Swedish Hosp. Corp. v. Shalala

• Decision Date: 10 August 1993
• Docket Number: 92-5155,Nos. 92-5061,s. 92-5061
• Parties: , 62 USLW 2101, 42 Soc.Sec.Rep.Ser. 27A, Medicare&Medicaid Guide P 41,593 SWEDISH HOSPITAL CORPORATION, et al., Appellants, v. Donna E. SHALALA, Secretary of Health and Human Services. SWEDISH HOSPITAL CORPORATION, et al. v. Donna E. SHALALA, Secretary of Health and Human Services, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1261

1 F.3d 1261

303 U.S.App.D.C. 94, 62 USLW 2101, 42

Soc.Sec.Rep.Ser. 27A,

Medicare&Medicaid Guide P 41,593

SWEDISH HOSPITAL CORPORATION, et al., Appellants, v. Donna E. SHALALA, Secretary of Health and Human Services.

SWEDISH HOSPITAL CORPORATION, et al. v. Donna E. SHALALA, Secretary of Health and Human Services, Appellant.

Nos. 92-5061, 92-5155.

United States Court of Appeals, District of Columbia Circuit.

Argued April 5, 1993.

Decided Aug. 10, 1993.

Appeals from the United States District Court for the District of Columbia, No. 89-01693.

J. Mark Waxman, Los Angeles, CA, of the bar of the Supreme Court of California, pro hac vice, by special leave of Court, argued the cause for appellant/cross-appellee. With him on the brief were Margaret M. Manning and Robert A. Klein, Los Angeles, CA.

Frank A. Rosenfeld, Attorney, U.S. Dept. of Justice, Washington, DC, argued the cause for appellee/cross-appellant. With him on the brief were Stuart M. Gerson, Asst. Atty. Gen., Jay B. Stephens, U.S. Atty. at the time the brief was filed, and William Kanter, Attorney, U.S. Dept. of Justice. John D. Bates, R. Craig Lawrence, and Susanne Marie Lee, Asst. U.S. Attys., Washington, DC, also entered appearances for appellee/cross-appellant.

Before: D.H. GINSBURG, SENTELLE, and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

Separate opinion concurring in part and dissenting in part filed by Circuit Judge D.H. GINSBURG.

SENTELLE, Circuit Judge:

This appeal raises important questions about the reasonable calculation of contingent counsel fees in class actions resulting in the creation of a common fund payable to plaintiffs. We hold that the proper measure of such fees in a common fund case is a percentage of the fund. In addition, on the facts before us, we conclude that the District Court did not abuse its discretion in calculating both the percentage to be used and the amount of the fund that resulted from the efforts of counsel. Therefore, we affirm.

I. Introduction

This case is the endgame in a series of lawsuits attacking a Department of Health and Human Services ("HHS," the "Department," or the "Secretary") policy concerning reimbursement by HHS for photocopying costs incurred by hospitals in meeting requirements of the Medicare program. In the underlying case, plaintiff hospitals and HHS entered into a settlement agreement, approved by the District Court, in which HHS agreed to pay $27.8 million to the hospitals. Today's dispute is over what portion of that pie goes to plaintiffs' lawyers.

The District Court applied a "percentage-of-the-fund" method in determining a reasonable fee award for class counsel, and decided that the attorneys should receive twenty percent of the common fund produced by their efforts. However, the court awarded only $2 million in fees, reasoning that because the efforts of plaintiffs' attorneys had contributed only $10 million to the value of the settlement fund, the attorneys were entitled to twenty percent of only that amount.

Plaintiffs appeal, arguing that their attorneys were entitled to twenty percent of the entire $27.8 million fund, or about $5.6 million. The Secretary cross-appeals, arguing that the fees awarded were too high; that under governing circuit and Supreme Court precedent, class counsel's fee should be limited to the product of the hours reasonably spent by the attorneys and their reasonable hourly rates (the "lodestar"), resulting in a fee of no more than $619,000.

II. Background

The Social Security Amendments of 1983 require all hospitals participating in the Medicare program to enter into agreements with Medicare "peer review organizations" ("PROs"), which review the quality and medical necessity of hospital services rendered to Medicare beneficiaries. 42 U.S.C. Sec. 1395cc(a)(1)(F) (1988). The statute directs HHS to reimburse hospitals for the costs of maintaining such agreements. Id.

From the outset, however, HHS has refused to reimburse some costs incurred by hospitals in maintaining PRO agreements. One regulation, known as the "photocopying rule," specifically prohibited reimbursing costs incurred by hospitals in furnishing photocopies of medical records to PROs for mandatory review. 42 C.F.R. Sec. 466.78(b)(2) (1985), as amended by 57 Fed.Reg. 47,779 (1992) (codified at 42 C.F.R. Sec. 466.78(b)(2) (1993)).

Several hospitals filed a series of lawsuits challenging the legality of the photocopying rule. In Burlington Memorial Hosp. v. Bowen, 644 F.Supp. 1020 (W.D.Wis.1986), a district court concluded that the photocopying rule was arbitrary and capricious because the Department's basis for denying reimbursement for photocopying costs mandated by the statute--that these costs were already reimbursed in other payments--was without any reasonable basis in the rulemaking record. The court accordingly enjoined the Secretary's enforcement of the rule. HHS appealed the Burlington decision, but later dropped the appeal and settled with the seventeen plaintiffs in that case, agreeing to pay ten cents per page for PRO photocopies.

Because HHS did not change its photocopying rule, hospitals filed at least six other cases seeking reimbursement. In Beverly Hosp. v. Bowen, Medicare & Medicaid Guide (CCH) p 36,738, 1987 WL 192217 (D.D.C.1987), a consolidation of four of those cases involving several hundred hospitals, the district court held the photocopying rule illegal. That court, however, denied plaintiffs' requested relief of prospective and retrospective reimbursement, holding that the rulemaking process would provide an adequate remedy. The hospitals appealed.

During the pendency of the Beverly appeal, HHS issued a notice of proposed rulemaking, proposing to reimburse hospitals for photocopies furnished to PROs at the rate of $.0498 per page. 53 Fed.Reg. 8,654 (1988). The proposed rule would have limited retrospective relief to the previous three years, and would have imposed a number of procedural and substantive restrictions on hospitals seeking relief.

We rejected HHS's proposed approach, and remanded the case to the District Court "with instructions to assure that the agency affords the hospitals a fair opportunity to recover photocopying costs they were made to pay due to the Secretary's unlawful regulation." Beverly Hosp. v. Bowen, 872 F.2d 483, 487 (D.C.Cir.1989) (per curiam). We defined the Department's "task ... [as] conscientiously to remold the situation to approximate fairly what it should have been initially." Id.

Beverly, by its terms, applied only to the few hundred hospitals which were plaintiffs in that case. Perceiving that HHS was likely to pursue a policy of "non-acquiescence," several hospitals brought this class action, seeking declaratory and injunctive relief and damages for all other hospitals participating in the Medicare program. Two principal issues separated the parties: how much HHS should pay per page and how to calculate retroactively the number of pages copied going back to 1984. Most hospitals kept records of the relevant copying expenses starting in 1987, but the parties could not agree how to calculate the number of copies made between 1984 and 1987. HHS initially insisted on documentation for all copies reimbursed, whereas the hospitals urged, and eventually the settlement embraced, an extrapolation formula for determining the number of copies in the earlier years.

Shortly before the trial was scheduled to begin, after eighteen months of litigation involving considerable discovery, the parties entered a settlement agreement requiring HHS to pay prospectively for relevant copying costs, and to pay $27.8 million into a settlement fund for distribution to the class for copies made between 1984 and 1991. Before approving the settlement agreement, the District Court ordered notice of the proposed settlement sent to class members. In a separate mailing, class members received the details of the petition for attorneys' fees, requesting twenty percent of the common fund. The fee petition notice advised class members of their right to file objections to any element of the proposed settlement or fee petition. None of the plaintiff hospitals objected to class counsel receiving twenty percent of the common fund; indeed, a number of hospitals, including several of the class members with the largest economic stake in the fund, submitted declarations affirmatively favoring that disposition.

The District Court, applying a percentage-of-the-fund methodology, granted plaintiffs' requested twenty percent share as a rate, but concluded that counsel could "claim credit only for enhancing the fund" by payment at roughly $.07 per page instead of approximately $.0498 per page "which was apparently on the table when negotiations opened." Swedish Hosp. Corp. v. Sullivan, Medicare & Medicaid Guide (CCH) p 39,730, at 28,743, 1991 WL 319154 (D.D.C.1991). As that difference generated a "fund for which ... counsel is responsible" of approximately $10 million, rather than the $28 million, the twenty percent rate produced a fee of $2 million.

The district judge based his assessment of the attorneys' contribution to the fund on a number of factors. He found that plaintiffs in this case were at least in part piggybacking on the success of the Beverly plaintiffs; that plaintiffs' attorneys never faced the risk of zero recovery because the central issue of the illegality of HHS's photocopying rule was resolved in Beverly; that because the government was the defendant, plaintiffs and their attorneys never faced a risk of nonpayment; and that "the government acquiesced early in the treatment of the dispute as a class action." Id. The court also observed that the class members "were not paupers, unable to pay counsel for their time in the remote event of no recovery beyond" the Secretary's initial offer. Finally, the court was of the opinion that plaintiffs' attorneys had exhibited no extraordinary legal skills...