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In a decision closely watched by plaintiffs' lawyers, the 7th U.S. Circuit Court of Appeals has rejected the fees awarded to a class-action firm, but not because the payment was too high.

The court, in an opinion earlier this month, raised the possibility that the law firm, New York's Milberg Weiss, was undercompensated for its representation of shareholders of the now-defunct Chicago-based Internet consulting company MarchFirst Inc.

It's a rare victory for class-action lawyers, who have been vilified for taking excessive cash fees while their clients receive awards of little economic value. Indeed, Congress has twice created laws aimed at addressing abuses in the system.

In this case Milberg Weiss asked for 28 percent, or $5.04 million, of the $18 million settlement it reached with lawyers for the defendants, which included MarchFirst founder and former Chief Executive Robert Bernard. U.S. District Judge John Grady rejected the fee as excessive, considering that the settlement equaled a recovery of 19 cents per share. He reduced the amount to $2.6 million, or 15 percent of the settlement.

In support of his decision the judge cited the Private Securities Litigation Reform Act of 1995, which directs judges to determine attorneys' fees based on the results achieved for the class. Milberg Weiss appealed his 2006 ruling.

The 7th Circuit objected to Grady's method for coming up with the fee percentage, saying the judge did not consider anything besides the amount recovered for the class.

The court "did not factor into its assessment the value that the market would have placed on Counsel's legal services had its fees been arranged at the outset," Judge Ann Claire Williams wrote for the majority.

The ruling is consistent with previous decisions of the appellate court that have directed district courts to consider the market price for legal services.

That should take into account the risk that plaintiffs' lawyers will not be paid if they lose the case. Like other lawyers who work on a contingent-fee basis, class-action practitioners get paid only when litigation concludes successfully. These large-scale cases often require a steep upfront investment of time and money, with no guarantee of any return.

But Grady had dismissed that risk in his calculation, declaring that "this is a common argument in support of large fees in class actions, but it has no relationship to reality."

The appellate court did not make its own calculation of the attorneys' fees, instead sending the case back to the district court for further proceedings. Officials at Milberg Weiss were not available for comment.

Chicago lawyer Joel Chefitz, who represented MarchFirst, said the defense lawyers did not have a stake in the fees awarded to Milberg Weiss and did not support or oppose its original request for 28 percent.

He said he thinks most plaintiffs' lawyers will applaud the 7th Circuit decision because it will make fee awards less subjective. "It's sending a consistent message that we want to replicate a marketplace," Chefitz said. "What it means is that plaintiffs' lawyers will be less subject to the vagaries of which judge they get."

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