduced in spite of the agreed and published fee arrangement. Id. at 7-8.

Finally, the Appellate Court held that an award of 18% of the $40 million fund was not unreasonable. The Appellate Court reasoned that, given the large size of the recovery, the percentage of the recovery should be reduced to make it reasonable. Id. at 8-9.

Implications For Employers

Employers in Iowa and elsewhere who are subject to class actions should use this case to encourage reasonable settlement demands from class counsel. It can be used to convince class counsel that a large settlement or verdict might not necessarily increase their personal recovery, as courts are more likely to reduce the percentage of damages allocated to class counsel’s fees when there are larger verdicts or settlements.

This case also gives employers a new, potentially powerful argument for why class counsel’s fees should be reduced. The Appellate Court found that class counsel’s fees can be reduced as unreasonable if they represent a significant percentage of the recovery because, in the very act of awarding fees, courts force the class to pay class counsel in the form of a smaller recovery for the wrong class counsel claims they suffered. This argument should concern class counsel since, when it is addressed to them, they will have to argue why the class they have been claiming is so hurt that they need an enormous recovery should have their recovery reduced to pay class counsel’s (often) exorbitant fees. That this is potentially concerning to class counsel is confirmed in the Schroeder case itself, with class counsel trying to dodge the issue by asserting the district court abused its discretion by even considering the issue.

Given the sums at issue, we anticipate a further appeal to the Iowa Supreme Court.