Without expressing an opinion on the fairness of the attorney’s fee award, the Ninth Circuit Court of Appeals has returned a class-action settlement and fee award to a district court in a product liability action involving the purported potential for Bluetooth™ headsets to cause hearing loss; the appeals court found that “the disparity between the value of the class recovery [$100,000 in cy pres awards] and class counsel’s compensation [$800,000] raises at least an inference of unfairness.” In re: Bluetooth Headset Prods. Liab. Litig., MDL No. 1822 (9th Cir., decided August 19, 2011). The appeal involved more than 26 putative class actions filed in courts throughout the country and consolidated before a multidistrict litigation (MDL) court in California.

The plaintiffs claimed that they would not have purchased the headsets if they had known that using the devices for more than a few minutes each day exposes users to the risk of noise-induced hearing loss. They sought economic damages of $70 to $150 per headset, as well as restitution, punitive damages, attorney’s fees, and costs. The MDL court certified a class of all persons in the United States who purchased Bluetooth™ headsets between 2002 and 2009; more than 100 million headsets were sold in the country during that period.

The parties successfully mediated the claims, and the defendants agreed to (i) post warnings on their Websites and in product manuals; (ii) pay $100,000 in cy pres awards to be divided among non-profits addressing hearing loss prevention issues; (iii) pay the costs of notice, up to $1.2 million; (iv) pay documented costs to class counsel of no more than $50,000; (v) pay attorney’s fees not in excess of $800,000; and (vi) provide an incentive award to the named plaintiffs of no more than $12,000 in total. It was estimated that 80 percent of Bluetooth™ purchasers were reached by the notice plan, and, of the millions of potential class members, 715 opted out, and 50 chose to object. Following a hearing, the district court entered an order approving the settlement as fair, reasonable and adequate.

The appellate court first discusses the legal foundation for an attorney’s fee award and how such awards are typically calculated in class action litigation, including a “lodestar” method that “is calculated by multiplying the number of hours the prevailing party reasonably expended on the litigation (as supported by adequate documentation) by a reasonable hourly rate for the region and for the experience of the lawyer.” The district court apparently applied the lodestar method to calculate the award, while the objecting class members claimed that the court should have employed a percentage-of-recovery method to assess the reasonableness of the $800,000 fee award.

The Ninth Circuit determined that it lacked “a sufficient basis for determining the reasonableness of the award,” because the district court did not make an explicit calculation of a reasonable lodestar amount, failed to compare the fee award and “the benefit to the class or degree of success in the litigation,” and did not compare the lodestar amount with a reasonable percentage award. According to the court, “Absent any explanation from the district court, we are concerned that the amount awarded was 83.2% of the total amount defendants were willing to spend to settle the case [calculated by adding the attorney’s fees, incentive award, cy pres award, and actual expenses]. Twenty-five percent of this $962,000 fund, by contrast, would have yielded only $240,000 in attorneys’ fees.”  

Declining to rule that the disproportion was per se unreasonable, the court said that it had “no choice but to remand the case to the district court to permit it to make the necessary calculations and provide the necessary explanations.” The court also reversed the settlement agreement approval “because the parties expressly negotiated a possibly unreasonable amount of fees, and because the district court did not take this possibility into account in reviewing the settlement’s fairness the first time around.”

In the court’s view, several warning signs indicating implicit collusion between class counsel and the defendants were evident. The attorney’s fees were disproportionate to the class award, “which includes no monetary distribution.” The settlement included a “clear sailing” arrangement, providing attorney’s fees to be paid separately and apart from the class funds. And “all fees not awarded would revert to defendants rather than be added to the cy pres fund or otherwise benefit the class,” in what the court referred to as a “kicker” arrangement.