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Separating Financial Interest from Clients Backfires for Class Action Attorneys

In February when the Supreme Court declined to hear our appeal of the Urban Active Settlement that proposed to pay class members $1.6 million and their attorneys $2.4 million, the general consensus was that it was “putting to bed” the matter. The settlement would proceed as planned.

But in the realm of class action litigation it’s not always so simple. In a surprise filing yesterday, the defendant Global Fitness notified the district court that it has insufficient remaining assets to pay class counsel’s attorneys’ fee and the claims administrator’s fee (incurred to send class members notice and to administer the claims process). Because the class members’ portion of the settlement was placed in escrow last month, they will still be paid in full.

The latest twist in the case is not without irony. Throughout the district court and appellate proceedings, CEI’s client class-member objector Josh Blackman has insisted that class counsel’s decision to pay themselves from a segregated fee fund is a sign that they cared more their own welfare than the class’s. If they had simply negotiated their fee from the total pool of settlement money available (in legalese from the “common fund”), the judge would have the authority to send the excess amounts back into class members’ pockets. But because they negotiated their fee out of a separate, segregated fund instead, any reduction of the fees would simply return money to the defendant, an entity that has already agreed not to oppose the request. This is a classic tactic to reduce scrutiny of fee requests by objectors and judges, a tactic Seventh Circuit Court of Appeals Judge Richard Posner has referred to as a “gimmick.”

This time the gimmick backfired. If class counsel had proposed to draw their fee from the common fund—a more transparent and beneficial structure for the class—their fee could have been in escrow right now alongside the class’s money.

Now, the defendant’s notice was not completely out of the blue. They’ve been in financial distress for some years now and sold off their gyms to LA Fitness in 2012. Also, we don’t know how large the shortfall is; if it is small class counsel will still be netting more money than their clients.

If class action lawyers tie their fate to their clients’, there will be ups and downs. But if they jump ship, few people will be sympathetic when their lifeboat springs a leak.