In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 12-‐‑2339 & 12-‐‑2354
ERIC SILVERMAN, et al.,
Plaintiffs-‐‑Appellees,
v.
MOTOROLA SOLUTIONS, INC., et al.,
Defendants-‐‑Appellees.
Appeals of:
EDWARD FALKNER and PAUL A. LILES
____________________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 07 C 4507 — Amy J. St. Eve, Judge.
____________________
ARGUED NOVEMBER 1, 2012 — DECIDED AUGUST 14, 2013
____________________
Before EASTERBROOK, Chief Judge, and ROVNER and
HAMILTON, Circuit Judges.
EASTERBROOK, Chief Judge. A class of Motorola’s investors
contended that, during the second half of 2006, the firm
made false statements in order to disguise its inability to de-‐‑
liver a competitive mobile phone that could employ 3G pro-‐‑
Nos. 12-‐‑2339 & 12-‐‑2354 2
tocols. When the problem became public, the price of
Motorola’s stock declined. After the suit had been pending
for four years, the district court denied Motorola’s motion
for summary judgment. 798 F. Supp. 2d 954 (N.D. Ill. 2011).
The parties then settled for $200 million. None of the class
members contends that this is inadequate—but two contend
that the judge abused her discretion by approving counsel’s
proposal that they receive 27.5% of the fund. See 2012 U.S.
Dist. LEXIS 63477 (N.D. Ill. May 7, 2012).
Paul Liles, one of the objectors, protested almost a month
after the deadline. And although he filed a belated objection
to the award of legal fees, he did not file a claim to his share
of the recovery. He thus lacks any interest in the amount of
fees, since he would not receive a penny from the fund even
if counsel’s take should be reduced to zero. The class repre-‐‑
sentatives’ appellate brief flags this problem; Liles’s reply
brief ignores it. We dismiss his appeal on the ground that he
lacks any interest in the outcome.
Edward Falkner, the other objector, contends that the
award is improper because it was fixed at the end of the liti-‐‑
gation. He maintains that fee schedules should be set at the
outset, preferably by auction in which law firms competing
to represent the class tell the judge how much they will ac-‐‑
cept, and the judge picks the low bidder. We agree with
Falkner’s premise that attorneys’ fees in class actions should
approximate the market rate that prevails between willing
buyers and willing sellers of legal services. See In re Conti-‐‑
nental Illinois Securities Litigation, 962 F.2d 566, 572 (7th Cir.
1992); In re Synthroid Marketing Litigation, 264 F.3d 712, 718
(7th Cir. 2001) (Synthroid I); In re Synthroid Marketing Litiga-‐‑
tion, 325 F.3d 974, 975 (7th Cir. 2003) (Synthroid II). In many
3 Nos. 12-‐‑2339 & 12-‐‑2354
markets competition proceeds by auction. But we also ob-‐‑
served in Synthroid II, 325 F.3d at 979–80, that solvent liti-‐‑
gants do not select their own lawyers by holding auctions,
because auctions do not work well unless a standard unit of
quality can be defined and its delivery verified. There is no
“standard quality” of legal services, and verification is diffi-‐‑
cult if not impossible.
The two Synthroid decisions observed that establishing a
fee structure at the outset of a suit is desirable; unlike auc-‐‑
tions, which private markets in legal services do not use, ex
ante fee structures are common and beneficial to clients. But
neither Synthroid nor any other decision of which we are
aware holds that fee schedules set ex ante are the only lawful
means to compensate class counsel in common-‐‑fund cases. It
is unfortunate that the district judge originally assigned to
this case did not consider the possibility of establishing a fee
schedule when he appointed a lead plaintiff and approved
that party’s choice of counsel. By the time that judge died,
and the case had been reassigned to the judge who awarded
the fees, it was not possible to recreate the conditions that
existed at the case’s outset. Too much legal time had been
sunk into the litigation, and it would have been counterpro-‐‑
ductive to invite other law firms to make other offers and, if
selected, start over.
When reviewing awards set after the fact, the court of
appeals asks whether the district judge has abused her dis-‐‑
cretion. Harman v. Lyphomed, Inc., 945 F.2d 969, 973 (7th Cir.
1991). Falkner contends that the judge abused her discretion
here because fees substantially less than 27.5% have been
awarded in other cases. Data show that 27.5% is well above
the norm for cases in which $100 million or more changes
Nos. 12-‐‑2339 & 12-‐‑2354 4
hands. See Brian T. Fitzpatrick, An Empirical Study of Class
Action Settlements and Their Fee Awards, 7 J. Empirical Legal
Studies 811 (2010); Theodore Eisenberg & Geoffrey P. Miller,
Attorney Fees and Expenses in Class Action Settlements: 1993–
2008, 7 J. Empirical Legal Studies 248 (2010); Theodore Ei-‐‑
senberg & Geoffrey P. Miller, Attorney Fees in Class Action
Settlements: An Empirical Study, 1 J. Empirical Legal Studies
27 (2004). Eisenberg and Miller find that the mean award
from settlements in the $100 to $250 million range is 12% and
the median 10.2%. All three articles find that the percentage
of the fund awarded to counsel declines as the size of the
fund increases. An award fixed at 27.5% of a $200 million
fund is exceptionally high.
It does not necessarily follow that 27.5% is legally exces-‐‑
sive. Contingent fees compensate lawyers for the risk of
nonpayment. The greater the risk of walking away empty-‐‑
handed, the higher the award must be to attract competent
and energetic counsel. See Kirchoff v. Flynn, 786 F.2d 320 (7th
Cir. 1986). The district court received a report from Professor
Charles Silver, who concluded that this suit was unusually
risky. Defendants prevail outright in many securities suits.
This one took more than four years, and more than $5 mil-‐‑
lion in out-‐‑of-‐‑pocket expenses by counsel to conduct discov-‐‑
ery and engage experts, before reaching the summary-‐‑
judgment stage. Only after the district court denied its mo-‐‑
tion for summary judgment was Motorola willing to settle
for a substantial sum—and Motorola might well have pre-‐‑
vailed on summary judgment but for some unanticipated
facts plaintiffs’ lawyers turned up in discovery. When this
suit got under way, no other law firm was willing to serve as
lead counsel. Lack of competition not only implies a higher
fee but also suggests that most members of the securities bar
5 Nos. 12-‐‑2339 & 12-‐‑2354
saw this litigation as too risky for their practices. The district
judge did not abuse her discretion in concluding that the
risks of this suit justified a substantial award, even though
compensation in most other suits has been lower.
Our concern is less with the absolute level of fees than
with the structure of the award. The articles we have cited
reinforce the observation in the Synthroid opinions that nego-‐‑
tiated fee agreements regularly provide for a recovery that
increases at a decreasing rate. In Synthroid II, for example,
the award was 30% of the first $10 million, 25% of the next
$10 million, 22% of the band from $20 to $46 million, and
15% of everything else.
Many costs of litigation do not depend on the outcome; it
is almost as expensive to conduct discovery in a $100 million
case as in a $200 million case. Much of the expense must be
devoted to determining liability, which does not depend on
the amount of damages; in securities litigation damages of-‐‑
ten can be calculated mechanically from movements in stock
prices. There may be some marginal costs of bumping the
recovery from $100 million to $200 million, but as a percent-‐‑
age of the incremental recovery these costs are bound to be
low. It is accordingly hard to justify awarding counsel as
much of the second hundred million as of the first. The justi-‐‑
fication for diminishing marginal rates applies to $50 million
and $500 million cases too, not just to $200 million cases.
Awarding counsel a decreasing percentage of the higher
tiers of recovery enables them to recover the principal costs
of litigation from the first bands of the award, while allow-‐‑
ing the clients to reap more of the benefit at the margin (yet
still preserving some incentive for lawyers to strive for these
higher awards). Professor Silver’s report does not identify
Nos. 12-‐‑2339 & 12-‐‑2354 6
suits seeking more than $100 million in which solvent clients
agree ex ante to pay their lawyers a flat portion of all recover-‐‑
ies, as opposed to a rate that declines as the recovery in-‐‑
creases. The district judge did not discuss whether a market-‐‑
based rate would include different portions of different
bands of the recovery. There’s a reason for that omission:
Falkner did not raise this subject in the district court. (Nor
did he call the judge’s attention to data showing that 27.5%
substantially exceeds the norm for large settlements. Falkner
pointed to three cases where the rates were low, but the dis-‐‑
trict court needed data rather than cherry-‐‑picked examples.)
A district judge, looking out for the interests of all class
members, sometimes must consider issues that the class rep-‐‑
resentatives and their lawyers prefer to let pass. This is not
such a situation, however. Institutional investors such as
pension funds and university endowments hold claims to
more than 70% of the settlement fund. These institutional
investors have in-‐‑house counsel with fiduciary duties to pro-‐‑
tect the beneficiaries. That these large investors, looking out
for themselves, help to protect the interests of class members
with smaller stakes is a premise of several rules in the Pri-‐‑
vate Securities Litigation Reform Act of 1995. The difference
between 27.5% of $200 million and a smaller award (say, one
averaging 20%) could be a tidy sum for institutional inves-‐‑
tors (including this suit’s lead plaintiff, a pension fund), one
worth a complaint to the district judge if the lawyers’ cut
seems too high. Yet none of the institutional investors has
protested—either by filing a motion asking the judge to re-‐‑
duce the fees or by supporting Falkner’s position in this
court. This award may be at the outer limit of reasonable-‐‑
ness, but, given the way the subject was litigated in the dis-‐‑
7 Nos. 12-‐‑2339 & 12-‐‑2354
trict court, deferential appellate review means that the deci-‐‑
sion must stand.
Appeal No. 12-‐‑2339 is dismissed for lack of a justiciable
controversy. In appeal No. 12-‐‑2354, the decision is affirmed.