In Laffitte v. Robert Half International Inc., No. S222996 (Aug. 11, 2016), the California Supreme Court held, in an employment class action lawsuit, that when attorney fees are awarded to class counsel from a common fund, that the award is not per se unreasonable because it is calculated as a percentage of the common fund, as opposed to pursuant to a loadstar calculation.

Laffitte involved a class action employment lawsuit that settled before trial for $19 million, with agreement that no more than 1/3 of that recovery would go to class counsel as attorney’s fees. Class counsel sought the maximum fee amount, $6,333,333.33, which the trial court approved over the objection of one class member.  The objecting class member contended that the trial court’s award of attorney’s fees as a percentage of the total settlement amount violated the California Supreme Court’s holding in Serrano v. Priest, 20 Cal.3d 25 (1977), also known as Serrano III.  The objector reasoned that Serrano III holds that every class action fee award must be calculated on the basis of time spent by counsel on the case and that awarding attorney’s fees based upon a percentage of recovery is impermissible.

On appeal, the Supreme Court clarified that Serrano III does not preclude an award of a percentage fee in a common fund case.  In reaching this decision, the Supreme Court analyzed the history of attorney fee awards in class actions, comparing the “percentage of recovery” award ultimately approved by the Court and the “lodestar” award method that gained popularity in the mid-1970’s and 1980’s.  As described by the Court, the “lodestar” method calculates the fee by multiplying the number of hours reasonably expended by counsel by a reasonable hourly rate.  “Once the court has fixed the lodestar, it may increase or decrease that amount by applying a positive of negative ‘multiplier’ to take into account a variety of factors, including the quality of representation, the novelty and complexity of the issues, the results obtained, and the contingent risk presented.”  While the Supreme Court acknowledged that, in Serrano III, it approved the lodestar-multiplier method, the Court distinguished Serrano III on the grounds that the attorney fee calculation in that case was made under the “private attorney general” doctrine, and did not involve payment from a common fund.

The Court held that the “percentage of fund method survives in California class action cases, and the trial court did not abuse its discretion in using it, in part, to approve the fee request in this class action.”  The Court continued:  “We hold further that trial courts have discretion to conduct a lodestar cross-check on a percentage fee, as the court did here; they also retain the discretion to forgo the lodestar cross-check and use other means to evaluate the reasonableness of a requested percentage fee.”

In a concurring opinion, Justice Goodwin Liu suggested that courts and litigants need not and should not wait until the end of litigation to set the terms of attorney compensation.  Where possible, the parties should negotiate, and the court should review and conditionally approve the terms of attorney compensation at the start of litigation, which the court can adjust later if unforeseen circumstances make the initial terms unfair.

The Supreme Court’s decision clarifies that California courts are included in the majority of federal and state courts that permit percentage-based class action attorney fee awards.  While courts have discretion to perform a “lodestar” cross-check against the percentage fee award, an award is not per se unreasonable because it is calculated as a percentage of a common fund, as opposed to pursuant to a lodestar analysis.