“How to Lose a Class Action Settlement in 10 Ways” – Recent Decisions Reflect a Trend of Applying Greater Scrutiny to Attorneys’ Fees Requests in Class Action Settlements

Note: We’d like to thank co-author Mai-Anh Tran, summer associate, for her contributions to this post.

Last month, the Ninth Circuit struck down a district court’s order approving a class settlement and awarding nearly $7 million in attorneys’ fees to class counsel in a consumer class action challenging the defendant’s labeling of cooking oil products. The Court of Appeals highlighted a “squadron of red flags” in the settlement agreement, including the inordinate provision for attorneys’ fees that eclipsed, by a factor of seven, the total settlement funds allocated to class members. The decision in Briseño v. Henderson, No. 19-56297, 2021 U.S. App. LEXIS 16261 (9th Cir. June 1, 2021), which Judge Kenneth K. Lee’s opinion summarized in its opening sentence as “How to Lose a Class Action Settlement in 10 Ways,” is one of the latest decisions reflecting the increasing attention paid by courts to evaluating attorneys’ fees awards in consumer class action settlements.

A class member objector brought the appeal in Briseño, opposing the settlement on the grounds that class counsel had “hoarded” an excessive amount of the class recovery. In reversing the district court’s approval of the settlement, the Ninth Circuit underscored its concern regarding potential collusion between class counsel and defendants with respect to the distribution of funds between class members and class counsel. As the panel explained, courts have an independent obligation under Federal Rule of Civil Procedure 23(e) to ensure the reasonableness of fee awards included in class action settlement agreements. To “smoke out potential collusion,” courts should consider the following factors established in In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935 (9th Cir. 2011), under a heightened scrutiny standard: (1) whether class counsel receives a disproportionate distribution of the settlement proceeds; (2) whether the defendant agrees not to challenge the attorneys’ fees in a “clear sailing” arrangement; and (3) whether the settlement contains a “kicker” clause that returns unawarded fees to the defendant rather than to the class. In particular, courts must balance the proposed attorneys’ fees with the payout offered to class members to determine if the settlement is fair, reasonable, and adequate, and not simply a “shortchanging” of the class.

Earlier cases have applied this analysis and addressed the possibility of collusion in the context of pre-class certification settlements, where plaintiffs’ attorneys are, as the Bluetooth court explained, particularly susceptible to allowing the “pursuit of their own self-interests to infect the negotiations.” In that case, the Ninth Circuit noted that plaintiffs’ attorneys often have not invested substantial time and expenses before the class certification stage, meaning that they are more likely to strike quick settlements against class members’ interests. As such, pre-class certification settlement agreements “must withstand an even higher level of scrutiny for evidence of collusion or other conflicts of interest than is ordinarily required under Rule 23(e) before securing the court’s approval as fair.”

In a novel turn, Briseño extended Bluetooth’s heightened scrutiny analysis of attorneys’ fees arrangements to post-class certification settlements as well. The court noted that “class certification does not cleanse all sins,” and that the “specter of collusion still casts a long shadow over post-class certification settlements” involving the division of funds between class counsel and class members. The Ninth Circuit explained that while a post-class certification settlement “ensures that the parties litigated aggressively” to reach an adequate total payout, it does not eliminate an attorney’s incentive to negotiate for a larger fee distribution within the payout. Even after a class is certified, there can still be legitimate questions about whether the amount and mode of payment of attorneys’ fees are “fair, reasonable, and adequate” under Rule 23(e)(2).

The court concluded the post-class certification settlement in Briseño “reek[ed] of collusion at the expense of the class members.” While the defendant agreed to pay a total of nearly $8 million, only $1 million (“relative scraps”) would go to class members, with the remainder allocated to attorneys’ fees and expenses. Applying the Bluetooth heightened scrutiny standard, the Ninth Circuit found that the fee arrangement in Briseño featured every red flag of a collusive settlement giving “short shrift” to the class: class counsel received a disproportionate distribution of the settlement; the defendant agreed to a “clear sailing” arrangement whereby it would not challenge the request for attorneys’ fees; and the settlement agreement contained a “kicker” clause returning any court-reduced attorneys’ fees to the defendant rather than to class members. Ultimately, the panel remanded the case for further proceedings in the district court.

The Ninth Circuit’s decision in Briseño is among the latest in a decade-long trend of cases scrutinizing attorneys’ fees awards in the consumer class action settlement context. By way of examples:

• In Bluetooth (2011), the Ninth Circuit vacated approval of a class action settlement agreement that provided $100,000 for class members and $800,000 for class counsel. The court found that the disparity between the amount of attorneys’ fees and the amount allocated to the class raised the possibility that plaintiffs’ counsel had negotiated against class members’ interests and instead promoted their own.
• Similarly, last year, the Ninth Circuit in Chambers v. Whirlpool Corp., 980 F.3d 645 (9th Cir. 2020), struck down a $14.8 million attorneys’ fees award that it found unreasonably disproportionate to the potential class settlement value of $4.2 million. There, the Ninth Circuit held that the district court lacked proper justification in granting a fee multiplier and that it had partially failed to “give a hard look” at the fee agreement to ensure that it was proportional to the settlement value.
• In May, the Tenth Circuit, in Wells v. Best Buy Co., 997 F.3d 1077 (10th Cir. 2021), affirmed a district court’s reduction of attorneys’ fees from $6.25 million to $3.8 million in a class action settlement regarding top-load washing machines. The fee reduction stemmed from the court’s heightened scrutiny of the settlement agreement’s “clear sailing” arrangement and “kicker” clause.
• And just last month, in Hilsley v. Gen. Mills, Inc., 2021 U.S. Dist. LEXIS 105648 (S.D. Cal. June 4, 2021), the U.S. District Court for the Southern District of California denied a proposed class action settlement over concerns that class counsel had advanced their own self-interests before those of class members. The court noted that the settlement agreement included all of the Bluetooth collusion factors: the class would receive no monetary reward compared to class counsel’s $725,000 fee award; the settlement included a “clear sailing” arrangement; and there was an implied “kicker” clause. Ultimately, the court determined that class counsel’s fee request appeared excessive on its face while providing no meaningful benefit to class members.

Together, these recent decisions serve as a reminder that attorneys’ fees awards in class action settlements will be scrutinized carefully by the courts and that class counsel have an obligation to negotiate not for their own pecuniary interests, but for the best interests of class members. These cases also underscore that defense counsel should be careful to negotiate at arm’s length, or else run the risk that the fruits of their negotiations will be rejected by a reviewing court.