Lawyers’ Class-Action Payouts Face Court Challenge

Typically, attorneys who represent plaintiffs in class actions-like employees accusing a company of discrimination, or customers claiming a product misled them-are paid a percentage of any money recovered for their clients. The payouts, which nationally average about 25% of the collected funds, can be substantial.

But a Berkeley, Calif., lawyer who has waged a decadeslong crusade to reduce class-action fees is pushing to pay lawyers based only on the hours they put into a case.

"Every dollar class lawyers get for their fee is a dollar the class doesn't get for recovery," the lawyer, Lawrence Schonbrun, said.

He lost his fight in two lower courts, but the Supreme Court of California decided earlier this year to consider the issue and could rule in the coming months. Mr. Schonbrun argues that California case law requires the hourly method to be applied, an interpretation that others dispute.

The fee challenge comes at a time of intensifying attacks on class actions, which provide a way for one lawsuit to potentially benefit hundreds or thousands of people. U.S. Supreme Court decisions in recent years have limited the ability to bring such cases, and many companies have added clauses into contracts with employees and customers that instead require disputes to go to arbitration.

Courts have also long grappled with the fairest way to pay class-action attorneys. The percentage and hourly methods have "always been two different and warring approaches," said Adam Zimmerman, a professor at Loyola Law School in Los Angeles.

Some federal circuits require the percentage method be used in class actions where a "common fund" is being split between attorneys and their clients. But two states have rejected the use of percentages in such cases, and in New York earlier this year, a federal judge denied a proposed 33% fee in favor of hourly compensation. The final fees in class actions are ultimately up to judges.

The California appeal stems from a 2004 wage-and-hour class action against staffing firm Robert Half. In 2013, a judge approved a $19 million settlement on behalf of 4,000 employees, who said they were denied overtime pay and other benefits. Using the percentage method, $6.33 million was slated for the plaintiffs' attorneys.

Mr. Schonbrun, who represents one of the employees, is trying to convince the court that the lawyers should instead be paid according to the amount of work they put in.

But the plaintiffs' lawyers say in a court filing that if their percentage-based fee is overturned, "class counsel will be less inclined to take on complex class action suits against large, well-financed institutions." They haven't been paid while the appeal works its way through the courts. Robert Half said it doesn't have a stake in the fee dispute.

Class-action proponents say such lawsuits are the only remedy for people who feel they have been wronged but don't have the financial resources to go to court alone. Dissenters say they offer outsize payments to plaintiffs' lawyers while providing little value for their clients.

The California court ruling will affect how fees are paid in class actions filed in state courts there, and could influence judges in other jurisdictions.

Paying lawyers a percentage of the ultimate recovery is seen by some as an incentive to work harder for clients, in some ways akin to compensating corporate executives with shares of stock. When a class action fails, "the firms just have to eat all that money," says Kathryn Honecker, an Arizona plaintiffs' lawyer who co-chairs a class-action committee for the American Bar Association.

Mr. Schonbrun, who began his fight against high fees in the late 1990s, is part of an active field of so-called fee objectors, who step into class actions to challenge the plaintiffs' attorneys' fees.

Such objectors sometimes make side deals with plaintiffs' lawyers looking to avoid prolonging a lawsuit, and they can be paid as much as $1 million, those familiar with the practice say. Mr. Schonbrun said he has filed objections in 150 cases and in some instances received more than $100,000 for his role in reducing a fee.

Theodore Case, an American Airlines pilot in Atlanta who has been a plaintiff in a class-action labor dispute for more than 12 years, said he unsuccessfully fought against his lawyers to reduce their fee request of $15.5 million, based on a 30% calculation of a settlement. When paying a percentage, "the only people it benefits is the attorneys," said Mr. Case, who received about $113,700 of the settlement money.