Eighth Circuit overturns fee award in megafund settlement, but declines adoption of bright line rule for limits on fees

Cybercriminals hacked into computer systems belonging to telecommunications company, T-Mobile US, INC., stealing the confidential personal information of an estimated 76.6 million customers. A bevy of class actions filed against T-Mobile were centralized in the United States District Court for the Western District of Missouri.  Following settlement of the claim for $350 million, class counsel moved for a fee award of 22.5% of the $350 million settlement fund ($78.75 million).  Class member Cassie Hampe objected to the settlement, contending the amount of attorneys’ fees sought was too high.  The District Court struck Hampe’s objection on the merits and approved class counsel’s requested fee award.  Hampe appealed.

On appeal, the Eighth Circuit Court of Appeals held that the District Court erred in striking Hampe’s objection, concluding she was a proper party to challenge the court’s fee award.  Regarding the reasonableness of the fee award, the Eighth Circuit noted that Federal Rule of Civil Procedure 23(h) provides that “the court may award reasonable attorney's fees” in class actions and, at the fee award stage, a district court must be vigilant in protecting the right of class members to not have their recovery reduced by excessive attorneys' fees.  See In re Wireless Tel. Fed. Recovery Fees Litig., 396 F.3d 922, 932 (8th Cir. 2005); see also Fed. R. Civ. P. 23(e)(2)(C)(iii).

The Eighth Circuit identified the two methods for awarding attorneys' fees in class actions.  The first is the “lodestar” method where the court multiplies the number of hours attorneys worked by their hourly rates to come up with a starting point, which can then be adjusted up or down depending on the circumstances of a case. The second is the “percentage” method, where the court awards a percentage of the fund that the attorneys helped recover.  The Eighth Circuit recognized a dozen “factors” to be considered by courts under either approach in assessing the reasonableness of a fee award.  (citing Johnson v. Ga. Highway Express, Inc., 488 F.2d 714, 719-20 (5th Cir. 1974)).  The Eighth Circuit’s ultimate conclusion turned on its consideration of the “the time and labor required,” “the amount involved and the results obtained,” and “awards in similar cases” factors. 

Class member Hampe argued that the District Court’s percentage award was excessive because the “megafund settlement” (exceeding $100 million) was disproportionate to the amount of labor required to achieve it.  She argued that the immense recovery was the product of the class’s size, rather than counsel’s effort and, as such, the attorneys should not receive as high a percentage of the settlement fund in such case.  She argued that the Court should consider "the economies of scale when addressing attorneys’ fees awarded in class action settlements exceeding $100 million,” so as to avoid an undue windfall to class counsel.  The District Court rejected her contention, noting that the Eighth Circuit has never required district courts to reduce fee awards because a settlement created a “megafund.”  While the Eighth Circuit recognized both sides of the argument, it ultimately declined to adopt a brightline rule requiring district courts to award reduced attorney fee percentages in megafund cases.  The Eighth Circuit noted that the determination of a reasonable fee is a wide-ranging inquiry that seeks to account for a variety of case-specific circumstances. 

Methodology aside, the Eighth Circuit next turned its attention to the excessiveness of the award itself.  In justifying the value of the fee award, the District Court noted that it had utilized a “lodestar crosscheck” to confirm that the fee award was reasonable.  The Eighth Circuit recognized that a lodestar crosscheck helps a court evaluate whether a percentage award would result in a windfall by comparing it to counsels' lodestar (product of total hours worked multiplied by counsel’s typical hourly rate).  In this case, class counsel reported spending more than 8,000 hours on the case and anticipated another 3,000 hours in administering the settlement, resulting in a lodestar of about $8.17 million.  Considering the $78.75 million fee award, this results in a lodestar “multiplier” of 9.6, meaning that counsel would get paid about 9.6 times their customary hourly rates.

Although the District Court cited cases approving fee awards with similar lodestar multipliers, the Eighth Circuit concluded the District Court abused its discretion by awarding an excessive fee.  While the Eighth Circuit noted that it had never held a particular multiplier was per se unreasonable, it also cited past authority in which a multiplier of 5.3 was found to be “high.”  See Rawa v. Monsanto Co., 934 F.3d 862, 870 (8th Cir. 2019).  As support for its conclusion, the Eighth Circuit noted that class counsel worked on the case for just a matter of months, conducted relatively little discovery, and engaged in no substantial motion practice.  The Court noted that if the fee award were to be permitted, it would mean that class counsel would effectively earn between $7,000 to $9,500 an hour, which it concluded “no reasonable class member would willingly pay to an attorney to help resolve this claim, especially when, as here, dozens of other attorneys were offering their assistance.”  The Court concluded that “reducing the fee award to, say, half of what was requested (resulting in fees of $3,500 to $4,750 per hour) could hardly be considered a penalty.”  While a lodestar crosscheck may not be necessary in every case, the Eighth Circuit noted that it “might be helpful” in megafund cases which settle quickly, giving rise to a potential windfall.  The Court remanded the case back to the District Court for further proceeding consistent with the opinion.