McGee v. China Electric Motor

When the difference between a requested fee and the final award are too disparate, the court must provide specific reasoning in using the lodestar method.

A class of investors raised a suit against China Electric Motor, Inc. (China Electric), and its officers, directors, auditors, and underwriters. The parties finally reached a settlement of $3.78 million. At the time of settlement, none of the parties objected to the size of the proposed attorneys’ fees award of 25% of the class fund. One of the plaintiffs, Mike McGee (Class Counsel) appealed the district court’s decision, wherein the district court used the lodestar method rather than the percentage-of-fund method to calculate the attorneys’ fees award, arguing that it was arbitrary. The district court applied the lodestar method to the settlement award of $3.78 million; the lodestar value of attorneys’ fees was roughly three hundred thousand dollars less the value of the percentage-of-fund method. On appeal, the Ninth Circuit determined the issue of whether, on de novo review, the district court applied the correct legal standard. The district court must provide a “concise but clear explanation of its reasons for the fee award” in order for the panel to hold a meaningful review of the fee award’s reasonableness. Moreover, when the difference between a requested fee and final award are too disparate, the court must be more specific in its reasoning. In the lodestar method, the court “multiplies a reasonable number of hours by a reasonable hourly rate.” On the contrary the percentage-of-fund method involves a set percentage of common fund awarded to attorneys so long as the percentage yields a reasonable fee. The panel held pursuant to the Securities Act of 1993 that the district court did not adequately explain its reasons for using the lodestar method, because, notwithstanding the district court’s considerations supporting its decisions, there was no explanation regarding how the court weighed those considerations in calculating the final award. VACATED and REMANDED.