A recent Law 360 article by David Ross, “Atty Fee Reversal May Complicate Claims Made Settlement”, reports on the ramification of the Lowery v. Rapsody International decision. This article was posted with permission. The article reads:
A decision prefaced by "will likely make the average person shake her head in disbelief" is unlikely to end well for a party. That was the outcome when an initially sought $6 million in legal fees was later awarded at $1.7 million by a district court. In Lowery v. Rhapsody International Inc., the U.S. Court of Appeals for the Ninth Circuit reversed the fee award June 7 because class members obtained less than $53,000 in benefits.
The rationale for that decision could spell trouble for those seeking approval of claims-made class action settlements that do not have sufficient financial benefits actually received by class members or meaningful injunctive or non-monetary relief.
In Lowery, the Ninth Circuit panel addressed a claims-made class settlement. For a little background, class settlements typically involve a claims-made or common fund structure. A claims-made settlement involves claims submissions to determine the amount of benefits that a defendant will pay. The ultimate amount is unknown, although, as in Lowery, caps may be in place to prevent a runaway payout amount.
In comparison, the defendant in a common fund settlement agrees to the total amount it will pay for the class settlement. In other words, the overall amount is predetermined. The common fund often includes settlement benefits, plaintiffs' attorney fee awards, service awards for the class representatives, and claims administration and notice costs. In some settlements, hybrid structures are crafted that may include claims-made and common fund elements.
The Lowery case involved a claims-made class settlement in a music copyright class action. Rhapsody agreed to pay class members — copyright holders — for music played on its streaming service. However, an earlier settlement between Rhapsody and the National Music Publishers Association to resolve the same copyright issues resulted in 98% of the class members waiving their right to participate in the settlement. This gutted the class.
Despite agreeing to pay up to $20 million for claims, Rhapsody wound up paying only $52,841.05 in claims. Rhapsody also did not have to change its licensing practices, as Congress passed the Music Modernization Act in 2018, which allowed digital music providers to obtain blanket licenses. On appeal, the panel found that the $1.7 million fee award to the plaintiffs' counsel, "more than thirty times larger than the amount paid to class members," was not reasonable.
The panel held that: courts must consider the actual or realistically anticipated benefit to the class — not the maximum or hypothetical amount — in assessing the value of a class action settlement. On remand, the U.S. District Court for the Northern District of California was directed to "disregard the theoretical $20 million cap" and instead "start with" the actual amount the class claimed.
The panel noted that "rule is especially important when the class redemption rate is low" and another "approach would allow parties to concoct a high phantom settlement cap to justify excessive fees, even though class members receive nothing close to that amount." The panel added that "the district court should consider cross-checking its lodestar calculation to ensure that it is reasonably proportional to the benefit provided to the class." If the cross-check showed that the fee award exceeded 25% of the class benefits, that disparity might "suggest that the fee amount is unreasonable."
The panel added that except for extraordinary cases, a fee award should not exceed the value provided to the class, and remarked that it did not matter that "attorneys may have devoted hundreds or even thousands of hours to a case."
Potential Ramifications of the Lowry Decision
The takeaways from this decision will likely emanate far beyond copyright cases. Class action plaintiffs attorneys may refuse to consider claims-made settlements in the Ninth Circuit, and insist on common fund settlements. This position could extend to state court cases on the West Coast for fear that these courts might find the Ninth Circuit's decision persuasive. Even for common fund settlements, the amount that class members actually will receive must be considered.
While common fund settlements predetermine the amount that the defendant will pay, the amount actually paid in benefits to class members might still depend on the take rate and the types of benefits available. Common fund settlements are thus not entirely inoculated from the potential application of the panel's rationale in the Lowery decision. A court still could consider the amount of attorney fees and the amount of the common fund actually allocable to class member benefits.
Thus, regardless of whether a common fund or claims-made settlement in the Ninth Circuit is pursued, the likely take rate and associated monetary benefit for class members should be carefully evaluated.
Looking Ahead in the Ninth Circuit
For any settlement, the impact of non-monetary and injunctive relief, which the Ninth Circuit recognized was not at issue in Lowery, should be considered. The panel noted a contrast to civil rights cases, where attorney fees awards did not need to be strictly proportional to monetary damages. In civil rights cases, significant non-monetary and injunctive relief to the plaintiffs can be provided, but for copyright cases, attorney fees must consider the proportion between the award and the class benefits to confirm the award is reasonable.
That said, the panel recognized that in copyright cases such as infringement where substantial non-monetary relief or a meaningful benefit to society is encompassed, a fee award may exceed the monetary benefit provided to the class. The Lowery decision does not have to be a death knell for claims-made settlements in the Ninth Circuit. There is no reason to conclude that a well-structured claims-made settlement that provides significant settlement benefits to class members can no longer obtain court approval. To the extent that material injunctive and non-monetary benefits are included, even more reason for optimism exists.
It also should be noted that the Lowery decision does not mean that all focus in a class settlement should be on boosting the amount paid to class members. The key focus in Lowery was the amount of the plaintiffs' attorney fees in comparison to the amount of class member benefits. So, maybe — just maybe — more reasonable attorney fees amounts can increasingly become part of class action settlements, whether structured as a claims-made or common fund settlement.
David Ross is a partner at Wilson Elser Moskowitz Edelman & Dicker LLP.