District Court Carefully Analyzed Requisite Factors in Determining Reasonable Attorney Fee Award in Securities Class Action and did not Abuse its Discretion in Awarding Class Counsel 3% of the Value of Class Action Settlement Rather than 8.5% Requested by Class Counsel, even though Lead Plaintiffs in Class Action Supported 8.5% Award Second Circuit Holds
Plaintiffs filed a class action against Nortel Networks alleging violations of federal securities laws (Nortel I); specifically, the Nortel I class action complaint alleged that Nortel “knowingly and recklessly issued false and misleading statements and engaged in various accounting manipulations causing its stock price to be inflated between October 24, 2000 and February 15, 2001.” In re Nortel Networks Corp. Securities Litig., ___ F.3d ___ (2d Cir. August 19, 2008) [Slip Opn., at 2]. Plaintiffs in the Nortel I class action were represented by Milberg Weiss & Bershad LLP, id. After several years of litigation, the district court approved a class action settlement of almost $439 million in cash, plus more than 300,000,000 shares of Nortel common stock valued at more than $700 million at the time the class action settled was approved. Id. As part of the “same overall settlement,” Nortel settled a separate action securities class action lawsuit (Nortel II); the terms of that class action settlement involved common stock also valued at more than $700 million plus $370 million in cash (roughly $68.5 million less than the Nortel I class action settlement). Id., at 2-3. The district court in Nortel II awarded class counsel 8% of the settlement value in attorney fees, but the Nortel I court awarded Milberg attorney fees amounting to only 3% of the settlement value. Id., at 3. Milberg Weiss appealed the attorney fee award, and the Second Circuit affirmed.
Milberg argued on appeal that they were entitled to 8.5% of the value of the class action settlement they obtained in prosecuting the private securities class action and that the district court erred in reducing the award to only 3%. In re Nortel, at 2. Milberg argued that it had a “negotiated fee” which, under the terms of the Private Securities Litigation Reform Act of 1995 (PSLRA), should have been deemed “presumptively reasonable.” Id. The Second Circuit held that Milberg waived its PSLRA argument because it failed to raise it in the district court, id. The Circuit Court’s analysis of the waiver issue may be found at pages 5 through 8.
The Circuit Court also rejected Milberg’s argument on the merits. It first observed that Milberg’s original fee agreement with lead plaintiff did not include any specific fee schedule; rather, it was only after the class action settlement had been negotiated that lead plaintiff and Milberg “agreed to a fee award of 8.5% of the settlement to be paid in a mixture of cash and stock.” In re Nortel, at 3-4. Lead plaintiff submitted an affidavit to the district court in which it “strongly support[ed]” Milberg’s request for 8.5% of the settlement, opining that such an award would be “fair and reasonable” and that the settlement represents “a recovery that is both excellent and historic in magnitude,” id., at 4. The district court, however, conducted an “independent analysis of the factors laid out by [the Second Circuit] in Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000),” and “court concluded that the requested 8.5% fee was excessive and instead concluded that a 3% fee was a fair and reasonable award.” Id. The lower court reached this figure by concluding, with respect to the Goldberger factors, that (1) Milberg’s lodestar was about $16.7 million, (2) the case was not particularly complex or risky in that it “did not differ significantly from other large securities litigations,” (3) a 3% award equated to a multiplier of 2.04, which “fairly compensated for these factors,” (4) as to quality of representation, “Milberg was experienced and qualified,” (5) “a 3% fee was consistent with fees granted in similar cases,” and finally, (6) public policy considerations were served by the $34 million award. Id., at 4-5.
The Second Circuit held that the district court did not abuse its discretion in awarding Milberg 3% of the value of the class action settlement. The Court explained found that the district court “carefully weighed” the required factors before concluding that an award of 8.5% was excessive and that an award of 3% was “fair and reasonable under the circumstances.” In re Nortel, at 8. And the Circuit Court rejected Milberg’s claim that the district court should have used the 8% attorney fee award in Nortel II as a “benchmark.” Id., at 9. The Court noted that the question on appeal was not whether it “would have awarded a different fee” but whether the district court abused its discretion in making the 3% award. Id. It concluded at page 9, “Given the district court’s careful analysis of the Goldberger factors, we conclude that the fee award here does not fall outside the bounds of the district court’s discretion.” Accordingly, it affirmed the district court’s fee award, id.
NOTE: The Second Circuit expressly stated that it “[left] open the question of how much weight should be given to fees agreed upon by PSLRA lead plaintiffs” but added that it would “expect, however, that district courts will give serious consideration to negotiated fees because PSLRA lead plaintiffs often have a significant financial stake in the settlement, providing a powerful incentive to ensure that any fees resulting from that settlement are reasonable.” In re Nortel, at 7-8.