Lealao v. Beneficial California Inc.

Opinion

Appellants Richard U. Lealao and his wife Sese Lealao, who commenced this successful consumer class action, claim that the attorney fees awarded class counsel were unreasonably low. The questions before us are whether, under the circumstances of this case, the trial court had discretion to award a fee based solely on a percentage of the class benefit or, in the alternative, to measure an award calculated under the lodestar methodology by a percentage-of-the-benefit yardstick and to adjust the lodestar upward or downward on that basis. Our answers are no to the first question and yes to the second.

Facts and Procedural History

Appellants filed their class action complaint in the San Francisco Superior Court on October 3, 1995. The complaint claimed that respondent, Beneficial California, Inc., a major lender which then had 130 offices in this state, wrongfully charged a penalty when persons with whom it entered into certain credit line account agreements prepaid their open-end loans, as the imposition of such a penalty was neither provided for in the agreement nor otherwise authorized. For example, in August 1993, appellants opened a credit line account with respondent that was secured by their home. When they sold the home in March 1995, respondent imposed a prepayment penalty in the amount of $8,048.20.

The original complaint alleged causes of action for (1) breach of contract, (2) breach of the duty of good faith and fair dealing, (3) money had and received, (4) unjust enrichment, (5) conversion, and (6) unfair business practice. The first amended complaint substituted a claim under the Consumer Finance Lenders Law (Fin. Code, former § 24500 et seq.) for that

In February 1997, appellants moved for class certification. Respondent resisted the motion chiefly on the ground that issues particular to individual class members predominated and that a fact-based inquiry needed to be made with respect to particular loan agreements. Respondent also maintained that appellants’ claims were not typical and they were therefore not competent to represent the class. On August 13, 1997, the trial court rejected respondent’s arguments and issued an order granting class certification. The class consisted of borrowers on 6,698 loans opened by respondent between October 1991 and November 1994 and closed on or before February 28, 1998, all of whom were charged prepayment penalties. Each loan was secured by real property, generally the borrower’s home. The total amount of prepayment penalties imposed on the class was approximately $19.2 million; the average penalty was $2,866.53.

The settlement ultimately reached by the parties provided that respondent would pay members of the class who filed claims 77 percent of the amount they had paid as prepayment penalties. Since prepayment penalties of approximately $19.2 million had been paid by the class, respondent effectively agreed to pay $14,784,000 if every member of the class filed a valid claim.

The settlement agreement did not require that class counsel’s fee be deducted from the refunds received by members of the class, nor did it specify the amount of the fee class counsel would receive. With respect to attorney fees, the agreement provided only that respondent would pay class counsel “such reasonable attorneys’ fees and costs as determined by the Court.”

Class counsel emphasize that even though their fee was not to be paid directly out of the class recovery, they always contemplated it would be paid out of the unclaimed residual amount of funds available to the class, as may be done in cases in which a common fund is established. (See, e.g., Boeing

On December 21, 1998, appellants filed a motion for new trial limited to the issue of attorney fees. Based on new information that the valid claims then actually filed by members of the class totaled $7.35 million, counsel used this amount rather than the amount of potential claims respondent agreed to pay ($14,748,000) as the basis of a percentage fee. Instead of the $3.5 million fee they originally sought, class counsel requested 24 percent of $7.35 million, or $1.76 million. Counsel urged the court to reach this result by adjusting the lodestar figure ($425,000) upward to $1,487,500 by a multiplier of 3.5 “based among other things on the result obtained by counsel as shown by actual payments to be made to the class.”

The order granting fees of $425,000 solely on the basis of the hours counsel expended on the case, and the order denying a new trial as to attorney fees, do not set forth the court’s reasoning. However, the court’s orders and comments from the bench indicate its belief that in a class action case such as this—in which the class benefits are not in the form of a separate fund out of which fees are to be paid—a court has no discretion to award a percentage fee. Concluding it was compelled to employ the lodestar formula for calculating a reasonable attorney fee, the court apparently agreed with respondent that it could use a multiplier to adjust the lodestar upward only in cases in which the litigation resulted in a great public benefit or the litigation was particularly complex and difficult, and that this was not such a case.

Discussion

A trial court’s determination of reasonable attorney fees is reviewed under the abuse of discretion standard. (Westside Community for Independent Living, Inc. v. Obledo (1983) 33 Cal.3d 348 , 355 [ 188 Cal.Rptr. 873 , 657 P.2d 365 ].) “The scope of discretion always resides in the particular law being applied, i.e., in the ‘legal principles governing the subject of [the] action . . . .’ Action that transgresses the confines of the applicable principles of law is outside the scope of discretion and we call such action an ‘abuse’ of discretion.” (City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287 , 1297 [ 255 Cal.Rptr. 704 ].) Accordingly, the question before us is whether the trial court’s refusal to either award a percentage fee or consider

The parties’ dispute centers on the validity and continuing jurisprudential viability of the distinction between “fee shifting” and “fee spreading.”

In so-called fee shifting cases, in which the responsibility to pay attorney fees is statutorily or otherwise transferred from the prevailing plaintiff or class to the defendant, the primary method for establishing the amount of “reasonable” attorney fees is the lodestar method. The lodestar (or touchstone) is produced by multiplying the number of hours reasonably expended by counsel by a reasonable hourly rate. Once the court has fixed the lodestar, it may increase or decrease that amount by applying a positive or negative “multiplier” to take into account a variety of other factors, including the quality of the representation, the novelty and complexity of the issues, the results obtained, and the contingent risk presented. (See Pearl, Cal. Attorney Fee Awards (Cont.Ed.Bar 2d ed. 1998) §§ 13.1-13.7.)

Fee spreading occurs when a settlement or adjudication results in the establishment of a separate or so-called common fund for the benefit of the class. Because the fee awarded class counsel comes from this fund, it is said that the expense is borne by the beneficiaries. Percentage fees have traditionally been allowed in such common fund cases, although, as will be seen, the lodestar methodology may also be utilized in this context.

Respondent maintains that, because the settlement in this case did not result in the establishment of a traditional common fund, the percentage-of-the-benefit approach cannot be utilized, even in connection with the lodestar formulation. Appellant, conceding a conventional common fund does not exist, answers with federal cases suggesting that the distinction between “fee shifting” and “fee spreading” is an illusory jurisprudential construct, and that unless the fee award is in some fashion considered as a percentage of the monetary benefit received by the class the law will create counterproductive economic incentives and disincentives that should no longer be tolerated.

The primacy of the lodestar method in California was established in 1977 in Serrano III, supra, 20 Cal.3d 25 . Adopting the view at that time of the Second and Third Circuits, our Supreme Court declared: “ ‘The starting point of every fee award, once it is recognized that the court’s role in equity is to provide just compensation for the attorney, must be a calculation of the attorney’s services in terms of the time he has expended on the case.

Despite its primacy, the lodestar method is not necessarily utilized in common fund cases. The common fund or “fund-in-court” doctrine, first articulated by the United States Supreme Court in Trustees v. Greenough (1881) 105 U.S. 527 [ 26 L.Ed. 1157 ], is a venerable exception to the general American rule disfavoring attorney fees in the absence of statutory or contractual authorization. (Code Civ. Proc., § 1021.) The exception “is grounded in ‘the historic power of equity to permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover his costs, including his attorneys’ fees, from the fund of property itself or directly from the other parties enjoying the benefit.’ ” (Serrano III, supra, 20 Cal.3d at p. 35, quoting Alyeska Pipeline Co. v. Wilderness Society (1975) 421 U.S. 240 , 257 [ 95 S.Ct. 1612 , 1621, 44 L.Ed.2d 141 ], italics added.)

Because the common fund doctrine “rest[s] squarely on the principle of avoiding unjust enrichment” (Serrano v. Unruh (1982) 32 Cal.3d 621 , 632 [ 186 Cal.Rptr. 754 , 652 P.2d 985 ] (Serrano IV); Boeing Co. v. Van Gemert, supra, 444 U.S. at p. 478 [100 S.Ct. at p. 749]), attorney fees awarded under this doctrine are not assessed directly against the losing party (fee shifting), but come out of the fund established by the litigation, so that the beneficiaries of the litigation, not the defendant, bear this cost (fee spreading). Under federal law, the amount of fees awarded in a common fund case may be determined under either the lodestar method or the percentage-of-the-benefit approach (In re Washington Public Power Supply Sys. Lit. (9th Cir. 1994) 19 F.3d 1291 , 1296), although, about a decade ago, as the Ninth Circuit then noted, there commenced a “ground swell of support for mandating the percentage-of-the-fund approach in common fund cases.” (State of Fla. v. Dunne (9th Cir. 1990) 915 F.2d 542 , 545.) Prior to 1977, when the California Supreme Court decided Serrano III, supra, 20 Cal.3d 25 , California courts could award a percentage fee in a common fund case. (See, e.g., Melendres v. City of Los Angeles (1975) 45 Cal.App.3d 267 , 284 [ 119 Cal.Rptr. 713 ].) After Serrano III, it is not clear whether this may still be done. (See Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794 , 1809 [ 56 Cal.Rptr.2d 483 ] [“The award of attorney fees based on a percentage of a ‘common fund’ recovery is of questionable validity in California.”].)

This now widely shared view has stimulated greater judicial willingness to evaluate a fee award as a percentage of the recovery. (See, e.g., In re Thirteen Appeals Arising Out of San Juan (1st Cir. 1995) 56 F.3d 295 , 305-306; Gottlieb v. Barry (10th Cir. 1994) 43 F.3d 474 , 482 ; Rawlings v. Prudential-Bache Properties, Inc. (6th Cir. 1993) 9 F.3d 513 , 517; Matter of Continental Illinois Securities Litigation (7th Cir. 1992) 962 F.2d 566 , 572; Chun v. Bd. of Trustees of E.R.S. (2000) 92 Hawaii 432 [ 992 P.2d 127 ].) Although, as will be seen, it is an overstatement, one commentator has observed that “[b]asically, all courts except the Florida Supreme Court and, to some extent, the Fifth Circuit, have abandoned the failed lodestar experiment,” which he describes as a “welcome development.” (Issacharoff, Class Action Conflicts, supra, 30 U.C. Davis L.Rev. at p. 827, fns. omitted; see also Grady, Reasonable Fees: A Suggested Value-Based Analysis for Judges, supra, 184 F.R.D. at p. 131 [“lodestar method . . . has been so unsatisfactory that it is now being abandoned in most Circuits, at least in class action situations, in favor of a modified percentage-of-recovery approach.”].) The Ninth Circuit, responding perhaps to the growing complaint of trial judges in the circuit and elsewhere that lodestar analyses “consume an undue amount of court time with little resulting advantage to anyone, but [operate] to the detriment of the class members” (In re Activision Securities Litigation

In support of this conclusion, the Johnston court relied on the earlier Third Circuit opinion In re General Motors Corp. Pick-Up Truck Fuel Tank, supra, 55 F.3d 768 . There the court explained that the lodestar method and the percentage-of-the-benefit approach each have “distinct advantages for certain kinds of actions, which will make one of the methods more appropriate as a primary basis for determining the fee.” (Id. at p. 820.) The lodestar method is most useful in statutory fee shifting cases, the court indicated. First, by decoupling the fee award from the class recovery, “the lodestar assures counsel undertaking socially beneficial litigation (as legislatively identified by the statutory fee shifting provision) an adequate fee irrespective of the monetary value of the final relief achieved for the class.” (Id. at p. 821.) Asserting that the lodestar rationale has the additional advantage of eliminating the need for subjective judgments where the value of the settlement cannot be precisely evaluated, the court noted that, on the other hand, it may provide class counsel “the incentive to delay settlement in order to run up fees while still failing to align the interests of the class and its counsel, and for not rewarding counsel incrementally for undertaking the risk of going to trial. [Citation.]” (Ibid.) The lodestar method is less useful, the court suggested, where the value of the relief is monetarily ascertainable; and in such cases there is therefore less need to suffer the disadvantages of that method of fee assessment.

As in the present case, the settlement in In re General Motors Corp. Pick-Up Truck Fuel Tank, supra, 55 F.3d 768 , did not create a common fund for the benefit of the class; instead, it provided members of the class a $1,000 or $500 certificate redeemable only if they purchased specified

The General Motors court realized that the size of the class recovery was influenced by and therefore related to the size of the fee even though the fee was paid directly by the defendant and not out of the class recovery, stating: “[T]his court has recognized that ‘a defendant is interested only in disposing of the total claim asserted against it; . . . the allocation between the class payment and the attorneys’ fees is of little or no interest to the defense.’ ” (In re General Motors Corp. Pick-Up Truck Fuel Tank, supra, 55 F.3d at pp. 819-820, quoting Prandini v. National Tea Co. (3d Cir. 1977) 557 F.2d 1015 , 1020.) The court therefore took the position that the fee the defendant separately agreed to pay directly to class counsel “is, for practical purposes, a constructive common fund.” (General Motors at p. 820.) The fact that the

Johnston and General Motors are not the only cases reflecting greater federal reliance on the percentage-of-the-benefit approach; use of that approach is also illustrated by two recent opinions of the Ninth Circuit. Wing v. Asarco Inc., supra, 114 F.3d 986 , was a class action for alleged contamination of residential soils by toxic substances. The $67.5 million settlement included cash payments to the class of $60.5 million, the amount the defendant expected to receive from its insurer, which was not guaranteed. The $60.5 million also included attorney fees and expenses as determined by the court, which the defendant agreed to pay directly to counsel rather than detract from the class’s recovery. A “supplemental agreement” regarding attorney fees included a stipulation that class counsel’s lodestar was equal to or less than $4 million, with expenses slightly exceeding $1.5 million, and that the defendant would not litigate these amounts. The parties also stipulated that they could litigate the propriety of using a multiplier to adjust the lodestar upward and appeal the amount of any multiplier awarded. After the settlement was approved, class counsel petitioned the trial court, alternatively, for fees and expenses equal to 25 percent of the $67.5 million ($16,875,000) or for fees equal to the lodestar times a multiplier of 3.8 plus expenses ($16,782,951.30).

After considering both a lodestar calculation plus a multiplier and a percentage-based figure, the trial court determined that $8 million was a reasonable fee and also awarded $1.6 million in expenses. (Wing v. Asarco Inc., supra, 114 F.3d at p. 988.) “Cross-checking the $8 million fee against the stated value of the Settlement Agreement, the court determined that the fee award constituted only 12% of the class’ recovery.” (Id. at p. 990.) On appeal, the defendant disputed class counsel’s contention that the case presented a common fund situation, pointing out that the cash fund was not guaranteed. The Ninth Circuit acknowledged at the outset “that this situation is neither fish nor fowl nor fair weather game” (id. at p. 989), i.e., it was not strictly a fee shifting case because fees were not statutorily mandated, nor was it a conventional common fund case, because fees would come from the defendant directly, not out of the class recovery. The court additionally acknowledged, as did the trial court, that the cash fund contemplated by the parties was not guaranteed, that other aspects of the settlement were “open-ended” and “difficult to value,” and that, indeed, it was “impossible to determine the ‘actual’ value of the recovery for percentage purposes.” (Id. at 990.) Nevertheless, the Court of Appeals concluded that the trial court was

More recently, in Hanlon v. Chrysler Corporation, supra, 150 F.3d 1011 , the Ninth Circuit again indicated that even where use of the lodestar approach is justified by the difficulty of placing a value on the settlement, the correctness of the amount awarded under the lodestar method should, where possible, be measured by inquiring whether it represents a reasonable percentage of the benefit to the class claimed by the parties: “Although no class member is entitled to a cash recovery—making valuation of the settlement agreement more difficult—Chrysler and class counsel valued the settlement at $115 million. This is the amount Chrysler charged against its earnings in order to account for its voluntary service action and the production and installation of the replacement latches. The fee award of $5.2 million represents roughly 4.5% of this ‘common fund’, significantly less than the 25% commonly used under Six Mexican Workers [v. Arizona Citrus Growers, supra, 904 F.2d at p. 1311].” (Id. at p. 1029; see also Paul, Johnson, Alston & Hunt v. Graulty, supra, 886 F.2d 268 , 271.)

The cases just described reflect the growing willingness of federal courts to disregard the strict theoretical distinction between fee shifting and fee spreading in cases in which fees are not authorized by statute, no separate fund is established, and fees are paid directly by the defendant—provided, of course, that the monetary value of the class recovery is reasonably ascertainable. Respondent does not address the policies that inform this trend; instead, it simply argues that (1) the federal cases class counsel rely upon are inapposite, because the defendants in those cases did not object to the amount of fees sought; (2) in any case, the California Supreme Court has rejected pure percentage fees; and (3) a lodestar calculation cannot be enhanced on the basis of a percentage-of-the-benefit analysis, or for any other reason, absent showings, which cannot be made in this case, that the litigation conferred a substantial benefit on the public or a large number of persons and was particularly complex or novel.

We are not impressed with the first argument. The agreement of the parties as to the fee is not the main point of Johnston or General Motors. Those opinions reject adherence to the traditional distinction between fee shifting and fee spreading because it unjustifiably ignores the relationship between the class recovery and the fee award where the defendant pays the fee directly. Even where, as here, the parties do not specifically agree to the amount of attorney fees, the defendant usually has a fairly good idea of the range of fees that will be sought and the approximate amount likely to be awarded. The value of the benefit a settling defendant is willing to confer on the class—either through the establishment of a separate fund or in some other way—will therefore invariably be influenced by the amount of fees it would be obliged, or estimates it would be obliged, to pay class counsel if it did so directly. In short, a settlement involves an element of fee spreading even if the defendant pays fees directly, and it involves an element of (indirect) fee shifting even if counsel are to be paid out of a fund. Stating the proposition differently, where the monetary value of the benefit conferred on the class is reasonably ascertainable, settlement of a class or derivative action almost always represents a “package deal,” though the size of the package is not in some cases as fixed in advance as it is in others.

B.

Respondent’s contention that pure percentage fees have been rejected by the California Supreme Court, at least in cases such as this in which there is not a conventional common fund, and that the court’s view is binding, is persuasive.

The statement of some courts that “California does not follow the approach to fee awards adopted by the federal courts” (Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128 , 1173 [ 74 Cal.Rptr.2d 510 ]; Flannery v. California Highway Patrol (1998) 61 Cal.App.4th 629 , 644 [ 71 Cal.Rptr.2d 632 ]), is correct only insofar as there is California precedent regarding the question at issue. Thus in Serrano TV, where the question related to the construction of a state statute authorizing fees on the private attorney general theory, the California Supreme Court followed the lead of federal courts construing similar statutes because it believed such federal authority has “analogous precedential value” in construing the state statute. (Serrano IV, supra, 32 Cal.3d at p. 639, fn. 29; see also Feminist Women’s Health Center v. Blythe (1995) 32 Cal.App.4th 1641 , 1674, fn. 8 [ 39 Cal.Rptr.2d 189 ]; Sokolow v. County of San Mateo (1989) 213 Cal.App.3d 231 , 249 [ 261

Respondent rests not just on the foregoing language in Serrano III but also on the statement elsewhere in that opinion that “ ‘[t]he starting point of every fee award . . . must be a calculation of the attorney’s services in terms of the time he has expended on the case.’ ” (Serrano III, supra, 20 Cal.3d at p. 48, fn. 23, italics added.) The reason the fee analysis must be “anchored” to the time spent on the case and a reasonable hourly rate, the court declared, is that “ ‘this concept is the only way of approaching the problem that can claim objectivity, a claim which is obviously vital to the prestige of the bar and the courts.’ ” (Ibid.) This statement, which arguably renders it questionable whether a pure percentage fee can be awarded even in a conventional common fund case (see Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1809), certainly precludes such an award in a case such as this. Even if the ascertainable amount of money respondent has actually paid to satisfy valid claims were deemed a “fund,” class counsel has never suggested that their fee should come from this source.

Accordingly, we hold that refusal of the trial court to award class counsel a fee calculated purely as a percentage of the class recovery was not an abuse of discretion.

C.

Respondent’s final argument is that the lodestar cannot be enhanced on the basis of a percentage-of-the-benefit analysis, or for any reason, because the settlement did not greatly benefit the public and the litigation was neither complex nor novel, all of which must assertedly be shown in order to justify

Respondent’s contention that a court may enhance the lodestar through the use of a multiplier only in cases “where the public benefit is great and the litigation complex and difficult” is based on Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1407 [ 1 Cal.Rptr.2d 459 ] and Weeks v. Baker & McKenzie, supra, 63 Cal.App.4th 1128 . Those cases cannot be construed so broadly. Beasley was a successful class action challenging a bank’s assessment of fees against credit card customers who failed to make timely payments or exceeded their credit limits. The judgment was for more than $5 million and the trial court awarded attorney fees of nearly $2 million based on the “private attorney general” doctrine. (Code Civ. Proc., § 1021.5.) In affirming the fee award, the appellate court stated, in language seized upon by respondent, that the action “has undoubtedly been closely watched by lending institutions nationwide that do business in California, consequently providing an indirect benefit to non-Wells Fargo California customers who could easily number in the millions.” (235 Cal.App.3d at p. 1417.) This factor was relevant in Beasley because the fee in that case, unlike the one here, was awarded under a statute that specifically required a “substantial benefit” to have been “conferred on the general public or a large class of persons . . . .” (Code Civ. Proc., § 1021.5.) Moreover, and more importantly, the Beasley court also justified enhancement of the lodestar because it agreed with the trial judge “ ‘that this kind of consumer class action litigation would not be pursued by counsel but for the expectation of receiving enhanced fee awards in successful cases.’ ” (235 Cal.App.3d at p. 1419.) Beasley certainly does not stand for the proposition that a lodestar can be enhanced in a case such as the one before us only if it benefits a significant number of persons beyond the class.

Nor does Weeks v. Baker & McKenzie, supra, 63 Cal.App.4th 1128 , stand for any such principle. Weeks was a sexual harassment action brought by a legal secretary against a partner in a law firm and the firm itself under the Fair Employment and Housing Act (FEHA). (Gov. Code, § 12900 et seq.) The jury awarded the plaintiff $50,000 in compensatory damages, and

Respondent also overlooks the acknowledgment by the Weeks court that California trial courts have considerably wider latitude than their federal counterparts in the selection of factors that may be used to adjust the lodestar and that, therefore, “an upward or downward adjustment from the lodestar figure will be far more common under California law than under federal law.” (Weeks v. Baker & McKenzie, supra, 63 Cal.App.4th at p. 1173.) For example, certain factors California courts can use to enhance a lodestar award, such as the novelty and complexity of the issues, the special skill and experience of counsel, and the contingent nature of the recovery, cannot be used to increase an award in federal courts because they are presumed to be already incorporated into the lodestar figure. (City of Burlington v. Dague

In Dunk v. Ford Motor Co., supra, 48 Cal.App.4th 1794 , the settlement of a class action against an automobile manufacturer relating to defects in the doors of certain cars provided that each member of the class would receive a coupon redeemable for $400 off the price of any new Ford car or light truck purchased within a year. The defendant also agreed to pay attorney fees and costs not to exceed $1.5 million. The trial court approved the settlement and awarded counsel attorney fees of $985,000. The judgment was affirmed except as to attorney fees, which were challenged by an objecting member of the class. Counsel argued that “the nearly $1 million attorney fees were properly determined to be a reasonable percentage of the common fund, as they were only a tiny percentage of the potential settlement value of over $26 million.” (Id. at p. 1809.) The Court of Appeal found two flaws in this argument: “(1) The award of attorney fees based on a percentage of a ‘common fund’ recovery is of questionable validity in California; and (2) even if it is valid, the true value of the fund must be easily calculated.” (Ibid.)

The trial court here appears to have agreed with respondent that Jutkowitz and Dunk, which relied upon Serrano III, barred any adjustment of the

“In the class action context, that would mean attempting to award the fee that informed private bargaining, if it were truly possible, might have reached. The simplest way for the law to duplicate the bargain that informed parties would reach if agency costs were low is to look to fee award levels in actions brought by sophisticated private parties under the same or comparable statutes. . . . To be sure, a variety of factors distinguish class actions from private suits. For example, in class actions, the plaintiff’s attorney typically assumes more risk because the fee is contingent, but may also have lower search costs (if the attorney is piggybacking on a prior governmental action). Still, if courts were to ask what fee structure an informed, sophisticated client would use to compensate his attorney when close monitoring is not feasible, they would at least have focused on the correct question. Moreover, ... the most logical answer to this problem of premature settlement would be to base fees on a graduated, increasing percentage of the recovery formula—one that operates, much like the Internal Revenue Code, to award the plaintiff’s attorney a marginally greater percentage of each defined increment of the recovery. While this approach cannot be said to eliminate the inevitable tension between the interest of plaintiffs’ attorneys and their clients in class actions, it can at least partially counteract the tendency for premature settlements.” (Coffee, Understanding the Plaintiff’s Attorney, supra, 86 Colum. L.Rev. 669 at pp. 696-697, fns. omitted.) Courts agree that, because the percentage-of-the-benefit approach “is result-oriented rather than process-oriented, it better approximates the workings of the marketplace” than the lodestar approach (In re Thirteen Appeals Arising Out of San Juan, supra, 56 F.3d 295 , 307); though they do not necessarily agree the percentage should increase with the size of the recovery. (See, e.g., In re Prudential Ins. Co. America Sales Litigation, supra, 148 F.3d 283 , 339; Shaw v. Toshiba America Information Systems, Inc., supra, 91 F.Supp.2d 942 , 972; Report of the Third Circuit Task Force, supra, 108 F.R.D. at p. 256 [“absent

V.

The record reveals nothing about this case which would make it manifestly inappropriate to evaluate the lodestar as a percentage of the recovery and adjust it accordingly if it can be determined that the lodestar is significantly different from the range of percentage fees freely negotiated in comparable litigation.

Though the settlement did not create a common fund out of which fees are to be paid, the monetary value of the benefit to the class is much less speculative than that of some traditional common funds. (See, e.g., discussion of Shaw v. Toshiba America Information Systems, Inc., supra, 91 F.Supp.2d 942 , ante, at p. 32, fn. 6.) Respondent does not dispute that the settlement exposes it to claims in the collective amount of $14,748,000, and class counsel were able to provide the court the exact number of valid claims submitted at the time of the renewed fee application, and the collective value of those claims ($7.35 million), which is also undisputed. As has been noted, basing the fee “on the number of claims actually remediated” serves the important goal of encouraging class counsel’s continued participation after settlement has been reached (In re Prudential Ins. Co. America Sales Litigation, supra, 148 F.3d at p. 334, fn. 110), and the record shows that plaintiffs’ counsel advised members of the class of their rights under the settlement and urged the submission of claims.

The benefit to the class in this case is similar in most important respects to a “reversionary” common fund, in which unclaimed amounts revert to the defendant. The amount of claims actually paid, and the basis for the percentage analysis class counsel urge, is approximately $7.4 million less than the

Adjusting the lodestar to reflect the monetary value of the benefit received by the class is also justified by the fact that the class was notified its counsel would seek a fee representing approximately 24 percent of the recovery; no member of the class objected and only two members opted out.

It is also noteworthy that, as counsel for respondent pointed out at the hearing on the motion for fees, appellants “could have had a deal at $5 million of the pot and they could have made their [attorney fee] claim against it, or $6 million,” in which case there “would have been a common fund.” In that event, respondent’s counsel implied, a percentage fee (which would have been well in excess of $1 million if a 25 percent benchmark were adopted) would have been available; but that was not the deal struck, he emphasized, and the claims-made settlement precluded a fee based on a percentage of the benefit. In a declaration submitted in support of the fee application, lead counsel for the class stated that he knew he could have insisted on a settlement establishing a common fund, and that he actually “rejected an offer in which class members would have received 75 percent of the prepayment penalty if plaintiffs agreed to cap their attorneys’ fees at $2,500,000,00,” explaining that “I rejected any offer which included any specific amount of attorneys’ fees to avoid any conflict of interest with the class.” (See Folsom v. Butte County Assn. of Governments (1982) 32 Cal.3d 668 , 681 [ 186 Cal.Rptr. 589 , 652 P.2d 437 ]; Prandini v. National Tea Co., supra, 557 F.2d 1015 .) As he also explained in the declaration, a claims-made settlement “allows me to contact class members and urge them to file a claim form without any conflict based upon the fact that the more claim forms which are filed the lower will be the payment made to each class member filing these claims. I realize that this approach makes it more difficult to establish the use of [the] common fund approach when determining attorneys’ fees, but it would have been contrary to the interest of the

Finally, as earlier noted, permitting the amount of the recovery to influence the fee is most justified where the amount of the recovery is not due primarily to the size of the class. This case is not one in which the individual recoveries of class members were de minimis. As a result of the settlement, named plaintiffs recovered over $6,000; and the average recovery was over $2,000. Thus, whether the benefit to the class resulting from the settlement be considered the $14,780,000 that would be paid if all members presented valid claims, or the $7,350,000 of valid claims processed at the time of the renewed fee application, the amount would in either case be determined in significant measure by the size of the individual recoveries, not just by the size of the class. The large recovery in this case is thus a more authentic indication of the value of counsel’s contribution than might otherwise be true.

What constitutes a reasonable fee in a representative action has been shown to be a far more complex question than the judiciary once thought it to be. There are no easy answers. The lodestar methodology originated as an alternative to percentage recoveries, which often resulted in exorbitant fee awards clearly unjustified by the contributions of counsel, which in turn undermined public confidence in the bench and bar. (See Report of the Third Circuit Task Force, supra, 108 F.R.D. 237 , 242; see also Serrano III, supra, 20 Cal.3d at p. 48, fn. 23.) Considering the fee only as a percentage of the benefit would simply resurrect that problem. Refusing ever to take that consideration into account, however, would, as we have indicated, create equally pernicious problems; The federal judicial experience teaches that the “reasonableness” of a fee in a representative action will often require some consideration of the amount to be awarded as a percentage of the class recovery. How much weight that factor should receive may well be, as an experienced trial judge has said, “the most difficult question in present-day jurisprudence concerning attorney’s fees.” (Grady, Reasonable Fees: A Suggested Value-Based Analysis for Judges, supra, 184 F.R.D. at p. 141.) However difficult this question, it cannot be avoided; and the ability of California courts to intelligently address it would not be enhanced by diminishing the tools with which they have to work.

Haerle, J., and Lambden, J., concurred.