Do you think class action lawsuits make huge profits for the amount of work they put in? Are you confused about how courts decide how much an attorney in a class action should receive? Here are the answers to some of the most frequently-asked questions about class action attorneys' fees.

Who pays the lawyers in a class action lawsuit?

In a class action for money damages, lawyers who represent the class are generally paid out of the money that's recovered - called a "common fund" - for the people they are representing. In class actions involving declaratory judgments or injunctive relief, lawyers may be paid by the people who hired them, or in some cases, by the people or companies they are suing.

Attorney's fee awards are subject to court review and approval. Ordinarily, if an award is made in a common fund case, it will be awarded as a percentage of the total money available for the class. A benchmark award generally accepted by the courts is approximately 25 percent of the total, although the award may be adjusted higher or lower, depending on the specific facts of a case.

What are the signs of an unfair settlement or improper representation?

There has been a great deal of criticism of class action litigation in the news in recent years. Sometimes the criticism is justified; often, it's not. A good deal of the criticism focuses on the fees that lawyers receive. Many times, the most vocal opponents of class action litigation are insurers who are required to pay covered claims as a result of the litigation, or the wrongdoers involved in the underlying misconduct.

It's true that lawyers who represent a class will often receive fees many times greater than the compensation received by any given class member. But the total money recovered on behalf of the class in a proper settlement is invariably many times the fee awarded to lawyers.

Without a means to sue wrongdoers for cheating people out of small sums, we would all be at the mercy of small time cheats. Generally, no one person cheated out of $100 can find a lawyer to represent him. But several thousand people cheated out of $100 each have a powerful collective wrong that attracts qualified legal representation to put a stop to the practice.

Despite the frequent unjustified criticism of lawyers handling class action litigation, there have been instances where courts have found representation of a class to be inadequate and proposed settlements unfair. Although the presence of one or more of the following circumstances doesn't always mean a settlement is unfair, the following are examples of circumstances which may justify a closer look at a proposed settlement of class action litigation:

(1) The proposed settlement fails to create a substantial return for the class in terms of collective benefit to the absent class members. For example, in a case alleging a defect in a particular product, the proposed settlement provides only that class members are to receive a nontransferable coupon good for a limited time on the purchase of a new product by the same manufacturer. It's likely that if the class members purchased a defective product in the first place, they might not be interested in repeating the mistake again with the same manufacturer. And it could be argued that the settlement is of more value to the defendant as a marketing scheme than to the class members as compensation for damages. On the other hand, such a "coupon settlement" could be of substantial value if the coupon can be used on a product in great demand, offers substantial savings to the class, provides a reasonable period of time in which it may be used and is transferable.

(2) A class action was filed as an action for money damages, but the settlement provides no monetary award for the class members. Further, the attorney's fee is for several million dollars and is based on "nontangible" benefits the class will purportedly receive. For example, in a case involving a vehicle subject to rollovers, class counsel negotiates a settlement in which a class member receives only an inspection of his vehicle to determine if it has been modified since the date of manufacture, a warning sticker for the visor saying "watch out," and a toll free number they can call for a free tow if their vehicle rolls over. At the end of the proposed settlement, the class members are still left with dangerous, unmodified vehicles and provided no compensation for the defect. Yet the class counsel contends the settlement is fair and worth millions in fees.

On the other hand, in some instances nontangible benefits can be substantial. For example, in a pollution case, a defendant might be sued for both money damages and injunctive relief in an effort to stop continued pollution. Under some circumstances, the injunctive relief could provide true substantial benefits to the class even in the absence of money damages. If the pollution is stopped, the quality of life for those in the area could very well be improved, potential illness and risk to children from the pollution eliminated and any further damages to the class from continuing pollution stopped. In such a situation, a class counsel might make a conscious and intelligent decision that it's more important to the class to stop the pollution now through settlement than to continue it indefinitely by continuing to litigate. In such a situation, a substantial fee may be appropriate even if no direct compensation is paid to individual class members.

(3) Any settlement where the release being demanded as a condition of the settlement is extremely broad and may cover claims that weren't pursued in the lawsuit. For instance, a bank is improperly charging a "fax fee" when a person pays off a mortgage issued by the bank. Assume such a practice violates state loan charge disclosure statutes or the Truth in Lending Act and the $15 fee charged for a fax is improper.

Assume further that the same bank is also improperly calculating interest due on a loan closing date and is overcharging some customers several hundred dollars in interest at the time a loan is paid off. A lawyer finds out about and sues over the improper fax fee, but never discovers the bank is improperly charging interest. It is possible that under some circumstances a bank could even lie about the interest charges and preclude the class action attorney from discovering the lie by blocking procedures in the litigation. The bank agrees to settle the fax claim, but knowing it may soon be sued for the interest claim attempts to head off in advance any such new suit by insisting that the release in the fax claim case covers "every and all claims relating to loans, known or unknown" arising from any loan. If a demand by a defendant is made for a ridiculously overbroad release of claims, they may very well have something to hide that hasn't yet been discovered.

(4) The virtual nonexistence of work attorneys do that's called "discovery," which is research into the other party's case, including looking at documents, taking depositions, etc.

In order for an attorney to be able to tell a court that a settlement is fair, reasonable and adequate, he or she must be familiar with the underlying facts of the case. If the attorneys have not done their homework, they may not have sufficient familiarity with the facts to adequately make recommendations to the class or to the court.

In class action litigation, there often is a committee of attorneys representing the class members. Although each and every attorney need not be familiar in depth with all underlying facts, that knowledge should be present among the group representing the class.

(5) The failure of the class counsel to notify the class in either general or specific terms as to the amount of his proposed attorney's fees. If an attorney earns a fee, he shouldn't be concerned about disclosing the amount. If he will be asking for a percentage of a common fund, the class should be informed of the maximum fee that may be requested. Such a disclosure could be made either by disclosing the maximum percentage that may be sought, or the amount in dollars - or both. The failure to disclose the intended fee may occur when the fee would be considered excessive by many people.

(6) In a settlement class, the amount of attorney's fees to be requested appears on its face to be excessive, the fees were negotiated with the defendant, and the defendant agreed not to object to the fee request as part of the settlement. This type of arrangement is known as a "clear sailing" agreement.

Such clear sailing agreements create an appearance of class counsel putting his interest ahead of the class. On the other hand, a clear sailing agreement might not be improper if the fee is reasonable, the fact the defendant will not be objecting is disclosed, the class is given an opportunity to object to the fee, and the court provides oversight on ultimate approval of the amount awarded.

The presence of one or more of these factors doesn't necessarily lead to the conclusion that a settlement is unfair or that the class has been poorly or inadequately represented. But if several of these elements are present in the same case, a much closer look may be necessary to protect your interests as a class action member.

Reprinted with permission from classactionlitigation.info(sm). Copyright 2000, Timothy E. Eble.