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In re Dep't of Veterans Affairs Data Theft Litigation

September 11, 2009

IN RE: DEPARTMENT OF VETERANS AFFAIRS (VA) DATA THEFT LITIGATION


The opinion of the court was delivered by: James Robertson United States District Judge

MDL Docket No. 1796

This Document Relates To: ALL CASES

MEMORANDUM

In May 2006, burglars stole a laptop and an external hard drive from the home of an employee of the Department of Veterans Affairs. The external hard drive contained the names, dates of birth, and Social Security numbers of some 26.5 million veterans and their spouses. Affected veterans brought three separate federal class action suits, alleging violations of the Privacy Act, the Administrative Procedure Act, and the Fourth and Fifth Amendments.

In November 2006, the Judicial Panel on Multidistrict Litigation transferred the three suits to this Court for consolidated proceedings. I dismissed all claims except the Privacy Act claim, Dkt. 30, and referred the case to Magistrate Judge Alan Kay for mediation. With Judge Kay's able assistance, the parties reached a settlement agreement, which I approved preliminarily earlier this year. Dkt. 54.

The agreement creates a $20 million fund. Class members can submit claims for 100 percent of their out-of-pocket because of the hard drive theft. Eligible claimants receive a minimum reimbursement of $75 and can receive a maximum of $1,500. After valid claims are paid out, and attorneys' fees and other expenses are deducted, the money remaining in the fund will be split equally between two cy pres recipients, the Intrepid Fallen Heroes Fund and the Fisher House Foundation, both not-for-profit charitable organizations that help military personnel, veterans, and their families.

At the hearing on the parties' joint motion for final approval of the settlement, I asked for additional briefing on two issues: the request of plaintiffs' attorneys that I award them 25 percent of the common fund ($5 million) in fees, and their request that I require the sole objector to the settlement, Tere Lawyer, to post an appeal bond that secured their attorneys' fees and expenses.

A. Attorneys' Fees

An award of attorneys' fees must be reasonable in light of the results obtained. Hensley v. Eckerhart, 461 U.S. 424, 440 (1983). In a case such as this one, where the settlement agreement creates a common fund against which individual plaintiffs may make claims, I must "act as fiduciary for the beneficiaries (who are paying the fee)... because few, if any, of the action's beneficiaries actually are before the court at the time the fees are set," and because "there is no adversary process that can be relied upon in the setting of a reasonable fee." Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237, 251 (1985).

In this Circuit, the "percentage-of the fund method [rather than the lodestar method] is the appropriate mechanism for determining the attorney fees award in common fund cases." Swedish Hosp. Corp. v. Shalala, 1 F.3d 1261, 1271 (D.C. Cir. 1993). The question presented by the somewhat unusual facts of this case is whether the fee should be a percentage of the total common fund ($20 million) or of the funds that actually go to class members. In support of the latter approach, the objector, Mrs. Lawyer, notes that, as of the final fairness hearing this July, only 2100 reimbursement claims had been filed with the common fund administrator. Fairness Hearing Tr. (July 28, 2009), at 11. Even if claims were to double before the claims period ended, and the average claim were for $500 -- both generous suppositions for the plaintiffs' attorneys -- the class members would only claim $2.1 million. Mrs. Lawyer argues that it would be unfair to let the attorneys walk away with more than twice what the individual class members would receive collectively. She also submits that limiting the attorneys to a percentage of actual claim would create an incentive for the attorneys and their administrators to ensure that the class members receive as much money as possible.

Mrs. Lawyer's arguments have intuitive appeal, but they go against the weight of the relevant precedent. As Professor William B. Rubenstein explains in his declaration accompanying the plaintiffs' briefing, the national trend, and the trend in this Circuit, is toward awards that represent a percentage of the total common fund, even when some portion of that fund will go to a cy pres beneficiary. See Dkt. 75, Ex. 2, at nn.18-19 (citing cases). Professor Rubenstein identifies three bases for this approach:

First, courts reason that the efforts of counsel created the entire fund and made it available to the class. Second, courts reason that the class itself benefits from the cy pres award, as in this case, [where] the veterans' service organizations receiving the cy pres funds provide services that the members of the class would generally be eligible to receive. Third, and more generally, the primary purpose of small claims class actions is not individual plaintiff compensation but rather aggregate deterrence of the defendant's activities. Compensation is not a primary goal because each class member has been harmed such a small amount that getting those funds to them may be inefficient and/or class members are unlikely to spend time coming forward to claim such small amounts. However, the aggregate effect of the defendant's actions may be significant and need to be deterred. Creating a fund that truly penalizes the defendant by fully disgorging a significant amount of money serves this deterrent effect regardless of where the funds are sent.

Id. ¶ 26.

Professor Rubenstein does not have or cite to examples of cases like this one, however, in which it seems likely that the cy pres fund will turn out to have been by far the largest component of the total fund. That factors, it seems to me, should affect the selection of the ...


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