Volkswagen Grp. of Am., Inc. v. Peter J. McNulty Law Firm

Citation83 Fed.R.Serv.3d 174,692 F.3d 4
Decision Date27 July 2012
Docket Number11–1857.,Nos. 11–1438,s. 11–1438
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
PartiesIn re VOLKSWAGEN AND AUDI WARRANTY EXTENSION LITIGATION. Volkswagen Group of America, Inc.; Volkswagen AG; Audi AG, Defendants, Appellants, v. Peter J. McNulty Law Firm; Irwin & Boesen, P.C.; Berger & Montague, Interested Parties, Appellees.


Kenneth S. Geller, with whom Michael B. Kimberly, Mayer Brown LLP, Michael Hoenig, Jeffrey L. Chase, Daniel V. Gsovski, Miriam Skolnik, Michael B. Gallub, Herzfeld & Rubin, P.C., David A. Barry, and Sugarman, Rogers, Barshak & Cohen, PC were on brief, for appellants.

Michael B. Bogdanow, with whom Victoria M. Santoro and Meehan, Boyle, Black & Bogdanow, P.C. were on brief, for appellees.

Before LYNCH, Chief Judge, SELYA and BOUDIN, Circuit Judges.

LYNCH, Chief Judge.

This appeal is from the district court's award of $30 million in attorneys' fees to several groups of plaintiffs' attorneys who achieved a class action settlement agreement. It presents the question of what source of law governs the award of such fees in a diversity suit, where the parties' settlement agreement contains, inter alia, a provision expressly stating that the parties have not agreed on the source of law to apply to the fee award. We hold that under these circumstances, where there is an agreement that the defendants will pay reasonable fees, state law governs the award of fees. We vacate the fee award, which was based on federal sources of law, and remand for a new determination of the proper reasonable fee award under the relevant state law.

A. The Lawsuit

This suit arises out of alleged engine defects in certain Volkswagen and Audi vehicles, which plaintiffs asserted were prone to the formation of damaging engine sludge unless particular types of motor oil were used. Five putative statewide class actions were filed in five federal district courts, alleging, among other claims, consumer fraud and unfair and deceptive trade practices. In Re Volkswagen & Audi Warranty Extension Litig., 452 F.Supp.2d 1354, 1355–56 (J.P.M.L.2006). On August 29, 2006, these suits were consolidated by the Judicial Panel on Multidistrict Litigation and, as multidistrict litigation(MDL) cases, were transferred to the District of Massachusetts for pretrial proceedings.1Id. at 1356. The Massachusetts district court ordered the plaintiffs to file and serve a consolidated amended complaint. In re Volkswagen & Audi Warranty Extension Litig., No. 07–1790 (D.Mass. Feb. 7, 2007).

Plaintiffs filed their second amended consolidated complaint on October 15, 2007. The factual allegations underlying the complaint were that the 1.8 liter turbo-charged engines contained in 1997 to 2004 model Audi vehicles and 1998 to 2004 model Volkswagen Passat vehicles were defectively designed, and that the defendants concealed this defect. The plaintiffs sought to bring claims “on behalf of all persons or entities in the United States who are current or former owners and/or lessees” of those particular vehicles. The complaint named as defendants Volkswagen of America, Inc., a New Jersey corporation, Volkswagen of America, Inc., d/b/a Audi of America, Inc., a New Jersey corporation, the domestic distributors of the vehicles, as well as Volkswagen AG and Audi AG, two German corporations.

The second amended complaint raised a number of legal theories of recovery, including that defendants had violated the New Jersey Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8–1 et seq., and other state consumer fraud statutes that are “the same or substantially similar to the New Jersey” law. The complaint also alleged breach of contract, breach of implied warranty of merchantability, unjust enrichment, and violation of certain California laws. The complaint stated that diversity subject matter jurisdiction was proper under the Class Action Fairness Act of 2005, 28 U.S.C. § 1332(d)(2), (d)(6), and sought a declaratory judgment, injunctive relief, actual and treble damages, restitution, and an award of costs, including attorneys' fees. 2

On October 23, 2008, a special master was appointed to “supervise all aspects of discovery,” to “decide all nondispositive pretrial motions,” to make recommendations as to all dispositive motions, and to assist the parties in any settlement efforts. In re Volkswagen & Audi Warranty Extension Litig., No. 07–1790 (D.Mass. Oct. 23, 2008).

At some point, serious settlement discussions between the parties began, and on December 14, 2009, the special master reported that the parties “seem[ed] very close to reaching an agreement.” In re Volkswagen & Audi Warranty Extension Litig., No. 07–1790 (D.Mass. Dec. 14, 2009). On May 12, 2010, the special master reported that the parties had begun drafting a proposed settlement agreement and associated documents. In re Volkswagen & Audi Warranty Extension Litig., No. 07–1790 (D.Mass. May 12, 2010).

B. The Settlement Agreement

On September 13, 2010, a proposed settlement agreement was submitted to the district court, along with a motion requesting conditional approval of the settlement and certification of a class for settlement purposes. The final settlement as approved by the court did not change the terms of the proposed settlement. So we discuss several material portions of the proposed settlement: the benefits obtained by the class, the appointment of a settlement administrator, the terms as to attorneys' fees, and the choice of law provision.

The settlement stated it was not “an admission by Defendants of any liability or wrongdoing whatsoever.” The settlement class consisted of all current and former owners and lessees of model year 19972004 Audi A4 vehicles or model year 19982004 Volkswagen Passat vehicles equipped with 1.8 liter turbo engines, comprising a total of 479,768 vehicles. The proposed settlement offered several benefits to the class, including (1) payment for engine repair or replacement costs, (2) a warranty extension for a subset of the vehicles, (3) a one-time $25 oil change discount for a subset of the vehicles, and (4) an education and information program designed to inform class members of the risks to their engines and means to prevent those risks. The proposed settlement did not place a monetary value on these benefits.

The proposed settlement created an “Oil Sludge Settlement Administrator” to oversee the claims process for class members. The administrator was to record every claim for reimbursement, to determine whether the claim was to be allowed or denied, and to explain the basis for any claim that was denied.

The proposed settlement contained a procedure for providing notice to all settlement class members of the certification and fairness hearing and the settlement agreement. Notice of the proposed settlement was to be prepared by defendants, reviewed and approved by class counsel, and disseminated by the settlement administrator.

The proposed settlement also “reserve[d] to the [district] [c]ourt exclusive and continuing jurisdiction over this action, the [p]arties, ... and this Settlement Agreement for purposes of administering, supervising, construing, and enforcing this Settlement Agreement.”

Most relevant to this appeal, the proposed settlement contained a section regarding “Attorney Fees and Costs.” It provided:

1. Class Counsel will submit an application to the Court for an award of reasonable attorneys' fees and expenses on or before a date to be set by the Court (Fee Application). Each Settling Party reserves all rights to appeal from a Class Counsel fees and expenses award if that Party files a timely and proper objection with the Court. The Class Counsel fees and expenses award and Final Judicial Approval shall be separate so that the appeal of one shall not constitute an appeal from the other.

2. Subject to Section VI.A.2 above, Class Counsel fees and expenses shall be paid entirely and exclusively by Defendants and shall not diminish, invade, or reduce, or be derived from, benefits afforded to Settlement Class Members under this Settlement Agreement.

3. Any Class Counsel fees and expenses awarded shall be paid by Defendants to Class Counsel within thirty (30) days of the entry of a final judgment or order by the Court with respect to Class Counsel fees and expenses, except in the event of an appeal, .... All matters pertaining to an award of Class Counsel fees and expenses including, but not limited to, any dispute amongst class/plaintiffs' counsel as to their respective attorneys fees and expenses, have been referred to the [special master]. [The special master's] recommendation with respect to Class Counsel fees and expenses shall be made to the Court.3

Section VI.A.2 of the proposed agreement provided:

It is expressly understood and confirmed that the parties have not agreed to any choice, selection or waiver of state or federal law to be applied to any aspect of the construction, preliminary or final approval, or application of any provision of this Agreement of Settlement, including but not limited to attorney fees and costs.

The attorneys' fees provision expressly states that it is “subject to” this section.

C. Notice of the Proposed Settlement with Statement About Attorneys' Fees

On September 22, 2010, the special master issued a recommendation that the district court (1) conditionally approve a class for settlement purposes only and (2) conditionally approve the proposed settlement agreement, with a hearing on the final agreement to be held on March 11, 2011, after notice of the settlement was sent to class members. In re Volkswagen & Audi Warranty Extension Litig., No. 07–1790, 2010 WL 3769259, at *1, *7 (D.Mass. Sept. 22, 2010).4 The district court adopted this recommendation in full. In re Volkswagen & Audi Warranty Extension Litig., No. 07–1790, 2010 WL 3810625 (D.Mass. Sept. 24, 2010).

On December 20, 2010, notice of the proposed settlement was mailed to 1,603,013 class members, seeFe...

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