In Lowery v. Rhapsody International, Inc., —F.4th—, 2023 WL 3857499 (June 7, 2023), the Ninth Circuit Court of Appeals recently reversed an award of attorneys’ fees to class counsel that was more than thirty times the amount the class members received.
In Lowery, a class of copyright owners sued Rhapsody International for alleged copyright infringement for musical compositions that Rhapsody played on its streaming service. Eventually the parties entered a settlement agreement under which Rhapsody would pay a maximum of $20 million on class members’ claims. However, because an outside settlement with the National Music Publishers Association “had gutted the potential class, very few potential class members submitted claims” in this litigation, and Rhapsody paid only $52,841.05 to satisfy class members’ claims.
Nevertheless, class counsel sought a fee award of over $6 million. After the district court tasked the magistrate judge with analyzing the fees’ request, the magistrate judge recommended a lodestar calculation of $1.7 million with a negative 0.5 multiplier, resulting in a recommended fee award of $860,000. The district court accepted the magistrate judge’s lodestar calculation but refused to apply the negative multiplier, declining to place a value on the benefit to the class. As such, the district court awarded class counsel over $1.7 million in attorneys’ fees.
After Rhapsody appealed, the Ninth Circuit held the “district court’s fee award is not reasonable under Rule 23, given that the $1.7 million fee award is more than thirty times larger than the amount paid to class members” (emphasis in original). The key to a fee award in a class action is reasonableness, the Ninth Circuit held. “When evaluating reasonableness, a district court must mainly consider the benefit the class counsel obtained for the class.”
The district court failed to properly assess the reasonableness of the fee request, the Ninth Circuit reasoned, because it did not consider “the actual or realistically anticipated benefit to the class,” rather than “the maximum or hypothetical amount.” Therefore, the Ninth Circuit remanded the fee issue back to the district court, directing the court to “disregard the theoretical $20 million settlement cap and instead start with the $52,841.05 that the class claimed.” Any contrary approach “would allow parties to concoct a high phantom settlement cap to justify excessive fees,” an outcome that district courts “have the responsibility to guard against.”
The Ninth Circuit also instructed the district court to “cross-check” its lodestar calculation to “ensure that it is reasonably proportional to the benefit provided to the class.” As a general rule, if “the cross-check reveals that a contemplated fee award exceeds 25% of the benefit to the class, the court should take a hard and probing look at the award because this disparity may suggest that the fee amount is unreasonable.” Here, that would mean the district court would have to scrutinize any fee award over $13,000. It is immaterial, the Ninth Circuit observed, “that class action attorneys may have devoted hundreds or even thousands of hours to a case.” The “key factor in assessing the reasonableness of attorneys’ fees is the benefit to the class members.”