North Carolina Court Rules Class Action Settlements Can Award Attorneys’ Fees, but Note of Caution to Local Counsel

North CarolinaThe North Carolina Court of Appeals considered for the first time whether it is legal in a class action settlement agreement for one party to agree to pay the other’s attorneys' fees and expenses. The court concluded that it is legal, subject to appropriate judicial review. But, the court’s ruling leaves local North Carolina counsel shut out of the roughly $1 million attorneys’ fee award granted to New York lead counsel. The appellate court’s opinion in Ehrenhaus v. Baker, Nos. 14-1201, 14-1083 (N.C. Ct. App. Sept. 15, 2015)(“Ehrenhaus II”) reads much like a primer on state class action law and provides an additional key takeaway for firms serving as local counsel – a fee-sharing arrangement with lead counsel will not be sufficient evidence to support an award of local counsel’s attorneys’ fees. The same evidentiary review must be conducted by the court to determine whether any portion of the fees awarded, and to what extent, will be allocated to local counsel. Letting lead counsel take the lead on the attorneys’ fee issue may leave local counsel empty-handed. Ehrenhaus II also serves as a reminder to counsel and parties operating in the North Carolina Business Court to take note of the applicable procedural rules. Plaintiff’s cross-appeal of the court’s decisions to award less than the fees requested and no fees to local counsel was dismissed for failure to file the notice of appeal properly and timely, and the appellate court denied the extraordinary remedy of writ of certiorari to review the matter. Details. Details. Details.

Ehrenhaus’ Journey to the Court of Appeals

In the wake of the 2008 financial crisis, Wachovia Corporation accepted a merger proposal from Wells Fargo & Company. In October 2008, the plaintiff filed a class action suit on behalf of Wachovia common stock shareholders that challenged the merger and alleged breach of fiduciary duty against Wachovia, its Board of Directors and Wells Fargo. Plaintiff later amended the complaint to include claims that Wachovia’s proxy statement contained materially false and misleading information and omitted material information. The case was designated as a mandatory complex business case and assigned to the North Carolina Business Court. The parties ultimately entered into an agreement to settle the case under terms including that Wells Fargo would make additional disclosures and would pay up to $1.975 million in attorneys’ fees to class counsel. After a fairness hearing and considering objections raised, the trial court approved the settlement and an attorneys’ fee award of approximately $932,000.

Four years ago, the Court of Appeals in Ehrenhaus I upheld the settlement approval, but vacated the attorneys’ fee award on the grounds that the trial court’s findings of fact and conclusions of law regarding the reasonableness of the attorneys’ fee award were lacking and insufficient to facilitate appellate review. The trial court was instructed to reconsider the attorneys’ fee award and to “(1) articulate the legal basis for any fee it chose to award; and (2) analyze the reasonableness of any such award by considering the factors set out in Rule 1.5 of the North Carolina Rules of Professional Conduct.” Those factors include:

  • the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
  • the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
  • the fee customarily charged in the locality for similar legal services;
  • the amount involved and the results obtained;
  • the time limitations imposed by the client or by the circumstances;
  • the nature and length of the professional relationship with the client;
  • the experience, reputation, and ability of the lawyer or lawyers performing the services; and
  • whether the fee is fixed or contingent.

On remand, the trial court considered additional evidence and held that (1) an award of attorneys’ fees was legally permissible because the parties settled the case, rendering the American Rule inapplicable, (2) an award of $1,056,067.57 was reasonable based on the Rule 1.5 factors, and (3) despite the existence of a valid fee-sharing agreement between New York lead counsel and North Carolina local counsel, a reasonableness determination could not be made regarding local counsel’s fees because “the absence of documentation in the record as to [local counsel’s] rates, time expended, and expenses incurred in connection with this litigation made it unfeasible to conduct a proper analysis regarding the services rendered by [local counsel] to Plaintiff.” Objectors appealed the award of attorneys’ fees again, and plaintiff attempted to appeal the court’s decisions to grant a lesser award than requested and to deny any award of fees to local counsel. Plaintiff erroneously filed a notice of appeal with the Business Court through the court’s electronic filing system, and only after the allotted time to appeal had lapsed did plaintiff file a written notice of appeal with the clerk of court in Mecklenburg County Superior Court, as required by North Carolina Appellate Rule of Procedure 3(a).

Why the Controversy over Attorneys’ Fees for Class Counsel?

For those familiar with the federal class action mechanism, it may seem a given that class action settlements include attorneys’ fee awards – usually large sums for plaintiff’s counsel which has led some to question whether plaintiffs themselves benefit as much as their lawyers. Indeed, members of Congress have initiated legislation seeking to address perceived unfairness in the federal class action system and have expressed concern regarding the abuses that have accompanied the shift from class actions largely being used to effect landmark civil rights advancements to “enterprising plaintiffs’ attorneys seeking money damages on behalf of consumers.” While the rule governing federal class actions (Fed. R. Civ. P. 23) explicitly makes provision for the award of attorneys’ fees to class counsel, North Carolina Rule of Civil Procedure 23 makes no such provision and does not address attorneys’ fees at all. In some areas where federal class action law is robust, North Carolina class action law still is developing. The appellate court has noted that the state’s business courts have reviewed certain class action issues based upon “persuasive authority developed by federal courts and cases from other jurisdictions,” where the North Carolina appellate court has not reviewed them yet. In fact, Ehrenhaus I (2011) was the first appellate decision to consider the standard for approval of class action settlements under North Carolina law. Ehrenhaus II now addresses, for the first time, the approval of attorneys’ fee awards in the context of class action settlement agreements.

North Carolina follows what is known as the “American Rule,” which holds that attorneys’ fees may not be awarded to the successful party in litigation without statutory authority. North Carolina has refused to recognize the “common benefit” doctrine applied in some jurisdictions to allow an award of attorneys’ fees if the litigant “confers a common monetary benefit upon an ascertainable stockholder class.” A viable and recognized exception to the American Rule under North Carolina law – the “common fund” doctrine – was inapplicable in this case because the settlement did not establish a fund to be shared by the class members. Accordingly, those objecting to the settlement and attorneys’ fee award argued that there was no legal basis for the court’s approval of the fees.

Settlement Makes All the Difference – No One Wins

In the trial and appellate courts’ view, the “fatal flaw” undermining the objectors’ arguments is that there is no “successful litigant” or “prevailing party” in the context of a settlement agreement. No one wins if the parties voluntarily agree to resolve the matter. Therefore, the American Rule and its primary purpose of removing any chilling effects that may flow from the threat of attorney fee awards against non-prevailing parties are not implicated by settlement. Indeed, the appellate court noted that exceptions to the American Rule usually are designed to promote settlement and North Carolina case law explicitly “recognizes the enforceability of settlement agreements providing for the payment of one party’s attorneys’ fees by the other party to the lawsuit.” Despite a lack of statutory authority, the North Carolina courts have reasoned that enforcing a settlement with a fee award is consistent with the public policy of encouraging negotiated settlement.

Although class actions are unique in the due process considerations raised by a representative action, the appellate court reasoned that the “fair and reasonableness determination” to be made by the court during consideration of whether to approve a class action settlement (established in Ehrenhaus I) also can include a determination of whether an agreed upon award of attorneys’ fees is fair and reasonable. “A ruling that courts may enforce settlement agreements providing for the payment of attorneys’ fees by one party to another party only in non-class action lawsuits would run counter to this public policy favoring the settlement of litigation.” Accordingly, the appellate court ruled in Ehrenhaus II that this reasoning and policy extends to the class action settlement context. The appellate court ultimately held:

the parties to a class action may agree to a fee-shifting provision in a negotiated settlement that is — like all other aspects of the settlement — subject to the trial court’s approval in a fairness hearing. During the fairness hearing, the trial court must carefully assess the award of attorneys’ fees to ensure that it is fair and reasonable.

Are There Really No Winners?

The court’s conclusion that no one is the “successful litigant” coming out of a class action settlement may be accurate technically, but ask any company on the receiving end of a class action complaint whether they feel like they’ve lost anything by settling a matter. And at the end of this particular tussle, plaintiffs lost out on the opportunity to challenge the denial of fees to local counsel and the amount of the award granted by the trial court due to its erroneous and untimely filing of the notice of appeal. So, whether there really are no winners at the end of this settlement negotiation is not decidedly clear.

In reality, for many companies it is more efficient and cost effective to settle class actions (even those without merit) than to face the risks posed by protracted class action litigation. So, a palatable settlement may warrant the positive spin the courts put on the voluntary resolution of class actions. And although the appellate court refused to grant a writ of certiorari to allow the plaintiff’s appeal in this case, it did note the possibility that local counsel ultimately could be granted an attorneys’ fee award since the trial court ruled that it “would not award a portion of the total attorneys’ fee award to [local counsel] ‘until such time as there is sufficient evidence before the Court to support a proper analysis regarding the services rendered by [local counsel] to Plaintiff.’” At the end of the day, maybe the result will be win-win.

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