The United States Court of Appeals for the Fifth Circuit has confirmed that lower courts may use their discretion in choosing either of two methods - the "percentage method" or "lodestar method" - to calculate attorneys' fees in class action suits. The decision, in Union Asset Mgmt Holding A.G. v. Dell, Inc., 2012 WL 35249 (5th Cir. Feb. 7, 2012), affirmed a district court's use of the percentage method to calculate a $7.2 million fee award.

Background

Certain Dell shareholders claimed that Dell and its officers had issued disclosures that violated the Securities Exchange Act. The district court granted Dell's motion to dismiss. While plaintiffs' appeal was pending, the parties settled. Plaintiffs moved for class certification and approval of a $40 million class settlement fund. The district court certified the class and approved the settlement (over objections by certain other Dell shareholders). The trial court awarded class counsel fees with interest using the percentage method of calculation. This method involves computing fees as a reasonable percentage of the common fund. The lodestar method, in contrast, involves multiplying the number of hours reasonably expended on the litigation by a reasonable hourly rate. Under the percentage method, the court awarded $7.2 million in fees, or 18 percent of the settlement fund. The objectors appealed on several grounds, including the use of the percentage method for fees.

Fifth Circuit Opinion

The Fifth Circuit held that the district court did not abuse its discretion in using the percentage method. The opinion, by Judge Patrick E. Higginbotham, noted that the Fifth Circuit had never expressly endorsed the percentage method for common fund cases. He further stated that while the Fifth Circuit had previously used the lodestar method, the circuit had never required that courts employ that method exclusively. Judge Higginbotham wrote that "[w]e join the majority of circuits in allowing our district courts the flexibility to choose between the percentage and lodestar methods in common fund cases," as long the result comports with twelve reasonableness factors set out by the Fifth Circuit in Johnson v. Ga. Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974). The court affirmed that the district court's 18 percent award reasonably compensated counsel while protecting the class members' interests. The circuit also affirmed the rejection of all other objections to the settlement.

The court's ruling on fee methodologies brings the Fifth Circuit closer to other circuits and will no doubt be welcomed by some members of the shareholder plaintiffs' bar who have viewed the circuit as more demanding on class issues than other federal appellate courts. More broadly, while this opinion arose out of a securities class action, the court made clear that trial courts have similar discretion in any "common fund" class settlement.

For more information, please visit the Securities Class Action Defense and Shareholder Litigation page of the Haynes and Boone, LLP website, or contact one of the attorneys below.