Public interest lawyers deserve risk multipliers.

In the past decade or so, a series of U.S. Supreme Court opinions on attorney fee awards has made it more difficult for public interest attorneys to bring actions vindicating certain federal rights.

A number of federal statutes, including civil rights and environmental laws, authorize courts to award attorney fees under certain conditions. These awards were designed to give lawyers an economic incentive to represent people who need judicial relief but cannot afford the costs of the litigation.

However, this incentive was not always seen as adequate. Public interest cases can be exceptionally challenging. To compensate the lawyers for risking their time and resources under such difficult circumstances, courts sometimes sweetened the pot by authorizing contingency multipliers--using a factor of, say, 1.5 to increase the amount of the fees. The result was inconsistent awards for similar cases in different courts.

In the 1983 case Hensley v. Eckerhart, the Supreme Court tried to create uniform guidelines governing statutory-fee awards.(1) The Court admonished that a request for attorney fees should not turn into a second major litigation. Despite this, fee litigation has become a discrete specialty, with "specialized" attorneys conducting that aspect of the suit.

Hensley was followed by over a dozen fee-related High Court rulings. Some left open as many questions as they answered and generated many more opinions in lower federal courts. The Supreme Court cases culminated in the 1992 decision in City of Burlington v. Dague, in which the Court held 6-3 that contingency multipliers cannot be used in statutory-fee cases.(2) Since then, some courts have also applied the holding in Dague to class actions where the court sets up a common fund for the class members (known as common-fund cases).

This article examines the cases that followed Hensley and suggests why the Dague reasoning is inappropriate.

Paying the Bill

Under the "American Rule," each party to litigation is responsible for its own attorney fees, regardless of who wins the case.(3) But a number of legislative and judicial exceptions to this rule have developed over time.

* The first major exception is the aforementioned common-fund doctrine, which emerged from the law of class actions. This doctrine allows a losing defendant to pay directly into a common fund created by the court rather than pay each member of the class. Attorney fees are awarded from this fund, so the costs of the litigation are distributed uniformly among all the class members. This doctrine "rests upon the perception that persons who obtain the benefit of a lawsuit without contributing to its cost are unjustly enriched at the successful litigant's expense."(4)

* Another exception to the American Rule, the bad-faith exception, allows fee-shifting against a party that is prosecuting baseless litigation.

* A third exception, the private-attorney-general doctrine, encourages parties to look after the public interest by enforcing important statutory rights.

In 1975 the Supreme Court restricted the ability of federal courts to exercise their equitable fee-shifting power. In Alyeska Pipeline Service Co. v. Wilderness Society, the Court held that the private-attorney-general doctrine could only be used in cases where Congress had mandated that the losing party must pay the prevailing party's attorney fees.(5)

Congress responded by enacting the Civil Rights Attorney's Fees Awards Act of 1976.(6) The act permits successful plaintiffs in civil rights cases to recover attorney fees unless the award would be unjust.

Congress intended these fee awards to serve as a remedy so that citizens acting as private attorneys general would have a "meaningful opportunity" to enforce the law and effectuate congressional policy.(7)

This concept has been consistently extended to other federal fee-shifting statutes. The benchmark for fee awards under most of these statutes is that the attorney fee must be "reasonable."

Lodestar 

The Third Circuit developed what became known as the "odestar" system for setting fees in public interest cases in Lindy Bros. Builders P. American Radiator Standard Sanitary Corp.(8) To arrive the lodestar figure, the court set up a simple formula-hours expended times hourly rate. The resulting figure could be modified by two other fators--the quality of the attorney's work and whether fee payment was guaranteed or was contingent on the success of the case.

The following year, in Johnson P. Georgia Highway Express, the Fifth Circuit set forth 12 factors for courts to consider in determining a reasonable fee:

* the time and labor required;

* the novelty and difficulty, of the legal questions;

* the skill needed to perform the legal service properly;

* the preclusion of other employment by the attorney due to acceptance of the case;

* the customary fee;

* the nature of the fee--that is, whether fixed or contingent;

* the time limits imposed by the client or by circumstances;

* the amount of damages involved in the suit, and the results obtained; the experience, reputation, and ability of the attorneys;

* the undesirability of the case;

* the nature and length of the lawyer's professional relationship with the client; and

* the size of awards in similar cases.(9)

Actual Outcomes

The practical application of these factors led to inconsistent results in cases where there were overlapping factors and it was not clear how much weight should be placed on each.

Some courts used the factors to justify awarding the lodestar amount. Others used them to support the award of the contingency enhancement as a premium or bonus for attorneys who had agreed to represent their clients on a "no win, no fee" basis and thereby took the risk of not getting paid at all. This was to compensate for a major shortcoming of the lodestar method--that no matter whether payment of a fee is guaranteed or depends on a successful case outcome, the amount is the same.

In Hensley, the Supreme Court recognized that the "most useful starting point for determining the amount of a reasonable fee" was the primary lodestar figure. However, other considerations (for example, the factors named in Johnson) could be used to increase it.(10) The Court put a heavy emphasis on the "results obtained" factor.

In Blum v. Stenson, the Court held that to earn an upward adjustment of the lodestar, the petitioner must show that the adjustment was necessary to arrive at a reasonable fee.(11) The Court noted that the quality of representation may justify an upward adjustment "only in the rare case where the fee applicant offers specific evidence" to demonstrate that the quality of representation "was superior to that one reasonably should expect in light of the hourly rates charged and that the success was exceptional."(12)The opinion presumed that the number of hours billed would reflect the complexity and novelty of the case issues and that the hourly billing rate would reflect the attorney's skill.

Read together, therefore, Hensley and Blum effectively eliminated most Johnson factors as bases for fee enhancement but did not address whether the risk factor might permit enhancement.

In Pennsylyania v. Delaware Valley Citizens' Council for Clean Air (Delaware Valley 1), the Supreme Court emphasized that "most, if not all, of the relevant factors constituting a `reasonable' attorney's fee" are included within the lodestar figure.(13) But again the Court deferred the issue of contingency enhancement for reargument the following term.

In Pennsylyania P. Delaware Valley Citizens' Council for Clean Air (Delaware Valley II), a four-justice plurality rejected the idea of a contingency, fee enhancement under [sections]304(d) of the Clean Air Act and by extension under any of the "typical fee-shifting" statutes, including [sections]1988.(14)

The plurality concluded that Congress had not specifically authorized enhancing attorney fees for risk and that doing so would in essence be paying attorneys for taking cases they might lose. The uncertainty of prevailing is not a compensable factor because in theory it characterizes both sides of every case. Therefore, awarding a contingency enhancement would violate the statutory mandate that only prevailing parties are entitled to attorney fees.(15) Justice Harry Blackmun and three others. dissented.

Justice Sandra Day O'Connor concurred in the judgment, which was pivotal in determining the majority decision. But O'Connor rejected the plurality's finding that Congress did not authorize courts to consider contingency in making fee calculations.(16) Instead, she agreed with the dissent in approving a basis for contingency enhancement in ordinary contingent fee cases. With a few reservations, she also essentially agreed with the dissent on how to establish entitlement to enhancement and how to calculate it. The five formed a majority on this issue.

The opening paragraph of O'Connor's opinion confirms her agreement with the dissenters' major premises--that the intent behind the federal fee-shifting statutes is to make sure the "reasonable fee" reflects the relevant market and that a contingency adjustment may be necessary if these fees are to be competitive with the private market.(17)

She also proposed a "substantial difficulties" test as an alternative "objective and nonarbitrary" way to determine the need for contingency enhancement. To avoid widely divergent awards, she said, courts should treat contingency cases as a class and "strive for consistency between one fee determination and the next." The burden is on fee petitioners to demonstrate that without the prospect of enhancement, they would have faced "substantial difficulties in finding counsel in the local or other relevant market."(18)

This test properly fulfills the goals of the fee-shifting statutes and provides incentives for attorneys to take on statutory-fee cases. O'Connor observed that the private market commonly compensates for this risk by giving the attorney a percentage of the damages awarded, but that in most fee-shifting cases, "the private model of contingency compensation will provide very little guidance."(19)

Commenting on setting the size of the

contingency enhancement, the dissenters, with O'Connor's general concurrence, said:

Thus, a statutory fee cannot be computed

solely by reference to rates

charged by corporate firms, which obtain

many payments from their clients

through monthly billings. Rather, in

order to arrive at a "reasonable" attorney's

fee, a court must incorporate

a premium for the risk of nonrecovery,

for the delay in payment, and for any

economic risks aggravated by the contingency

payment, at a level similar

to the premium incorporated in market

rates. The risk premium can be reflected

in the hourly rate that goes into

the lodestar calculation, or, if the

hourly rate does not include consideration

of risk, in an enhancement of the

lodestar... Under either approach,

adding a premium simply brings the

fee up to the "reasonable" level contemplated

by Congress.(20)

Reversals

In Dague, the Court rejected the five justices' opinions in Delaware Valley II. In an opinion written by Justice Antonin Scalia and joined by five others, the Court held that the Solid Waste Disposal Act, the Clean Water Act, and typical fee-shifting statutes do not allow fee enhancements for contingency:

We note at the outset that an enhancement

for contingency would likely

duplicate in substantial part factors

already subsumed in the lodestar. The

risk of loss in a particular case (and,

therefore, the attorney's contingent

risk) is the product of two factors:

(1) the legal and factual merits of the

claim, and (2) the difficulty of establishing

those merits. The second factor,

however, is ordinarily reflected

in the lodestar-either in the higher

numbers of hours expended to overcome

the difficulty, or in the higher

hourly rate of the attorney skilled and

experienced enough to do so.... Taking

account of it again through lodestar

enhancement amounts to double-counting.(21)

According to Scalia, the relative merit of the claim is not reflected in the lodestar for good reason: Awarding enhancement to adjust for the "merits" factor would give attorneys as much incentive to bring poor claims as good ones.

Scalia also rejected treating contingent fee cases as a class:

[F]or a very large proportion of contingency-fee

cases--those seeking not

monetary damages but injunctive or

other equitable relief--there is no

"market treatment." Such cases scarcely

exist, except to the extent Congress

has created an artificial "market" for

them by fee-shifting--and looking to

that "market" for the meaning of fee-shifting

is obviously circular. Our decrees

would follow the "market,"

which in turn is billed on our decrees.(22)

Treating a class of cases uniformly, wrote Scalia, cannot mirror market incentives. The riskiness of taking a case depends mainly on the case's merits. If contingent fee enhancements were calculated for any type of statutory-fee case, he argued, cases with an average chance of success would be compensated according to the "market," while those that could be won more easily would be overcompensated.

Since Dague, courts have struggled to find a place for fee enhancement in exceptional cases. One was Gomez v. Gates, a successful civil rights case in which the police were accused of using excessive force.(23) The trial court noted that Dague did not address whether the undesirability of the case may be a basis for enhancement and concluded that the opinion left room to consider this.

The court noted that in some civil rights cases, primarily those involving allegations of excessive force by police against unattractive plaintiffs, "it is extremely difficult for the plaintiff to prevail, and virtually impossible to obtain a recovery large enough to support a reasonable fee," regardless of the merits of the case or the skill of counsel. "Lawyers who take on cases to vindicate the rights of unattractive plaintiffs can almost count on being put to trial," the court wrote. "The time must be invested, and the risk of loss actually taken, before the lawyer has a chance of any fee at all."(24)

Common-Fund Cases

Attorneys seeking fees from common funds generally may rely on receiving a reasonable percentage of the fund--thereby avoiding litigation of the contingency issue--unless they are trying for a particularly large award. In complex class actions and shareholder derivative suits where common funds of up to about $50 million are involved, fees normally constitute 20 percent to 30 percent of the class recovery.(25) Often, expenses are awarded in addition to the percentage amount.(26)

For ordinary cases, courts usually start with the normal 20 percent to 30 percent range of fee awards. As an alternative, courts have discretion to consider the median figure (25 percent) as a reasonable starting point. Deviations can be made for relevant factors.(27)

The normal fee range already reflects the economies of scale inherent in class-action litigation and class recoveries, so it is lower than the 3 31/3 percent to 40 percent norm for contingent fee agreements in individual personal injury and commercial litigation.

Deviations from the normal fee range are appropriate under these two special circumstances:

* the find recovered is extraordinarily large, or

* the fund is modest in relation to the large number of hours reasonably expended by the lawyer.

Both common-fund and statutory fees are contingent on the successful resolution of a case by the plaintiffs' attorney. However, the underlying purpose and judicial authority to award these fees are substantially different.

Statutory fees encourage the private enforcement of substantive statutory rights. Common-fund fees are drawn from a benefit conferred on a class of people in order to avoid unjust enrichment of absent class members and to distribute litigation costs uniformly among the class members. So even if one accepts the reasoning of the plurality in Dague as to the impropriety of risk enhancement in statutory-fee cases, extending the holding to common-fund cases seems ill-conceived.

Widening the Field

Some courts, however, have done just that.

* In In re Bolar Pharmaceutical Co., Inc., Securities Litigation, the Eastern District of New York found that a risk enhancement was inappropriate.(28) The opinion noted that applying Dague to common-fund cases would not defeat the purpose of the equitable-fund doctrine because a lodestar analysis would ensure that an attorney would receive reasonable compensation from the fund.(29) By concluding that the overriding purpose of the fee-shifting statutes is identical to the goals of the equitable fee doctrine, the Bolar court disregarded the differences between fee awards under fee-shifting statutes and those under the common-fund doctrine.

* In Nensel v. Peoples Heritage Financial Group, Inc., the District of Maine approved a proposed securities settlement and a lodestar for class counsel.(30) However, the court denied the application of a 1.2 multiplier for risk, noting that "it is desirable to compute fees fairly to encourage counsel to undertake such cases where counsel might not otherwise be available. . . ." According to the court, having counsel understand that when they, prevail, fees will be fairly determined and will be paid is enough to provide sufficient motivation.(31)

* By comparison, the Ninth Circuit reached a different conclusion in In re Washington Public Power Supply System Securities Litigation. The court held that Dague's rationale for barring risk multipliers in statutory-fee cases did not apply in common-fund cases.(32)

Instead, the court reasoned, the use of contingency multipliers is an established practice in the private legal market, designed to reward attorneys for taking the risk of nonpayment by paying them a premium over the normal hourly fees they receive.

The court noted that contingent fees "that may far exceed the market value of the services if rendered on a noncontingent basis are accepted in the legal profession as a legitimate way of assuring competent representation for plaintiffs who could not afford to pay on an hourly basis regardless whether they win or lose."(33)

Moreover, the Ninth Circuit wrote, the concerns expressed in the Dague case about unduly burdening losing parties in statutory-fee cases are not present in common-fund cases, where fees are paid out of the fund.(34)

* In Florin v. Nationsbank of Georgia, the Seventh Circuit held that Dague did not control class-action settlement-fund cases because its reasoning was based largely on the statutory language of fee-shifting provisions. Fee awards in common-fund cases are ultimately charged against the plaintiffs' fund rather than directly against the defendant as they are in fee-shifting cases.(35)

* In the absence of definitive precedent to the contrary in the Second Circuit, the Southern District of New York refused to apply the Dague reasoning to a common fund in Dubin v. E.E Hutton Group, Inc., a securities Suit.(36)

The court held that applying risk multipliers is appropriate in cases like this. However, each application must be closely examined to avoid rewarding attorneys for bringing cases of "dubious merit." And the judge in each case must determine whether "as a matter of public policy, it is the type of case worthy of judicial encouragement."(37)

* Mister v. Illinois Central Gulf Railroad Co. was unusual in that a common-fund awards as made in an employment discrimination case.(38) The district court held that Dague does not extend to common-fund cases.

The court noted that if ever there was a case where the maximum multiplier ought to be used, it was this one. The case was undesirable, the result was exceptional, the fee was on a contingent basis, and public policy was advanced. The court did not have to address the amount of the multiplier because the lodestar based on the local rate exceeded the requested fee.

Lawyers seeking statutory fees will have a more difficult time. In Dague, the Supreme Court ignored its own precedent and Congress's legislative guidance in holding that it is not necessary to account for the risk of losing in determining a reasonable fee.

In his dissent, Blackmun said that the Court's refusal to acknowledge contingency enhancement "violates the principles we have applied consistently in prior cases."(39) Blackmun recognized that Congress enacted fee-shifting statutes so victims of civil rights violations would be able to hire competent counsel. "Congress intended the fee-shifting statutes to serve as an integral enforcement mechanism in a variety of federal statutes--most notably, civil rights and environmental statutes."(40)

Competent, fully employed attorneys, Blackmun wrote, will not forgo private contingent fee cases for public interest cases unless they can potentially get full market rate for them. Contingency enhancements should not be awarded freely, he said, but they should be available when they are clearly called for by special situations.

The Dague majority argued that contingency enhancement "would make the setting of fees more complex and arbitrary, hence more unpredictable, and hence more litigable."(41) But the fact that contingency enhancements are hard to apply is a weak basis for simply ruling them out.

Justice O'Connor's "substantial difficulties" test is a viable alternative to a blanket pronouncement that multipliers are burdensome.

It may take an act of Congress to rectify this inequity.

Notes

(1) 461 U.S. 424 (1983).

(2) 112 S. Ct. 2638 (1992).

(3) See generally ALBA CONTE, ATTORNEY FEE AWARDS (2d ed. 1993).

(4) Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980).

(5) 421 U.S. 240 (1975).

(6) 42 U.S.C. [subsections]1988 (1988).

(7) S. REP. NO. 1011, 94th Cong., 2d Sess. 6 (1976), reprinted in 1976 U.S.C.C.A.N. 5908, 5913.

(8) 487 F.2d 161, 167-69 (3d Cir. 1973).

(9) 488 F.2d 714, 717-19 (5th Cir. 1974).

(10) 461 U.S. 424,433-34 n.9.

(11) 465 U.S. 886 (1984).

(12) Id. at 899.

(13) 478 U.S. 546, 566 (1986).

(14) 483 U.S. 711, 728 (1987).

(15) Id. at 725.

(16) Id. at 731 (O'Connor, J., concurring).

(17) Id.

(18) Id. at 733.

(19) Id. at 731.

(20) Id. at 740 (Blackmun, J., dissenting) (citation omitted).

(21) 112 S. Ct. 2638, 2641-42 (emphasis by the Court).

(22) Id. at 2642 (emphasis by the Court).

(23) 804 F. Supp. 69 (C.D. Cal. 1992).

(24) Id. at 75-76.

(25) CONTE, supra note 3, at [subsections]2.07-2.09.

(26) Id.

(27) Id.

(28) 800 F. Supp. 1091 (E.D.N.Y. 1992).

(29) Id. at 1096.

(30) [1992-1993] Fed. Sec. L. Rep. (CCH) 97,425 (D. Me. Jan. 8, 1993).

(31) Id. at 96,308.

(32) [1993-1994 Transfer Binder] Fed. Sec. L. Rep. (CCH) 198,137 (9th Cir. Mar. 23, 1994).

(33) Id. at 98,996.

(34) See also Gottlieb v. Wiles, 150 F.R.D. 174 (D. Colo. 1993) (Dague does not extend to common-fund cases); Edelman v. PSI Assocs. II, Inc., 147 F.R.D. 217 (C.D. Cal. 1993) (same); In re Avon Prods., Inc. Sec. litig., [1992] Fed. Sec. L. Rep. (CCH) 197,061 (S.D.N.Y. Nov. 5, 1992) (decision used the percentage method but stated that under the lodestar approach, a risk multiplier of 2 to 3 would have been appropriate).

(35) No. 93-2062 (7th Cir. Sept. 8, 1994).

(36) [1993-1994 Transfer Binder] Fed. Sec. L. Rep. (CCH) [paragraph]98,161 (S.D.N.Y. Mar. 4,1994).

(37) Id. at 99,131, quoting In re Agent Orange Prod. Liab. Litig., 818 F.2d 226,236 (2d Cir. 1987).

(38) No. 81-3006 (S.D. Ill. Aug. 5, 1993) (employment/race).

(39) 112 S. Ct. 2638, 2644 (Blackmun, J., dissenting).

(40) Id. at 2648.

(41) Id. at 2643.