Attorney's Fees: The Death of Arbor Hill (New York State Bar Assn. Journal, Feb. 2012)

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ATTORNEY’S FEES: THE DEATH OF ARBOR HILL

- John A. Beranbaum

The federal civil rights laws are distinct from other statues in that they authorize the district courts to grant reasonable attorney’s fees to the prevailing plaintiff, payable by the losing party. Congress included fee-shifting provisions to enable litigants to serve as “private attorneys general,” seeking relief for themselves while assuring more generally compliance with the civil rights laws. Without statutory attorney’s fees, people with modest resources or claims with low damages could not hire a lawyer, and would be left powerless to vindicate important rights – to their own and society’s detriment.

The Supreme Court has held that a “reasonable attorney’s fee” under the fee-shifting statutes is a “fully compensated fee,” commensurate with the customary compensation an attorney receives from a fee-paying client. The fee must be “adequate to attract competent counsel, but which do[es] not produce windfalls to attorneys.” In 1984, the Court adopted the lodestar method for calculating reasonable attorney’s fees which entails multiplying a reasonable hourly rate consistent with prevailing market rates in the relevant community by the number of hours reasonably expended upon the matter, with a final adjustment for case-specific considerations.

In 2007, a panel of the Second Circuit, including retired U.S. Supreme Court Justice Sandra Day O’Connor sitting by designation, handed down a decision that promised to shake up attorney’s fees in this circuit. In Arbor Hill Concerned Citizens Neighborhood Assn. v. Cty. of Albany, the Second Circuit declared that the value of the lodestar method for calculating attorney’s fees had “deteriorated to the point of unhelpfulness,” causing the court to “abando[n] its use,” and replace it with the “presumptively reasonable fee.” The substitution of the “presumptively reasonable fee” for the lodestar was significant not just for the change in methodologies but for the implications of that change, that from now on, attorney’s fees were to be calculated to more closely resemble the market between client and attorneys.

So, it was remarkable when in 2011, the Second Circuit, in Millea v. Metro-North Railroad Co., relied upon the recently obsolete lodestar method to reverse a lower court attorney’s fees decision, and made just passing reference to the “presumptively reasonable fee.” The “presumptively reasonable fee” method, it seems, didn’t even last four years, and Arbor Hill appears to be a thing of the past. This article looks at the reasons for this quick judicial turnaround and what it says about the importance of statutory attorney’s fees in enforcing the civil rights laws.

Arbor Hill Concerned Citizens

In Arbor Hill, a neighborhood association brought a successful action under the federal Voting Rights Act of 1965 voiding Albany County’s redistricting plan and requiring the County to hold special elections. Plaintiffs then moved for attorney’s fees under the provision of the Act granting the prevailing party reasonable fees. The sole issue on appeal was whether plaintiffs’ Manhattan law firm should be awarded fees based on the hourly rate customarily charged by Manhattan attorneys or the hourly rate commonly charged in the Northern District of New York where the action was brought. The Second Circuit affirmed the district court’s award based on Northern District rates, but in reaching that decision found it necessary to address more broadly the computation of fees under the civil rights statutes.

Arbor Hill described how two competing methods for calculating attorneys’ fees developed within the circuits. The Third Circuit, in Lindy Bros. Builder, Inc. v. Am. Radiator & Standards Sanitary Corp., outlined a two-step process in which the court first took the product of the attorney’s usual hourly rate and the number of hours worked, the lodestar, and then adjusted that sum by case-specific considerations, such as the lawsuit’s likelihood of success. The Fifth Circuit, in Johnson v. Georgia Highway Express, Inc., by contrast, followed a one-step process in which the court set a reasonable fee by considering twelve factors (the “Johnson factors”), including the novelty and difficulty of the legal issues; the skill necessary to perform the legal service properly; the results obtained; and the experience, reputation, and ability of the attorneys.

Arbor Hill characterized the Supreme Court’s attorney’s fees decisions as adopting the lodestar method “in principle.” Whereas the Third Circuit had used the attorney’s own billing rate to calculate the lodestar, the Supreme Court introduced a variety of less objective, case-specific factors for determining a “reasonable hourly rate.” The Second Circuit criticized the Supreme Court’s modified lodestar method as “unhelpful” because it obliged district courts to engage in “an equitable inquiry of varying methodology while making a pretense of mathematical precision.” In the words of Circuit Judge Walker, the lodestar method, and fee-setting jurisprudence generally, were afflicted by the “serious illness” of having “come untethered from the free market [they are] meant to approximate.”

In place of the loadstar method, the Second Circuit conceived the “presumptively reasonable fee.” The presumptively reasonable fee calculation differed from the lodestar methodology principally in two respects. The traditional method for calculating fees involved two steps, first calculating the loadstar and then adjusting the fee for case-specific consideration, whereas the Second Circuit collapsed the two steps into one. Under Arbor Hill, the district courts were to assess case specific considerations, in particular the Johnson factors, at the point when they fixed “a reasonable hourly rate,” not as a final adjustment to the lodestar. The other distinctive feature of the “presumptively hourly fee” also concerned the reasonable hourly rate. While the lodestar method used the prevailing billing rate in the relevant community as the basis for a reasonable hourly rate, Arbor Hill instructed the lower courts to use “the rate a paying client would be willing to pay.”

Arbor Hill gave the district courts little guidance for how to determine “the rate a paying client would be willing to pay.” In fact, only at the tail end of the opinion, when the court addresses the specific question on appeal of whether to award the Manhattan law firm fees based on Northern District or out-of-district Southern District rates, is there a discussion of some of the factors that a paying client and his or her attorney would consider in agreeing on a rate. The Second Circuit noted that under its “forum rule,” attorney’s fees ordinarily are calculated using the prevailing hourly rate in the district where the action is litigated, although where circumstances permit, a court may apply higher, out-of-district rates. In a supposed clarification of when a district court may adjust upwards the hourly rate, Arbor Hill held that higher, out-of-district hourly rates may be used “if it is clear that a reasonable, paying client would have paid those higher rates.”

In the case before it, the court affirmed the lower court’s decision to apply in-district rates, giving the following rationale:

We are confident that a reasonable, paying client would have known that law firms undertaking representation such as that of the plaintiffs often obtain considerable non-monetary returns – in experience, reputation, or achievement of the attorneys’ own interests and agendas – that might cause them to accept such representation despite a prevailing hourly rate that is lower than the law firm’s customary billing rates, and that the client would have insisted on paying his attorneys at a rate no higher than that charged by Albany attorneys....

Tellingly, in making these suppositions, the appellate court cited to neither the record below nor case law, but relied on its own subjective perceptions of lawyers’ motivations and clients’ negotiating skills.

If the objective of the Second Circuit in Arbor Hill was to create a more objective, market-driven standard for setting attorney’s fees, it failed. If anything, the presumptively reasonable fee was more, not less, subjective than the lodestar. The Johnson factors, used by Arbor Hill to establish a reasonable hourly rate, were open ended and generally not empirically based.

Moreover, despite the Second Circuit’s claim to the contrary, pegging a reasonable hourly rate to “the rate a paying client would be willing to pay,” required the district courts to engage in greater subjectivity than if they used the lodestar method. With the traditional fee award method, courts could rely on evidence such as the attorney’s own billing rate in non-fee shifting matters and other attorneys’ affidavits attesting to their rates in similar matters. Arbor Hill, by contrast, required the district courts to answer the hypothetical question of what a client would pay, taking into account such intangibles as the client’s success in negotiating a lower fee and the “reputational benefits” of a case. As Magistrate Judge Dolinger stated in analyzing Arbor Hill, “[w]hat a reasonable but parsimonious client would be willing to pay for effective advocacy is not self-evident in any case; after all, the inquiry requires an excursion into the subjective state of a hypothetical person or organization.”

Perdue v. Kenny A.

In the interim between the Second Circuit’s decisions in Arbor Hill and Millea, the Supreme Court decided Perdue v. Kenny A. Ex rel. Winn. In Perdue, a class action on behalf of foster children in Georgia, the Court considered whether the lower courts erred in granting plaintiffs’ counsel a fee enhancement beyond the loadstar because of superior performance and results. In the course of striking down the enhancement, the Supreme Court reaffirmed that the lodestar approach was the “guiding light of our fee-shifting jurisprudence.” It explained that the lodestar calculation, by securing the attorney’s fee to the “prevailing hourly rate” has the advantage of being “readily administrable” and “objective,” whereas the Johnson factors give the district courts minimal guidance in setting a fair rate and allow for much subjectivity.

After Perdue, it is questionable whether Arbor Hill’s presumptively reasonable fee calculation remains good law. The Supreme Court rejected the basic precepts of Arbor Hill. Whereas the Second Circuit had found the loadstar metaphor more confusing than helpful, the Supreme Court declared that it remained the foundation of attorney’s fees jurisprudence. While Arbor Hill endorsed the Johnson factors for determining a “reasonable hourly rate,” the Supreme Court concluded that they were less objective than the considerations used in the lodestar calculation. After Perdue, it was left to the Second Circuit to decide what, if anything, remained of Arbor Hill.

Millea v. Metro-North

While Millea did not explicitly overrule Arbor Hill, its abandonment of the “presumptively reasonable fee” analysis is clear enough. In Millea, the plaintiff had prevailed at trial on his claim that the defendant Railroad interfered with his right to take medical leave under the Family and Medical Leave Act, a federal fee-shifting statute. Since the plaintiff had missed just two days’ work as a result of the Railroad’s unlawful interference, the jury awarded him only $612.50 in damages. Although the lodestar was $144,792, the district court awarded just $204 in attorney’s fees, one-third of the damages, on grounds that the recovery was de minimis, the case was not particularly complex or novel, and the interference claim had no public policy significance.

The Second Circuit held that the district court abused its discretion when it awarded fees as a proportion of damages and disregarded the lodestar. Citing Perdue a dozen times in the opinion, Millea left no doubt of the soundness of the lodestar calculation in this circuit. By contrast, Millea mentioned Arbor Hill’s “presumptively reasonable fee” once, and then only to suggest, somewhat misleadingly, that it was the equivalent of, and not a departure from, the lodestar.

Arguably as important as restoring the lodestar method in this circuit was Millea’s re-focus on the public policy underlying the fee-shifting statutes, which Arbor Hill, with its more market-based emphasis, had obscured. Millea observed that although FMLA actions are often “small-ticket items,” they “serve an important public purpose disproportionate to their cash value,” namely “assuring that civil rights claims of modest cash value can attract competent counsel.” The Second Circuit added that the district court erred in finding plaintiff’s $612.50 recovery de minimis, observing that it was more than 100% of the damages sought on that claim.

Millea makes clear that Arbor Hill’s presumptively reasonable fee is unworkable with respect to civil rights claims with low damages. When 100% of the damages in a federal lawsuit are, as in Millea, $612.50, it is fanciful to ask what rate a paying client would be willing to pay to bring that lawsuit, much less to “attract competent counsel.” And the same is true for a low income worker’s claim for minimum wages or unpaid overtime, or a disabled employee challenging the denial of a reasonable accommodation, or a citizen seeking vindication for being locked up without probable cause. Arbor Hill, taken at its word, would preclude a fee award in such small damages cases, despite their importance, since a rational paying client would not bring suit, and therefore would not pay attorney’s fees.

Even if Arbor Hill’s instruction that the fee award be based on what a paying client would pay were not applied literally, the appellate court’s entreaty that the district courts “enforce market discipline” in order “to ensure that the attorney does not recoup fees that the market would not bear,” was a clear and troubling signal to the lower courts to limit attorney’s fees in civil rights actions, public policy notwithstanding. After all, if the goal is to make fee awards “best approximat[e] the workings of today’s market for legal services,” then the attorney who achieves a modest recovery for his client, should, consistent with market principles, earn only a marginal fee. Of course, setting fees according to market principles runs up against the well established public policy of the civil rights laws, which Millea has now put back front and center in the Circuit’s attorney’s fees jurisprudence.

Conclusion

It is worth asking how such a respected court as the Second Circuit could have come up with such a wrongheaded decision as Arbor Hill, re-writing the calculation of attorney’s fees with standards that were, in great measure, unworkable, and, tone deaf to long settled public policy. The Second Circuit wrote Arbor Hill in April 2007, when the American economy was still booming and leading voices in business, government and academia uncritically accepted the virtues of the “free market.” Echoes of that prevailing credo can be heard throughout the opinion. Millea was decided four years later, when society was still trying to sort out the damage caused by a largely unregulated economy, and the unfettered market was no longer looked to as the wise arbiter of people’s affairs. Millea, perhaps, can be seen not only as correcting a flawed decision, but as the appellate court’s response to the sea change wrought throughout society by the ongoing financial crisis.

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