What Are Lodestar Legal Fees?
Lodestar legal fees are a way of calculating attorney fees by taking the number of hours worked on a matter and multiplying that times the hourly rate. Lodestar is the fee methodology most often used to determine the amount of attorney fees in United States District Court cases, in cases which are brought in state courts under statutes providing for an award of attorney fees, and in cases brought under contingency fee agreements . The lodestar method does not apply to all contracts – only contracts that authorize the award of attorney fees. To determine what is reasonable in the award of attorney fees depends on the circumstances. In almost all matters the lodestar method should be used and routinely applied by the trial court.
How Does the Lodestar Method Function?
As seen, the lodestar method includes a two-step process. The lodestar method first requires identification of the number of hours reasonably expended by an attorney on the case, and "that the product of that number times a reasonable hourly rate will yield a presumptively reasonable fee." Twersky v. Yeshiva Univ., 2015 WL 5945806, at *2 (S.D.N.Y. Oct. 9, 2015). In making this determination, a court should consider all the circumstances of a given case including, but not limited to, what contemporaneous billing records are available, the amount of time necessarily spent in preparing a fee motion, and the time spent litigating entitlement to fees and, if necessary, the amount of fees. See, e.g., Karpel & Karpel v. Karpel, 1999 WL 1147513, at *3 (E.D.N.Y. March 12, 1999) (when determining a fee award, court considered grievance proceedings, fee proceedings and contempt proceedings to determine the reasonable amount of time expended by counsel who handled them all). Once the hours have been determined, the court moves to the second step of multiplying the hours expended by a reasonable hourly rate, which is normally based on the rates of comparable non-contingency cases in the district. See, e.g., Twersky v. Yeshiva Univ., 2015 WL 5945806, at *2 (S.D.N.Y. Oct. 9, 2015). The Second Circuit has endorsed the use of the prevailing rate in the district in which the reviewing court sits. See Arbor Hill Concerned Citizens Neighborhood Ass’n v. County of Albany, 522 F.3d 182, 190 (2d Cir. 2008). The reasonableness of the rates is determined by "bearing in mind that a reasonable, paying client would insist at the outset of the case . . . on what the pay structure would be, and act accordingly. Id. (quoting Reed v. Rhodes, 179 F.3d 453, 472 (6th Cir. 1999)). The court may also consider the attorney’s experience, special skills and reputation as well as the attorney’s usual billing rate for similar work. Id. Although most cases settle and the matter settles, if a case does not settle, then the second step of the lodestar analysis, whether a reasonable hourly rate should be applied, is no longer appropriate merely because there has been a judicial determination that a party’s position was substantially justified. See, e.g., Burroughs v. Colvin, 2013 WL 6025402, at *36 (S.D.N.Y. Nov. 11, 2013) (setting forth the reasonable hourly rate for the purpose of awarding attorney’s fees in a fee application is different from what that party should receive for their efforts to represent their client at a hearing).
History of The Lodestar Method
The lodestar method, a calculation used to determine legal fees that is the number of attorney hours billed multiplied by the prevailing hourly rate depending on the area of law, has its roots in feudal England, when courts based their decisions for attorney fee awards on what it would have cost administratively to have the case heard before the king’s court. As a modern method for calculating attorney fees, the lodestar approach was first proposed by former Chief Justice of the United States Supreme Court, William H. Rehnquist, during his tenure on the United States Court of Appeals for the District of Columbia Circuit.
In his 1975 opinion in Copeland v. Marshall, Judge Rehnquist set forth a formula for determining the number of hours in a case, which included a consideration of both (i) the hours actually expended on the case and (ii) the amount of time "reasonably" spent. Several years later, in Hensley v. Eckerhart, a 1983 decision that arose from a civil rights action, the Supreme Court adopted the lodestar approach to calculating attorney fees. The Court held that the lodestar method provided a fair and just way to compensate attorneys who brought civil rights claims within the federal court system. In this case, the Supreme Court also provided the first substantial discussion of the various factors to be considered when calculating attorney fees. These factors include such things as the nature of the difficulty of the matter, the experience of the attorney, and the results obtained.
In addressing whether, under the lodestar approach, a trial court must review and strike "excessive hours," the Supreme Court in Hensley held that to merit reduction, fee request entries must be "grossly disproportionate" and any such reduction should be "concise but clear." Interestingly, while the Court used the "split billing" approach of awarding a percentage of time spent on unsuccessful representations when determining the amount of time reasonably expended, it did not include the "proportional approach" in the list of factors that should be considered when determining whether to award attorney fees.
While he was serving as the Secretary of the United States Department of Labor, former Chief Justice Rehnquist, along with the Sixth Circuit, introduced several modifications to the lodestar approach to attorney fee calculations. The first came in the 1988 decision of Davis v. U.S. Department of Labor, in which the Sixth Circuit based its determination of the "prevailing market rate" (the number used in the lodestar formula) on the widespread use of survey data compiled at the national level by the Bureau of Labor Statistics. The second came in 1991, when the Supreme Court in a unanimous opinion authored by Justice Clarence Thomas in the case of City of Burlington v. Dague significantly limited the power of courts to enhance attorney fee awards (that is, award a multiplier to the number obtained by the lodestar method). This limitation was done by holding that the lodestar method "provides an adequate basis for determining the fee," and by rejecting a theory that enhancements were required when an award was not based on a statutory provision that permitted enhancement.
In the 1994 case of Commissioner, Alabama Department of Human Resources v. Dollar General Corporation, in which the Supreme Court addressed the issue of whether fees awarded under the Fair Labor Standards Act could be determined using the lodestar method, the Court extended the Burlington model in a somewhat unusual way. Applying arguments made before the Court in separate briefed filed by then Chief Justice Rehnquist, the Court held that in order to avoid "government windfall," "fee request entries which fail to disclose adequately their subject matter and context should be charged at the minimum hourly rate." This resulted in the rejection of a fee request for $72,000 for 177.6 hours of work. In its place, the Court found that a reasonable hourly rate of $150 per hour for 98 hours of work was sufficient.
In 2001, in an opinion authored by Justice Sandra Day O’Connor in the case of Venegas v. Mitchell, the Supreme Court indicated that there may be ways, in certain cases, to enhance lodestar fee awards. While the Court did not explicitly address the issue of whether there were circumstances where the calculation of a requested fee could be based on a percentage of a recovery, it did state: "The question is not whether Congress could evaluate attorney fees in this manner, but rather whether 29 U.S.C. § 216(b) specifically authorizes such a form of recovery." On this point, the Court had divided four-to-three. In writing the opinion for the dissent, Justice Stephen Breyer went into detail about the history of the development of the lodestar method in general, and questioned the judgment of his colleagues on the bench. While in the majority, Justice O’Connor noted that "declining to affirmative answer the question would forestall future development of the law," and "leave open the possibility of serious confusion in future cases." Although the Court’s opinion in Venegas v. Mitchell was not definitive, it did leave the door ajar regarding enhancing lodestar attorney fees, and thus concluding the historical development of the lodestar approach.
Benefits of the Lodestar Method
The lodestar method brings specific benefits that contribute to its favor among many courts. For example:
It Enables a Fair Determination of Reasonable Compensation
One of the main advantages of the lodestar method is that it provides a means by which courts can assess an appropriate fee based on the number of hours reasonably spent on these tasks, multiplied by a reasonable hourly rate for the lawyers involved. Despite some exceptions, such as when a party is represented by an institutional service, it is extremely unlikely that a court would find that a reasonable lawyer could provide the same legal work in fewer hours or at a lower rate, and the lodestar method helps to ensure that the compensation awarded to attorneys accurately reflects the hours they actually worked at their normal hourly rates.
It Reduces the Subjectivity of the Calculation
The second benefit of the lodestar method is that calculating fees under this method is more objective than using the previous methods of awarding fees of small proportions of the damages award based on the facts of the case. This objectivity is partially achieved by relying on specific and measurable hours and hourly rates rather than on abstract notions of contribution, with the result being that the rates suggested by the lodestar method are not simply fair in terms of the amount of work performed, but are also fair in terms of market research and time-theft.
It Results in Fewer Disputes
The fact that the lodestar method is both more objective and more quantitative than other methods for determining a fee award results in fewer disputes about the amount of the fees themselves. In particular, the lodestar method mitigates the potential for protracted litigation about the fee award itself and consequently reduces the costs associated with calculating maximum reasonable hours and reasonable hourly rates for the work done in a case.
Difficulties and Objections
Despite its ubiquity, the lodestar method is not without its challenges and criticisms.
One of the most significant criticisms is a procedural one: It can be difficult to estimate the amount of time a case may take and thus, what constitutes a reasonable hourly rate. In cases where more than one attorney bills time, the second billers are usually required to submit time entries to the primary biller in order for the primary biller to ascertain which tasks have been completed and then review and revise the time entries before submission to the client. Because the primary biller is usually not the attorney completing the work, there is a potential problem that the primary biller will not accurately predict the amount of time necessary for certain tasks and possibly inflate the number of billable hours.
Further, tracking lawyer’s time seems to present so many problems and potential pitfalls that when a lawyer reviews their own time entries at the end of a matter or when creating a new time entry, they might be tempted because of the specific assessment criteria that lodestar queries (i.e., disallowed hours, block billing, etc . ) into being less than accurate, perhaps out of fear that if the lawyer takes too long on an issue, the bill will be questioned by the client or another lawyer. As such, this together with lawyer’s biases against their own work will lead to a mismatch between actual time spent and the resulting time entries. In lodestar, the majority of attorney time entries are logged in 6-minute increments. If a lawyer spends 8 minutes on something, they will convert that (or add a placeholder) to .1 (i.e., 6 minutes). 12 minutes is .2. 18 minutes is .3. Now we have 30-minute blocks (i.e., .5) and hour blocks (i.e., 1.0). If the lawyer spent 2.5 hours on a session and recorded it as 2.1 hours, but the 2.1 hours was broken down over 3 different dates (2/1 a .4 entry, 2/2 a .2 entry, and 2/17 a .5 entry), how do we know that the time spent on the ".5 entry" was valid and not overstated? That brings us to the more general criticisms that attorneys have about lodestar itself—questions about whether certain areas of practice are undervalued despite the changing nature of legal work and how legislature changes influence the lodestar award.
Lodestar as Compared To Other Billing Methods
The lodestar method has been around for decades. To make sure everyone is on the same page, let’s briefly see how that stacks up against some other structures:
Contingency Fees
As you may know, the lodestar method of calculating attorney fees is not the only way to charge a client. However, the lodestar method is different than a contingency fee. A contingency fee means that you do not receive any money unless your case wins. In a complex mass tort case, an attorney may speculate to take a significant risk and accept a large contingent fee structure. In that case, your fee is generally a certain percentage of the recovery. The amount of the contingency depends on the agreement between you and your attorney. If the expense to your attorney is higher than what was expected, your attorney may ask you to pay more through a series of bills. However, in this scenario, the amount is capped. For example, you might agree that your attorney receives 25% of what’s recovered after the case is over. Most contracts have a cap on the fee so it won’t exceed this figure.
Fixed Fees
Not all cases are appropriate for a lodestar calculation. For example, a case may not involve significant pre-trial activity that involves discovery. In such a case, a fixed fee is usually appropriate. However, for a complicated civil litigation, this may not be appropriate. Since a case with a fixed fee works differently from a traditional hourly billing system, your attorney needs to invest and calculate the time necessary to finish the project. When your attorney uses a fixed fee, they usually front the costs. As a result, a fixed fee is usually more costly when compared to lodestar. At the same time, sometimes a fixed fee is more appropriate. For example, more commoditized transactions (like real estate) can be addressed effectively with a fixed fee. However, a contingency fee might be the best option for a personal injury case.
Percentage Fees
Similar to the fixed fee arrangement, the percentage fee method also involves the attorney receiving a certain percentage of the recovery. If the case involves money recovered from a trust or from a divorce settlement, this method can be used. However, this method is rarely seen and not widely used. Usually, the contingency fee method is considered more appropriate.
Overall, there is no single right answer to determining the rate of fees that are charged to clients. Sometimes, fee arrangements may even be a combination of the above-mentioned methods. Lodestar, however, is still the applicable method that the American Bar Association suggests to be used to calculate attorney fees.
Recent Developments and Court Uses
Currently, the lodestar method is applied on a case-by-case basis and has been limited to consumer class action fees, multiplication of the lodestar amount by some factor, particularly where there are multiple activities in front of various government agencies, the complexity of issues and the number of years in which a case is pending in order to reflect the extreme nature of the risk. For example, in Poertner v. Gillette Co., 2013 U.S. LEXIS 163321, 13-116 (S.D. Ind. Nov. 14, 2013), an indigestion Class Action case that was settled for $8 million, the court increased the lodestar from $3.6 million (based on over 2,000 hours billed) to $5.4 million, a 1.5 multiplier, based upon the risk in taking the case, the novelty, skill and complexity of the issues and the number of years in which the case was pending. Essentially the court essentially looked to the substantial litigation which took place in the case and a number of depositions, expert discovery, class certification, Daubert motion, summary judgment, motions to preclude expert testimony, pretrial orders and a complex settlement process. Contrary to this, in Blatt v. Pfizer, Inc., 2013 U.S. Dist. LEXIS 140209, 13-303 (S.D. Ind. Sept. 30, 2013), the Court reduced the lodestar amount taken by the attorneys of $351,234 to $288,500. In this case, there were 474 total hours billing, which the Court found to be excessive. Essentially the Court utilized the 5% "rough-in" as a reasonable amount to reduce the fee recovery. In New England Carpenters Health & Welfare Fund v. First Databank, Inc., 2013 U.S. Dist. LEXIS 164858, 2013 WL 6190487 (D. Mass. Nov. 27, 2013), the Court utilized a 3.0 multiplier in awarding attorney’s fees, while as in Poertner, specifically overstating the risk and extensive amount of work performed on behalf of the Class. In First Databank, the Court noted that it took 318 days in order to settle the case, there was a lengthy cross-country negotiation between several different states and that the case was a complex case entailing multiple motions for class certification , Daubert motion, partial summary judgment, and an appeal process, which all added to the risk of the case. In répresentation of plaintiffs and defendants in Class Action cases, the courts have not removed nor limited the use of the lodestar method, even if the cases themselves go through a questionable basis for settlement. In Colgan v. Labor Finders of New England, Inc., 2013 U.S. Dist. LEXIS 113347, 2013 WL 4544587 (D. Mass. Aug. 28, 2013), aff’d, 2013 U.S. App. LEXIS 10460 (1st Cir. May 28, 2013), the court found that the lodestar method was appropriate in finding that the attorneys’ fees were reasonable at $225-$450 per hour, not withstanding the fact that the settlement of potentially $8 million was reached in a matter of hours following dispositive motion practice. Essentially the Court reduced the attorney’s fees to the 25% assessment based upon overall settlement value and the common benefit to the Class. However, as illustrated by the cases above, the Court has in some limited instances looked at the amount of recovery as part of its analysis in determining the reasonableness of the amount of the fee. If the case is resolved at an early stage in the litigation, the Court may adjust the attorney’s fee upward or downward. Where the amount of the applied lodestar is high or disproportionate to the total recovery being sought, the Court or defense counsel/party defendants in some cases has a basis for challenging the amount of the attorney’s fees sought. Conversely, where the recovery of the Class is minimal or there has been limited risk in the case, the lodestar method may not be appropriate and the ability of the attorneys to claim a percentage of the recovery may be more suitable. Accordingly, in these instances, the attorneys’ fees sought for any final lodestar determination in a final approval motion is important and should be detailed and supported by invoices or other submissions; otherwise the requested percentage recovery will be limited accordingly.
Leave a Reply