Class Counsel Incurs Seventh Circuit Criticism for Calling Objector’s Counsel A “Notorious Professional Objector” in a Brief

In Petri v. Stericycle, Inc. No. 20-2055 (7th Cir. May 19, 2022), the Seventh Circuit vacates and remands a 25% class-action fee award in a securities case, ordering reconsideration of evidence that lead class counsel benefitted from prior litigation and other factors, and—in a parting shot—criticizes lead counsel for going after the objector’s lawyer individually in an appellate brief.

“Stericycle is a waste management company with both government and private customers. Several years before this securities fraud case was filed, a former Stericycle employee brought a qui tam action under the federal False Claims Act and analogous state laws.” The resulting litigation and government investigations resulted in penalties and settlements totaling over $325 million. A follow-up securities class action was filed (for alleged material misstatements to the investors) and two pension funds— the Public Employees’ Retirement System of Mississippi and the Arkansas Teacher Retirement System—were appointed as lead plaintiffs.

As two years of litigation, “the parties agreed to settle for $45 million. Lead counsel moved for a fee award of 25 percent of the settlement fund, as well as reimbursement of costs. Petri, a member of the class, objected only to the fee award, arguing that the amount was unreasonably high given the low risk of the litigation and the early stage at which the case settled. Petri also moved to lift the stay the court had entered while the settlement agreement was pending so that he could seek discovery regarding class counsel’s billing methods, the fee allocation among firms, and counsel’s political and financial relationship with the Mississippi fund.”

The district court denied the objector’s discovery and approved the settlement, including the percentage-of-the-fund fee. The objector appealed.

The Seventh Circuit vacates the fee award and remands for reconsideration. It finds error in three respects.

“First, the court failed to consider an actual ex ante fee agreement between one of the funds and its counsel” as evidence of the market rate. The Mississippi pension fund had a 2016 retainer agreement with lead counsel “that provides for increasing attorney fees, but declining percentages, as the settlement fund increases, which is generally consistent with widespread practices in cases generating funds to be distributed.” Under such an agreement, as applied to the entire class, lead counsel’s recovery would have been 12.78% of the fund. “[W]here, as here, there is evidence of an ex ante agreement for a sliding scale fee structure, we expect a district court to give that evidence substantial weight in assessing the reasonableness of the proposed award.”

“Second, the court’s assessment of the risk of nonpayment did not give sufficient weight to the prior litigation involving Stericycle, which substantially reduced the risk of nonpayment.” Given the significant penalties and settlements already logged against the defendant, even if class counsel carried the securities fraud ball across the goal line, the prior litigation gave them excellent starting field position, strengthening the plaintiffs’ case and substantially reducing class counsel’s risk of recovering nothing. That reduced risk would have been taken into account in any ex ante auction or market transaction for representation of the securities fraud class.”

Finally, “[t]hird, in evaluating lead counsel’s efforts, the court did not give sufficient weight to the early stage at which the case settled.” The cases settled at the motion to dismiss stage with no merits discovery. “Because of the early settlement and the information lead counsel already had, however, it was not a case where the firm had to engage in extensive discovery or defend against a summary judgment motion.”

The Seventh Circuit affirms, as within the district court’s discretion, the denial of discovery. Yet it also states that had the district court granted the discovery, it probably would have affirmed such an order as well. It registers specific reservations about so-called “pay-to-play” arrangements “where a law firm makes campaign contributions to elected officials who control governmental pension funds and is selected as the fund’s lead counsel.” Nevertheless, considering the specific record in this case, the district court “did not abuse its discretion in thinking that the selection process did not appear to have been tainted by political contributions.”

In closing, the objector “moved for sanctions against lead counsel based on remarks in its response brief about [the objector’s] attorney,” specifically that the lawyer is supposedly a “notorious professional objector” and his firm an “objection-factory.” The Seventh Circuit states that the brief’s “ad hominem attack on [counsel] was not professional and served only to emphasize the weakness of [the class’s] own arguments.” While “the use of this language falls short of the type of conduct we have deemed sanctionable,” the panel concludes that “[w]e exercise our discretion not to impose more formal sanctions in the still-optimistic hope that the rhetorical attacks might be de-escalated. But we reiterate what we said in [Pearson v. Target Corp., 968 F.3d 827, 831 n.1 (7th Cir. 2020)]: this kind of ad hominem criticism is unwarranted and counterproductive.”

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