A federal appeals panel has junked a large fee award for attorneys who led a securities class action against medical waste processor Stericycle, saying a federal judge needed to reconsider how much work the plaintiffs' lawyers had actually performed to earn more than $11 million.
The lawsuit in question originated in October 2015 when two Florida pension funds sued Stericycle alleging company executives inflated its stock price through misleading statements about fraudulent billing practices. That lawsuit had followed Stericycle's decisions earlier in the decade to agree to pay more than $325 million to settle a number of legal actions from public and private sector customers, based on a whistleblower’s allegations the company had imposed illegal price increases.
In the stock price lawsuit, U.S. District Judge Andrea Wood appointed two pension funds as lead plaintiffs — the Arkansas Teacher Retirement System and the Public Employees’ Retirement System of Mississippi — and named attorneys from the firm of Bernstein Litowitz Berger & Grossman as lead counsel. After two years, with motions to dismiss pending, the parties agreed to settle for $45 million and the firm sought a 25 percent fee award, or about $11.25 million.
U.S. Seventh Circuit Court of Appeals Judge David F. Hamilton
| law.columbia.edu
Class member Mark Petri objected to that award, asking Judge Wood to allow discovery on so-called “pay to play” arrangements between the law firm and the Mississippi fund. Wood denied both requests, prompting Petri to appeal to the U.S. Seventh Circuit Court of Appeals.
Seventh Circuit Judge David Hamilton wrote the panel’s opinion, published May 18; Judges Frank Easterbrook and Michael Kanne concurred.
The panel said Wood’s analysis of appropriate legal fees was incomplete and sent the matter back to Wood's court for recalculation.
“First, the court failed to consider an actual ex ante fee agreement between one of the funds and its counsel,” Hamilton wrote. “Second, the court’s assessment of the risk of nonpayment did not give sufficient weight to the prior litigation involving Stericycle, which substantially reduced the risk of nonpayment. Third, in evaluating lead counsel’s efforts, the court did not give sufficient weight to the early stage at which the case settled.
The Mississippi Attorney General’s Office retained Bernstein Litowitz Berger & Grossman in September 2016 regarding the Stericycle lawsuit, the panel said. That agreement included a sliding schedule for potential recovery with percentages decreasing based on the size of the settlement fund.
While arguing before the appeals panel, the firm said 25 percent is appropriate because the Mississippi fund’s share was less than $10 million, the lowest tier on the schedule. While the panel said that interpretation is consistent with the contract between the firm and Mississippi, Hamilton said “the limitation is improbable, arbitrary, unreasonable and not consistent with a class representative’s fiduciary duty to class members.”
If the fee schedule applied to the entire class, the panel said, the firm would recover 12.78 percent, or $5.75 million. And although district courts can award flat-rate fees, the existence of a sliding scale agreement should provide “substantial weight in assessing the reasonableness of the proposed award,” Hamilton wrote.
The panel further disagreed with Wood’s assessment the firm faced a “substantial” risk of nonpayment for its work because Stericycle’s earlier settlements signaled a reduced threat. It noted the class action complaint relied on allegations from the earlier litigation and investigations, including testimony from Stericycle executives showing “defendants were directly involved in developing and implementing the fraudulent automatic price increases.”
While acknowledging “class counsel still faced meaningful challenges,” Hamilton wrote, Wood should have more strongly considered the starting point of this specific lawsuit. The panel also said other pension funds sought to be lead plaintiff with their own lead counsel, and noted Bernstein Litowitz Berger & Grossman offered no testimony to Wood concerning its risk of not getting paid.
Wood also didn’t sufficiently consider the state at which the parties settled, the panel said, noting the lack of extensive discovery on a motion for summary judgment and even questioning the ultimate result.
“We are not as convinced the settlement was a good outcome,” Hamilton wrote, “but neither Petri nor anyone else is challenging here the $45 million settlement total.”
The panel sided against Petri on his argument Wood improperly denied his request for further discovery. Hamilton said there was “no abuse of discretion, though we also would find no abuse of discretion if the court had decided these issues the other way or somewhere in-between.”
Petri also sought sanctions against Bernstein Litowitz Berger & Grossman for calling his lawyer, Ted Frank, a “notorious professional objector.”
Frank has won renown throughout the country for his work representing objectors to class action settlements. That work has often led to the redrafting of multi million dollar deals to boost recovery for class members, or reducing exhorbitant or unjust fees for plaintiffs' lawyers.
Frank has been described in published reports as “the leading critic of abusive class action settlements” and “the indefatigable scourge of underwhelming class action settlements.”
Although Hamilton said the “ad hominem attack on Frank was not professional and served only to emphasize the weakness of lead counsel’s own arguments,” the phrasing didn’t amount to “the type of conduct we have deemed sanctionable.”