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June 27, 1985

DOW CHEMICAL COMPANY, et al., Defendants. STEPHEN J. SCHLEGEL, et al., Petitioners, v. DAVID J. DEAN, Respondent.

The opinion of the court was delivered by: WEINSTEIN



 David J. Dean, Esq., a member of the Agent Orange Plaintiffs' Management Committee ("PMC"), has moved to set aside the PMC's agreement to pay certain committee members a 300 percent return of funds they advanced to finance the litigation. The payment would be made out of all the fees awarded to the PMC attorneys by the court. The other PMC members oppose the motion and seek to compel arbitration. For reasons indicated below, Mr. Dean's motion is denied and the petition to compel arbitration is dismissed.

 The issues raised by Mr. Dean's motion present new and difficult questions in the financing of major toxic tort litigations. Implicated are the boundaries of legal ethics and the legality of fee arrangements among attorneys in class actions. The instant attorney's agreement for fee distribution will not be set aside. In any future case in this district such an agreement must be revealed to the court and members of the class as soon as possible. A "sunshine" rule is essential to protect the interests of the public, the class and the honor of the legal profession.


 In 1979 cases began to be transferred to this district for consolidation of pretrial proceedings in the Agent Orange multidistrict litigation. In 1980 the court tentatively certified a class and appointed Yannacone and Associates, a consortium of local lawyers, as class attorneys. Yannacone and Associates withdrew as class counsel in September 1983 because of management problems and lack of financing. They were replaced by Stephen J. Schlegel, Benton Musslewhite, and Thomas W. Henderson. Mr. Schlegel and Mr. Henderson are members of the current PMC. Mr. Musslewhite resigned in February 1985 but still considers himself bound by the PMC fee sharing agreement.

 David Dean, a member of the original management committee, remained associated with the new committee. At pretrial conferences after October 1983 the court indicated that he would be expected to take the lead in preparing and trying the case. In February 1984 the court at the PMC's request approved an expansion of its membership to include Mr. Dean and other lawyers who previously had been working informally with class counsel.

 The class action was settled in May 1984 on the eve of trial. Attorney fee applications were required to be submitted by the end of August 1984. The PMC submitted a joint fee award application. Only then was the court apprised of the existence of an internal management agreement among the PMC lawyers that set out the procedure for allocation of any fees awarded from a class recovery. Its provisions called for (1) a 300% return of funds advanced by certain PMC members before any other distribution, and (2) division of the remainder of the award as follows: 50% in equal shares among all committee members, 30% in proportion to hours worked, and 20% based on factors paralleling those considered by courts in granting fee award multipliers.

 After the court voiced serious doubt about the legality and propriety of this arrangement at the September 26, 1984 attorney fee hearing, the PMC members renegotiated their fee-sharing agreement. The new arrangement still requires a threefold reimbursement of monies advanced, but the remainder of the fee awards would be allocated to those who were awarded them by the court. This renegotiated agreement, entered into on December 13, 1984, is retroactive to October 1, 1983. It provides in pertinent part as follows:

When and if funds are received, either by the AOPMC or individual members thereof, the first priority distribution will be to distribute to Messrs. Brown, Chesley, Henderson, Locks, O'Quinn and Schwartz, an amount equivalent to the actual monies expended for which these six signatories were responsible toward the common advancement of the litigation up to $ 250,000.00 with a multiplier of three (i.e., none of these six individuals will receive more than $ 750,000.00 each), which shall be paid to them for having secured the funds for the AOPMC and to Messrs. Dean, Schlegel and Musslewhite an amount equivalent to the actual monies expended by these three signatories toward the common advancement of the litigation up to $ 50,000.00 with a multiplier of three (i.e., none of these three signatories will receive more than $ 150,000.00 each). Any additional expenses will be reimbursed without a multiplier as ordered by the Court.
All of the expenses plus the appropriate multiplier will be deducted from the total fees and expenses awarded by the Court to all of the AOPMC firms. The remaining fees will then be distributed pro rata to each signatory in the proportion the individual's and/or firm's fee award bears to the total fees awarded.

 The agreement also provides for mandatory arbitration of "any dispute concerning monies due a member [of the PMC] or his rights under this agreement."

 Messrs. Brown, Chesley, Locks, O'Quinn and Schwartz each have advanced $ 250,000. Mr. Henderson has contributed a total of $ 200,000. The remaining three PMC members have not advanced any funds for general expenses, although they have incurred individual expenses, for which they will be individually reimbursed. See In re "Agent Orange" Product Liability Litigation, F. Supp. , M.D.L. No. 381 (E.D.N.Y. Jan. 7, 1985, as modified June 18, 1985). According to Mr. Dean, the agreement will be interpreted to reach the results indicated in the following table taken from his motion papers. The figures given are based on the fees awarded in the January 7, 1985 order rather than the somewhat higher awards ultimately allowed on reconsideration. See In re "Agent Orange" Product Liability Litigation, F. Supp. , M.D.L. No. 381 (E.D.N.Y. January 7, 1985, as modified June 18, 1985). Nevertheless, the general fee-shifting effect shown by the table remains essentially the same. Those who advanced money would be advantaged over those who gave time and skill to the enterprise. COURT NET FEES GAIN COURT NET AWARDED UNDER OR AWARDED HOURLY FEES AGREEMENT LOSS RATE RATE BROWN 296,493.75 551,157.19 �,663.44 225.00 418.26 CHESLEY 390,993.75 567,476.19 ힾ,482.44 225.00 326.56 HENDERSON 442,552.50 576,358.26 흽,805.76 225.00 293.03 LOCKS 332,268.75 562,354.76 �,086.01 225.00 380.81 O'QUINN 88,305.00 515,217.00 426,912.00 100.00 583.45 SCHWARTZ 29,145.00 505,026.34 ,881.34 100.00 1,732.81 DEAN 1,340,437.50 331,346.75 -1,009.090.75 225.00 55.62 MUSSLEWHITE 304,657.50 152,535.04 -152,122.46 100.00 75.10 SCHLEGEL 763,678.12 231,785.14 -531,892.99 262.50 79.67


 By notice of motion dated May 20, 1985, Mr. Dean has asked the court to set aside the PMC's fee-sharing agreement. The jurisdictional predicate for the motion is not stated. A new motion to alter or amend the January 7, 1985 judgment insofar as it concerns the agreement would no longer be timely under Rule 59(e) of the Federal Rules of Civil Procedure. A umber of Rule 59(e) motions requesting reconsideration of the January 7, 1985 fee order, including one by Mr. Dean to increase his fee award, were pending when his motion was filed. His present application will be deemed a timely amendment to his original Rule 59(e) motion. Alternatively, Mr. Dean's motion will be treated as an independent action for declaratory judgment. See 28 U.S.C. § 2201; Fed. R. Civ. P. 57. Federal question jurisdiction would exist. See infra Part III. Diversity of citizenship, though unneeded, is present as well.

 The other PMC members have opposed Mr. Dean's motion and seek arbitration of the issues raised. They have submitted an independent petition to compel arbitration or, in the alternative, a motion for a stay of proceedings pending arbitration, pursuant to the Federal Arbitration Act. See 9 U.S.C. §§ 3, 4. Both applications will be decided in this memorandum and order, which will supersede the unpublished January 7, 1985 memorandum of this court insofar as the latter referred to the PMC's fee-sharing agreement.


 Under Rule 23(e) of the Federal Rules of Civil Procedure, the court has an obligation to protect the rights of class members. That duty requires review of the reasonableness of an internal fee-sharing agreement to ensure that it does not pose a danger of harm to the class. The court also has supervisory authority over attorneys who practice before it and thus an obligation to prevent breaches of professional ethics. See, e.g., In re Corn Derivatives Antitrust Litigation, 748 F.2d 157, 160, 166 (3d Cir. 1984) (Federal court has inherent power to discipline attorneys practicing before it); Dunn v. H. K. Porter Co., Inc., 602 F.2d 1105, 1114 (3d Cir. 1979) (court has authority to review and set aside contingent fee contracts under Rule 23(e) and its supervisory power); Prandini v. National Tea Co., 557 F.2d 1015, 1019 (3d Cir. 1977) (applying bar association disciplinary rules to fee allocation agreement); City of Detroit v. Grinnell Corp., 560 F.2d 1093, 1099 (2d Cir. 1977) (noting court's obligation to class members when determining the amount of fee award); Developments in the Law--Class Actions, 89 Harv. L. Rev. 1318, 1607 (1976).

 Rule 23(e) and the common fund doctrine require a court to fix reasonable attorney fees when a settlement fund has been created in a class action. Under the "lodestar" formula prevailing in this and other circuits, the "touchstone for the fee [is] to be the actual effort made by the attorney to benefit the class." City of Detroit v. Grinnell Corp., 560 F.2d 1093, 1099 (2d Cir. 1977). See, e.g., In re "Agent Orange" Product Liability Litigation, F. Supp. , M.D.L. No. 381 (E.D.N.Y. Jan. 7, 1985, as modified June 18, 1985) (containing an extensive discussion). When an attorney has performed services for the class but is allocated a portion of the fee award by an agreement among attorneys in an amount far different from the value of the services rendered to the class, the court must review the allocation to protect the rights of the class. Whether the total fee award amount is affected by the allocation is not decisive. See, e.g., Lewis v. Teleprompter Corp., 88 F.R.D. 11, 16-24 (S.D.N.Y. 1980); cf. Housler v. First National Bank, 524 F. Supp. 1063, 1065-66 (E.D.N.Y. 1981) (ignoring fee sharing arrangement not brought to court's attention at outset of agreement).

 In a number of instances, courts have permitted class counsel to decide how a court-awarded fee should be allocated among them. See In re Magic Marker Securities Litigation, [1979-1980] Fed. Sec. L. Rep. (CCH) P 97,116 at 96,195 (E.D. Pa. 1979) (approving joint fee application); Valente v. Pepsico, Inc., [1979] Fed. Sec. L. Rep. (CCH) P 96,921 at 95,863 (D. Del. 1979); Del Noce v. Delyar Corp, 457 F. Supp. 1051, 1055 (S.D.N.Y. 1978) ("private arrangement as if they were law partners, or joint venturers"); In re Ampicillin Antitrust Litigation, 81 F.R.D. 395, 400 (D.D.C. 1978) ("Court will defer to the attorney's request that the fee award be made to the Committee of Counsel as a whole, and will not inquire further into the agreement among the attorneys"). None of these cases, however, holds that a court has no power to review an internal fee allocation agreement or that it has no duty to do so when circumstances call for such an inquiry. An attitude of "judicial indifference to attorney fee sharing arrangements," whatever its propriety under ordinary circumstances, is "inappropriate here where another interest of general concern is implicated." Kamens v. Horizon Corp., [1981] Fed. Sec. L. Rep. (CCH) P 98,007 at 91,218 n.4 (S.D.N.Y. 1981).

 Federal law governs the exercise of Rule 23(e) responsibilities and the court's inherent supervisory authority. See Dunn v. H. K. Porter Co., Inc., 602 F.2d 1105, 1110 n.8 (3d Cir. 1979). principles of professional ethics provide useful guidance to the courts in Administering Rule 23(e) and in exercising their supervisory power since federal law has not developed comprehensive standards to govern the conduct of attorneys. In light of the value of uniformity in regulating the bar, federal courts look to the ABA Code of Professional Responsibility and the recently promulgated ABA Model Rules of Professional Conduct. See In re Corn Derivatives Antitrust Litigation, 748 F.2d 157, 160-61 (3d Cir. 1984); Code DR 2-107, 5-103; Model Rule 1.5, 1.8.

 The Code has been enacted in nearly every state. The Model Rules, approved by the ABA in 1983, have been adopted by Arizona, New Jersey, and the United States Claims Court and Tax Court. They are under consideration in a number of other states including New York. See ABA/BNA Lawyers' Manual on Professional Conduct 613-14, 792 (current supp.).

 Under Rule 23(e) these ethical principles are not dispositive. The focus of Rule 23(e) is prevention of harm to the rights of the class, a consideration that is independent of, albeit usually consistent with, the Code and Model Rule standards. In addition, general professional ethics guidelines may require interpretation in the class action setting because of the special problems posed by this kind of litigation. As Judge Adams recently observed:

Perhaps no area of the law provokes as much litigation concerning ethical issues as class actions. . . . Moreover, the Code of Professional Responsibility, Model Rules of Professional Conduct, as well as bar association opinions provide little guidance to the class action practitioner. . . . Courts confronting an ethical problem in the class action setting must focus on two points. First, courts cannot mechanically transpose to class actions the rules developed in the traditional lawyer-client setting context; and second, a resolution of such issues would appear to call for a balancing process that in most cases should be undertaken initially by the district court.

 In re Corn Derivatives Antitrust Litigation, 748 F.2d 157, 163 (3d Cir. 1984) (Adams, J., concurring) (citations omitted). Thus a careful analysis must be undertaken with particular attention ...

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