Charles I. Friedman, P.C. v. Microsoft

Decision Date24 August 2006
Docket NumberNo. 1 CA-CV 05-0313.,1 CA-CV 05-0313.
Citation141 P.3d 824,213 Ariz. 344
PartiesCHARLES I. FRIEDMAN, P.C., an Arizona corporation; The Power P.E.O., Inc., an Arizona corporation; Jake Lucero; on behalf of themselves and all others similarly situated, Plaintiffs/Appellees, v. MICROSOFT CORPORATION, a Washington corporation, Defendant/Appellant. Townsend and Townsend and Crew, LLP., Class Counsel/Appellant, v. Microsoft Corporation, Defendant/Appellee.
CourtArizona Court of Appeals

Shughart Thomson & Kilroy, P.C. By Brian Michael Goodwin, Rudolph J. Gerber, Marty Harper, Kelly J. Flood, Lori V. Berke, Phoenix, Co-Counsel for Appellees Friedman.

Lerach Coughlin Stoia Geller Rudman Robbins, L.L.P. By Leonard B. Simon, Susan G. Taylor, Pamela M. Parker, San Diego, CA, Patrick J. Coughlin, San Francisco, CA, Co-Counsel for Appellees Friedman.

Bonnett Fairbourn Friedman & Balint, P.C. By Francis J. Balint, Jr., Phoenix, Co-Counsel for Appellees Friedman.

Osborn Maledon, P.A. By William Maledon, Thomas L. Hudson, Keith A. Swisher, Meghan Grabel, Phoenix, Co-Counsel for Appellant Microsoft.

Montgomery McCracken Walker & Rhoads, L.L.P. By Charles B. Casper, Philadelphia, PA, Co-Counsel for Appellant Microsoft.

Sullivan & Cromwell By David B. Tulchin, New York, NY, Co-Counsel for Appellant Microsoft.

Townsend and Townsend and Crew By Richard Grossman, Eugene Crew, San Francisco, CA, Co-Counsel for Appellant Townsend.

Thomas A. Zlaket, P.L.L.C. By Thomas A. Zlaket, Tucson, Co-Counsel for Appellant Townsend.

OPINION

KESSLER, Presiding Judge.

¶ 1 Microsoft appeals the superior court's award of $19,132,728 in attorneys' fees to class counsel1 for their representation of the class members in this consolidated antitrust action. That award is based on a settlement agreement with a "face value" of $104.6 million and a provision that Microsoft pay class counsel "reasonable attorneys' fees ... calculated on a common fund basis." Microsoft argues that the superior court erred in the calculation of the attorneys' fee award by applying a 3.42 multiplier to an incorrect lodestar2 figure.

¶ 2 While we have concerns with the amount of the fees awarded in this case, those concerns are not sufficient for us to hold the superior court abused its discretion in selecting a 3.42 multiplier. We reach that conclusion given the deferential standard of review we must apply, the factual record, Microsoft's own experts suggesting a multiplier in the range of 1.5 to 2.3, Microsoft agreeing to fees being determined under the common fund doctrine, and class counsel's expert recommending a multiplier of 5.3. However, we do find the court erred in applying a multiplier to post-settlement fees and in calculating the lodestar figure. Accordingly, we affirm the court's imposition of a 3.42 multiplier, reverse the court's application of the multiplier to post-settlement fees and calculation of the base lodestar figure, and remand for further proceedings consistent with this decision.3

Facts and Procedural History

¶ 3 The fee dispute at issue arose out of Arizona consolidated class actions,4 in which the class alleged that Microsoft had violated Arizona law by asserting unlawful monopoly power and engaging in anti-competitive conduct. The Arizona class action was initiated after a federal judge made extensive findings of fact supporting the conclusion that Microsoft had engaged in improper use of monopoly power and violated federal antitrust laws. See United States v. Microsoft, 84 F.Supp.2d 9, 111 (D.D.C.1999).5 After the federal court issued its findings of fact, more than 100 class actions were filed against Microsoft in states across the country.

¶ 4 Arizona class members used, and were encouraged to use, the ongoing litigation against Microsoft in other jurisdictions throughout the pretrial proceedings, including coordinated deposition discovery. Class members successfully moved the superior court to grant summary judgment that the findings of fact in the federal action have preclusive effect and demonstrate that Microsoft was liable for unlawful conduct. Accordingly, Microsoft refers to the Arizona class action as a "tag-along action."

¶ 5 Notwithstanding Microsoft's allegations that the Arizona class action was "tag-along" in nature, it took Microsoft and the class members over four years of litigation before they were able to settle the action. During that time, class counsel were successful in certifying the class and defending against dismissal based on federal precedent that indirect purchasers could not recover under federal antitrust law. See Illinois Brick v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). Moreover, it was not until three years after the class members filed their action that it was clear that Arizona indirect purchasers could recover for antitrust violations under Arizona law. See Bunker's Glass Co. v. Pilkington, 206 Ariz. 9, 75 P.3d 99 (2003).

¶ 6 Ultimately, the parties reached an agreement to settle "All Cases"6 against Microsoft (the "Settlement Agreement"). Pursuant to the Settlement Agreement, Microsoft agreed to make available to class members vouchers that ranged in value from $9-$15, which, if collected by every class member, would have a "face value" of $104.6 million. The Settlement Agreement also contained a cy pres7 clause. Pursuant to that provision, if the total amount of vouchers claimed did not reach the face value amount, the difference between the face value amount and the total amount of issued vouchers claimed would be divided in half and distributed to eligible school districts. The cy pres amount would also include one half of the value of the coupons distributed but unused by March 2009.

¶ 7 The Settlement Agreement further provided that Microsoft agreed to pay reasonable attorneys' fees "calculated on a common fund basis" for work performed by all counsel for plaintiffs in "All Cases in connection with this litigation." The parties specified that:

(2) the amount of the attorneys' fees will be determined upon the basis of the "common fund" doctrine rather than as a "prevailing party" or statutory fee, with each party being free to argue for what it believe[s] is a reasonable common fund fee; (3) plaintiffs are free to argue that the value of the "common fund" created by the litigation is any amount up to ... Face Value ... [A]nd Microsoft is free to argue that the "common fund" created by the litigation is any amount less than the Face Value or is the amount of the benefit conferred directly on class members....

¶ 8 Subsequently, class counsel filed a joint application for attorneys' fees in the sum of $34.8 million, which is one third of the face value of the Settlement Agreement. Class counsel provided evidence of risks that were inherent in the class action, such as: the difficulty in prevailing in an antitrust action; Microsoft's extensive resources allowed it to be an aggressive opponent; the indirect purchaser hurdle; the difficulty of certifying a class; and causation barriers. Class counsel suggested that the court cross-check the percentage requested with a lodestar value of $6.6 million multiplied by 5.3. Class counsel pointed to persuasive, but not precedential, authorities to support their request of a 5.3 multiplier. The application for attorneys' fees was supplemented by the declarations of three attorneys' fees experts that all support the fee application and found the fee request to be reasonable under prevailing rates for attorneys' fees.

¶ 9 Microsoft opposed the fee application and requested the court find an award of $7.1 million to be a reasonable request. Microsoft urged the court to consider the actual value, rather than the face value, of the Settlement Agreement when calculating the fees. Microsoft argued that, with the cy pres award, the actual value would be "in the range of $53.9 million." Microsoft also argued that the lodestar method of calculations was more appropriate. Microsoft requested class counsel's proposed lodestar be reduced by $1.7 million because class counsel rates were excessive and it included work that was not compensable. Microsoft also argued that "Arizona case law supports a multiplier between 1.5 and 2.3" and reasoned that, considering the risk of this case, a multiplier of 1.5 would be appropriate.

¶ 10 While Microsoft unmistakably argued in the superior court that no multiplier should be applied to the hours spent after the case had settled, it did not unequivocally contend no multiplier should be used at all. Instead, Microsoft first argued that a multiplier was appropriate, but should be no more than 1.5:

The law and record support a fee award to class counsel of $7.1 million, which would include a lodestar of $4.9 million and multiplier of 1.5 on time spent prior to settlement.

In this same vein, Microsoft analyzed the risk to class counsel in undertaking and litigating the case and concluded that based on risk, class counsel's requested multiplier of 5.3 was "unwarranted" and there was no need to award a "significant multiplier." In contrast to the appropriateness of a multiplier based on risks, Microsoft argued that no multiplier was appropriate based on counsel's skill, the difficulty of the case and the results. Significantly, Microsoft concluded its argument by stating:

A 1.5 multiplier would provide more than enough enhancement for the risk class counsel faced of not being paid in this case. Were the Court to consider awarding an even higher multiplier, however, it should not be greater than 2.3.8

¶ 11 In support of its opposition, Microsoft filed the declaration of Mitchell Polinsky, an attorneys' fees expert, who recommended a fee of $12.2 million if the percentage-of-recovery method was used, or a fee in the range of $7.4-9.9 million if the lodestar method with a multiplier of 1.5 was used to calculate fees.

¶ 12 Microsoft also filed the declaration of...

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