When a class action lawsuit ends, class counsel typically seek a fee award. Under Rule 23(h), the district court must make findings of facts and conclusions of law to support an award of “reasonable attorney’s fees and nontaxable costs” to the class counsel. Fed. R. Civ. P. 23(h). In calculating these fees, courts generally use one of two different methods: (1) the “lodestar” method; or (2) the “percentage of fund” method.
1. Lodestar Method. Under the “lodestar” method, the district court identifies a lodestar figure by multiplying the number of hours expended by class counsel by a reasonable hourly rate. The court may then adjust the lodestar figure using a “multiplier” derived from various factors, such as the benefit achieved for the class and the complexity of the case. Because class counsel can suggest a greater multiplier, they often choose this method to achieve a higher award.
2. Percentage of Fund Method. Under the “percentage of fund” method, the court awards the fee as a percentage of the common fund. Typically, class counsel will seek between 20% and 45% of the amount set aside for the class.
While Rule 23(h) seems to require application of only one method, in recent years, circuit courts have rejected proposed attorneys’ fees calculations in cases where the award did not effectively meet both the lodestar method and the percentage of fund method.
The percentage of fund method should be checked against the lodestar method. Where the district court evaluates the award as a percentage of fund to the class, circuit courts have held that a lodestar crosscheck should be used as well.
For instance, the Eighth Circuit rejected an award to class counsel based on a percentage of fund method in In re T-Mobile Customer Data Sec. Breach Litig., 111 F.4th 849 (8th Cir. 2024). In this data breach class action lawsuit, the defendant agreed to pay $350 million to a settlement fund, and class counsel asked the court for 22.5% of that recovery (or $78.75 million) in attorneys’ fees. Id. at 856. The Eighth Circuit held that because a crosscheck against the lodestar method demonstrated that counsel’s award was 9.6 times its hourly rate—which the court held to be unreasonable. Id. at 861. In so holding, the court observed, “If we permitted the fee award here to stand, it would mean that counsel could make $7,000 to $9,500 an hour, which we think no reasonable class member would willingly pay to an attorney to help resolve this claim… .” Id.
The lodestar method should be checked against the percentage of fund method. Where a court adopts the lodestar method, circuit courts have vacated the award where it was not also evaluated as a percentage of the amount actually paid to the class members.
In Lowery v. Rhapsody Int’l, Inc., 75 F.4th 985 (9th Cir. 2023), the class was paid almost $53,000, even though the class fund had a hypothetical settlement cap of $20 million. Using the lodestar method, counsel requested a 2.87 multiplier of its hourly rate and sought an award of $2.1 million. Id. at 990-991. Although the district court lowered the amount awarded to class counsel, it ultimately awarded class counsel $1.7 million—which was more than 30 times the amount awarded to the class. The Ninth Circuit vacated the award. Id. at 995. In doing so, it encouraged the district court to cross-check its lodestar calculation against the percentage of fund method, to “assure that the counsel’s fee does not dwarf class recovery.” Id. at 987. The court stated, “It does not matter that class action attorneys may have devoted hundreds or even thousands of hours to a case. Id. at 994. The key factor in assessing the reasonableness of attorneys’ fees is the benefit to the class members.” Id.
In Fessler v. Porcelana Corona De Mexico, S.A. DE C.V., 23 F.4th 408 (5th Cir. 2022), the Fifth Circuit vacated the district court’s fee award to class counsel of $4.3 million because it was more than eight times the $575,000 that would be paid to the class. Id. at 420. The Fifth Circuit held that the fee award should approximate what a client would be expected to pay in a comparable case. Id. at 419.
If both methods are applied, the court will scrutinize the underlying calculations. Finally, even where the district court apparently checked both methods, circuit courts have vacated awards if the court used the wrong numbers in the calculation.
In In re Wawa, Inc. Data Sec. Litig., 85 F.4th 712 (3d Cir. 2023), the Third Circuit vacated a $3.2 million fee award where the common fund amount was $12.2 million, but the expected payout to the class was only $2.9 million. Id. at 727. The court instructed the district court to consider, on remand, the ratio of class counsel fees to class recovery in calculating a new fee award. Id. at 715. The Third Circuit specifically advised that trial judges would be well-advised to use the actual distribution to class members as a “sensible starting line to begin the fee award analysis.” Id. at 725.
Similarly, in Moses v. New York Times Co., 79 F.4th 235 (2d Cir. 2023), the Second Circuit vacated an award of $1.25 million to class counsel where the amount provided to the class was $395,000 for 876,000 potential class members. Id. at 257. The court observed that the district court’s determination that the fee award was 22.5% of the face value of the settlement was not a “fair evaluation” of the settlement because many class members were unlikely to redeem their portion of the settlement. Id. The district court purported to have “cross-checked” the award against the lodestar method, but the Second Circuit held that this check was not persuasive because, in applying the percentage of fund method, the court used the nominal value of coupon codes as opposed to their redemption value. Id. at 253.
For defendants seeking to challenge a hefty class award, it seems that there is ample room for scrutiny of an attorney’s fee award where the award may be unreasonable under either the lodestar or percentage of fund methods.
