Goesel v. Boley International (H.K.) Ltd., 110515 FED7, 13-2434

Docket Nº:13-2434
Opinion Judge:Sykes, Circuit Judge.
Party Name:Andrew Goesel and Christine Goesel, individually and as next friend to Cole Goesel, a minor, Plaintiffs, v. Boley International (H.K.) Ltd., et al., Defendants. Appeal of: Williams, Bax & Saltzman, P.C., Appellant.
Judge Panel:Before Ripple, Kanne, and Sykes, Circuit Judges.
Case Date:November 05, 2015
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Andrew Goesel and Christine Goesel, individually and as next friend to Cole Goesel, a minor, Plaintiffs,


Boley International (H.K.) Ltd., et al., Defendants.

Appeal of: Williams, Bax & Saltzman, P.C., Appellant.

No. 13-2434

United States Court of Appeals, Seventh Circuit

November 5, 2015

Argued October 29, 2014

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 09-cv-4595 Milton I. Shadur, Judge.

Before Ripple, Kanne, and Sykes, Circuit Judges.

Sykes, Circuit Judge.

The law firm of Williams, Bax & Saltzman, P.C., represented Cole Goesel and his parents in a personal-injury suit that settled prior to trial. Because Cole was a minor, the law firm needed judicial approval to finalize the settlement. The parties' contingent-fee agreement entitled the firm to one-third of the gross settlement, while all litigation expenses would be covered by the Goesels' share.

The district court refused to approve the settlement unless litigation expenses were deducted off the top and one-third of the net settlement was allocated to the firm. The judge also rejected the firm's attempt to count the cost of computerized legal research as a separately compensable litigation expense rather than rolling it into the fee recovery. The firm appealed the judge's order limiting its fees. The Goesels declined to participate, so we appointed an amicus to argue in support of the decision below.

We now reverse. Though the district court enjoys substantial discretion to safeguard the interests of minors in the settlement of litigation, this discretion is not boundless. Here, the judge criticized aspects of the firm's contingent-fee agreement that have received the express blessing of Illinois courts. Once these improper reasons are stripped away, the only rationale that remains-namely, that "fairness and right reason" require that the Goesels receive 51% of the gross settlement amount rather than 42%-is insufficient to justify discarding a reasonable contingent-fee agreement.

I. Background

In 2007 five-year-old Cole Goesel was injured when a toy robot shattered and punctured the lens of his right eye. Cole's parents, Andrew and Christine Goesel, retained the law firm of Williams, Bax & Saltzman, P.C., to sue on Cole's behalf. The retainer agreement between the parties stipulated that the firm would receive one-third off the top of any gross settlement or judgment and the Goesels would be responsible for litigation expenses; but in the event of no recovery, the Goesels were off the hook for both expenses and attorney's fees.

In 2009 the firm filed a lawsuit on the Goesels' behalf in Illinois state court, which the defendants removed to federal court based on diversity jurisdiction. Nearly four years of contentious litigation ensued, ultimately focusing on two issues: (1) the appropriateness of the material used in the shattered part of the toy, and (2) the severity of Cole's injuries. These questions necessitated the retention of multiple expert witnesses, including chemists, toy-safety specialists, ophthalmologists, and rehabilitation counselors. The litigants also conducted extensive discovery, including depositions in seven states and a videoconference with deponents in Hong Kong.

The parties settled on the eve of trial. The defendants agreed to pay $687, 500. Under the retainer agreement, the firm's one-third of the gross settlement amount was $229, 166.67, and litigation expenses totaled $172, 949.19, leaving the Goesels with $285, 384.14, or roughly 42% of the total recovery.

Because Cole was a minor at the time of the litigation, the federal court's local rules and the Illinois Probate Act required court approval before the settlement could be finalized. N.D.Ill. L.R. 17.1; 755 Ill. Comp. Stat. 5/19-8. At a hearing to determine whether to place the settlement details under seal, the district judge launched sua sponte into his objections to the contingent-fee agreement. He noted first that the case required "a very large amount of out-of-pocket expenditure, " and those costs were "certainly expended reasonably here." He also acknowledged that the firm had done "a terrific job for the client." But the judge was "very troubled" by the clients' bottom line-specifically, that the Goesels would "end[] up with something like 40 percent of the total recovery, " the rest having been eaten up by litigation costs and the law firm's fee.

The judge asked the firm whether the approach of deducting the contingent fee prior to expenses comported with industry practice. In response the firm amended its initial submission to address the judge's inquiry as well as to argue more vigorously that Cole's ultimate recovery was "sufficient to not only cover any future medical needs but … also sufficient to compensate him for his pain and suffering." The judge bristled at this, calling it a "subjective comment on the asserted value of the minor child's pain and suffering." But the judge acknowledged "that the terms in contingent fee agreements are not of a one-size-fits-all nature." He also noted that Rule 1.5(c) of the Illinois Rules of Professional Conduct expressly permits "litigation and other expenses to be deducted from the recovery" and expenses may be "deducted before or after the contingent fee is calculated." Accordingly, the judge concluded that "counsel's request … certainly cannot be characterized as per se unreasonable."

Still, the judge remained concerned about the child's recovery. Invoking "fairness and right reason, " the judge modified the fee structure so that the litigation expenses were deducted off the top, prior to the one-third allocation to the law firm. He also excluded the firm's Westlaw charges from reimbursable litigation expenses. The judge according- ly authorized fees in the amount of $174, 730.47; reimbursement of litigation expenses in the amount of $163, 308.59; and disbursement of $349, 460.94 to Cole.

The law firm appealed in its own right, as it is entitled to do. See In re Trans Union Corp. Privacy Litig., 629 F.3d 741, 743 (7th Cir. 2011). Though informed of their pecuniary stake in this appeal, the Goesels declined to participate. We appointed an amicus to argue in support of the district court's decision.1

II. Discussion

A. Applicable Law

A threshold question is whether state or federal law governs this appeal. The district court cited both Local Rule 17.1 and the Illinois Probate Act as controlling authority. Local Rule 17.1 requires "written approval by the court" before a "proposed settlement of an action brought by or on behalf of an infant or incompetent … become[s] final." The rule also states that the district court may "authorize payment of reasonable attorney's fees and expenses from the amount realized in such an action." But the rule is silent as to the substantive criteria governing the reasonableness inquiry.

Under Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), and its progeny, federal courts sitting in diversity apply state substantive law using federal procedural rules. For federal rules to apply, "[t]he test must be whether a rule really regulates procedure-the judicial process for enforcing rights and duties recognized by substantive law and for justly administering remedy and redress for disregard or infraction of them." Sibbach v. Wilson & Co., 312 U.S. 1, 14 (1941). This approach serves "the twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable administration of the laws." Hanna v. Plumer, 380 U.S. 460, 468 (1965).

"[I]n a diversity suit, the damages rules of the state whose law governs the substantive issues in the case bind the federal court; damages law is substantive law." Arpi n v. United States, 521 F.3d 769, 776 (7th Cir. 2008). Since a contingent fee is calculated as a proportion of the damages to which successful plaintiffs are entitled-or, here, a portion of a settlement meant to preempt a jury's award of damages- we see no reason why laws permitting the modification of this payment should be considered merely procedural rather than substantive. We join our colleagues in other federal courts in characterizing judicial approval of settlements involving minors as a matter of substantive law. See, e.g., Burke v. Smith, 252 F.3d 1260, 1265–66 (11th Cir. 2001); Eagan v. Jackson, 855 F.Supp. 765, 775 (E.D. Pa. 1994). Local Rule 17.1 applies to require the district court's review, but the substantive standard for that review is informed by Illinois law.

B. Guideposts for the Exercise of Discretion

Less clear-cut is what exactly Illinois law prescribes as the appropriate analytical framework in the minor-settlement context. We review a court's award of attorney's fees under a "highly deferential abuse of discretion standard, " but even this "'wide latitude' is not unlimited latitude, and the district court still bears the responsibility of justifying its conclusions." Pickett v. Sheridan Health Care Ctr., 664 F.3d 632, 639 (7th Cir. 2011) (quoting Sottoriva v. Claps, 617 F.3d 971, 975 (7th Cir. 2010)). The Illinois Probate Act does not expressly channel the trial court's discretion. Rather it simply requires that the minor's representative obtain "leave of court" before "compound[ing] or compromis[ing] any claim or any interest of the ward." 755 Ill. Comp. Stat. 5/19-8.

Even though the statute itself doesn't specify limits on the court's discretion, "[w]e have it on good authority that 'a motion to [a court's] discretion is a motion, not to its inclination, but to its judgment; and its judgment is to be guided by sound legal principles.'" Martin v. Franklin Capital Corp. 546 U.S. 132, 139 (2005) (quoting United States v. Burr, 25 F. Cas. 30, 35 (No. 14692D) (C.C. Va. 1807)) (second alteration in original). "Discretion is not whim, and limiting discretion according to legal standards helps promote the basic principle of justice that...

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