How Class Action Lawyers Get Paid
People often ask us how class action lawyers get paid. When an attorney is hired to draft a will, assist in the formation of a business entity, defend against criminal charges etc., he or she is usually paid at an hourly rate that the client agrees to when the attorney-client relationship is formed. In personal injury cases such as car accidents and medical malpractice actions, the plaintiff’s lawyer gets a percentage of whatever the jury awards (or of any settlement). This is not how class action lawyers get paid—the named plaintiff in a class action never pays the lawyer. Rather, class action lawyers take cases on a contingency basis and have their attorneys’ fees approved by the court when a class settlement is approved or class judgment obtained.
A class action seeking monetary relief gets filed, the defendant loses a motion to dismiss, and the class is certified—now what? More often than not, the parties will negotiate a settlement. During settlement discussions—which often occur through formal mediation sessions—class action lawyers should not negotiate attorneys’ fees before relief for class members has been conditionally agreed to. But after the relief that will go to the class members is negotiated (ie., the parties have agreed on the amount of money class members may receive together with any policy changes to correct the conduct challenged in the lawsuit), the parties discuss attorneys’ fees together with items such as the class representative incentive awards.
Its All About Court Approval
In addition to determining that the settlement is overall fair, reasonable, and adequate, courts must also approve whatever fees are agreed-to. As such, class action settlements often indicate that the defendant agrees not object to or challenge class counsel’s petition to the court for a specific amount of attorneys’ fees, and class counsel agrees to not petition for more fees than the amount agreed to.
There are two ways that courts evaluate a class settlement to determine what amount to award in reasonable attorneys’ fees: the percentage-of-the-fund method and the lodestar method. Percentage-of-the-fund means exactly as it sounds—reasonable attorneys’ fees are a portion, typically around 25% - 33%, of the total relief awarded to the class members. So if a settlement results in the setting up of a fund valued at $2.4 million, a 25% award would equal $600,000 in attorneys’ fees.
The lodestar approach is different. Courts using that method look at how many hours the attorneys worked on the case and the attorneys’ hourly rates, multiply those together, and then factor in a risk multiplier to reward attorneys for taking on the risk of non-payment in contingency cases. So, for example, if an attorney spends 500 hours on a case and charges an hourly rate of $400 per hour, that would equal $200,000. If the risks presented by the case were high (the case was very challenging, presented novel issues) and if the results obtained were impressive in light of those risks, the court can apply a risk multiplier, usually between 2 and 4, to the lodestar amount. As such, for doing $200,000 worth of work on a case where the court awards a multiplier of 3, the reasonable attorneys’ fees awarded may equal $600,000.
Note that courts in different jurisdictions take different approaches to calculating fees. Some Circuits require that only the percentage-of-the-fund method or the lodestar method be used, some allow judges to decide which one is appropriate on a case-by-case basis, and some use a hybrid approach in which the lodestar method is used to verify that the percentage-of-the-fund amount is reasonable given the time actually spent on the case.