The 7th Circuit recently vacated a 25% attorneys’ fee award in In re Stericycle Securities Litigation, No. 20-2055, 2022 WL 1564997, at *1–14 (7th Cir. May 18, 2022). The Court’s reasoning focused on the previous litigation against the defendant.

Years before this litigation, a former Stericycle employee brought a qui tam action under the Federal False Claims Act with similar claims. Various settlements with governments and private customers followed. All cases settled.

Two Florida pension funds filed this securities class action. The district court appointed two class representatives—the Public Employee’s Retirement System of Mississippi (“Mississippi Fund”) and the Arkansas Teacher Retirement System. The district court approve the Mississippi Fund’s motion to appoint Bernstein Litowitz Berger & Grossman LLP (“Bernstein”) as class counsel.

With motions to dismiss pending, the parties settled for $45 million. An Objector claimed that the fee award was unreasonably high given the low risk of litigation and the early stage at which the case settled. And it moved the court to permit discovery into potential “pay-to-play” arrangements between the Mississippi fund and Bernstein, its chosen counsel. The district court approved the $45 million settlement based on the contingent nature of the litigation and the positive outcome for the class, and denied discovery.

The 7th Circuit held that the district court’s fee analysis was incomplete for three reasons: the court did not give sufficient weight to (1) evidence of an actual ex-ante attorneys’ fee agreement, (2) all the work product counsel inherited from the prior litigations, and (3) the early stage at which settlement was reached.

Bernstein had an ex-ante attorneys’ fee agreement with the Mississippi Attorney General who can bring claims on behalf of the Mississippi fund. The ex-ante attorneys’ fee agreement was as follows: 25% for the first $10 million, 15% for the next $5 million, 10% for the next $5 million, and 5% for anything above that.

Bernstein argued that the fee agreement applied only to the Mississippi fund, not the total settlement. The Court agreed that, on its face, the agreement called for this. But that interpretation would be “improbable, arbitrary, and unreasonable” and not “consistent with a class representative’s fiduciary duty.” The Court used a hypothetical to explain its reasoning: if there was a $1 billion settlement and the Mississippi Fund recovered 1% ($10,000,000) then counsel would be entitled to a $250,000,000 award. Several studies showed that the average fee award for $1 billion settlements was between 10% and 15% of the settlement fund. The 25% fee would not be in line with this, especially “when counsel launched the case after others had done most of the heavy lifting and then settled early.” “It is hard to see how those class members would be well served by an agreement where they recover less if the Mississippi funds share of the losses is . . . 20% rather than 50%.”

In addition, the district court’s analysis about the risk of nonpayment did not give sufficient weight to prior litigation involving Stericycle. The prior litigation strengthened this plaintiff’s case and lessened the risk of nonpayment. For example, the Fourth Amended Complaint repeatedly cited deposition testimony given by Stericycle in the private customer’s case. While class counsel was not “wrong in relying on prior litigation” and “still faced meaningful challenges,” the prior litigation “gave them an excellent starting field.”

Finally, the district court did not give sufficient weight to the early stage at which the case settled. The district court “made a passing reference to how [counsel] had secured a good outcome for the class,” but the 7th Circuit was “not as convinced” that the settlement was a good outcome. Nor did the court discuss whether the preliminary stage of the litigation warranted a reduction in the fee request. Discovery from previous cases reduced plaintiffs’ discovery burden “substantially[.]”

The cumulative effect of these led the 7th Circuit to conclude that the district court’s analysis did not sufficiently “reflect the market-based approach for determining fee awards that is required by [7th Circuit] precedent.” Further, the district court did not abuse its discretion in denying discovery into potential “pay-to-play” agreements. Although “reasonable minds could differ,” the district court did not abuse its discretion in holding that lead counsel’s political contributions alone were not sufficient to allow discovery. Moreover, an assistant attorney general in the Mississippi office submitted an affidavit explaining the selection process. The office had a “first-to-approach” policy where the first counsel to flag the case is selected.

Courts continue to scrutinize class settlements very closely, and even a 25% attorney fee award is no longer safe from such scrutiny. When settling class actions, defendants should be aware that class counsel may need to account for any assistance from prior litigation when requesting attorneys’ fees. And class counsel should be ready to show that their appointment was not because of political contributions with an affidavit or declaration.