BENAVIDES, Circuit Judge.
We are presented with the question of whether district courts may employ the lodestar method to determine whether an attorney fee constitutes a "windfall" under Gisbrecht v. Barnhart, 535 U.S. 789, 122 S.Ct. 1817, 152 L.Ed.2d 996 (2002). Because we read Gisbrecht as merely forbidding exclusive reliance on the lodestar method to determine the reasonableness of a 42 U.S.C. § 406(b) attorney fee, we do not conclude that Gisbrecht precludes a court's consideration of the lodestar method altogether. And since the district court here did not rely exclusively on the lodestar method to evaluate the reasonableness of a contingency fee, we conclude the district court did not abuse its discretion in finding the contingency fee unreasonable under § 406(b). Accordingly, we AFFIRM the decision of the district court, and we write further only to clarify an area of the law that, following the Supreme Court's decision in Gisbrecht, has resulted in confusion and conflicting outcomes in the decisions of our lower courts.
The named appellant in this appeal, Gary W. Jeter ("Jeter"), is a Social Security benefits claimant. He is represented by his attorney, John G. Ratcliff ("Ratcliff"), who is the real party in interest for purposes of this appeal's pertinent analysis.
On August 12, 2002, Jeter filed an application for Title II disability insurance benefits and Title XVI supplemental security income, alleging an inability to work due to physical impairments resulting from a myocardial infarction. On April 22, 2005, an administrative law judge issued a decision finding Jeter not disabled under the Act. Jeter requested review before the Appeals Council, and on November 29, 2005, the Council denied his request. As a result, Jeter had exhausted his administrative remedies and could then file an appeal of the Administration's denial of his claim to the United States District Court, for the Western District of Louisiana.
Jeter sought out the services of Ratcliff. Ratcliff agreed to represent Jeter in his appeal of the Administration's denial of his claim for benefits, and on January 12,
The case proceeded and six months later, on July 31, 2006, Ratcliff filed a brief arguing that the Administration's failure to find Jeter disabled violated the Act. On October 4, 2006, the Administration filed a motion requesting remand. The matter was referred to a magistrate judge, and the magistrate judge recommended remand. Soon thereafter, the district court adopted the magistrate judge's report and recommendation in its entirety, and entered judgment remanding the case. After further proceedings before the Administration, including a hearing and a supplemental hearing, a second administrative law judge determined that Jeter had been disabled since March 20, 2002. In a notice of award dated May 4, 2008, the Administration stated that Jeter's "past due benefits are $89,289.00 for September 2002 through March 2008."
Ratcliff then collected $5,300.00, the maximum fee permitted for his work at the administrative level, leaving a balance of $17,022.25 available for attorney's fees under § 406(b). Ratcliff returned to the federal district court and, pursuant to § 406(b), requested the $17,022.25 in fees for the work he performed in the district court. At the same time, Ratcliff noted that he intended to refund Jeter the $2,827.50 in fees he had previously received under the Equal Access to Justice Act (EAJA), recognizing that "[f]ee awards may be made under both [EAJA and § 406(b)], but the claimant's attorney must refund to the claimant the amount of the smaller fee." Gisbrecht, 535 U.S. at 796, 122 S.Ct. 1817.
The case was once again referred to a magistrate judge, and the magistrate judge issued a report and recommendation on December 29, 2008. The magistrate judge recommended granting Ratcliff's request for payment pursuant to his and Jeter's contingency fee but reducing the total amount Ratcliff would be awarded to $3,993.75.
Thus, in undertaking a § 406(b) "reasonableness" analysis, the court considered several factors including: (1) Ratcliff's degree of expertise in Social Security cases; (2) the adequacy of Ratcliff's representation of Jeter; (3) the amount Jeter ultimately recovered; (4) the fact that Ratcliff sought twenty-five percent of Jeter's recovered amount; and (5) Ratcliff's risk of loss. The court also considered the hourly rate Ratcliff would receive as a result of the contingency fee—by dividing the fee by the number of hours Ratcliff worked—and found that if the court deemed the whole fee to be reasonable, Ratcliff would be paid at a rate of $846.88 per hour for his services. In considering all of the aforementioned factors combined, the magistrate judge recommended that the district court find that Ratcliff's requested fee would result in an unreasonable windfall under Gisbrecht.
Since she found the contingency fee unreasonable, the magistrate judge recommended that instead of the requested $14,734.74, the district court award $3,993.75, reasoning that "[t]his will result in ... an amount the court considers reasonable and appropriate under the circumstances before it." On April 3, 2009, the district court fully adopted the magistrate judge's report and recommendation, finding the requested contingency fee unreasonable and awarding only $3,993.75.
This appeal timely followed. On appeal, Ratcliff asserts that the district court erred when it found his § 406(b) contingency fee would constitute a windfall under Gisbrecht. In particular, Ratcliff argues that the district court's reliance on the lodestar method in making its fee determination violates the Supreme Court's decision in Gisbrecht. As we will explain in greater detail to follow, we find that the district court did not rely exclusively on a lodestar calculation to find Ratcliff's requested fee unreasonable, and consequently, we cannot conclude that the district court's fee award violates Gisbrecht. We write further, however, in order to provide our lower courts better guidance in navigating the circuitous contours of Gisbrecht's "windfall" jurisprudence.
A district court's assessment of whether a contingency fee is reasonable under 42 U.S.C. § 406(b) "qualif[ies] for [this Court's] highly respectful review." Gisbrecht, 535 U.S. at 808, 122 S.Ct. 1817. That is, "[a]n award of attorney's fees out of past-due benefits is discretionary, and we will not reverse a district court's denial of attorney's fees under § 406(b) absent an abuse of discretion." Pierce v. Barnhart, 440 F.3d 657, 663 (5th Cir.2006).
"A district court abuses its discretion when it bases its decision on an erroneous legal conclusion or on a clearly erroneous finding of fact." James v. Cain, 56 F.3d 662, 665 (5th Cir.1995); see also Squires-Allman v. Callahan, 117 F.3d 918, 920 (5th Cir.1997) ("Underlying findings of fact are reviewed for clear error. Underlying conclusions of law, however, are reviewed de novo.") (internal citations omitted). Accordingly, "`it is not inconsistent with the discretion standard for an appellate court to decline to honor a purported exercise of discretion which was infected by an error of law.'" Rice v. Astrue, 609 F.3d 831, 836 n. 22 (5th Cir.2010) (quoting Abrams v. Interco, Inc., 719 F.2d 23, 28 (2d Cir.1983)) (internal citations omitted).
As the magistrate judge aptly noted in her report and recommendation, our
We find, however, that it is possible to construe Gisbrecht such that its prohibition against lone reliance on the lodestar method still permits a court to include a lodestar calculation in its consideration of the fee—specifically, in instances where the court simultaneously relies on additional factors to support its determination that the contingency fee constitutes an unearned advantage to the attorney—such that the fee award may be considered a windfall.
A brief examination of the rationale behind the Supreme Court's decision in Gisbrecht provides support for our understanding and interpretation of Gisbrecht's holding—and ultimately, demonstrates why the district court did not abuse its discretion in this particular instance.
First, it is important to note that the Supreme Court's decision in Gisbrecht came about in response to a circuit split. See Gisbrecht, 535 U.S. at 799, 122 S.Ct. 1817 ("We granted certiorari in view of the division among the Circuits on the appropriate method of calculating fees under § 406(b).") (internal citation omitted). Prior to Gisbrecht, the Second, Sixth, and Seventh Circuits did not begin a § 406(b) reasonableness determination with a lodestar calculation, but instead all gave primacy "effect to attorney-client contingent-fee agreement[s.]" See id. (citing Wells v. Sullivan, 907 F.2d 367 (2d Cir.1990); Rodriquez v. Bowen, 865 F.2d 739 (6th Cir. 1989) (en banc); and McGuire v. Sullivan, 873 F.2d 974 (7th Cir.1989)). The Third, Fourth, Fifth, Eighth, Ninth, Tenth, and Eleventh Circuits, however, did not. As the Supreme Court noted, in order to determine whether a § 406(b) contingency fee was reasonable, these Circuit Courts looked first to the lodestar method to determine whether the resulting hourly fee would be higher than the attorney's normal hourly rate. See id. (citing Coup v. Heckler, 834 F.2d 313 (3d. Cir.1987); Craig v. Secretary, Dept. of Health and Human Servs., 864 F.2d 324 (4th Cir. 1989); Brown v. Sullivan, 917 F.2d 189 (5th Cir.1990); Cotter v. Bowen, 879 F.2d 359 (8th Cir.1989); Gisbrecht v. Apfel, 238 F.3d 1196 (9th Cir.2000); Hubbard v. Shalala,
In rejecting these courts' cardinal reliance on the lodestar method to determine a "reasonable" fee under § 406(b), we find it important to note in particular that the Gisbrecht Court abrogated this Court's decision in Brown v. Sullivan, 917 F.2d 189 (5th Cir.1990). In Brown, this Court had held that although "due consideration [must] be given to the contingency fee agreement ... [t]he starting point ... is the number of attorney hours reasonably expended on litigation multiplied by a reasonable hourly rate." Id. at 192 (internal quotation marks omitted). That is, this Court recognized a lodestar calculation as the method lower courts should "us[e] as a first approximation of the reasonable hourly rate" when determining a reasonable fee under § 406(b). Id.
In Gisbrecht, the Supreme Court explicitly rejected Brown's primary reliance on the lodestar method as the "starting point" in determining a fee's reasonableness pursuant to § 406(b). Although the Supreme Court noted that "the `lodestar' figure has, as its name suggests, become the guiding light of our fee-shifting jurisprudence[,]" Gisbrecht, 535 U.S. at 801, 122 S.Ct. 1817 (internal quotation marks and brackets omitted), the Gisbrecht Court distinguished § 406(b) fee awards on the basis that 42 U.S.C. § 406(b) is not a fee-shifting statute. As a result, the Gisbrecht Court reasoned that the lodestar method does not serve the same purpose as when applied to the fee-shifting statutes from which it actually originated. Id. at 802, 122 S.Ct. 1817. That is, "the lodestar method today holds sway in federal-court adjudication of disputes over the amount of fees properly shifted to the loser in the litigation." Id. Section 406(b), however, does not shift fees to the loser (in this case, the Administration), but rather, § 406(b) shifts fees to the winner, the claimant (in this case Jeter). Id. ("Fees shifted to the losing party, however, are not at issue here.").
Furthermore, in contrast to the fee-shifting statutes that created the lodestar method, § 406(b) constitutes "the exclusive regime for obtaining fees for successful representation of Social Security benefits claimants." Id. at 795-96, 122 S.Ct. 1817. This distinction is significant because plaintiffs whose actions are covered by fee-shifting statutes can offer to pay their attorneys money above and beyond what they might recover under the applicable fee-shifting statute, if and when they are successful. See id. at 801-02, 122 S.Ct. 1817. This gives the fee-shifting plaintiffs the ability to expend their own resources—if they wish to—in order to obtain better counsel. A Social Security claimant, however, cannot pay his counsel more than twenty-five percent of the unpaid benefits he receives if his attorney is successful. In fact, if an attorney accepts or attempts to collect anything beyond twenty-five percent of the claimant's unpaid past benefits, the attorney subjects himself to criminal prosecution. Id. at 796, 122 S.Ct. 1817 ("Collecting or even demanding from the client anything more than the authorized allocation of past-due benefits is a criminal offense.") (citing 42 U.S.C. §§ 406(a)(5), (b)(2); 20 CFR §§ 404.1740-1799). As a result, "[t]he lodestar method under-compensates attorneys for the risk they assume in representing SSDI claimants and ordinarily produces remarkably smaller fees than would
With this in mind, Congress wrote § 406(b)(1)(A) in 1965 to read as follows:
Consequently, the Gisbrecht Court reasoned that by limiting contingency fees to no more than twenty-five percent, "Congress thus sought to protect claimants against `inordinately large fees' and also to ensure that attorneys representing successful claimants would not risk `nonpayment of [appropriate] fees.'" Gisbrecht, 535 U.S. at 805, 122 S.Ct. 1817 (quoting SSA Report 66). Given the aforementioned distinctions between fee-shifting statutes and § 406(b), the Gisbrecht Court reasoned that it was "unlikely that Congress, legislating in 1965, and providing for a contingent fee tied to a 25 percent of past-due benefits boundary, intended to install a lodestar method courts did not develop until some years later." Id. at 806, 122 S.Ct. 1817.
Thus, the aforementioned discussion reveals that the Gisbrecht Court proscribes exclusive, primary reliance on the lodestar method to determine the reasonableness of a § 406(b) fee award. It is clear that the Gisbrecht Court first instructed our lower courts to give the contingency fee agreement "primacy"—recognizing that this would in some instances result in an excessively high fee award to an individual attorney—and justifying this potential for excessively high fees on the basis that § 406(b) is not a fee-shifting statute. Although in some instances a twenty-five percent contingency fee may result in a seemingly large fee, a particular claimant's attorney often is not compensated at all for Social Security work in federal court.
With this understanding of Gisbrecht in mind, the closing paragraph of Gisbrecht may seem a mystery. Although the Gisbrecht Court went to great lengths to explain its denouncement of the lodestar method for § 406(b) reasonableness determinations, the Court concluded by instructing lower courts that, "[i]f the benefits are large in comparison to the amount of time counsel spent on the case, a downward adjustment is ... in order [to] ... disallow windfalls for lawyers." Id. at 808, 122 S.Ct. 1817 (internal citations and quotation marks omitted) (emphasis added). And so the question post-Gisbrecht is really the following: if lower courts are not to resort first to the lodestar method when determining whether a fee is reasonable
On appeal, Ratcliff asserts that because the district court determined the reasonableness of his § 406(b) fee by considering the resulting hourly rate he would receive for his services, the district court abused its discretion and violated Gisbrecht's edict against relying on the lodestar method. Thus, the crux of Ratcliff's argument is that Gisbrecht forbids any consideration of the lodestar method in § 406(b) fee determinations. Our reading of Gisbrecht, however, does not abide that position.
Ratcliff's proffered interpretation of Gisbrecht would render the concluding paragraph of Gisbrecht meaningless (where the Court held that "a downward adjustment [may be] ... in order [to] ... disallow for windfalls" id. at 808, 122 S.Ct. 1817), just as permitting courts to rely exclusively on the lodestar method to declare a fee unreasonable would render the entirety of Gisbrecht's decision meaningless. Instead, we conclude that Gisbrecht's concluding reference to downward adjustments for windfalls must be read in accordance with Gisbrecht's instruction that courts are not to rely exclusively on the lodestar method. Adopting Ratcliff's interpretation would require our judges to blind themselves to a factor the Supreme Court has clearly deemed worthy of consideration, while allowing exclusive reliance on the lodestar method to find fees unreasonable would have the effect of converting every contingency fee that results in an amount higher than the lodestar into a windfall. Thus, neither of these two interpretations can be squared with the entirety of the Supreme Court's decision.
Although the Supreme Court did not set out a clear list of circumstances in which a court may find that a contingency fee results in an unreasonable windfall, we conclude that courts may consider the lodestar in their analyses so long as the court can articulate additional factors demonstrating that the excessively high fee would result in an unearned advantage. In other words, the Gisbrecht Court's reference to windfall leaves room for consideration of an effective hourly fee rate, but only so long as this mathematical calculation is accompanied by consideration of whether an attorney's success is attributable to his own work or instead to some unearned advantage for which it would not be reasonable to compensate him.
Any other reading would give attorneys a perverse incentive to delay proceedings or expend unnecessary hours in an effort to prolong successful litigation—all to ensure that their § 406(b) fee would not be reduced based on its appearing excessively high in comparison to the number of hours they expended.
Thus, our district courts may consider the lodestar method in determining the reasonableness of a § 406(b) fee, but the lodestar calculation alone cannot constitute the basis for an "unreasonable" finding. Looking to the present case, we find that the district court did not rely exclusively on the lodestar method to find Ratcliff's requested fee unreasonable. Instead, the district court considered the resulting hourly fee rate in combination with a list of additional factors the district court found combined to demonstrate that the fee constituted an unearned windfall under Gisbrecht, and consequently we cannot say that the district court abused its discretion in declaring the fee unreasonable pursuant to § 406(b).
We hesitate, however, in this particular instance to prescribe an exhaustive list of the precise factors our lower courts must consider in order to determine whether a particular fee is unearned such that it may be considered a windfall. Because district courts are in a better position to determine what factors are relevant in considering whether the success of a claimant's claim before their court can be attributed to the attorney's work—or whether the success is unearned on the part of the attorney—we will refrain at this time forcing our lower courts into applying an arbitrary, formulaic set of factors of our own making.
Civ. A. No. 99-325, 2004 WL 1737443, at *5 (E.D.Tex., July 22, 2004).
While we are not limiting courts' consideration of what constitutes a windfall to some exhaustive list, we are instructing our courts that Gisbrecht's windfall is not a simple reiteration of the lodestar method. Likewise, the Supreme Court's decision in Gisbrecht does not altogether preclude a district court's consideration of the lodestar method in a § 406(b) fee determination. Instead, Gisbrecht commands that where lower courts look to the lodestar method to evaluate the ratio of fee earned to number of hours expended, they cannot find that a particular fee award would result in a windfall unless the court can articulate additional, specific factors to demonstrate that the resulting high fee was unearned by the attorney-and thus not attributable to the attorney's representation of the client before the court.
The Gisbrecht Court certainly did not expect our district judges to turn a blind eye to hourly fee rates that are excessively high for the services provided in their courts. Rather, the Gisbrecht Court made it clear that as a result of the legislative history behind § 406(b)—as well as the difficult nature of Social Security appeals and their low rates of success in general—an excessively high hourly rate alone does not render an otherwise reasonable fee unreasonable. Gisbrecht commands no more and no less.
For the aforementioned reasons, we AFFIRM the judgment of the district court.
