A recent opinion by the US Court of Appeals for the Second Circuit breaks new ground in determining when non-lead counsel should receive attorneys' fees after the settlement of a securities class action (In re: Bank of America Corp., (2d Cir. Mar. 17, 2016)).

In consolidated shareholder litigation arising out of Bank of America's merger with Merrill Lynch, the district court appointed a group of lead plaintiffs under the Private Securities Litigation Reform Act of 1995 (PSLRA). Two of those plaintiffs had previously retained a law firm, the Flanagan firm, that did not serve as lead counsel in the consolidated action. Still, the Flanagan firm worked on the case at lead counsel's request.

After the case settled, the plaintiffs' counsel applied for attorneys' fees, including for the Flanagan firm. The district court granted most of the application but ordered that the Flanagan firm receive no fees. The court held that the Flanagan firm had not provided a benefit to the class, noting that it was not lead counsel, had not appeared in the action, and was not mentioned in the plaintiffs' declarations in support of the application.

The Flanagan firm appealed. It argued that the precedent on which the district court relied for the substantial benefit analysis applied only to work performed before the appointment of lead counsel (Victor v. Argent Classic Convertible Arbitrage Fund L.P., 623 F.3d 82 (2d Cir. 2010)). After the appointment of lead counsel, the firm argued, courts should follow the Third Circuit and presume the lead plaintiffs' position on attorneys' fees is correct (In re Cendant Corporation Securities Litigation, 404 F.3d 173, 199 (3d Cir. 2005)).

The Second Circuit vacated and remanded, finding neither precedent directly on point. The court agreed that Victor did not address work performed after appointment of lead counsel, but it refused to hold that Victor never applies after that point. The court also refused to hold that Cendant's presumption of correctness always applies after appointment of lead counsel.

The presumption of correctness applies where, as here, the plaintiffs support non-lead counsel's request for a share of a total fee award that the plaintiffs and their law firms have already agreed to cap. The court left open whether the presumption applies in other situations, such as where the lead plaintiffs oppose non-lead counsel's application or where the fee award would decrease the class's recovery.

The court also stressed that the presumption is rebuttable. A showing that the proposed fee is either excessive or agreed to for improper reasons rebuts the presumption. In considering a claim of excessiveness, courts may use Victor's substantial benefit analysis. The Second Circuit also reminded the district court that it must protect the interests of the absent class members because there is no adversarial process when the lead plaintiffs and their counsel all support the fee request.

In light of this decision, lead plaintiffs' and their counsel can maximize the chances of recovering attorneys' fees for non-lead counsel by:

Practical Law has resources that can help with attorneys' fees in class actions, including:

For more information about class actions generally, see Class Action Toolkit.