Too Big a Slice? What’s Next for Attorneys’ Fees in Claims-Made Settlements?

The Ninth Circuit’s recent decision in In re: California Pizza Kitchen Data Breach Litigation sheds new light on the viability of a claims-made settlement in that Circuit.  While the 2-1 decision affirmed the lower court’s decision that the class action settlement was fair, reasonable, and adequate, the court took issue with the attorneys’ fee award and remanded for additional scrutiny and likely “downward adjustment.”  Below is a brief overview of the case and its key takeaways. 

The case stemmed from a 2021 data breach in which over 100,000 CPK employees’ personal information was compromised.  One group of plaintiffs quickly negotiated a claims-made settlement with CPK, which would provide valid claimants with: up to $1,000 for ordinary expenses; up to $5,000 for identity theft losses; 24 months’ worth of credit monitoring services; and $100 (as part of the $1,000) in statutory damages for California residents.  The settlement was uncapped, meaning there was no overall limit as to how much CPK ultimately would have to pay.  Finally, CPK promised not to object to class counsel’s fee award so long as it did not exceed $800k. 

Counsel for another set of plaintiffs objected to the settlement as collusive and to the attorneys’ fees requested as excessive, arguing they could “negotiate a better settlement for the class.” 

The Central District of California overruled the objection and approved the settlement, even though only 1.8% of the class filed a claim.  And despite expressing “tremendous concern” over the scope of attorneys’ fees, in a “sparse written order,” the district court awarded the full $800k in attorneys’ fees and costs.  The other set of plaintiffs timely appealed. 

The Ninth Circuit quickly homed in on a critical risk in any class action settlement: that “class counsel may collude with the defendants, tacitly reducing the overall settlement in return for a higher attorneys’ fee.”  Under In re Bluetooth Headset Prods. Liab. Litig. , the court identified three “subtle signs” of collusion: 

1. Counsel receiving a disproportionate distribution of the settlement; 

2. The parties negotiating a “clear sailing arrangement” under which the defendant agrees not to object to an agreed-upon attorneys’ fee; and 

3. A “reverter” clause that returns unawarded fees to the defendant rather than the class.   

If these three indicia are present, then a settlement “must withstand an even higher level of scrutiny….” 

Here, the Ninth Circuit found that all three indicia were present.  Nevertheless, the court held that their existence does not render a settlement “per se collusive,” noting that it was satisfied that the district court “fulfilled its heightened obligation to ferret out any evidence of collusion or other conflicts of interest.” 

As for whether the settlement satisfied Rule 23’s requirement that it must be fair, reasonable, and adequate, the court found that it did, in part because there was adequate compensation to the class and real risk and uncertainty of prolonged litigation.  In closing, the court underscored that lower courts “do not have a duty to maximize settlement value for class members.”  Rather, a court’s task is “much more modest,” namely, “ensuring that the class settlement is fair, reasonable, and adequate.” 

Because the settlement was not conditioned on the approval of an attorneys’ fee request, the court was able to vacate the fee award without undoing the settlement approval.  So, it did. 

The court explained that under both the “lodestar” and “percentage-of-recovery” methods, the $800k in fees did not pass muster, and the district court’s barebones approval explanation was ultimately its death knell.  Specifically, the court pointed out that the district court had both questioned the $687k lodestar and “appeared disinclined” to approve fees of more than 25% of the recovery.  Yet, at the end of the day, the district court did just that, “even though the attorneys’ fees constitute around 45% of the settlement value to the class.”  Because the trial court failed to provide an adequate explanation for the fees, the Ninth Circuit reversed and remanded, with strict instructions for the district court to scrutinize the reasonableness of plaintiffs’ lodestar, with the expectation that the results “will likely favor downward adjustment.” 

First , the Ninth Circuit reiterated that it has “never held that claims-made settlements are per se inadequate under Rule 23(e).”  So claims-made settlements remain a viable option in the Ninth Circuit.   

Second , clear-sailing provisions, in which the defendant agrees not to object to an application for attorneys’ fees up to a certain amount, remain disfavored and should be avoided.   

Third , to avoid heightened Bluetooth scrutiny in claims-made settlements, parties should consider building into the settlement that any reduction in attorneys’ fees should inure to the benefit of the class through a pro rata adjustment of the benefit.   

Fourth , while competing sets of plaintiffs’ counsel can often complicate settlement and yield accusations of “reverse auctions,” the Ninth Circuit is once again on record that courts do “not have a duty to maximize settlement value for class members.”   

The Ninth Circuit’s decision strikes a balanced approach that preserves claims-made settlements as a viable option while ensuring appropriate scrutiny. By following the court’s guidance—particularly by avoiding clear-sailing provisions and structuring settlements so fee reductions benefit the class—litigants can create claims-made settlements that provide meaningful benefits to participating class members while offering defendants the certainty of resolving claims. 

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