Labor Code section 218.5 controls contractual attorney fee provisions when wage and contract claims are intertwined

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This is a little nugget for the wage & hour set. In a matter of first impression, the Court of Appeal (Fourth Appellate District, Division Three), in Dane-Elec Corp. v. Bodokh (May 24, 2019) considered the effect of Labor Code section 218.5 on a prevailing party employer’s right to recover contract-based attorney fees from an employee where the employer successfully defended against a wage claim, found not to have been brought in bad faith, when the wage claim was inextricably intertwined with a contract claim for which the employer would otherwise be contractually entitled to recover attorney fees.

The Court described Labor Code section 218.5 as follows:

Labor Code section 218.5 is a fee-shifting statute in actions for nonpayment of wages. The first sentence of section 218.5(a) states: “In any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, the court shall award reasonable attorney’s fees and costs to the prevailing party if any party to the action requests attorney’s fees and costs upon the initiation of the action.”There is a significant limitation if the prevailing party is not an employee. The second sentence of section 218.5 (a) states: “However, if the prevailing party in the court action is not an employee, attorney’s fees and costs shall be awarded pursuant to this section only if the court finds that the employee brought the court action in bad faith.”

Slip op., at 15. The issue in the case arose because the wage claim and a contract claim were inexplicably intertwined. The Court resolved the question after looking at apportionment rules and the purpose of similar fee-shifting statutes, such as the Cartwright Act. The Court observed that while section 218.5 isn’t exactly a one-way fee shifting statute, the bad faith requirement effectively renders it a one-way fee-shifting statute that favors employees.

That's right -- common fund attorney fee awards can be calculated as a percentage of the fund

I take this opportunity to say I told you so.  "We clarify today that when an attorney fee is awarded out of a common fund preserved or recovered by means of litigation (see Serrano III, supra, at p. 35), the award is not per se unreasonable merely because it is calculated as a percentage of the common fund."  Laffitte, et al. v. Robert Half International, Inc., et al., at p. 2 (August 11, 2016).  See the rest if you have the time, but this should put an end to the spreading nonsense that lodestar is the method for calculating fees in common fund class action settlements.

Percentage of the fund is still an approved method of awarding fees in California class actions

Funny timing on this one.  In Episode 14 of the Class Re-Action podcast, our discussion turned at one point to fee awards in class actions.  We briefly mentioned Laffitte v. Robert Half International, Inc. (November 21, 2014), but didn't dive under the hood.  But now that I've had a chance to read it, I see that a postscript to the podcast is in order.  In Laffitte, the Court of Appeal (Second Appellate District, Division Seven) considered an appeal by an objector to a class action settlement.  One issue the Court touched on was the propriety of using a percentage of the fund to award fees (with a lodestar crosscheck), rather than the currently trendy approach of using lodestar with a percentage crosscheck.  Here's a rundown of the Court's opinion.

The plaintiff settled a class action lawsuit against a group of defendants related to Robert Half International Inc. for $19 million.  The trial court granted the parties’ ex parte application for an order amending the settlement agreement, class notice, and claim form. Among other things, the amended settlement agreement said that Robert Half would pay a gross settlement amount of $19,000,000. Subject to court approval, the settlement agreement listed the following payments would be made from the gross settlement amount: class counsel attorneys’ fees of not more than $6,333,333.33 (one third of the gross settlement amount) and costs not to exceed counsel’s actual costs, class representative payments not to exceed $80,000, settlement administrator fees not to exceed $79,000, civil penalties owed to the California Labor and Workforce Development Agency, and applicable payroll taxes on the employees’ recovery.

In support of their motion for attorneys’ fees, class counsel submitted declarations from the attorneys in each of the three law firms serving as class counsel. The attorneys did not submit detailed time records. The declarations stated that class counsel worked a total of 4,263.5 hours on the case (and anticipated working 200 hours on the appeal) and, using the hourly rate for each attorney, calculated that the total lodestar amount was $2,968,620 ($3,118,620 including the appeal). Class counsel requested a lodestar multiplier of between 2.03 to 2.13 for a total requested attorneys’ fee award of $6,333,333.33.

David Brennan, a member of the class, objected to the settlement and the amount awarded in attorney’s fees. The trial court overruled his objections and approved the settlement, which included an award of attorneys’ fees to class counsel of one-third of the settlement, or approximately $6.3 million. Brennan appealed from the order approving the settlement and entering final judgment, challenging both the class action settlement notice regarding the award of attorneys’ fees and the amount of attorneys’ fees awarded. Laffitte asked that the Court affirm the trial court’s order. The Robert Half defendants had no strong position on the appropriate amount of fees, but asked that the Court affirm the order “in order to bring this lawsuit to closure.”

The Court began its discussion of the challenge to attorney’s fees by observing that the Notice stated the maximum amount of fees that would be sought by class counsel:

The class notice describing the preliminarily-approved settlement included the proposed attorneys’ fees award for class counsel, a schedule for final approval, and the procedure for making objections. The notice stated: “Class Counsel, consisting of Law Offices of Kevin T. Barnes, Law Office of Joseph Antonelli, and Appell | Hilaire | Benardo LLP, will seek approval from the Court for the payment in an amount not more than $6,333,333.33 for their attorneys’ fees in connection with their work in the Actions, and an amount not more than $200,000 in reimbursement of their actual litigation expenses that were advanced in connection with the Actions. Class Counsel’s attorneys’ fees and litigation expenses as approved by the Court will be paid out of the Gross Settlement Amount.”

Slip op., at 10.  The Court then considered and rejected the argument that the motion for an award of fees should be available to the class members before the deadline to object expires, as Fed. R. Civ. P. 23 requires, as interpreted by the Ninth Circuit decision, In re Mercury Interactive Corp. Securities Litigation, 618 F.3d 988 (9th Cir. 2010):  “Rule 23 does not control in California. ‘As a general rule, California courts are not bound by the federal rules of procedure but may look to them and to the federal cases interpreting them for guidance or where California precedent is lacking. [Citations.] California courts have never adopted Rule 23 as “a procedural strait jacket. To the contrary, trial courts [are] urged to exercise pragmatism and flexibility in dealing with class actions.” [Citations.]’ ”  Slip op., at 11-12.  Instead, the Court said that California had adequate rules for notice:

California precedent and authority governing court approval of class action settlements and attorneys’ fees applications, however, are not lacking. Rule 3.769 of the California Rules of Court states the procedure for including an attorneys’ fees provision in a class action settlement agreement and for giving notice of the final approval hearing on the proposed settlement. Under rule 3.769(b) of the California Rules of Court, “[a]ny agreement, express or implied, that has been entered into with respect to the payment of attorney’s fees or the submission of an application for the approval of attorney’s fees must be set forth in full in any application for approval of the dismissal or settlement of an action that has been certified as a class action.”

Slip op., at 12.  The Court concluded that the notice given complied with Rule 3.769:

The notice given to the class members complied with California Rules of Court rule 3.769 by apprising them of the agreement concerning attorneys’ fees. The notice told the class members that class counsel could receive up to $6.3 million in attorneys’ fees. The notice also advised the class members of the procedures for objecting to the proposed settlement and appearing at the settlement hearing, where they could present their objections to any aspect of the settlement, including the amount of attorneys’ fees to be awarded to class counsel.

Slip op., at 13.  Positive number one from this opinion: no need to copy the approach of In re Mercury Interactive.

Next, the Court looked at the reasonableness of the fee award, noting discussion first the lodestar method of calculation:

In Lealao v. Beneficial California, Inc., supra, 82 Cal.App.4th 19 the court stated that “[t]he primacy of the lodestar method in California was established in 1977 in Serrano [v. Priest (1977)] 20 Cal.3d 25. . . . [O]ur Supreme Court declared: ‘“The starting point of every fee award . . . must be a calculation of the attorney’s services in terms of the time he has expended on the case.”’” (Id. at p. 26.) The court added that “[i]n so-called fee shifting cases, in which the responsibility to pay attorney fees is statutorily or otherwise transferred from the prevailing plaintiff or class to the defendant, the primary method for establishing the amount of ‘reasonable’ attorney fees is the lodestar method. The lodestar (or touchstone) is produced 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 or negative ‘multiplier’ to take into account a variety of other factors, including the quality of the representation, the novelty and complexity of the issues, the results obtained, and the contingent risk presented. [Citation.]”

Slip op., at 16-17.   The Court then noted that percentage of the fund remains a viable method of awarding fees in common fund cases:

Subsequent judicial opinions have made it clear that a percentage fee award in a common fund case “may still be done.” For example, in Chavez v. Netflix, Inc. (2008) 162 Cal.App.4th 43 the court stated that “the Lealao court did not purport to mandate the use of one particular formula in class action cases. The method the trial court used here and that [was] discussed in Lealao are merely different ways of using the same data—the amount of the proposed award and the monetized value of the class benefits—to accomplish the same purpose: to cross-check the fee award against an estimate of what the market would pay for comparable litigation services rendered pursuant to a fee agreement. [Citation.]” (Id. at p. 65.) Therefore, “fees based on a percentage of the benefits are in fact appropriate in large class actions when the benefit per class member is relatively low . . . .” (Id. at p. 63.)

Slip op., at 18.  In this matter, the Court held proper the trial court’s use of a percentage of the fund method with a lodestar crosscheck:

The trial court did not use the percentage of fund method exclusively to determine whether the amount of attorneys’ fees requested was reasonable and appropriate. The trial court also performed a lodestar calculation to cross-check the reasonableness of the percentage of fund award. This was entirely proper. “[A]lthough attorney fees awarded under the common fund doctrine are based on a ‘percentage-of-the-benefit’ analysis, while those under a fee-shifting statute are determined using the lodestar method, ‘[t]he ultimate goal . . . is the award of a “reasonable” fee to compensate counsel for their efforts, irrespective of the method of calculation.’ [Citations.]” (Apple Computer, Inc. v. Superior Court (2005) 126 Cal.App.4th 1253, 1270.) It therefore is appropriate for the trial court to cross-check an award of attorneys’ fees calculated by one method against an award calculated by the other method in order to confirm whether the award is reasonable.

Slip op., at 19-20.  Positive number two from this opinion: focusing on the percentage of the fund is still appropriate (courts claiming otherwise are misrepresenting the authority out there, though it probably doesn't matter, since what this really points out is that any rational method for evaluating the fee against the benefit conferred).  The Court added to the beneficial discussion by holding that detailed time records are not required:

Brennan argues that, in connection with the court’s lodestar calculations, class counsel did not submit detailed attorney time records. Such detailed time records, however, are not required. “It is well established that ‘California courts do not require detailed time records, and trial courts have discretion to award fees based on declarations of counsel describing the work they have done and the court’s own view of the number of hours reasonably spent.

Slip op., at 20.  That's right - more confirmation that there is no requirement to maintain detailed time records.  Positive number three.  The Court then soundly rejected the objector’s challenge to the application of a multiplier to compare the percentage of the fund award to the lodestar.  Finally, the Court concluded that the “clear sailing” provision in the settlement agreement was not improper in general:

“While it is true that the propriety of ‘clear sailing’ attorney fee agreements has been debated in scholarly circles [citations], commentators have also noted that class action ‘settlement agreement[s] typically include[] a “clear sailing” clause . . . .’ [Citation.] In fact, commentators have agreed that such an agreement is proper. ‘[A]n agreement by the defendant to pay such sum of reasonable fees as may be awarded by the court, and agreeing also not to object to a fee award up to a certain sum, is probably still a proper and ethical practice. This practice serves to facilitate settlements and avoids a conflict, and yet it gives the defendant a predictable measure of exposure of total monetary liability for the judgment and fees in a case. To the extent it facilitates completion of settlements, this practice should not be discouraged.’ [Citation.]” (Consumer Privacy Cases, supra, 175 Cal.App.4th at p. 553, fn. omitted; see Cellphone Termination Fee Cases (2009) 180 Cal.App.4th 1110, 1120 [“[c]lass action settlements frequently contain a ‘clear sailing’ agreement, whereby the defendant agrees not to object to an attorney fee award up to a certain amount”].)

Slip op. at 24-25.  The Court then concluded that there was no reason to find the “clear sailing” provision suspect in this matter.  The trial court was affirmed and costs were awarded to the plaintiff and defendants, indicating the Court’s view of the lack of merit in the appeal.

A bit of clarity added to lodestar fee applications

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I've had a long-running debate going with several of the judges in the complex litigation program regarding fee awards in class actions.  I contend that California has long recognized contingent fee awards, and there is nothing about class actions that justifies a "lodestar first" approach that seems to be a trend.  A decision issued yesterday didn't settle the debate (it's a decision in a lodestar award situation, not a common fund recovery), but it adds a bit of clarity in other respects.  If you are a plaintiff-side practitioner, you need to know about this one.  In Concepcion v. Amscan Holdings, Inc. (February 18, 2014), the Court of Appeal (Second Appellate District, Division Seven) considered a defendant's appeal of a $350,000 fee award following settlement of a Song-Beverly Credit Card Act suit.

Counsel for plaintiffs submitted declarations describing, in general terms, the categories of work they performed.  The trial court then required the in camera submission of billing records that were not provided to the defendant's attorneys. On appeal, the defendant argued that class counsel failed to submit sufficient evidence to justify the fee award and, in particular, did not demonstrate the time expended by the six law firms involved was reasonably necessary and nonduplicative.  The defendant also argued that the trial court’s in camera review of class counsel’s billing records to support the award was fundamentally unfair and denied it due process.  The Court agreed that it was improper for the court to rely upon billing information not provided to the defendant, preventing any opportunity to challenge it.

Upon learning that the Court rejected in camera review of billing records, you might be tempted to conclude that this means that detailed billing records must be provided to the defendant.  That is not required, and it is also why this case is important.

As the Court explained, it is not necessary to provide detailed billing records in order to support a fee award:

It is not necessary to provide detailed billing timesheets to support an award of attorney fees under the lodestar method. (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 254 [affirming lodestar fee award based on “declarations evidencing the reasonable hourly rate for [the attorneys’] services and establishing the number of hours spent working on the case”; “California case law permits fee awards in the absence of detailed time sheets”]; see Mardirossian & Associates v. Ersoff (2007) 153 Cal.App.4th 257, 269 [“there is no legal requirement that an attorney supply billing statements to support a claim for attorney fees”].) Declarations of counsel setting forth the reasonable hourly rate, the number of hours worked and the tasks performed are sufficient. (Steiny & Co. v. California Electric Supply Co. (2000) 79 Cal.App.4th 285, 293 [“[a]n attorney’s testimony as to the number of hours worked is sufficient to support an award of attorney fees, even in the absence of detailed time records”].) “‘Although a fee request ordinarily should be documented in great detail, it cannot be said . . . that the absence of time records and billing statements deprive[s] [a] trial court of substantial evidence to support an award . . . .’” (City of Colton v. Singletary (2012)
206 Cal.App.4th 751, 784-785.)

Slip op., at 17.  The Court then noted that, while the declarations of counsel provided total hours, the declarations, for the most part, did not break out the total number of hours each attorney spent on each type of work in a category.  This spartan showing was found to be insufficient by the Court:

As discussed, class counsel had the burden of proving the reasonable number of hours they devoted to the litigation, whether through declarations or redacted or unredacted time sheets or billing records. (See, e.g., Ellis v. Toshiba America Information Systems, Inc. (2013) 218 Cal.App.4th 853, 883; El Escorial Owners’  Assn. v. DLC Plastering, Inc., supra, 154 Cal.App.4th at p. 1366.) “A trial court may not rubberstamp a request for attorney fees, but must determine the number of hours reasonably expended.” (Donahue v. Donahue (2010) 182 Cal.App.4th 259, 271.)

Slip op., at 18.  The clear message is that, while it is proper for counsel to decline to submit billing sheets, the "reasonable" fees must be supported with a detailed declaration as an alternative approach.  It would appear that, to be definitely safe, a declaration for this purpose must include a thorough summary of the number of hours spent on various categories of work in the case.  But the practice of requiring the submission of detailed billing records is improper.  Whether you want to go that route and tell the trial court it is improper is another story.

Next, the Court considered the argument that the review of billing records in camera denied defendant a due process right to challenge the records.  The Court swiftly concluded that it did: "Under our adversarial system of justice, once class counsel presented evidence to support their fee request, Party City was entitled to see and respond to it and to present its own arguments as to why it failed to justify the fees requested."  Slip op., at 18.)

The Court essentially held that, while billing records weren't necessary to support a fee request, once provided, they had to be shared.  The Court dismissed the argument that the records were likely to contain a large volume of privileged information, suggesting that redaction would suffice.  The Court also found that cursory declarations with total numbers of hours were insufficient.  So, sufficient lies somewhere between billing records and cursory declarations with total hours listed.  Now you know what you can't do, what you don't have to do, and what you probably ought to do.

Law firm cannot recover fees as prevailing party when represented by Of Counsel

This isn't really on topic, but it was interesting enough to note.  In Sands & Associates v. Martin Juknavorian (October 10, 2012), the Court of Appeal (Second Appellate District, Divsion One) held that the Of Counsel relationship is sufficiently "close, personal, continuous, and regular" that a firm represented by Of Counsel to the firm cannot recover fees as a prevailing party, even when a prevailing party clause applies to the dispute.

Decision forthcoming in Kirby, et al. v. Immoos Fire Protection, Inc.

On Monday, April 30, 2012, the California Supreme Court will issue its decision in Kirby, et al. v. Immoos Fire Protection, Inc.  The Court of Appeal decision was discussed on this blog here.  The great question, of course, is whether the relatively employee-protective decision in Brinker will be tempered by prevailing party fee concerns.  The California Supreme Court describes the issues under review as follows:

The court limited review to the following issues: (1) Does Labor Code section 1194 apply to a cause of action alleging meal and rest period violations (Lab. Code, § 226.7) or may attorney’s fees be awarded under Labor Code section 218.5? (2) Is our analysis affected by whether the claims for meal and rest periods are brought alone or are accompanied by claims for minimum wage and overtime?

Aleman v. Airtouch Cellular confirms what we already suspected regarding reporting time pay and split shift wages

While this case ostensibly addresses issues of first impression in California, like many such decisions it was only a matter of time.  In Aleman v. Airtouch Cellular (December 21, 2011), the Court of Appeal (Second Appellate District, Division Two) examined claims for reporting time pay and split shift premiums.  The case was brought by former employees of AirTouch. The plaintiffs worked mostly as retail sales representatives or customer service representatives at AirTouch stores and kiosks.  Plaintiffs alleged that AirTouch did not properly pay its nonexempt employees for attending mandatory store meetings.

On the reporting time claim, the Court concluded that the plaintiffs were not entitled to receive "reporting time pay" for attending meetings at work, because all the meetings were scheduled and they worked at least half the scheduled time.  This issue stems from the argument that reporting time pay should be based on a two-hour minimum.  Thus, goes the argument, if you are called into a meeting one day for two hours, you should get two hours of pay, even if the meeting last 90 minutes.  This theory is dead.  If a meeting is scheduled, and the meeting lasts at least half the scheduled time, that is good enough.

On the split shift differential claim, the Court concluded, consistent with at least one treatise to examine the issue, that the split shift differential is intended only to protect the minimum wage law.  Thus, if your pay for the hours worked is enough to satisfy the split shift premium of one extra hour of pay at minimum wage, then no further pay need be supplied.

On the plus side, the Court explicitly held that an award of attorney's fees was improper, since both reporting time pay and split shift pay were governed by Labor Code section 1194, governing payment of minimum wages.  Since the one-way fee shifting statute controls the claims, defendant could not recover fees.  Phew.

California Supreme Court activity for the week of May 9, 2011

The California Supreme Court held its (usually) weekly conference on May 11, 2011.  Notable results include:

  • On a petition for review, review was granted, and the matter held, in United Parcel Service Wage And Hour Cases (February 24, 2011) (fees not available to defendant prevailing on Labor Code section 226.7 claims), covered previously on this blog here.  Review was previously granted in a case addressing this issue: Kirby v. Immoos Fire Protection, Inc. (July 27, 2010).
  • On a petition for review, review was denied in Price v. Starbucks Corporation (February 17, 2011).

Reasonable lodestar hourly rates in the Northern District of California

For those keeping track of such things, United States District Court Judge Marilyn Hall Patel (Northern District of California) found "reasonable attorneys fees based on rates of $650 for partner services, $500 for associate attorney services and $150 for paralegal services. See Suzuki v. Hitachi, 2010 WL 956896 *3 (N.D.Cal. March 12, 2010)."  Faigman v. AT&T Mobility LLC, 2011 WL 672648 (N.D.Cal. Feb 16, 2011).  The opinion also noted that counsel requesting a higher rate should provide information supporting the departure from those presumptively reasonable hourly rates.

United Parcel Service Wage And Hour Cases holds that a defendant cannot recover fees after prevailing on Labor Code section 226.7 claims

In Kirby v. Immoos Fire Protection, Inc. (July 27, 2010), the Court of Appeal (Third Appellate District) held that a prevailing defendant could recover fees when it prevailed against a plaintiff asserting claims arising under Labor Code section 226.7 (meal and rest periods).  The Supreme Court then granted review.  The answering brief is currently due in that matter on March 21, 2011.   Today, the inscrutable Second Appellate District (Division Eight) held, in United Parcel Service Wage And Hour Cases (February 24, 2011), that fees were not available to a prevailing defendant in such actions.  In its analysis, the Court said:

Nothing in the legislative history suggests the Legislature meant the reciprocal fee recovery provisions of Labor Code section 218.5 to apply in an action for violation of the section 226.7 mandate that employers provide meal and rest breaks for certain nonexempt employees. The statutory remedy of section 226.7, providing compensation for missed breaks, was first enacted in 2000 in response to poor employer compliance with the meal and rest break requirements. (Murphy, supra, 40 Cal.4th at pp. 1105-1106; Stats. 2000, ch. 876, § 7, p. 6509.) Before 2000, the only remedy available to an aggrieved employee was injunctive relief to prevent future abuse. (Murphy, at p. 1105.)

The 2000 amendment providing a pay remedy bears sufficient hallmarks of a penalty designed to shape employer behavior, and is sufficiently distinct from the customary types of bargained-for wages recognized under the law, that we cannot conclude the Legislature intended a claim under Labor Code section 226.7 to be interpreted as a claim for “nonpayment of wages” within the meaning of section 218.5. The section 226.7 pay remedy for missed meal and rest breaks was enacted 14 years after the Legislature enacted the reciprocal fee recovery provisions of section 218.5. It is therefore not reasonable to assume that when the Legislature enacted section 218.5 in 1986 to provide for recovery of prevailing party fees in claims for nonpayment of wages and benefits, it intended that provision to permit a prevailing employer-defendant to recover fees from an employee raising a claim for denial of breaks -- a claim which at that time only supported injunctive relief.

Construing the entire statutory scheme with a view toward protecting employees, as we must, we find that a claim for remedial compensation under Labor Code section 226.7 does not trigger the reciprocal fee recovery provisions of section 218.5. Since none of the claims on which UPS prevailed permit the recovery of attorney fees, the award of statutory fees to UPS was in error.

Slip op., at 14.

Considering the current state of Kirby, it seems like this decision will be citable law for about 90 days, give or take a week here or there.  If a Petition for Review wasn't granted, we'd certainly have a good idea about how a part of Kirby will be decided.