Appeal from a judgment of the United States District Court for the Southern District of New York, Thomas P. Griesa, Judge, approving the settlement of a class action asserting federal antitrust violations and approving an award of attorneys' fees and costs to plaintiffs. Approval of settlement affirmed as modified. Judge Newman concurs in a separate opinion; Judge Mansfield dissents in a separate opinion.
Mansfield, Oakes and Newman, Circuit Judges.
This approval of an antitrust class action settlement comes before us a second time. In Malchman v. Davis, 706 F.2d 426 (2d Cir. 1983), we remanded approval of the settlement for further analysis of the adequacy of class representation and the adequacy, fairness, and reasonableness of the settlement itself--the latter with particular concern for the proposed award of attorneys' fees and costs in the amount of $2.325 million. Remand was ordered with the understanding that, while we were calling for "further analysis," we were not making "any attempt to circumscribe the permissible conclusions that the District Judge may reach upon completing his further consideration of the matter." Id. at 436 (Newman, J., concurring). On such further consideration, the district judge again concluded that the representation of the plaintiff class was adequate and the settlement, including attorneys' fees, was adequate, fair, and reasonable. Malchman v. Davis, 588 F. Supp. 1047 (S.D.N.Y. 1984). We affirm. Familiarity with the opinion of this court on the prior appeal and the opinion of the district court after remand will be assumed, though we will briefly restate the case to illuminate what follows .
This litigation and a companion state court action, Conway v. Davis, No. 10535/76 (N.Y. Sup. Ct. filed May 4, 1976), principally arise fro the relationship between insurance companies created and controlled by Leonard Davis and two nonprofit retiree associations, the National Retired Teachers Association (NRTA) and the American Association of Retired Persons (AARP) (collectively the Associations). Some twenty years ago, Mr. Davis, an insurance broker, formed the companies that became Colonial Penn Group (CPG), an underwriter of group health insurance plans. From the 1960's until 1980, CPG became the first insurance company, and remained the only one, to underwrite health insurance policies for the members of the Associations. It also had the exclusive right to advertise in the Associations' publications, and, inter alia, maintained the membership lists of the Associations in its computers. The Associations in turn encouraged their members to purchase a variety of insurance products and services through CPG entities. Over twenty years of cooperation and mutual assistance between CPG and the Associations, together with numerous demographic factors, resulted in tremendous growth in the member ship of the Associations and in CPG's profits. See 706 F.2d at 428. The arrangement had had many benefits to the parties even if it was a locked-in one.
In 1976, litigation commenced in state court in the form of a class action brought by Frieda Lederer on behalf of the class of insurance-buying members of the AARP, charging Davis, CPG, and others with fraud and breach of fiduciary duty and alleging, inter alia, that the class was overcharged for insurance policies purchased from CPG. A federal class action alleging antitrust liability was subsequently brought in October 1977, the class again consisting of the insurance-buying members of the AARP. Neither the state court nor the federal court action sought damages; rather, each sought injunctive relief to terminate the relationship between Leonard Davis and CPG, on the one hand, and the Associations, on the other. The district court's opinion on remand now informs us that discovery was begun and basically continued in the state court action--in which there was no dispute concerning the jurisdiction of the court over the fraud and breach of fiduciary duty claims-- with the understanding that the state court discovery would or could be used in the federal court action. We are also advised that, in response to mutual document requests, plaintiffs produced over 4,000 pages of documents and defendants over 100,000 pages of documents of which plaintiffs made copies of over 65,000 pages. 588 F. Supp. at 1049-50 & n.1. Depositions were also taken by both plaintiffs and defendants from January 1979 through mid-May 1980, with some 66 days of testimony resulting in 11,850 pages of transcript and "numerous disputes during the discovery resulting in applications to the state court." Id. at 1050. Meanwhile, defendants filed a motion to dismiss the federal complaint, claiming that the action was barred by section 2(b) of the McCarran-Ferguson Act. 15 U.S.C. § 1012(b) (1982) (concerning applicability of the Sherman Act, Clayton Act, and Federal Trade Commission Act to insurance business), and that the plaintiffs lacked standing. This motion was never decided, despite the quantity of material submitted to the court, because by the spring of 1980 serious settlement negotiations were taking place, and by mid-June of 1980 the parties had requested the federal court to withhold decision. Id.
Meanwhile, in February 1979, the Associations had passed a series of resolutions--in essence, to discontinue their endorsement of certain CPG products other than group health insurance, to accept general advertising, to study other insurance programs, to negotiate with CPG relative to membership maintenance and processing, and to consider the possibility of phasing out the Associations' group health insurance program (run by CPG). On September 1, 1980, the Associations signed an agreement with CPG, the substance of which is set forth in our previous opinion, 706 F.2d at 429. The agreement essentially provided for a termination of the relationship between the Associations and CPG as well as elimination of CPG's control over the Associations' membership lists and exclusive right to advertise in Association publications. The agreement also provided for payment of some $6.86 million from CPG to the Associations, and an agreement by CPG to spend an additional $4.5 million to promote membership in the Association between January 1, 1980, and June 30, 1981. On November 6, 1980, the parties in the federal and state actions stipulated to a proposed settlement, which essentially incorporated the terms of the September 1980 voluntary agreement among the defendants. The proposed settlement did, however, add certain terms regarding (1) competitive bidding procedures for the placement of insurance by the Associations; (2) termination of the state and federal actions; (3) broadening of the plaintiff class to include all persons who were members of the Association as of November 1, 1980, thereby increasing the class membership to over 11,000,000 persons; (4) class notification of the settlement and state court hearing through the Associations' news bulletins and magazines; (5) attorneys' fees, as will be set forth below; and (6) an escape clause for the defendants in the event that more than 10,000 class members were to opt out or if the settlement were disapproved by either the state supreme court or federal district court or upon any appeal from either of such courts. See id. at 429-30. The district court now advises us, 588 F. Supp. at 1052, that 2,850 persons have opted out of the class while 11 have objected to the settlement.
The appellants objecting to the settlement are the same persons who previously objected--including Harriet Miller, the former executive director of the Associations, who played an instrumental role in bringing about the disassociation of CPG and the Associations, as well as the Mountain Plains Congress of Senior Organizations. They now urge that the district court erred and violated this court's mandate by granting renewed approval to the proposed settlement without allowing discovery and without conducting an evidentiary hearing. They continued that the settlement does not fall within a range of fairness reflecting adequacy of representation and that the district court made errors of law as well as incorrect assumptions regarding matters of fact. They object to approval of the attorneys' fees and conclude generally that the proposed settlement is contrary to the interests of the class, being "all cost and no benefit."
We begin with appellants' procedural objections. Their point is that the district court granted approval on remand without allowing discovery and without conducting an evidentiary hearing. Our prior opinion referred to the fact that the district court had "stated conclusions but made no specific findings" and that we could not properly review the settlement "because we do not have sufficient analysis of several pivotal issues." 706 F.2d at 427. We said that we could not "intelligently review the settlement on this record," id. at 433, and that while the district judge was entitled to rely on pertinent portions of the state court referee's report as to reasonableness, "his reliance could not substitute for federal court inquiry as to matters pertinent to the federal suit that were either not considered or inadequately considered by the referee." Id. at 434. Judge Newman, concurring, supported "our call for further analysis." Id. at 436.
At the same time, we said that we did not expect a district judge to "convert settlement hearings into mini-trials on the merits," id. at 433, and that no further evidentiary hearing would be necessary unless the objectors raised "cogent factual objections to the settlement," id. at 434 (quoting Weinberger v. Kendrick, 698 F.2d 61, 79 (2d Cir. 1982), cert. denied, 464 U.S. 818, 104 S. Ct. 77, 78 L. Ed. 2d 89 (1983)); see also City of Detroit v. Grinnell Corp., 495 F.2d 448, 464 (2d Cir. 1974) (Grinnell I) (objectors must make "clear and specific showing that vital material was ignored by the District Court"). Thus we did not require that the district court open the case for further discovery and an evidentiary hearing unless the district court found that the objectors raised "cogent factual objections to the settlement." Whether such objections were raised can only be determined by reviewing the individual issues on which we asked for further analysis.
1. Adequacy of class representation. The first issue remanded for findings is whether the named plaintiffs were fair and adequate representatives for both the class of insurance buyers they purported to represent at the time suit was brought and the broadened class ultimately approved by the district court. Fed. R. Civ. P. 23(a)(4). In the district court, the objectors sought discovery as to "the relationships of named-plaintiffs to counsel, and other information bearing upon adequacy of their representation of absentee class members." Discovery was denied by the district court, which instead proceeded on the theory, citing Fischer v. ITT, 72 F.R.D. 170, 173 (E.D.N.Y. 1976), that "the 'touchstone' for denial of class action statute was the question of whether the plaintiff had an interest in the attorney's fee," and that as "a matter of common experience in class actions," it is the attorneys and not the class plaintiffs "who make the litigation decisions, determine strategy, and negotiate settlement terms." 588 F. Supp. at 1057-58. The district court, attesting to "the high professional character of [plaintiffs' attorneys'] work," found that the class was represented by attorneys who had "acted with outstanding vigor and dedication." Id. at 1058.
On first impression, the district court's denial of discovery appears in conflict with the spirit of our remand, where we pointed out that "[a] judge has an obligation to consider whether the interests of the class are adequately represented" and that he or she "must examine the quality of representation with particular care where, as here, a class is sought to be broadly expanded after the litigation has been in process and for purposes of settlement." 706 F.2d at 433. Moreover, in this case an initial impression of impropriety in regard to class representation seems difficult to avoid; as we also pointed out, plaintiff Malchman is the brother of class counsel; plaintiff Conway is the sister of the chauffeur of class counsel; plaintiff Lederer was the mother-in-law of class counsel; and plaintiff Stone is a personal friend of class counsel. Id. at 432.
It appears now, however, that before settlement negotiations began, defendants had deposed the named plaintiffs at length on issues that included the ties between the named plaintiffs and class counsel; plaintiff Deutriell had been deposed for three days, resulting in 611 pages of transcript; plaintiff Louis Stone had also been deposed for three days, resulting in 399 pages of transcript; plaintiff Conway had been deposed for three days, resulting in 380 pages of transcript; and Joseph Stone, a plaintiff in the state court (but not the federal court) action, had been deposed at comparable length on two days. Our perusal of these depositions, transcripts of which were handed to us at argument, demonstrates to us that the defendants' questioning of plaintiffs was searching, strenuous, and conducted at arm's length--as evidenced by the acerbic interchanges among the parties' counsel and the deponents.
Joseph Stone, a man of impressive credentials,*fn1 was, if anything, a fiercely independent plaintiff. After reading articles about group health insurance in Consumer Reports and Forbes Magazine, an article about Leonard Davis in the Washington Post, and a "Sixty Minutes" transcript on CPG and the Associations, he formed the impression that Leonard Davis handpicked the members of the Associations' board. At one point, while under examination by counsel for CPG and Leonard Davis, he suggested to counsel "that you do not become antagonistic. You do not raise your voice to me at any time. Witnesses, like everybody else, have rights, and I will not tolerate any nonsense on your part. You just ask the questions and I will answer them."
Plaintiff Deautriell apparently had learned about the Lederer case from objector Harriet Miller, whom he had called in reference to the Washington Post article. Deautriell was to obtain from the Lederers what was then the name of co-counsel for plaintiffs, Kaufman, Taylor, Kimmel & Miller (now Kaufman Malchman & Kirby). He became a plaintiff after learning for himself about the nature of the suit; there is no indication that he was solicited in any manner, shape or form.
Plaintiff Louis Stone wrote an investment letter for the firm then known as Shearson, Hayden & Stone, for whom he was a registered representative and vice president. According to Stone's deposition, in June 1978, Stone had lunch with his friend, Stanley L. Kaufman, counsel for plaintiff Lederer. Following the luncheon, over which the litigation was discussed, Stone volunteered to become a plaintiff "as a representative policy holder and as a social-minded participant in so-called benefits of this hospitalization plan for older people ... in an inflating society who are subject to the hazards of sickness and old age without adequate incomes currently." Stone testified without hesitation that it was he who first raised the subject of his becoming a plaintiff. He, too, had some feisty words for defendants' counsel: "The objective here, it seems to me, is not to ascertain the truth of the facts, the objective is to discredit me as a plaintiff or as a witness and I wish you would state this objective and, of course, you don't." As he went on to say, "and although I don't hold myself out as one of nature's noblemen, I think that I have a duty as a citizen to help in the prosecution of evil."
Plaintiff Conway has worked full- and part-time for Social Concern Housekeeping Vendor Agency for some six years. Her late brother, Alvin Curley, had been a chauffeur for Milton Gould, of what was then Shea, Gould, Climenko & Casey (now Shea & Gould), and had "overheard a conversation that Shea Gould was involved in a lawsuit against AARP and Colonial Penn." Her brother asked her if she wanted to join in. After that conversation, she received a call from one of the Shea, Gould lawyers, but she testified unequivocally that no lawyer had asked her to become a plaintiff in this action.
Appellants argue that the district court did not make an independent examination of the relationship between counsel and the named plaintiffs. While we think the district court's treatment of the adequacy of representation was somewhat limited, cf. Susman v. Lincoln American Corp., 561 F.2d 86, 90-94 (7th Cir. 1977) (setting forth extensive analysis of adequacy of representation problems where named plaintiff related to plaintiff's counsel), our examination of the depositions indicates that the plaintiffs--particularly Joseph Stone, a plaintiff in the state court proceeding--were quite appropriate, perhaps even zealous members of the class. Moreover, as the brief of the plaintiffs-appellees points out, appellants failed to specify a single question that would have improved upon the defendants' searching depositions of the plaintiffs. Certainly in ...