First Circuit tosses $30m fee award in Volkswagen case

A federal appeals court threw out a Boston federal judge's $30 million attorney fee award for plaintiffs' lawyers in multidistrict litigation over oil-sludge damage to Volkswagen cars.

In a unanimous ruling on July 27, the U.S. Court of Appeals for the First Circuit vacated U.S. District Judge Joseph Tauro's March 2011 award, plus nearly $1.2 million in costs.

A First Circuit panel ruled that Taro erroneously based the award on federal law. The court remanded Volkswagen Group of America Inc. v. Peter J. McNulty Law Firm so that the fee could be calculated based on Massachusetts law.

Besides the McNulty firm, two additional firms acted as lead plaintiffs class counsel and parties to the appeal — Denver's Irwin & Boesen and Philadelphia's Berger & Montague. Chief Judge Sandra Lynch wrote the opinion, joined by Judge Michael Boudin and Senior Judge Bruce Selya. The lawsuit claimed that defects caused the 1.8-liter turbo engines in some Volkswagen Passat and Audi Cabriolet models were susceptible to damaging engine sludge.

The settlement provided for free oil changes and extended warranties. A special master valued the deal at about $223 million for a potential class of about 480,000 car owners.

On appeal, Volkswagen argued that the plaintiffs' attorney fees should have been $7.7 million. The class counsel sought $37.5 million in fees and about $1.8 million in costs.

The First Circuit ruling cited U.S. Supreme Court precedents to conclude that state law governs the interpretation of settlement agreements.

"The basis for the award here is the agreement itself, a contract under state law, and not federal law. The fact that attorneys' fees are provided for by the settlement agreement is one of several reasons why there is no basis to resort to these federal equitable doctrines," Lynch wrote.

Lynch then turned to the question of which state's principles should apply to the attorney fee calculation. Aside from Massachusetts, the cases in the MDL originated from California, Florida, Illinois, New Jersey, Ohio, and Pennsylvania.

When suits are consolidated and transferred, courts usually apply the rules of each of the transferring courts, Lynch wrote.

Except for California and Florida, the states in which the cases arose use the "most significant relationship" test to determine which jurisdiction's law applies to contracts lacking choice-of-law provisions, she continued.

Here, Massachusetts law should apply because the settlement agreement had been drafted to settle a District of Massachusetts case and many of the negotiations happened in Boston. Additionally, Lynch wrote, the agreement was entered into "subject to Final Judicial Approval" by the district court in Massachusetts.

Lynch added that Massachusetts law would apply under Florida's "lex loci contractus" rule, which "provides that the law of the jurisdiction where the contract was executed governs the rights and liabilities of the parties." A similar provision applies in California, she said.

Under Massachusetts law, Lynch continued, a trial can use either the lodestar approach or a multifactor analysis. The latter weighs factors including the attorney's ability and reputation; the matter's importance; the time spent; fees usually charged for similar services by other lawyers in the area; the value of the property affected; and the results.

If the lower court opts for the lodestar approach, it should adopt $7.7 million as the base figure "given the absence of any direct challenge to the number," Lynch wrote. That number does not include work by plaintiffs' attorneys who were not class counsel, work performed after the district court's fee award and any possible contingency enhancement.

"The district court on remand should determine which method Massachusetts would apply here. It is clear that the present award cannot stand," Lynch wrote.

The class counsel's lawyer, Michael Bogdanow, managing partner of Boston's Meehan, Boyle, Black & Bogdanow, predicted the court ultimately would award fees between the amount Volkswagen argued for and the $30 million class counsel wants.

"Our position was federal law was properly applied," Bogdanow said. "We lost on that, but the court didn't buy Volkswagen's argument that it's governed by New Jersey law."

Volkswagen claimed that New Jersey state law governed the attorney fee calculations because the only claim in the complaint that applies to every case in the MDL was under the New Jersey Consumer Fraud Act. Massachusetts law is "much more flexible," Bogdanow said.

Volkswagen's lawyer, Kenneth Geller, managing partner at Chicago's Mayer Brown, did not respond to a request for comment.

In an email, Volkswagen spokeswoman Jeannine Ginivan said the company would not comment because it considers the case active litigation.

(Published by The National Law Journal - July 30, 2012)