At MassTortDefense, we typically focus on product liability, toxic tort, and consumer fraud litigation. But a recent decision arising from the largest retail security breach in history, where, the intruders made off with data relating to over 45,000,000 credit and debit cards, raises important class action issues for our readers. In re TJX Companies Retail Security Breach Litigation, 2008 WL 4786658 (D.Mass. November 03, 2008).

Consumers made several complaints, many of them putative class actions. The federal court consolidated these cases, and later received additional cases by order of the Judicial Panel on Multidistrict Litigation, see In re TJX Cos. Customer Data Security Breach Litig., 493 F.Supp.2d 1382, 1383 (J.P.M.L.2007). By September, 2007, TJX and counsel for the consolidated putative class action reached an agreement on settlement. After reviewing objections to the Agreement and holding a fairness hearing, the court gave final approval to the agreement on July 15, 2008. The court then considered class counsel’s petition for attorneys’ fees.

Determining whether a requested fee is reasonable requires consideration of a variety of factors. Some of the most typical include (1) the reaction of the class members to the settlement and proposed attorneys’ fees; (2) the skill and efficiency of the attorneys involved; (3) the complexity and duration of the litigation; (4) the risk that the litigation will be unsuccessful; (5) the amount of time devoted to the case by counsel, and (6) the extent of the benefit obtained. The potential problem here was with the last item. Plaintiffs’ counsel asked for $6.5 million in fees, but as of October 30, 2008, class members had claimed just over $6,100,000 in benefits, a figure unlikely significantly to increase. To grant the petition would thus put more money in the pockets of the attorneys than in those of the wronged clients in whose name the suit was brought. When viewed through this prism, the benefits obtained for the class seem “virtual rather than real,” said the court. At bottom, said the court, class action litigation should benefit the individuals who have been harmed.

Simply awarding fees by reference to the valuation of the settlement presented by counsel requires a court to ignore two interrelated realities about class action litigation. First, only a fraction of any given class is likely to claim the benefits provided for in a settlement. Indeed, it is not unusual for only 10-15% of the class members to bother filing claims, and when settlements require class members to file statements or proofs of claim in order to receive their share response rates rarely exceed 50%. See Leslie, The Significance of Silence: Collective Action Problems and Class Action Settlements, 59 Fla. L. Rev. 71, 119-20 (2007)

The weakness in the approach of awarding fees based on benefits made available rather than actually utilized is that it arguably sets up a conflict between counsel and the class by creating an incentive for counsel to accept a settlement unlikely to yield a high claiming rate, for example, a coupon-in exchange for being guaranteed a percentage of the fund made available, not claimed. Similarly, some class counsel may agree to conditions on a settlement — such as a short time frame in which to make claims or a burdensome claims procedure –in order to obtain additional concessions from the defendant that purportedly increase the value created by the litigation and that support an enhanced fee award.

“Simply put, the class action vehicle is broken,” opined the court.  And tying the award of attorneys’ fees to claims actually made by class members is one step that judges can take toward repair. This approach will not only encourage more realistic settlement negotiations and agreements, but also will drive class counsel to devise ways to improve how class action suits and settlements operate. Class counsel would have an incentive to pay attention to the needs and desires of the class and to “think outside the box” to devise better notice programs, settlement terms, and claim procedures, all to the benefit of the consumers.

Linking attorneys’ fees to claims would serve two additional objectives, thought the court. First, it might prevent “windfalls” for attorneys created by “class apathy.” Second, the court noted that there are surely plaintiffs’ lawyers who bring putative class action lawsuits without merit, assuming, correctly, that in many cases the defendant will bw forced to settle the case to avoid a small probability of a substantial judgment. The failure to link fees to benefits claimed thus could encourage the filing of needless lawsuits.

Class counsel may argue that “You can lead a horse to water, but you can’t make him drink.”   But the court responded that while this may be true, it stands to reason that one can maximize the chances that a horse will drink by, for example, verifying the horse can see the water; choosing clear, fresh, and cold water so that the horse is given the utmost incentive to drink; and making sure there are no obstacles in the horse’s path.  (Gotta love it when a court takes a lawyer’s analogy and runs with it!)