Huge Fee Award OK’d for Lawyers in Motorola Suit

(CN) - Lawyers who won a $200 million settlement from Motorola Solutions deserve 27.5 percent in fees because the securities class action was risky, the 7th Circuit ruled.

The crux of the suit was that Motorola had allegedly concealed its inability in 2006 to produce a competitive mobile phone that could employ 3G protocols. Motorola's stock declined when the problem became public.

Four years into the case, a federal judge in Chicago denied Motorola's motion for summary judgment and the parties then settled for $200 million.

"None of the class members contends that this is inadequate - but two contend that the judge abused her discretion by approving counsel's proposal that they receive 27.5 percent of the fund," Chief Judge Frank Easterbrook wrote for a three-judge panel of the 7th Circuit.

The court nixed the first objector, Paul Liles, for missing the deadline and never actually claiming a penny from the settlement. Edward Falkner meanwhile objected on the grounds that the award was fixed at the end of the litigation, when fee schedules should be set at the beginning, preferably by an auction in which the judge picks the low bidder among the law firms competing to represent the class.

While the 7th Circuit agreed that attorneys' fees in class actions should approximate the market rate between willing buyers and willing sellers of legal services, it also found that "solvent litigants do not select their own lawyers by holding auctions, because auctions do not work well unless a standard unit of quality can be defined and its delivery verified. There is no 'standard quality' of legal services, and verification is difficult if not impossible."

Circuit precedent does note the desirability of establishing fee structures at the beginning of lawsuits, but that does not mean that they are the only lawful way to compensate class counsel in common-fund cases, according to the ruling.

"It is unfortunate that the district judge originally assigned to this case did not consider the possibility of establishing a fee schedule when he appointed a lead plaintiff and approved the party's choice of counsel," Easterbrook wrote. "By the time that judge died, and the case had been reassigned to the judge who awarded the fees, it was not possible to recreate the conditions that existed at the case's outset. Too much legal time had been sunk into litigation, and it would have been counterproductive to invite other law firms to make other offers and, if selected, start over."

The ruling also notes data about attorneys' fees in other class action settlements. An empirical study found that the mean award from settlements that range from $100 to $250 million is 12 percent, and the median is 10.2 percent. Courts usually award counsel a declining percentage as the size of the settlement fund increases.

Though "an award fixed at 27.5 percent of a $200 million fund is exceptionally high," that does not make the award legally excessive, the nine-page opinion states.

Easterbrook highlighted one expert's conclusion that "this suit was unusually risky. Defendants prevail outright in many securities suits. This one took more than four years, and more than $5 million in out-of-pocket expenses by counsel to conduct discovery and engage experts, before reaching the summary-judgment stage."

Indeed, Motorola had been primed to prevail on its summary judgment motion until class counsel uncovered some unanticipated facts during discovery. Motorola was only willing to settle for a substantial sum after its motion was denied.

In addition, no other law firm wanted to take on the case in the beginning.

"Lack of competition not only implies a higher fee but also suggests that most members of the securities bar saw this litigation as too risky for their practices," Easterbrook wrote. "The district judge did not abuse her discretion in concluding that the risks of this suit justified a substantial award, even though compensation in most other suits has been lower."

Investors would certainly reap more from the settlement if the court reined in the fees, but Easterbrook highlighted the lack of protest from the pension funds, university endowments and other large institutional investors that hold claim to more than 70 percent of the settlement fund.

"The difference between 27.5 percent of $200 million and a smaller award (say, one averaging 20 percent) could be a tidy sum for institutional investors (including this suit's lead plaintiff, a pension fund), one worth a complaint to the district judge if the lawyers' cut seems too high," he wrote. "Yet none of the institutional investors has protested - either by filing a motion asking the judge to reduce the fees or by supporting Falkner's position in this court. This award may be at the outer limit of reasonableness, but, given the way the subject was litigated in the district court, deferential appellate review means that the decision must stand."

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