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July 18, 2023 Practice Points

Ninth Circuit Holds That Attorney Fee Awards Must Be Proportionate to Their Class Settlements

Compensation should be a reasonable fraction of the class action settlement when the settlement amount is insignificant.

By D. Scott Carlton and Erica Kelley

The Ninth Circuit recently reversed and remanded a district court’s award of attorney fees in a class action copyright case, setting the stage for courts to more carefully review fee awards moving forward. The court held that the attorney fees award was unreasonable and disproportionate, given the minimal benefit secured for the class in the settlement. This decision cautions district courts to carefully scrutinize their attorney fee awards when there is minimal monetary benefit to the class and any injunctive relief is insignificant. It also encourages courts to “cross-check” their calculations to ensure fee awards are reasonable.

In Lowery v. Rhapsody International, Inc., David Lowery brought a putative class action suit, on behalf of music copyright owners, against Rhapsody, a digital music streaming service. Mr. Lowery alleged that Rhapsody infringed on copyrights held by putative class members when Rhapsody reproduced and distributed their music on its digital streaming platform without license to do so. While this litigation was pending, Rhapsody simultaneously settled with the National Music Publishers Association (NMPA) to address the broader issue of copyright licensing in the newly digital era. To receive compensation under the settlement agreement with the NMPA, however, the putative class members were required to waive their claims against Rhapsody, including those brought by Mr. Lowery, to avoid “double-dipping” and receiving compensation from both actions.

Mr. Lowery’s final settlement with Rhapsody required the company to pay class members’ claims up to $20,444,567. But since the majority of copyright holders chose the settlement negotiated by the NMPA, they waived their right to claims in the lawsuit, vastly reducing the litigation’s putative class. Ultimately, with so few plaintiffs, the lawsuit ended with Rhapsody paying only $52,841.05 for class members’ claims.

With respect to attorney fees, the magistrate judge used the lodestar calculation method: multiplying the number of hours reasonably spent on the case by a reasonable hourly rate. The magistrate judge computed $1.7 million under the lodestar method but recommended reducing that amount to approximately $860,000 because of the minimal benefit earned for the class. The district court judge, however, rejected the magistrate judge’s recommendation and maintained the $1.7 million amount. That sum was more than thirty times larger than the $52, 841.05 paid to the class members.

The Ninth Circuit disapproved of the $1.7 million award amount, finding it to be unreasonable under Rule 23. The court held that reasonableness is determined mainly by considering the benefit that class counsel obtains for the class, as set forth in In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935 (9th Cir. 2011). The court should not consider some maximum or hypothetical benefit but “the actual or realistically anticipated benefit to the class.” The Ninth Circuit instructed on remand that the district court should disregard the hypothetical maximum of $20 million. It was not the actual amount that plaintiffs received, nor was it realistically anticipated, given the impact of the NMPA settlement. Instead, the court instructed the district court to start its calculation for attorney fees using the actual $52,000 payment made to the class and reach a sum that is proportional.

The Ninth Circuit’s decision reinforces its directive that courts must consider the actual settlement value provided to the class, including the value of nonmonetary relief, and explain how that justifies the fee award. A fee award should not exceed the value that the litigation provides to the class, absent meaningful nonmonetary relief or other sufficient justification. Such extraneous justification was not present here. As a best practice, parties and courts should cross-check their lodestar calculations with the percentage-of-recovery method. In re Hyundai & Kia Fuel Econ. Litig., 926 F.3d 539 (9th Cir. 2019). If the cross-check reveals a contemplated fee award exceeding 25 percent of the benefit earned for the class, the district court should take “a hard and probing look” because the fee amount is likely unreasonable and the attorneys are being overcompensated.

This case reinforces the responsibility on district courts to guard against excessive attorney fees in class action cases. It also serves as a reminder to both counsel and courts that attorney fees are not based on the number of hours or level of anguish attorneys pour into their clients’ cases. They are based on the benefit achieved for the class. When success—by that measure—is meager, attorney fees should be doled out accordingly.

D. Scott Carlton is a partner and Erica Kelley is a summer associate at Paul Hastings LLP in Los Angeles, California.

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