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The State Supreme Court's Rejection of Federal Limits in
Fee-Shifting Cases is a Win for All Californians
by Robert J. Nelson
March 2001
 
How attorneys get paid in civil rights and public interest cases has a profound impact on whether rights affecting the public interest will be vindicated. When important rights remain trammeled for lack of qualified counsel willing to accept such cases, both the rule of law and the integrity of the profession itself are compromised. That's why the California Supreme Court's decision last week in Ketchum v. Moses, 01 C.D.O.S. 1549, is so important.
At issue in Ketchum was whether or not California should adopt the federal approach that limits the fees lawyers in successful public interest cases may recover. The origin of the federal rule is the U.S. Supreme Court decision, City of Burlington v. Dague, 505 U.S. 557 (1992). In Dague, the U.S. Supreme Court determined that in federal statutory fee-shifting cases (i.e., cases where Congress has determined that the prevailing plaintiff's attorney be paid by the losing party because the case vindicates an important public right), the trial court cannot add a multiplier to a successful lawyer's lodestar when calculating his or her fee. Thus, according to Dague, the very best fee an attorney could hope to expect in a federal civil rights or public interest case — no matter how successful the result or the enormity of the difficulties counsel had to overcome — is the lawyer's lodestar, i.e., the hourly rate multiplied by the number of hours worked on the case.
Because these cases are typically litigated on a contingency basis, take years to litigate, and often seek primarily injunctive relief, many public interest-minded lawyers cannot afford to take on such cases. The result in the federal courts has been a drop in private lawyers bringing the kinds of fee-shifting cases that Congress has recognized to be of great public import.
That private civil rights lawyers would pass on such cases makes economic sense. As the Third Circuit U.S. Court of Appeals long ago observed: "No one expects a lawyer whose compensation is contingent upon his success to charge, when successful, as little as he would charge a client who in advance had agreed to pay for his services, regardless of success." Lindy Bros. Builders v. American Radiator Standard Corp., 487 F.2d 161, 168 (3d Cir. 1973). Recognizing this, the California Supreme Court in Serrano v. Priest, 20 Cal. 3d 25 (1977) ("Serrano III"), adopted the "lodestar-adjustment method" of determining attorneys' fees in California statutory fee-shifting cases. When determining attorneys' fees in such cases, trial courts would start with counsel's lodestar, and adjust counsel's fee upward or downward depending upon the contingent nature of the risk undertaken, counsel's performance and the results achieved. In this way, the trial court at least has the discretion to award a fee that could fairly compensate counsel for the economic risks inherent in contingent litigation, something the federal courts may not do under Dague. Private counsel could accept a risky public interest case that held out little promise of substantial damages (from which a contingent fee could be achieved) and know, down the road, if he or she were successful and performed admirably by obtaining a significant injunctive relief, the court could award a multiplier to the lodestar.
The court of appeal in Ketchum distanced itself from Serrano III and its progeny and instead sought to follow the federal rule of Dague, ruling that it lacked the authority to add a multiplier to the successful trial counsel's lodestar. Opponents of the multiplier have long-argued that it unfairly penalizes the loser. For example, they observe that under the lodestar-adjustment method, the more difficult the case, the higher the multiplier; yet, the fact that a case is more difficult might meant that the wrongful nature of defendant's conduct is less clear. Opponents therefore argue that a defendant whose liability is less clear should not be burdened with paying a higher attorneys' fee to opposing counsel than a defendant whose liability is readily apparent. Relying on this and other arguments, the appellate court in Ketchum found that the trial court erred when it added a multiplier of 2 to a trial counsel's lodestar when setting the fee.
By its having granted review, many speculated that the California Supreme Court would allow the court of appeal and adopt the federal rule. In a unanimous decision, however, the Supreme Court re-affirmed the lodestar-adjustment method it first articulated 24 years ago in Serrano III and expressly rejected Dague as the rule in California.
What is most striking about the Supreme Court's opinion is its acknowledgment and clear recognition of the realities of contingent litigation practice. The court explained that the purpose of the Serrano III lodestar-adjustment method was to "fix a fee at the fair market value for the particular action. In effect, the court determines, retrospectively, whether the litigation involved a contingent risk or required extraordinary legal skill justifying augmentation of the unadorned lodestar in order to approximate the fair market rate for such services."
The court explained the "economic rationale" for fee enhancement as follows: "‘A lawyer who both bears the risk of not being paid and provides legal services is not receiving the fair market value of his work if he is paid only for the second of these functions. If he is paid no more, competent counsel will be reluctant to accept fee award cases.'" Quoting from Judge Richard Posner's Economic Analysis of Law, the California Supreme Court explained, "‘[t]he contingent fee compensates the lawyer not only for legal services he renders but for the loan of those services. The implicit interest rate on such a loan is higher because the risk of default (the loss of the case, which cancels the debt of the client to the lawyer) is much higher than that of conventional loans.'" The court concluded that the "purpose of the fee enhancement, or so-called multiplier, for contingent risk is to bring the financial incentives for attorneys enforcing important constitutional rights . . . into line with incentives they have to undertake claims for which they are paid on a fee-for-service basis."
In affirming Serrano III and maintaining California's "independent state rule," the California Supreme Court plainly recognized the economic realities of a contingent fee practice and the incentives necessary for competent counsel to agree to perform such work. The court acknowledged that contingent litigation is different, that being paid one's lodestar in such case necessarily means being paid less than one's market rates. Further, according to the court, the expressed will of the California Legislature to have lawyers represent needy persons whose civil or public rights have been violated, or to have lawyers serve as private attorneys general, requires that lawyers have sufficient economic incentive to do so.
The reality in California -- even with the Serrano III lodestar-adjustment method -- is that it is not easy to find qualified private counsel willing to represent plaintiffs in fee-shifting cases, which typically present complex legal challenges often requiring years to overcome, during which time counsel is not paid. Nonetheless, California's "independent state rule" at least makes such litigation practicable. Here, private citizens of limited means have been able to file cases that serve important public interests, and, through the use of enhancements, experienced counsel have had sufficient economic incentives to zealously prosecute such actions.
Serrano III has well served all Californians by improving the administration of justice, fairly rewarding attorneys who have fought successfully for improvements in the law on behalf of those whose rights would otherwise go unvindicated, and by providing a measure of public confidence in a bar that struggles daily to gain credibility with an increasingly cynical public.
The Supreme Court's decision in Ketchum allows that legacy to continue.
Robert J. Nelson is a partner at Lieff Cabraser who, along with Charles A. Renfrew, filed an amicus curiae brief in Ketchum v. Moses on behalf of the Bar Association of San Francisco.