FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: MERCURY INTERACTIVE CORP.
SECURITIES LITIGATION,
ARCHDIOCESE OF MILWAUKEE
SUPPORTING FUND, INC.; DENNIS S.
JOHNSON; KAREL MUNAO; CHANDRA
SINGHAL; CHARTER TOWNSHIP OF
CLINTON POLICE AND FIRE PENSION
SYSTEM; CITY OF DEARBORN
HEIGHTS POLICE AND FIRE
RETIREMENT SYSTEM; CITY OF
STERLING HEIGHTS GENERAL No. 08-17372
EMPLOYEES RETIREMENT SYSTEM;
LONGSHOREMAN’S ASSOCIATION
PENSION FUND; STEAMSHIP TRADE
DC No.
CV 05-03395
ASSOCIATION INTERNATIONAL; OPINION
MERCURY PENSION FUND GROUP,
Plaintiffs-Appellees,
NEW YORK STATE TEACHERS’
RETIREMENT SYSTEM,
Appellant,
CONNECTICUT RETIREMENT PLANS &
TRUSTS; BLOOMBERG NEWS; SAN
FRANCISCO CHRONICLE; THE
RECORDER,
Intervenors-Appellees,
v.
12191
12192 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
MERCURY INTERACTIVE
CORPORATION; AMNON LANDAN;
DOUGLAS P. SMITH; ANTHONY
ZINGALE; SUSAN J. SKAER; BRAD
BOSTON; IGAL KOHAVI; CLYDE
OSLTER; GIORA YARON; YAIR
SHAMIR; YUVAL SCARLAT; SHARLENE
ABRAMS; PRICEWATERHOUSECOOPERS
INC.,
Defendants-Appellees,
v.
THE MERCURY PENSION FUND
GROUP,
Third-party-plaintiff-Appellee,
Appeal from the United States District Court
for the Northern District of California
Jeremy D. Fogel, District Judge, Presiding
Argued and Submitted
December 8, 2009—San Francisco, California
Filed August 18, 2010
Before: A. Wallace Tashima, Susan P. Graber, and
Jay S. Bybee, Circuit Judges.
Opinion by Judge Tashima;
Dissent by Judge Bybee
IN RE: MERCURY INTERACTIVE CORP. SECURITIES 12195
COUNSEL
Ryan A. Stippich, Reinhart Boerner Van Deuren, Milwaukee,
Wisconsin, for objector-appellant New York State Teachers
Retirement System.
Louis Gottlieb, Labaton Sucharow, New York, New York, for
plaintiff-appellee Mercury Pension Fund Group.
Robert A. Long, Jr., Covington & Burling, Washington, Dis-
trict of Columbia, for amicus curiae Council of Institutional
Investors.
OPINION
TASHIMA, Circuit Judge:
This is a securities class action against Mercury Interactive
Corp. (“Mercury”), some of its former officers and directors,
and its auditor. The action was settled early on, a settlement
class was certified, the settlement was approved, and attor-
neys’ fees were awarded per the settlement agreement. The
New York State Teachers’ Retirement System (“Teachers”)
appeals from the district court’s order awarding attorneys’
fees of twenty-five percent of the $117.5 million settlement
fund to class counsel. We hold that the district court erred
under Federal Rule of Civil Procedure 23(h) in setting the
schedule for objecting to counsel’s fee request; we therefore
vacate the award and remand for further proceedings.
I. BACKGROUND
Beginning in the summer of 2005, Mercury made a series
of public disclosures revealing that an “informal inquiry” was
12196 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
being conducted into possible unreported backdating of stock
options at the company. Backdating stock options represented
to the market as having been granted at the current market
price of the company’s stock, when in fact they are being
granted at a previous date’s lower stock price and are there-
fore already “in the money,” results in companies’ under
reporting their compensation expenses and overstating their
income, leading to inflated stock prices. See Charles Forelle
& James Bandler, The Perfect Payday: Some CEOs Reap Mil-
lions by Landing Stock Options When They Are Most Valu-
able. Luck—or Something Else?, WALL ST. J., Mar. 18, 2006
at A1. These disclosures of potential wrongdoing at Mercury
became more serious throughout the fall of 2005, eventually
leading to an announcement that the CEO, CFO, and General
Counsel would be resigning because they had been aware of,
participated in, and benefitted from repeated instances of ille-
gal stock options backdating, among other instances of
wrongdoing. Mercury’s stock price dropped significantly in
reaction to these announcements.
In the class actions that followed, the district court, as is
customary, appointed lead counsel for the class. Lead counsel
conducted an investigation into Mercury’s backdating prac-
tices and filed a consolidated class action complaint under the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78oo, as
amended by the Private Securities Litigation Reform Act of
1995 (“PSLRA”), codified in 15 U.S.C. § 78. It opposed
motions to dismiss the complaints, which the district court
granted. Lead counsel conducted further investigation and
began drafting an amended complaint.
The parties broached the possibility of settlement in the
spring of 2007, after the motions to dismiss were argued in
the district court. After the district court granted the motions
to dismiss, the parties held two mediation sessions and the
parties subsequently agreed on a settlement of $117.5 million
in cash. As part of the settlement, lead counsel conducted con-
firmatory discovery, which included document review, two
IN RE: MERCURY INTERACTIVE CORP. SECURITIES 12197
additional depositions and an additional interview, in order to
ensure that there was a factual basis for settling the case for
the amount stipulated.
The district court certified a settlement class, preliminarily
approved the settlement, and ordered notice to the class. The
notice of the preliminary settlement informed the class of the
general terms of the proposed settlement. It also informed
class members that counsel would “request . . . attorneys’ fees
in the amount of 25% (29.375 million).” Further, the class
members were informed that they could object to the settle-
ment or application for attorneys’ fees by “appear[ing] . . . at
the Settlement Fairness Hearing” if they “submit[ted] a writ-
ten notice of objection, received or postmarked on or before
September 4, 2008.” No objections were made to the settle-
ment itself, but two objections, including Teachers’, were
made to the proposed attorneys’ fees.
Teachers timely objected to “counsel’s proposed fee
request for 25% of the $117.5 million settlement fund,” noted
that the “case was settled early, at the motion to dismiss
stage,” and made generalized arguments that any fee awarded
by the court should be no higher than 18 percent of the settle-
ment fund. Teachers argued that the court, serving as a fidu-
ciary for the absent class, “must critically examine class
counsel’s application and award no more than what is abso-
lutely required to provide reasonable compensation to class
counsel.” It noted that, after the passage of the PSLRA, “fed-
eral courts today are awarding fees which are far less than
25% of the settlement amount,” yet reasonably compensate
class counsel. Finally, Teachers argued that outstanding
results can be achieved for the class at lower market rates, cit-
ing the fact that “class counsel retained by public employee
retirement systems serving as lead plaintiffs pursuant to the
PSLRA have accepted fees which are significantly lower than
25%.”
Thereafter, lead counsel, on September 18, 2008, filed its
motion for award of counsel’s fees and reimbursement of
12198 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
expenses and supporting memorandum of law and declara-
tions. This filing was two weeks after the deadline for objec-
tions had passed. The memorandum and declarations
supporting the motion state that lead counsel and other law
firms worked a total of 17,001.06 hours on the case, valued
at $8,396,593.20. Counsel did not provide time sheets detail-
ing how many hours were spent by each attorney on specific
tasks. Instead, it provided tables listing a lawyer, his or her
hourly rate, and the number of hours he or she expended on
the case. The declarations supporting these fee requests only
broadly summarized the work done by each firm, including
descriptions such as “prepared for mediation,” “negotiating
and finalizing a global settlement with all Defendants for
$117.5 million,” and “prepared and filed discovery motions.”
One week later, on September 25, 2008, the district court
held a hearing on the fairness of the settlement and attorneys’
fees. Neither Teachers nor the other objector to the attorneys’
fee award attended. The district court approved the requested
fee, ruling from the bench:
[E]ssentially, both of these objectors claim that the
fee award can be no higher than 18 percent. They do
not object to any line item of work that was done,
but rather they simply believe that the amount of the
contingency fee should be 18 percent rather than 25
percent.
The court has read and considered those objec-
tions and it is not aware of any other objections in
this matter. The court notes that this matter was liti-
gated extensively, that it involves novel issues, that
it was certainly not a situation where counsel were
not required to extend significant effort; in fact, the
contrary is true. The accepted standard, which is sort
of a starting point for the analysis in the Ninth Cir-
cuit, appears to be a 25 percent award.
IN RE: MERCURY INTERACTIVE CORP. SECURITIES 12199
Certainly, in this case, the court does not believe
that the efforts of counsel fell below that such that
below the standard would be appropriate; and in fact,
it could be argued that a higher award might be justi-
fied given the very beneficial outcome.
In any event, the court doesn’t see any reason to
depart from the standard percentage that’s awarded
in the Ninth Circuit. So I’m prepared to overrule the
objections and approve the fee as well.
Teachers timely appealed the fee award.
II. STANDARD OF REVIEW
We review the district court’s award of attorneys’ fees in
class actions for an abuse of discretion. See Powers v. Eichen,
229 F.3d 1249, 1256 (9th Cir. 2000). “ ‘A district court
abuses its discretion if its decision is based on an erroneous
conclusion of law or if the record contains no evidence on
which it rationally could have based its decision.’ ” Fischel v.
Equitable Life Assurance Soc’y, 307 F.3d 997, 1005 (9th Cir.
2002) (quoting Paul, Johnson, Alston & Hunt v. Graulty, 886
F.2d 268, 270 (9th Cir. 1989)). The district court may exercise
its discretion to choose between the lodestar and percentage
method in calculating fees. See Powers, 229 F.3d at 1256. A
district court, however, abuses that “discretion when it uses a
mechanical or formulaic approach that results in an unreason-
able reward.” Id.
We review the district court’s underlying factual determi-
nations for clear error. Id. “Any element of legal analysis
which figures in the district court’s decision is reviewed de
novo.” Fischer v. SJB-P.D., Inc., 214 F.3d 1115, 1118 (9th
Cir. 2000).
III. WAIVER
“We apply a ‘general rule’ against entertaining arguments
on appeal that were not presented or developed before the dis-
12200 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
trict court.” Peterson v. Highland Music, Inc., 140 F.3d 1313,
1321 (9th Cir. 1998). Although “no ‘bright line rule’ exists to
determine whether a matter as been properly raised below,”
an issue will generally be deemed waived on appeal if the
argument was not “ ‘raised sufficiently for the trial court to
rule on it.’ ” Whittaker Corp. v. Execuair Corp., 953 F.2d
510, 515 (9th Cir. 1992) (quoting O’Rourke v. Seaboard Sur.
Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957 (9th Cir.
1989)). “This principle accords to the district court the oppor-
tunity to reconsider its rulings and correct its errors.” Id.
[1] Such waiver is a discretionary, not jurisdictional, deter-
mination. See United States v. Northrop Corp., 59 F.3d 953,
957 n.2 (9th Cir. 1995). We may consider issues not presented
to the district court, although we are not required to do so. See
Broad v. Sealaska Corp., 85 F.3d 422, 430 (9th Cir. 1996).
We will exercise our discretion to reach waived issues only in
three circumstances: “in the ‘exceptional’ case in which
review is necessary to prevent a miscarriage of justice or to
preserve the integrity of the judicial process,” “when a new
issue arises while appeal is pending because of a change in
the law,” and “when the issue presented is purely one of law
and either does not depend on the factual record developed
below, or the pertinent record has been fully developed.”
Bolker v. Comm’r, 760 F.2d 1039, 1042 (9th Cir. 1985).
Lead counsel contends that Teachers has waived all of the
issues that it presents on appeal by failing adequately to raise
them before the district court. Teachers raises three issues on
appeal, including whether the district court erred by setting
the deadline for the filing of class members’ objections to the
fee request on a date before the deadline for filing the fee
motion itself, then partially basing its decision on Teachers’
failure to object to “any line item of work” that lead counsel
performed.1
1
In light of our disposition of this issue, we need not reach the remain-
ing two waiver issues — whether this circuit’s 25-percent benchmark for
IN RE: MERCURY INTERACTIVE CORP. SECURITIES 12201
[2] We exercise our discretion to reach the question of
whether Federal Rule of Civil Procedure 23(h) requires dis-
trict courts to set the deadline for objections to attorneys’ fees
on a date after the fee motion has been filed, because it is a
pure question of law. See Bolker, 760 F.2d at 1042. The issue
has been sufficiently briefed and the record has been suffi-
ciently developed such that our “consideration of the issue
would not prejudice [lead counsel’s] ability to present rele-
vant facts that could affect our decision.” Kimes v. Stone, 84
F.3d 1121, 1126 (9th Cir. 1996). Moreover, as outlined
below, this is a recurring issue in class action litigation.
We have not yet had occasion to construe Rule 23(h), and
the schedule set by the district court in this case, requiring
objections to be filed before the filing of the fee motion itself
and its supporting papers, appears to be commonly employed
by district courts throughout the Ninth Circuit and elsewhere
in the country. See, e.g., In re Leadis Tech, Inc. Sec. Litig.,
No. C 05-0882 CRB (N.D. Cal. Feb. 4, 2009) (objections due
thirteen days before motions in support of fee); In re Brocade
Sec. Litig., No. C 05-02042 CRB (N.D. Cal. Nov. 18. 2008)
(objections due seven days before motions in support of fee);
In re Cisco Sys., Inc. Sec. Litig., No. C 01-20418 JW (N.D.
Cal. Sept. 12, 2006) (objections due 28 days before motions
in support of fee); In re Global Crossing Access Charge
Litig., No. 04-1630, slip op. (S.D.N.Y. May 2, 2006) (objec-
tions due eight days before motions in support of fee); In re
Tyco Int’l, Ltd., Sec. Litig., No. MDL 02-1335 PB (D.N.H.
July 13, 2007) (objections due 24 days before motions in sup-
port of fee). We, thus, now take the opportunity to examine
this practice and to construe and apply the requirements of
Rule 23(h).
attorneys’ fees in common fund cases, see Paul, Johnson, Alston & Hunt,
886 F.2d at 272, should be applied in PSLRA cases, an issue that Teachers
is free to raise before the district court on remand, and whether the district
court abused its discretion by failing to consider the required factors in
approving the award and by inadequately explaining the basis for its
award.
12202 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
IV. DISCUSSION
Although a district court has broad discretion to determine
attorneys’ fees, it abuses that discretion if it makes an error of
law. See Koon v. United States, 518 U.S. 81, 100 (1996) (“A
district court by definition abuses its discretion when it makes
an error of law.”). We hold that the district court abused its
discretion when it erred as a matter of law by misapplying
Rule 23(h) in setting the objection deadline for class members
on a date before the deadline for lead counsel to file their fee
motion. Moreover, the practice borders on a denial of due pro-
cess because it deprives objecting class members of a full and
fair opportunity to contest class counsel’s fee motion.
[3] The plain text of the rule requires a district court to set
the deadline for objections to counsel’s fee request on a date
after the motion and documents supporting it have been filed.
The relevant portions of Rule 23(h) provide:
(1) A claim for an award must be made by motion
under Rule 54(d)(2), subject to the provisions of this
subdivision (h), at a time the court sets. Notice of the
motion must be served on all parties and, for motions
by class counsel, directed to class members in a rea-
sonable manner.
(2) A class member, or a party from whom payment
is sought, may object to the motion.
Fed. R. Civ. P. 23(h). The plain text of the rule requires that
any class member be allowed an opportunity to object to the
fee “motion” itself, not merely to the preliminary notice that
such a motion will be filed. In this case, although notice of the
motion was provided to the class, class members were
deprived of an adequate opportunity to object to the motion
itself because, by the time they were served with the motion,
the time within which they were required to file their objec-
tions had already expired.
IN RE: MERCURY INTERACTIVE CORP. SECURITIES 12203
[4] The Advisory Committee Notes to the 2003 amend-
ments to Rule 23(h) further support this reading of the rule.
They elaborate that “[i]n setting the date objections are due,
the court should provide sufficient time after the full fee
motion is on file to enable potential objectors to examine the
motion.” Fed. R. Civ. P. 23, 2003 Advisory Committee Notes,
¶ 68. The Advisory Committee Notes further contemplate
that, in appropriate cases, the court will permit an “objector
discovery relevant to the objections.” Id. ¶ 69. Clearly, the
rule’s drafters envisioned a process much more thorough than
what occurred in this case.
Commentators also agree with this logical interpretation of
the rule. For example, Moore’s Federal Practice counsels that
“[a]ny objection deadline set by the court should provide the
eligible parties with an adequate opportunity to review all of
the materials that may have been submitted in support of the
motion and, in an appropriate case, conduct discovery con-
cerning the fees request.” 5 Moore’s Federal Practice
§ 23.124[4] (Matthew Bender 3d ed. 2009). Allowing class
members an opportunity thoroughly to examine counsel’s fee
motion, inquire into the bases for various charges and ensure
that they are adequately documented and supported is essen-
tial for the protection of the rights of class members. It also
ensures that the district court, acting as a fiduciary for the
class, is presented with adequate, and adequately-tested, infor-
mation to evaluate the reasonableness of a proposed fee.
In this case, Teachers was denied such an opportunity. At
the time that its objections to the fee request were due, Teach-
ers could make only generalized arguments about the size of
the total fee because they were only provided with general-
ized information. Teachers could not provide the court with
critiques of the specific work done by counsel when they were
furnished with no information of what that work was, how
much time it consumed, and whether and how it contributed
to the benefit of the class.
12204 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
[5] During the fee-setting stage of common fund class
action suits such as this one, “[p]laintiffs’ counsel, otherwise
a fiduciary for the class, . . . become[s] a claimant against the
fund created for the benefit of the class.” Class Plaintiffs v.
City of Seattle (In re Wash. Pub. Power Supply Sys. Sec.
Litig.), 19 F.3d 1291, 1302 (9th Cir. 1994) (internal quotation
marks omitted). This shift puts plaintiffs’ counsel’s under-
standable interest in getting paid the most for its work repre-
senting the class at odds with the class’ interest in securing
the largest possible recovery for its members. Because “the
relationship between plaintiffs and their attorneys turns adver-
sarial at the fee-setting stage, courts have stressed that when
awarding attorneys’ fees from a common fund, the district
court must assume the role of fiduciary for the class plain-
tiffs.” Id. As a fiduciary for the class, the district court must
“act with ‘a jealous regard to the rights of those who are inter-
ested in the fund’ in determining what a proper fee award is.”
Id. Included in that fiduciary obligation is the duty to ensure
that the class is afforded the opportunity to represent its own
best interests. When the district court sets a schedule that
denies the class an adequate opportunity to review and pre-
pare objections to class counsel’s completed fee motion, it
fails to fulfill its fiduciary responsibilities to the class.2
2
We also note that the district court failed to comply with its own Local
Rules, which ordinarily govern the length of notice required in filing
motions for attorneys’ fees, in setting the schedule for objections to lead
counsel’s attorneys’ fee request. Those rules provide that papers support-
ing a motion “must be filed, served and noticed in writing on the motion
calendar of the assigned Judge for hearing not less than 35 days after ser-
vice of the motion.” N.D.Cal. Civ. Local R. 7-2. This means that even in
the most routine of fee motions, in which perhaps a few thousand dollars
of attorneys’ fees may be at stake, the party opposing such fees would
have fourteen days to examine the papers supporting the fee request and
prepare its opposition. See Local Rule 7-3. The Local Rules themselves
state that these “are minimum time periods,” and when “complex
motions” and oppositions to them are being filed, longer time periods may
be necessary. Thus, although compliance with the Local Rules is not at
issue in this appeal, the time periods for ordinary motions in the Northern
District’s own Local Rules further support the inadequacy of the proce-
dures in this case.
IN RE: MERCURY INTERACTIVE CORP. SECURITIES 12205
V. CONCLUSION
[6] When $29.375 million is at stake, and the interests of
class counsel are in conflict with the interests of the class, it
is the obligation of the district court to ensure that the class
has an adequate opportunity to review and object to its coun-
sel’s fee motion and, potentially, to conduct discovery on its
objections to the fee motion if the district court, in its discre-
tion, deems it appropriate. We do not adopt a bright-line rule
of a time period that would meet Rule 23(h)’s requirement
that the class have an adequate opportunity to oppose class
counsel’s fee motion. Obviously, that period will vary from
case to case, and the district court is better positioned to make
that decision after consideration of all of the circumstances in
the case. But a schedule that requires objections to be filed
before the fee motion itself is filed denies the class the full
and fair opportunity to examine and oppose the motion that
Rule 23(h) contemplates.
[7] The district court’s order approving class counsel’s fee
request is vacated and the matter is remanded for further con-
sideration consistent with this opinion.3 Each party shall bear
its own costs on appeal.
VACATED and REMANDED.
BYBEE, Circuit Judge, dissenting:
I agree with the majority that the district court erred under
Federal Rule of Civil Procedure 23(h) in setting the schedule
for objecting to counsel’s fee request. However, I respectfully
dissent because I believe that the New York State Teachers’
Retirement System (“the Teachers”) waived this argument.
3
We, of course, express no opinion on the merits of the fee motion.
12206 IN RE: MERCURY INTERACTIVE CORP. SECURITIES
Although we have discretion to reach waived issues where
“the issue presented is purely one of law,” Bolker v. Comm’r
of Internal Revenue, 760 F.2d 1039, 1042 (9th Cir. 1985), I
would decline to exercise that discretion in this case. As the
majority recognizes, the Teachers raised no objection in the
district court to the schedule for objecting to attorneys’ fees
despite being given notice of the briefing schedule on July 2,
2008, and despite filing a general objection to counsel’s fee
application on August 28, 2008. Although the Teachers com-
plain that they could not reasonably have objected to coun-
sel’s fee application until counsel filed a memorandum in
support of the application for attorney’s fees on September
18, 2008, the Teachers certainly could have objected to the
schedule before that date. Moreover, the Teachers’ actual
objection to counsel’s fee application was composed almost
entirely of boilerplate allegations and contained almost no dis-
cussion of the case at hand. Although the Teachers had not yet
been presented with details on the ins and outs of counsel’s
work, I see no reason why they could not have described more
specifically why counsel’s services did not merit 25 percent
of the settlement fund. Finally, even after counsel filed a
memorandum detailing the hours worked on each case by
each firm, the Teachers did not file any papers addressing this
memorandum, and did not even show up to the district court’s
settlement fairness hearing on September 25, 2008.
In short, the Teachers were not at all diligent in presenting
their arguments to the district judge. And given that district
judges, due to their familiarity with counsel’s work, are in a
far better position than appellate courts to adjudicate attor-
ney’s fees disputes, I believe it is important to encourage par-
ties in Teachers’ position to raise issues with respect to
attorney’s fees with the district court. Thus, this seems to me
the prototypical context for enforcement of our waiver doc-
trine.
I respectfully dissent.