MORE MONEY, MORE PROBLEMS: NINTH CIRCUIT REJECTS $1.7 MILLION ATTORNEYS’ FEES CALCULATION FOR $52,000 CLASS ACTION SETTLEMENT, WITH A GLANCE AT FOURTH CIRCUIT LODESTAR ANALYSIS
Anyone asked to choose between receiving more money versus receiving less money would probably choose the obvious: more money.
So, when the U.S. District Court for the Northern District of California lacked structure for calculating attorneys’ fees, class counsel gingerly sought to secure a generous payday after obtaining a measly, albeit favorable, result for their plaintiffs. But attorneys’ fees, unlike rhetorical hypotheticals, do not exist in a vacuum. This was the background to the appeal in Lowery v. Rhapsody International, Inc., No. 22-15162, 2023 WL 3857499 (9th Cir. June 7, 2023), a threefold cautionary tale about copyright law, class action settlements, and improper block-billing.
This article breaks down how the Ninth Circuit, through the Lowery opinion, recently implemented rules and guidelines to calculating attorneys’ fees, and then draws parallels to the Fourth Circuit’s own methods for guaranteeing reasonableness.
Preamble to Lowery v. Rhapsody International, Inc.: Attorneys’ Fees Anarchy
In 2016, a class of copyright holders filed a class action against Rhapsody International, a digital music streaming service that had failed to obtain licenses for a large part of its catalog. Rhapsody had had two options for obtaining licenses: negotiate a voluntary license from the holder or obtain a “compulsory license,” a relic of the Copyright Act. According to the copyright holders: It did neither.
By the time the class action was underway, Rhapsody had started negotiating separately with the National Music Publishers Association (NMPA) to resolve the issue posited by “compulsory licenses” to online streaming services who want to stream a lot of music. Once a settlement was reached with NMPA, copyright holders who wanted to reap its benefits had to forego joining the Lowery class action to avoid double-dipping. Consequently, many would-be plaintiffs made the jump, “effectively decimating” the putative class in the Lowery action. This meant that, even if the class were to prevail in the lawsuit, it was never going to get that much money.
The parties in Lowery dedicated significant time and effort to reaching a settlement agreement, though litigation was sparse. When an agreement was finally reached, Rhapsody denied liability (Congress would soon after enact the Music Modernization Act, which would take care of any licensing conundrums) but agreed to pay the class a maximum of $20 million. (Per the settlement, Rhapsody also agreed to establish an Artist Advisory Board, for the purpose of “advance[ing] both parties’ goals of protecting artists’ rights,” with an annual budget of a minimum of $30,000.) Ultimately, perhaps due to the separate NMPA settlement having drained the putative class, very few class members submitted claims for the Lowery settlement. As a result, Rhapsody only had to pay them $52,841.05 total.
The next item left to determine was attorneys’ fees.
Courts in the Ninth Circuit allow one of two ways to determine attorneys’ fees: (1) the “lodestar” method, in which “the court multiplies the number of hours reasonably spent on the case by a reasonable hourly rate,” and (2) the “percentage-of-recovery” method, which gives attorneys a percentage of the total amount disbursed to the claimants. Here, class counsel opted for the lodestar method. Through some somewhat obscure math, class counsel arrived at a $2.1 million lodestar figure, which they then decided to multiply by 2.87 due to their “exceptional” results in a “difficult” and “complex” case. Overall, class counsel sought over $6 million in attorneys’ fees.
The magistrate judge curbed class counsel’s zealousness; she reduced the lodestar to $1.7 million, because “almost 20% of the hours spent on the case were unreasonable and improperly block-billed,” and swapped the 2.87 multiplier for 0.5, reflecting “the minor benefit to the class.” After concluding that the class action settlement provided $358,903.77 in benefit to the class (which included $52,841.05 paid to the class members, settlement administration costs of $251,400.72, class representative enhancement awards and travel reimbursements of $11,500, the Artist Advisory Board’s annual budget of $30,000, and litigation costs of $13,162), the magistrate’s math led to an award of about $860,000 in attorneys’ fees.
The district court, acknowledging the lack of a “bright line rule” to guide the lodestar method, accepted the $1.7 million lodestar and rejected the magistrate’s 0.5 multiplier, declining to place a value on the benefit conferred to the class because the claimed amount of $52,841.05 was so much smaller than the agreed-upon cap of $20 million. Accordingly, the district court summarily awarded $1.7 million to class counsel.
On appeal, reviewing for abuse of discretion, the Ninth Circuit concluded that the award was unreasonable; $1.7 million was over thirty times larger than the amount paid to class members. The Ninth Circuit suggested that the lower court’s confusion might have stemmed from the fact that the class action arose under copyright law; it clarified: “[t]hat this is a copyright case makes little difference—attorneys’ fees under the Copyright Act must be reasonably proportional to the benefit to the class.”
The Ninth Circuit remanded the issue to the district court, instructing it to ignore the “illusory” $20 million settlement cap and focus on the amount actually paid to the class, ensuring that attorneys’ fees are “reasonably proportional to that benefit.” This rule is essential; without it, parties would be incentivized to devise a high settlement cap to get away with excessive fees, even when class members receive a paltry payout. Here, plaintiffs’ counsel knew that the class members were fated to receive little compensation. Furthermore, per the settlement agreement, Rhapsody could not be held liable for the settlement cap, but only for the amount actually claimed; it was never going to pay $20 million unless that was necessary to satisfy each claim submitted.
The Ninth Circuit noted a distinction between Lowery and the U.S. Supreme Court’s opinion in Boeing Co. v. Van Gemert, 444 U.S. 472 (1980), specifically, to clarify that Boeing was unavailable to plaintiffs’ counsel to justify their desired fee award. In Boeing, the Supreme Court held that attorneys’ fees could be calculated based on the entire settlement fund; however, there, the defendant was found liable for a “sum certain,” regardless as to how many class members actually filed a claim in the settlement.
The settlement agreement in Lowery dictated the opposite: Rhapsody was not liable for a sum certain, but only for the claims submitted. The Boeing Court accounted for such nuance; indeed, the Supreme Court suggested that its holding would not apply to a defendant who is only liable for paying class members’ individual claims. Therefore, following the Seventh Circuit’s decision in Camp Drug Store, Inc. v. Cochran Wholesale Pharmacy Inc., 897 F.3d 825 (7th Cir. 2018), the Ninth Circuit confirmed that Boeing is inapplicable to a case such as this.
Steeped in Common Sense: The Ninth Circuit’s Criteria for Calculating Attorneys’ Fees
The Ninth Circuit instructed the lower court to go by the following criterion when analyzing an attorneys’ fees award: If the attorneys are getting more than 25 percent of the class benefit, the court should take a long and hard look at that number to ensure that it is reasonable compared to the class’s benefit. The reason for this rule is simple: No plaintiff would, or should, spend over a million dollars in legal fees only to recover a small fraction thereof.
And thus, apparently, the beginnings of a bright line rule for reasonableness of attorneys’ fees formed in the Ninth Circuit.
No mathematician was needed to conclude that the original lodestar of $1.7 million was much more than 25 percent of the circa $50,000 conferred on class members. Accordingly, even if an attorney devotes countless hours to litigating the best outcome for a client, the ultimate guidepost in assessing attorneys’ fees at the close of a class action is whether that fee is reasonable in light of the relief. The Ninth Circuit further clarified that, while some cases, such as civil rights actions, allow for attorneys’ fees that are not proportional to monetary damages, in those scenarios a favorable outcome not only benefits the plaintiffs but also society at large; Lowery is no such case.
The Fourth Circuit’s Lodestar Method: Multi-Pronged, Reasoned, Cautious
Closer to home, district courts in the Fourth Circuit calculating the reasonableness of attorneys’ fees in class action settlements similarly may employ either the lodestar or percentage-of-recovery method. “A district court may choose the method it deems appropriate based on its judgment and the facts of the case.” McAdams v. Robinson, 26 F.4th 149, 162 (4th Cir. 2022). With Lowery’s cautionary tale of lodestar gone awry as a backdrop, we take a look at how the Fourth Circuit applies the standard.
For the lodestar approach, the Fourth Circuit has endorsed a three-part standard. See In re Lumber Liquidators, 27 F.4th 291, 303 (4th Cir. 2022). First, the court applies a 12-factor analysis to determine reasonable hours and rates. Next, the court subtracts fees for hours spent on unsuccessful claims. Finally, the court awards a percentage of the remainder based on the degree of success for the plaintiff.
The 12-factor analysis for the lodestar method in the Fourth Circuit includes:
(1) the time and labor expended;
(2) the novelty and difficulty of the questions raised;
(3) the skill required to properly perform the legal services rendered;
(4) the attorney’s opportunity costs in pressing the instant litigation;
(5) the customary fee for like work;
(6) the attorney’s expectations at the outset of the litigation;
(7) the time limitations imposed by the client or circumstances;
(8) the amount in controversy and the results obtained;
(9) the experience, reputation and ability of the attorney;
(10) the undesirability of the case within the legal community in which the suit arose;
(11) the nature and length of the professional relationship between attorney and client; and
(12) attorneys’ fees awards in similar cases.
See Barber v. Kimbrell’s Inc., 577 F.2d 216, 226 n.28 (4th Cir.1978) (adopting factors originally set forth by the Fifth Circuit).
When faced with potentially absurd results like Lowery, Fourth Circuit district courts will sometimes look to the eighth factor, “the amount in controversy and the results obtained.” However, the Fourth Circuit has cautioned against this “somewhat circuitous route” to calculate reasonable fees, recommending instead to apply a percentage reduction to account for unsuccessful claims. Jackson v. Estelle’s Place, LLC, 391 F. App’x 239, 243 (4th Cir. 2010).
In the Fourth Circuit, courts employing the lodestar method are allowed—though not required—to use the percentage-of-recovery method as a check and vice versa. However, at least as recently as 2022, the Fourth Circuit has rejected a hard-and-fast rule to determine when a percentage becomes unreasonable.
The recent decisions in McAdams and In re Lumber Liquidators are good examples of the degree of care with which the Fourth Circuit looks at reasonableness with respect to attorneys’ fees in class actions. In McAdams, the Fourth Circuit considered the reasonableness of fees awarded in a class action settlement arising out of mortgage lending disputes. 26 F.4th at 162. The court held that fees totaling 43 percent of the common fund were reasonable, but “approache[d] the upper limit of permissible recovery.” The court noted that since 43 percent of the fund was within the range of historical results, employing percentage-of-recovery as a check did not outweigh the strong presumption the lodestar calculated award was reasonable.
In In re Lumber Liquidators, the Fourt Circuit rejected a contention that a class settlement cash fund alone should provide the denominator in a cross-check. 27 F.4th at 307. In that case, objectors challenged the reasonableness of $10.08 million in attorneys’ fees, arguing these were some 46 percent of the $22 million class cash fund. The Fourth Circuit observed there was no requirement under CAFA or related jurisprudence to perform a cross-check at all, and in any event, the objectors failed to recognize that vouchers offered in the settlement had value. The court had previously analyzed the voucher issue in detail, holding the district court must apply CAFA’s alternative “coupon” analysis to determine reasonableness of fees. See In re Lumber Liquidators, 952 F.3d 471, 487–92 (4th Cir. 2020). While recognizing the vouchers likely did not have the same value as the cash fund, the court of appeals was unpersuaded by arguments that they had no value, finding no error in the attorneys’ fees reasonableness determination.
More money can bring more problems, and—in the context of assessing the reasonableness of attorneys’ fees—more analysis. The Fourth Circuit’s practice with respect to attorneys’ fees, as well as the Ninth Circuit’s newfound north star, are the result of the simple fact that class action litigation can bring unique challenges at every step. As these cases demonstrate, even if the parties have negotiated a settlement and the proverbial light at the end of the tunnel seems clear, challenges can arise; therein lies the principal motive for implementing defined standards for calculating fees. But now, should a class action arise again in an arena as unique as copyright law, at least the path ahead for calculating attorneys’ fees will be a paved one.
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