In Re Mercury Interactive Corp. Securities Litigation

• Decision Date: 18 August 2010
• Docket Number: No. 08-17372.,08-17372.
• Citation: 618 F.3d 988
• Parties: In re MERCURY INTERACTIVE CORP. SECURITIES LITIGATION,Archdiocese of Milwaukee Supporting Fund, Inc.; Dennis S. Johnson; Karel Munao; Chandra Singhal; Charter Township of Clinton Police and Fire Pension System; City of Dearborn Heights Police and Fire Retirement System; City of Sterling Heights General Employees Retirement System; Longshoreman's Association Pension Fund; Steamship Trade Association International; Mercury Pension Fund Group, Plaintiffs-Appellees,New York State Teachers' Retirement System, Appellant,Connecticut Retirement Plans & Trusts; Bloomberg News; San Francisco Chronicle; The Recorder, Intervenors-Appellees,v.Mercury Interactive Corporation; Amnon Landan; Douglas P. Smith; Anthony Zingale; Susan J. Skaer; Brad Boston; Igal Kohavi; Clyde Oslter; Giora Yaron; Yair Shamir; Yuval Scarlat; Sharlene Abrams; Pricewaterhousecoopers Inc., Defendants-Appellees,v.The Mercury Pension Fund Group, Third-party-plaintiff-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

618 F.3d 988

In re MERCURY INTERACTIVE CORP. SECURITIES LITIGATION,

Archdiocese of Milwaukee Supporting Fund, Inc.; Dennis S. Johnson; Karel Munao; Chandra Singhal; Charter Township of Clinton Police and Fire Pension System; City of Dearborn Heights Police and Fire Retirement System; City of Sterling Heights General Employees Retirement System; Longshoreman's Association Pension Fund; Steamship Trade Association International; Mercury Pension Fund Group, Plaintiffs-Appellees,

New York State Teachers' Retirement System, Appellant,

Connecticut Retirement Plans & Trusts; Bloomberg News; San Francisco Chronicle; The Recorder, Intervenors-Appellees,

v.Mercury Interactive Corporation; Amnon Landan; Douglas P. Smith; Anthony Zingale; Susan J. Skaer; Brad Boston; Igal Kohavi; Clyde Oslter; Giora Yaron; Yair Shamir; Yuval Scarlat; Sharlene Abrams; Pricewaterhousecoopers Inc., Defendants-Appellees,

v.The Mercury Pension Fund Group, Third-party-plaintiff-Appellee.

No. 08-17372.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 8, 2009.

Filed Aug. 18, 2010.

Ryan A. Stippich, Reinhart Boerner Van Deuren, Milwaukee, WI, for objector-appellant New York State Teachers Retirement System.

Louis Gottlieb, Labaton Sucharow, New York, NY, for plaintiff-appellee Mercury Pension Fund Group.

Robert A. Long, Jr., Covington & Burling, Washington, DC, for amicus curiae Council of Institutional Investors.

Appeal from the United States District Court for the Northern District of California, Jeremy D. Fogel, District Judge, Presiding. DC No. CV 05-03395.

Before A. WALLACE TASHIMA, SUSAN P. GRABER, and JAY S. BYBEE, Circuit Judges.

Opinion by Judge TASHIMA; Dissent by Judge BYBEE.

OPINION

TASHIMA, Circuit Judge:

This is a securities class action against Mercury Interactive Corp. (“Mercury”) some of its former officers and directors, and its auditor. The action was settled early on, a settlement class was certified, the settlement was approved, and attorneys' fees were awarded per the settlement agreement. The New York State Teachers' Retirement System (“Teachers”) appeals from the district court's order awarding attorneys' fees of twenty-five percent of the $117.5 million settlement fund to class counsel. We hold that the district court erred under Federal Rule of Civil Procedure 23(h) in setting the schedule for objecting to counsel's fee request; we therefore vacate the award and remand for further proceedings.

I. Background

Beginning in the summer of 2005, Mercury made a series of public disclosures revealing that an “informal inquiry” was being conducted into possible unreported backdating of stock options at the company. Backdating stock options represented to the market as having been granted at the current market price of the company's stock, when in fact they are being granted at a previous date's lower stock price and are therefore already “in the money,” results in companies' under reporting their compensation expenses and overstating their income, leading to inflated stock prices. See Charles Forelle & James Bandler The Perfect Payday: Some CEOs Reap Millions by Landing Stock Options When They Are Most Valuable. Luck-or Something Else?, Wall St. J., Mar. 18, 2006 at A1. These disclosures of potential wrongdoing at Mercury became more serious throughout the fall of 2005, eventually leading to an announcement that the CEO, CFO, and General Counsel would be resigning because they had been aware of, participated in, and benefitted from repeated instances of illegal stock options backdating, among other instances of wrongdoing. Mercury's stock price dropped significantly in reaction to these announcements.

In the class actions that followed, the district court, as is customary, appointed lead counsel for the class. Lead counsel conducted an investigation into Mercury's backdating practices and filed a consolidated class action complaint under the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78oo, as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”), codified in 15 U.S.C. § 78u-4. It opposed motions to dismiss the complaints, which the district court granted. Lead counsel conducted further investigation and began drafting an amended complaint.

The parties broached the possibility of settlement in the spring of 2007, after the motions to dismiss were argued in the district court. After the district court granted the motions to dismiss, the parties held two mediation sessions and the parties subsequently agreed on a settlement of $117.5 million in cash. As part of the settlement, lead counsel conducted confirmatory discovery, which included document review, two additional depositions and an additional interview, in order to ensure that there was a factual basis for settling the case for the amount stipulated.

The district court certified a settlement class, preliminarily approved the settlement, and ordered notice to the class. The notice of the preliminary settlement informed the class of the general terms of the proposed settlement. It also informed class members that counsel would “request ... attorneys' fees in the amount of 25% (29.375 million).” Further, the class members were informed that they could object to the settlement or application for attorneys' fees by “appear[ing] ... at the Settlement Fairness Hearing” if they “submit [ted] a written notice of objection received or postmarked on or before September 4, 2008.” No objections were made to the settlement itself, but two objections, including Teachers', were made to the proposed attorneys' fees.

Teachers timely objected to “counsel's proposed fee request for 25% of the $117.5 million settlement fund,” noted that the “case was settled early, at the motion to dismiss stage,” and made generalized arguments that any fee awarded by the court should be no higher than 18 percent of the settlement fund. Teachers argued that the court, serving as a fiduciary for the absent class, “must critically examine class counsel's application and award no more than what is absolutely required to provide reasonable compensation to class counsel.” It noted that, after the passage of the PSLRA, “federal courts today are awarding fees which are far less than 25% of the settlement amount,” yet reasonably compensate class counsel. Finally, Teachers argued that outstanding results can be achieved for the class at lower market rates, citing the fact that “class counsel retained by public employee retirement systems serving as lead plaintiffs pursuant to the PSLRA have accepted fees which are significantly lower than 25%.”

Thereafter, lead counsel, on September 18, 2008, filed its motion for award of counsel's fees and reimbursement of expenses and supporting memorandum of law and declarations. This filing was two weeks after the deadline for objections had passed. The memorandum and declarations supporting the motion state that lead counsel and other law firms worked a total of 17,001.06 hours on the case, valued at $8,396,593.20. Counsel did not provide time sheets detailing how many hours were spent by each attorney on specific tasks. Instead, it provided tables listing a lawyer, his or her hourly rate, and the number of hours he or she expended on the case. The declarations supporting these fee requests only broadly summarized the work done by each firm, including descriptions such as “prepared for mediation,” “negotiating and finalizing a global settlement with all Defendants for $117.5 million,” and “prepared and filed discovery motions.”

One week later, on September 25, 2008, the district court held a hearing on the fairness of the settlement and attorneys' fees. Neither Teachers nor the other objector to the attorneys' fee award attended. The district court approved the requested fee, ruling from the bench:

[E]ssentially, both of these objectors claim that the fee award can be no higher than 18 percent. They do not object to any line item of work that was done, but rather they simply believe that the amount of the contingency fee should be 18 percent rather than 25 percent.

The court has read and considered those objections and it is not aware of any other objections in this matter. The court notes that this matter was litigated extensively, that it involves novel issues, that it was certainly not a situation where counsel were not required to extend significant effort; in fact, the contrary is true. The accepted standard, which is sort of a starting point for the analysis in the Ninth Circuit, appears to be a 25 percent award.

Certainly, in this case, the court does not believe that the efforts of counsel fell below that such that below the standard would be appropriate; and in fact, it could be argued that a higher award might be justified given the very beneficial outcome.

In any event, the court doesn't see any reason to depart from the standard percentage that's awarded in the Ninth Circuit. So I'm prepared to overrule the objections and approve the fee as well.

Teachers timely appealed the fee award.

II. Standard of Review

We review the district court's award of attorneys' fees in class actions for an abuse of discretion. See Powers v. Eichen, 229 F.3d 1249, 1256 (9th Cir.2000). “ ‘A district court abuses its discretion if its decision is based on an erroneous conclusion of law or if the record contains no evidence on which it rationally could have based its decision.’ ” Fischel v. Equitable Life Assurance Soc'y, 307 F.3d 997, 1005 (9th Cir.2002) (quoting Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 270 (9th Cir.1989)). The district court may exercise its discretion to choose between the lodestar and percentage method in calculating fees. See Powers, 229 F.3d at 1256. A district court, however, abuses that “discretion when it uses a mechanical or formulaic approach that results in an unreasonable reward.” Id.

We review the district court's underlying factual determinations for clear error. Id. “Any element of legal analysis which...