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Court Appoints Special Master to Investigate Overbilling in Anthem Class Action

“I would never have appointed you…had I known you were going to pile on 53 law firms on this case,” Judge Lucy Koh of the Northern District of California reportedly told class counsel Thursday in the data privacy settlement of In re Anthem, Inc. Data Breach Litigation. Judge Koh agreed with a motion filed by the Competitive Enterprise Institute’s Center for Class Action Fairness that a special master should be appointed to investigate overbilling.

Final approval hearings are normally sedate affairs in which settling parties ask for final approval of a class action settlement that the count preliminarily approved months before. Anthem didn’t turn out this way, and this should caution courts to scrutinize proposed settlements earlier in the process, when improvements to class relief are more feasible.

Repeat Players in Multidistrict Litigation

The Anthem litigation arose from a data breach of insurance provider Anthem’s computer systems containing personal information of 78.8 million people. Numerous lawsuits were filed across the country and consolidated in Judge Koh’s court by the Joint Panel of Multidistrict Litigation (JPMDL).

Overbilling is common in such consolidated cases (called MDLs) because dozens of firms may file suit and all expect to be generously compensated—sometimes at the expense of class members. Lawyers who prosecute MDLs are repeat players, and this breeds cronyism; MDL lawyers get along to get ahead. In each case, courts appoint a small number of lead attorneys. As these “lead lawyers can influence and sometimes directly control one another attorneys’ fees, lawyers must often rely on each other to form funding coalitions, and…being dubbed ‘uncooperative’ may render defectors ineligible for future leadership roles,” as Professors Burch and Williams have documented.

The Anthem settlement epitomized such backscratching. From the outset of the case in 2015, Judge Koh sought to control costs, trimming the eight firms proposed for leadership positions down to four. The steering committee had originally assured the court that “No one other than the attorneys and firms proposed here will necessarily work on this case,” but this proved to be a meaningless promise. The four appointed firms distributed over $3.5 million worth of work to the four firms Judge Koh specifically excluded, and distributed an additional $10 million to 45 other firms.

Such overbilling is harmful to class members because class counsel negotiates both attorneys’ fees and class benefit from defendants. Defendants simply want to minimize their costs and would happily overpay attorneys if it means less liability to class members. Courts usually understand this dynamic, so will not knowingly approve a settlement where attorneys get more than class members, but class lawyers have tricks to exaggerate the size of their settlements.

Anthem Settlement: A Case Study in Disproportional Fees

Anthem settled after two years, with attorneys earmarking $42 million for their own fees and costs, but only securing credit monitoring services for most class members. Class counsel preposterously claimed that this in-kind benefit would be worth up to $500 million if everyone signed up, such that their fee request was only 8%. Instead, merely 1.86% of class members signed up, for a total value of perhaps $51 million benefit out of a $115 million common fund, with the rest claimed for attorneys’ fees and costs. This claim rate is so low that the settling parties contend that millions of dollars must be distributed to an unrelated charity through the “cy pres” doctrine. Class members are frequently shortchanged by abusive cy pres” awards like this, which CEI is challenging in other settlements, and CEI disputes the parties’ interpretation of their agreement here which suggests that credit monitoring should be extended “as many months as possible.”

Meanwhile, class counsel arranged that they would be compensated with hard cash, not credit monitoring service. While Anthem class members will receive less than a dollar of benefit on average, their supposed attorneys seek $38 million in fees. Judge Koh observed that this upside-down settlement puts attorneys first: “It does bother me that 55 percent would go to attorney fees and administrative costs and only 45 percent goes to class members.”

Judge Koh chastised attorneys for their bill request due to the waste of 53 law firms billing, and also their markup of contract attorney fees. Temporary staff attorneys perform low-level legal work like document review and are typically billed at cost—perhaps $50/hour—to paying clients. Yet parties submitted millions of dollars’ worth of billing for contract attorneys at hundreds of dollars an hour. “I would like you to find a single paying client that would have approved these type of markups in a contract attorney,” challenged Judge Koh.

Second Special Master Appointed Within the Last Year

By appointing a special master to review billing in Anthem, Judge Koh follows the lead of Arkansas Teacher Retirement System v. State Street in the District of Massachusetts, which appointed a special master after the Boston Globe published an exposé on inflated billing. Both cases reveal enormous markups of contract attorney fees, and both happen to feature Lieff Cabraser Heimann & Bernstein, LLP—one of the most prolific MDL and class action firms.

While a special master might lessen the windfall to class counsel, it cannot remake a settlement to better benefit class members. In Anthem, $23 million has already been spent on notice of a settlement that attempts to prioritize attorney welfare over the class member victims of the data breach. The court has not decided whether the settlement itself will be approved, but the sunk costs of notice alone should caution courts to apply scrutiny earlier in the settlement approval process.