Sushi Yasuda has a reputation as one of New York City’s best restaurants, garnering rave reviews from critics and an exceptional 28 food rating (out of a possible 30) from Zagat’s.  In 2012, several current and former employees filed a lawsuit against Sushi Yasuda, alleging the restaurant violated the Fair Labor Standards Act and New York Labor Law by failing to pay workers minimum wage during their training period, premiums for overtime work, spread of hours premiums for days in which they worked over ten hours or a split shift, or the gratuities left by customers.  While the plaintiffs’ motion for class certification was pending, the parties reached a settlement.

In an order and opinion signed last week, Judge William H. Pauley III of the U.S. District Court for the Southern District of New York approved the $2.4 million settlement, but reduced the amount allocated as attorney’s fees to class counsel.  Fujiwara v. Sushi Yasuda Ltd., 2014 WL 5840700 (S.D.N.Y. Nov. 12, 2014).  Class counsel had originally sought to retain one-third of the settlement fund ($800,000) and subsequently reduced their request to one-fourth ($600,000) – apparently after heavy questioning from the court during the approval hearing.  But the court went even further than that and, following a lengthy analysis and critique, limited class counsel’s fees to one-fifth of the total settlement fund ($480,000).

Calls from the bench for increased scrutiny of attorney’s fee allocations in class action settlements are nothing new.  This blog recently reported on the Seventh Circuit’s opinion reversing a district court’s approval of the proposed class action settlement in Redman v. RadioShack Corp., in which Judge Posner emphasized the need for heightened judicial inquiry due to the conflict of interest inherent in most class action settlements:

A trial judge’s instinct, in our adversarial system of legal justice, is to approve a settlement, trusting the parties to have negotiated a just result as an alternative to bearing the risks and costs of litigation.  But the law quite rightly requires more than a judicial rubber stamp when the lawsuit that the parties have agreed to settle is a class action.  The reason is the built-in conflict of interest in class action suits.  The defendant (as RadioShack’s lawyer candidly admitted at the oral argument) is interested only in the bottom line: how much the settlement will cost him.  And class counsel, as “economic man,” presumably is interested primarily in the size of the attorneys’ fees provided for in the settlement....  The optimal settlement from the joint standpoint of class counsel and defendant, assuming they are self-interested, is therefore a sum of money moderate in amount but weighted in favor of attorneys’ fees for class counsel.  Ordinarily – in this case dramatically – individual members of the class have such a small stake in the outcome of the class action that they have no incentive to monitor the settlement negotiations or challenge the terms agreed upon by class counsel and the defendant.

768 F.3d 622, 629 (7th Cir. 2014).

In Sushi Yasuda, Judge Pauley similarly observed:

Often, fee applications are unopposed.  Defendants have little concern for what portion for what portion of the settlement goes to plaintiffs’ counsel.  And unlike a securities class action, where the class likely contains sophisticated investors, most FLSA class members are not in a position to object.  Those best suited to dispute the fees – the class representatives – would be forced to oppose their own lawyers and in any event are often placated by outsized service awards.  The risks presented by class action settlement – and the need for judicial scrutiny – have long been recognized.

2014 WL 5840700 at *8.

But what is notable about the Sushi Yasuda opinion is the court’s indictment of two practices that may often lead to unfairly disproportionate fee awards:

  • The court criticizes the tendency of district courts, in cases involving unopposed class settlements, to rely on proposed orders submitted by counsel – often including factual findings and conclusions of law – approving the settlement and fee allocation.  The result is a growing body of fee award “precedent” that is in fact largely drafted by the class action plaintiffs’ bar with little judicial interference or scrutiny.
  • The court also addresses the practice of some plaintiffs’ counsel to refer in their fee applications to high “standard” hourly rates, when those claimed rates are untested by the marketplace because the attorneys work solely on a contingency basis.  If unquestioned, the claimed rates reduce the lodestar multiplier and thus make counsel’s requested fee allocation from the settlement appear more reasonable.

The “mischief” of publishing proposed orders approving class settlements

In support of their fee application in Sushi Yasuda, class counsel cited a number of cases in which district courts awarded fees of one-third of the settlement amount in FLSA class actions.  Upon closer review, Judge Pauley noted “extreme similarities” in the wording of those decisions and discovered that many of the cited authorities were “in fact proposed orders drafted by the class action plaintiffs’ bar and entered with minimal, if any, edits by judges.”  When such orders are later taken as precedent, a self-referencing problem arises: “By submitting proposed orders masquerading as judicial opinions, and then citing to them in fee applications, the class action bar is in fact creating its own caselaw on the fees it is entitled to.”

Judge Pauley takes the courts to task as well, as this strategy could not be successful without judges willing to sign proposed orders with minimal scrutiny.  He begins by acknowledging that district judges may also have a conflict of interest when it comes to reviewing unopposed settlements

Proposed orders are a convenient way of managing congested dockets, and proposed orders approving class settlements are particularly attractive to judges in that they clear large cases from the docket in a situation where the likelihood of scrutiny from the Court of Appeals is remote.

Judicial scrutiny – not deference – is required, he states, because a class action settlement, if approved, “is an adjudication of the matter as to absent class members, who neither negotiated nor agreed to the settlement.”

While he stresses the need for enhanced scrutiny, Judge Pauley also makes clear his belief that judges should be more discerning in deciding what decisions to publish and should not enter proposed orders drafted by attorneys as judicial opinions.  Because district court decisions are not binding authority and courts are cautioned to publish only opinions addressing novel, complex, or important issues, he says, it is “particularly distressing when proposed orders drafted by Plaintiffs’ counsel migrate into the Federal Supplement or Federal Rules Decisions as published opinions.”

The use of inflated “standard” rates by contingency counsel to manipulate the lodestar multiplier

Judge Pauley also takes aim at class counsel’s purported hourly rates.  The court begins by performing a “lodestar cross check”: comparing the $800,000 in fees initially requested with the amount class counsel would have billed for the hours worked on the matter at their stated hourly rates to determine the “multiplier” represented by the proposed allocated fee.  The court notes that an $800,000 fee would equate to over $1,200 per hour for every attorney and paralegal who worked on the case – “a rate commanded by very few attorneys in this city, and deserved by even fewer,” the court quips.  At counsel’s stated hourly rates, the total fee would be approximately $275,000, yielding a multiplier of 2.8 (or 2.9, by this author’s calculation).

But the court also admits to being wary of this analysis because it is based on hourly rates that are not tested in the marketplace.  Lead class counsel stated his hourly rate is $550 and stated associate rates ranged from $275 to $350 per hour.  But all of those attorneys work entirely on contingency and thus the reported “rates” are never actually billed to clients.  “When no client pays by the hour, it is an easy matter to reduce a lodestar multiplier by increasing your ‘rate,’” Judge Pauley cautions.  Reviewing fees determined to be reasonable in other recent wage and hour cases, the court concludes that reasonable rates for such cases are significantly lower than class counsel’s stated hourly rates and compared to an $800,000 fee award would yield a multiplier of 3.8.

Having gone through the foregoing exercise, the court then reviews case law from within the Southern District and laments the lack of consensus on the appropriate range for lodestar multipliers.  Judge Pauley writes, with palpable frustration:

The lodestar is worthless as a “cross check” on the percentage recovery method when there is so little agreement as to what constitutes a reasonable multiplier.  Guidance from the Court of Appeals would be welcome, but of course there is rarely an appeal from a decision such as this.

The court – acknowledging that the fact the lawyers worked the case on a contingency “clearly entitles them to some premium for the risk incurred,” but also expressing an opinion that FLSA cases generally are not exceptionally complex or difficult – concludes that “a multiplier near 2 should, in most cases, be sufficient compensation for the risk associated with contingent fees in FLSA cases.”  Ultimately, the court held that 20% of the settlement fund is a reasonable fee, noting that it represents a 2.28 multiplier using the modified rates and a 1.75 multiplier using counsel’s stated rates.

The extent to which district judges will heed the call for greater scrutiny of fee allocations is an open question, but the message to class counsel is clear: do not expect a rubber stamp in Judge Pauley’s court.