Robert Powers Peter J. Franklin Sea Breeze Printing, Inc. Garvin D. Stanislawski Starlog Group, inc.and Starlog Group, Inc. Defined Pension Plan, on Behalf of Themselves and All Others Similarly Situated Howard Sobel Richard Strausz Richard W. Halsey, Wilfred George, Class Member/objector-Appellant v. Paul Eichen Robert Johnson Kenneth E. Olson Frederick Parker Michael Tamkin Michael Vogt Dennis A. Whittler Mary Zoeller Arthur Minich John M. Seiber John Thomas Jeffrey Nash Proxima Corporation John E. Rehfeld Charles S. Chestnutt
Docket: 98-56997
Court: Court of Appeals for the Ninth Circuit; October 20, 2000; Federal Appellate Court
Wilfred George, a class member, appeals a district court order granting class counsel thirty percent of the settlement as attorneys' fees. He filed an objection to this fee request, thus establishing standing for the appeal. The Ninth Circuit holds that while the district court correctly calculated the fees based on the gross settlement amount, it failed to adequately justify the awarded amount. Consequently, the court vacates the fee award and remands the case for further explanation. The underlying case involves a class action by shareholders against Proxima Corporation for securities fraud, alleging that misleading statements inflated stock prices, allowing insiders to profit at shareholders' expense. The district court had certified a class of individuals who traded Proxima stock during a specified period and initially approved a settlement, with George raising concerns about potential conflicts of interest regarding the attorneys' fees and advocating for a lodestar method for fee calculation.
The district court approved a settlement agreement and deferred the issue of attorneys' fees. In an order dated October 29, the court awarded lead counsel fees of thirty percent of the settlement amount, calculated on the gross recovery, deeming them fair and reasonable. George appealed this decision, but the named class members, referred to as "Powers," argued he lacked standing because he did not intervene in the district court. George asserted that Ninth Circuit precedent supports his right to appeal. The court found both arguments unpersuasive, noting that neither Supreme Court case law nor Rule 23 addressed this specific issue, labeling it an open question in the circuit.
The court reaffirmed the established principle that only parties to a lawsuit or those who properly intervene may appeal adverse judgments, referencing *Marino v. Ortiz* where the Supreme Court ruled that nonparties who did not intervene could not appeal a consent decree related to a settlement. Powers contended that *Marino* governed this case and cited various circuit decisions that applied *Marino* to bar appeals from unnamed class members who failed to intervene. These decisions emphasize that allowing non-intervening unnamed class members to appeal would undermine the coherence of class actions and create jurisdictional confusion. Overall, the court determined that George's failure to intervene precluded his standing to appeal the attorneys' fees ruling.
The Tenth and Eleventh Circuits have determined that nonparties in class action lawsuits do not have standing to contest class action settlement approvals, a position not influenced by the case of Marino. In *Gottlieb v. Wiles*, the Tenth Circuit emphasized that standing requires a grant of intervention, aligning with the policy goals of Rule 23 class actions. Similarly, in *Guthrie*, it was held that unnamed class members cannot appeal final judgments. The circuits reject standing for unnamed class members due to three main reasons: (1) they cannot represent the class without following Rule 23 procedures; (2) alternative means exist for class members to protect individual interests; and (3) allowing individual appeals would complicate class action management.
In contrast, George argues he has standing based on *Marshall v. Holiday Magic, Inc.*, but the court finds neither *Marino* nor *Marshall* relevant to the specific issue of an unnamed class member's standing to appeal an attorneys' fee award. *Marino* is distinguished as it did not involve a Rule 23 class action and featured appellants who did not attempt to intervene. George, however, is a class member who objected in the district court before appealing. The analysis of *Marshall* does not provide a valid rationale for allowing an appeal from a non-intervening unnamed class member, as it merely states that appellants were notified and fell under the class definition, granting them standing. The *Dosier* decision further complicates matters without clarifying standing issues. Overall, the question of whether an unnamed class member can appeal remains unresolved in the circuit.
Rule 23 of the Federal Rules of Civil Procedure facilitates class actions by allowing for collective litigation when numerous members share common claims against a defendant, provided that the representative parties adequately protect the class's interests. In contrast, Rule 23.1, governing shareholder derivative suits, does not require a prior determination of adequate representation, leading to different treatment regarding appeals by unnamed class members. The Tenth Circuit permits such appeals in Rule 23.1 cases but dismisses them in Rule 23 actions, emphasizing that Rule 23.1 lacks the same protective mechanisms as Rule 23. Shareholder derivative suits bind all shareholders to the outcome without an opt-out option, highlighting a distinction in rights and interests compared to class action members. Other circuits, such as the Second and Third, have recognized standing for unnamed parties in derivative suits to contest settlements, emphasizing the risk of inadequate representation. Conversely, the Seventh Circuit has denied standing for nonparty shareholders in derivative suits, asserting that they are not direct victims of the alleged injury, thus requiring intervention to appeal. The Supreme Court reviewed the Seventh Circuit's decision but did not provide a resolution, resulting in an affirmance by an equally divided court.
Non-intervening unnamed class members have the standing to appeal attorney's fee awards in Rule 23 class actions, as determined by the Tenth Circuit in Rosenbaum. The court recognized that allowing such appeals prevents a single dissident from delaying settlement benefits for the entire class. It noted that challenges to attorney's fees are less disruptive than challenges to the settlement itself, as named class members may struggle to represent the class when their own attorneys' fees are at issue. Additionally, settlement notices typically lack detailed fee information, and unnamed members can miss the chance to opt out before learning the fee amount.
The procedural mechanisms of Rule 23 do not adequately protect unnamed class members regarding fee awards. These members, often unaware of fee negotiations, have strong incentives to contest fee reasonableness since attorney fees directly affect their awards. Requiring intervention to appeal creates unnecessary procedural hurdles and could delay case resolutions. The court affirms that unnamed class members who object in district court may appeal attorney fee awards without intervening.
The court finds that George has standing to appeal the fee award and reviews it for abuse of discretion, acknowledging the district court's broad authority over such awards. George contends that the district court improperly used the percentage method instead of the lodestar method for calculating fees. However, the court clarifies that the district court has discretion to choose either method and that an abuse of discretion only occurs with a formulaic approach leading to unreasonable fees. The court concludes that as long as the fee award is reasonable and the district court provides an adequate explanation, using the percentage method does not constitute an abuse of discretion.
George argues that the district court abused its discretion in approving a fee award without adequately specifying the reasons for it and for exceeding the benchmark of 25% of the recovery, awarding 30% instead. Established case law requires the district court to provide a rationale for the specific fee awarded to facilitate meaningful review. While the court mentioned various factors considered in determining a reasonable fee, it failed to clarify how these factors were weighed in reaching the final amount. The court acknowledged complications involved in class actions and the risks taken by plaintiffs' counsel who worked on a contingency basis, suggesting that these issues justified a higher fee. However, despite providing a lengthy discussion on the complexities of the case, the district court's failure to offer a clear explanation in the record for exceeding the benchmark led to the conclusion that the fee award was inadequately justified.
The district court exhibited a tendency to lower the attorneys' fee award below the benchmark of thirty percent during the hearing, indicating that a lack of objections did not imply universal approval of the fee request. The court questioned whether a higher fee would motivate the attorneys more effectively, suggesting that the plaintiffs' counsel would still strive for the best settlement even with a lower fee. Additionally, the court challenged the validity of the lodestar calculation presented by the plaintiffs, implying uncertainty about the appropriateness of the thirty percent figure. Although the court made decisions on two issues at the conclusion of the hearing, it reserved judgment on the fee amount, stating it would issue a ruling after further review.
In the subsequent written order, issued three days later, the court awarded the thirty percent fee but provided minimal justification, stating it was "fair and reasonable" under the percentage of recovery method. This lack of clarity regarding the grounds for exceeding the benchmark hindered meaningful appellate review, leading to the conclusion that the district court abused its discretion by failing to adequately explain its decision.
Furthermore, George contended that the court incorrectly calculated attorneys' fees based on gross recovery instead of net recovery (after expenses). He argued that under the Private Securities Litigation Reform Act of 1995, "the amount actually paid to the class" should reflect net amounts. However, it was clarified that the Act does not prescribe a specific method for fee calculation, allowing for flexibility as long as the fees awarded are reasonable in relation to the recovery. The determination of whether to base fees on net or gross recovery should not affect the reasonableness of the fee, as case law supports that the choice of denominator does not inherently dictate reasonableness. The district court may recalculate the fee award on remand using the gross settlement amount.
The district court's decision is VACATED and REMANDED. The court addressed the standing of a non-intervening class member, George, to appeal an attorneys' fee award, clarifying that unlike in Lobatz, where the standing issue was not resolved, George's standing is supported by a direct injury due to the fee being deducted from the settlement. The analysis referenced previous cases, including Dosier, which established that unnamed class members can appeal without formally intervening, and In re First Capital Holdings Corp., which involved constitutional standing. George's appeal is valid as his settlement share diminishes with the attorney fee award, fulfilling the Article III standing requirement of having suffered a traceable injury likely to be redressed by a favorable ruling.
