Last week, the First Circuit Court of Appeals handed down a ruling that all class action attorneys should remember.  In the Volkswagen and Audi Warranty Extension Litigation, the litigants had reached a class action settlement that permitted class counsel to seek an award of reasonable attorney fees.  The U.S. District Court for the District of Massachusetts,  Judge Tauro presiding, had approved the settlement and issued an award of $30 million in attorneys’ fees.  Judge Tauro had applied the percentage method, finding that it represented a reasonable percentage of the overall settlement amount.  While the parties did not actually agree on what that settlement amount was, due to the varying value of the type of relief provided, Judge Tauro felt that $30 million was a reasonable percentage when balancing the range of value offered by the parties, from $50 million to $223 million.  Judge Tauro, in assessing reasonableness, also considered the lodestar value of class counsel’s time, which was approximately $7.75 million, with a 2.5 multiplier of unknown basis.  While this was still less than $20 million, Judge Tauro approved $30 million in fees.  Class counsel had sought $37.5 million.

The First Circuit reversed and remanded this award.  The District Court had used the wrong methodology to calculate attorney fees.  The underlying litigation was premised solely on diversity and presented no federal causes of action.  Thus, the First Circuit found that the attorney fee provision of the settlement must be construed under state law, being a substantive issue under the Erie doctrine.  As the matter arose from Multi-District Litigation, the First Circuit then undertook an analysis of which state’s law should apply.  Applying choice of law principles from all of the jurisdictions in which the cases were originally filed, the First Circuit found that the law of Massachusetts, the forum state, would govern.  One of the overarching considerations in this choice of law analysis was that the class action settlement was largely negotiated in Massachusetts and that the District Court, in exercising continuing jurisdiction, provided a location for the implementation of the agreement.  The First Circuit remanded for consideration under Massachusetts law, which uses a lodestar approach, though permitting a multiplier or enhancement for novel issues of law, complexity, or matters affecting a wide range of persons.  As Judge Tauro made no findings to justify a multiplier, remand was necessary.

Attorneys bringing class actions based only on state law claims, which find themselves in federal court and, ultimately, in Multi-District Litigation, should keep this decision in mind.  In the Volkswagen and Audi Litigation, the parties expressly avoided making a choice of law determination; such avoidance, at least in the First Circuit, is now impossible.  While a different outcome may have presented itself if there were federal claims or if more than one state’s law would govern, the MDL panel’s choice of forum may end up with that forum’s law governing the ultimate settlement itself.

The decision is found at Volkswagen Group of America, Inc., et al. v. Peter J. McNulty Law Firm, et al., Nos. 11-1438, 11-1857 (1st. Cir. Jul. 27, 2012),