In Re Bluetooth Headset Products Liability

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: BLUETOOTH HEADSET 

PRODUCTS LIABILITY LITIGATION.

MICHAEL JONES; AMY KARLE; LORI

RAINES; KIMBERLY RYAN; BETTY

DUMAS; BETSEE FINLEE; EVAN

NASS; ALEKSANDRA SPEVACEK,

Plaintiffs-Appellees, No. 09-56683

and D.C. No.

WILLIAM J. BRENNAN; BILL  2:07-ml-01822-

CLENDINENG; WILLIAM E. GERKEN; DSF-E

BENJAMIN T. RITTGERS; HENRY OPINION

TOWSNER; SCOTT M. UNIVER;

AARON J. WALKER,

Objectors-Appellants,

v.

GN NETCOM, INC.; MOTOROLA,

INC.; PLANTRONICS, INC.,

Defendants-Appellees.



Appeal from the United States District Court

for the Central District of California

Dale S. Fischer, District Judge, Presiding

Argued and Submitted

February 7, 2011—Pasadena, California

Filed August 19, 2011

11095

11096 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

Before: Michael Daly Hawkins and Raymond C. Fisher,

Circuit Judges, and Jack Zouhary,* District Judge.

Opinion by Judge Hawkins

*The Honorable Jack Zouhary, United States District Judge for the

Northern District of Ohio, sitting by designation.

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11099

COUNSEL

Theodore H. Frank, Center for Class Action Fairness, Wash-

ington, D.C., for the objectors-appellants.

Daniel L. Warshaw, Pearson, Simon Warshaw & Penny,

Sherman Oaks, California, for the plaintiffs-appellees.

Terrence J. Dee, Kirkland & Ellis, Chicago, Illinois, for the

defendants-appellees.

OPINION

HAWKINS, Senior Circuit Judge:

The settlement agreement approved in this products liabil-

ity class action provides the class $100,000 in cy pres awards

11100 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

and zero dollars for economic injury, while setting aside up

to $800,000 for class counsel and $12,000 for the class repre-

sentatives—amounts which the court subsequently awarded in

full in a separate order. William Brennan and other class

members (collectively “Objectors”) challenge the fairness and

reasonableness of the settlement and appeal both the approval

and fee orders, arguing the district court abused its discretion

in failing to consider whether the gross disproportion between

the class award and the negotiated fee award was reasonable.

We agree that the disparity between the value of the class

recovery and class counsel’s compensation raises at least an

inference of unfairness, and that the current record does not

adequately dispel the possibility that class counsel bargained

away a benefit to the class in exchange for their own interests.

We therefore vacate both orders and remand so that the dis-

trict court may conduct a more searching inquiry into the fair-

ness of the negotiated distribution of funds, as well as

consider the substantive reasonableness of the attorneys’ fee

request in light of the degree of success attained.

FACTS AND PROCEEDINGS

I. Background

Plaintiffs filed twenty-six putative class actions in courts

around the country against Motorola, Inc., Plantronics, Inc.,

and GN Netcom, Inc. (collectively “defendants”), alleging

defendants knowingly failed to disclose the potential risk of

noise-induced hearing loss1 associated with extended use of

their wireless Bluetooth headsets at high volumes, in violation

of state consumer fraud protection and unfair business prac-

tice laws.2 The Judicial Panel on Multidistrict Litigation coor-

1

Plaintiffs define noise-induced hearing loss as the gradual and perma-

nent loss of hearing over time caused by unsafe levels of noise.

2

Plaintiffs allege that defendants violated California’s Consumers Legal

Remedies Act, Cal. Civ. Code § 1750 et seq., False Advertising Law, Cal.

Bus. & Prof. Code § 17500 et seq., and Unfair Competition Law, Cal. Bus.

& Prof. Code § 17200 et seq., as well as Illinois’ Deceptive Trade Prac-

tices Act, 815 ILCS 510, and Consumer Fraud and Deceptive Business

Practices Act, 815 ILCS 505.

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11101

dinated these cases in In re Bluetooth Headset Products

Liability Litigation in the Central District of California.3

Plaintiffs’ Second Amended Consolidated Complaint

sought money damages on behalf of millions of individuals

who had purchased Bluetooth headsets since June 30, 2002,4

purportedly in reliance on allegedly misleading representa-

tions about the safety and usability of the product. Plaintiffs

alleged that defendants advertised “talk times” of three hours

or longer, while in reality, consumers could not safely use the

headsets for more than a few minutes each day without expos-

ing themselves to the risk of noise-induced hearing loss—a

risk that defendants failed to disclose in any of their market-

ing materials. The complaint did not state a claim for personal

injury but asserted economic injury, alleging plaintiffs would

not have purchased their Bluetooth headsets but for defen-

dants’ willful false advertising. Plaintiffs sought actual dam-

ages in the amount paid for the product, which they claimed

to be between $70 and $150 per headset, along with injunc-

tive relief, restitution, punitive damages, attorneys’ fees and

costs.

Class counsel spent considerable time researching legal and

industry standards on acceptable noise levels, surveying warn-

ings on other audio devices, obtaining acoustic test results and

other documents from defendants, and working with experts

to review this data and evaluate the risk of noise-induced

hearing loss. The parties voluntarily exchanged discovery and

held at least three in-person meetings to discuss the merits of

the litigation and discovery issues before participating in a

3

Another lawsuit raising similar questions of law and fact, Kirkpatrick

v. Motorola, No. 07-5570 (DSF), was subsequently filed and also consoli-

dated with the multi-district litigation.

4

The district court ultimately certified a class comprised of all persons

and entities in the United States who between June 30, 2002 and February

19, 2009 purchased a Bluetooth headset manufactured by one of the defen-

dants. More than 100 million Bluetooth headsets were sold during that

period.

11102 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

formal mediation session, overseen by a retired California

Court of Appeal Justice.

Unable to reach a settlement at that time, defendants shortly

thereafter filed a joint motion to dismiss on various grounds,

insisting their products are safe and denying any wrongdoing

on their part. The motion to dismiss was fully briefed by both

sides, but before the court heard argument, and before any

motion was made to certify a class for merits purposes, the

parties successfully participated in another mediation session

and filed a proposed class action settlement agreement pur-

porting to resolve all claims.

II. The Terms of the Settlement Agreement

In exchange for plaintiffs’ general release and waiver of all

asserted claims defendants agreed to: (1) post acoustic safety

information on their respective websites and in their product

manuals and/or packaging for new Bluetooth headsets; (2)

pay a total of $100,000 in cy pres awards to be distributed

among four non-profit organizations dedicated to the preven-

tion of hearing loss;5 (3) pay notice costs up to $1.2 million;

(4) pay documented costs to class counsel up to $38,000, or

if notice costs fell below $1.2 million, no more than $50,000;

(5) pay attorneys’ fees in an amount set by the district court,

not to exceed $800,000; and (6) pay an incentive award in an

amount set by the district court, not to exceed $12,000, to be

divided among the nine class representatives.6 Approval of the

settlement was not conditioned on any minimum attorneys’

5

The recipient organizations are the Center for Independent Living

Research at the University of Tennessee College of Medicine, the National

Hearing Conservation Association, the American Speech and Hearing

Association, and the Greater Los Angeles Agency on Deafness.

6

These negotiated attorneys’ fee and incentive awards were provided

under what is known as a “clear sailing agreement,” wherein the defendant

agrees not to oppose a petition for a fee award up to a specified maximum

value.

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11103

fee award, minimum costs award, or the payment of any

incentive award to any plaintiff.

III. Approval of the Settlement Agreement

Pursuant to the district court’s preliminary approval order

directing the provision of notice, the parties implemented a

comprehensive notice plan comprised of direct mailings, mag-

azine advertisements, and a dedicated Internet website, reach-

ing about 80% of potential class members an average of more

than 2.5 times each. Of the millions of potential class mem-

bers, 715 people validly elected to opt out of the settlement.

Fifty people, including the seven Appellants before us now,

sent in objections to the settlement and were given an oppor-

tunity to be heard at the fairness hearing. After considering

the objections, the district court entered an Order (“Approval

Order”) and Final Judgment certifying the class for settlement

purposes only, pursuant to Federal Rule of Civil Procedure

23(b)(3), and approving the settlement agreement as fair, rea-

sonable, and adequate.

IV. Award of Fees and Costs

After ordering class counsel to produce additional unredac-

ted billing records and reviewing the files submitted, the dis-

trict court later entered a separate order (“Fee Order”)

awarding $850,000 to class counsel for fees and costs, based

on a lodestar method calculation, and $12,000 to be distrib-

uted among the nine representative plaintiffs.

Objectors timely appealed both the Approval and Fee

Orders.

STANDARDS OF REVIEW

We review a district court’s approval of a class action set-

tlement for clear abuse of discretion. Rodriguez v. W. Publ’g

Corp., 563 F.3d 948, 963 (9th Cir. 2009). Such review is “ex-

11104 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

tremely limited,” and we “will affirm if the district judge

applies the proper legal standard and his findings of fact are

not clearly erroneous.” In re Mego Fin. Corp. Sec. Litig., 213

F.3d 454, 458 (9th Cir. 2000).

We also review for abuse of discretion a district court’s

award of fees and costs to class counsel, as well as its method

of calculation. Lobatz v. U.S. W. Cellular of Cal., Inc., 222

F.3d 1142, 1148-49 (9th Cir. 2000). Findings of fact underly-

ing an award of fees are reviewed for clear error. Id. at 1148.

DISCUSSION

[1] Objectors contest both the fee award and the approval

order, but their objections are motivated by the same issue:

what they claim are excessive attorneys’ fees, negotiated

unfairly by class counsel and ultimately awarded unreason-

ably by the court. Objectors argue that the district court

should not have approved as fair and reasonable a settlement

agreement that, on its face, so disproportionately advances the

interests of class counsel over those of the class itself. They

further contend that, even if the approval order can be upheld,

class counsel should not have been awarded eight times the

amount of the class recovery. Rather, they argue, the two

negotiated sums should have been viewed as a “constructive

common fund” and fees limited to an appropriate percentage

thereof.

We would ordinarily begin our review with the Approval

Order, whose vacatur would render moot the challenge to the

Fee Order. However, because Objectors’ challenge to the fair-

ness of the settlement agreement relies, in large part, on a

determination that the requested fees were substantively

unreasonable, we instead begin by temporarily assuming the

Approval Order to be valid and proceed to examine the rea-

sonableness of the fee award first, before then returning to

review the Approval Order itself.

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11105

I. Attorneys’ Fee Award

A. Applicable Legal Standards

[2] While attorneys’ fees and costs may be awarded in a

certified class action where so authorized by law or the par-

ties’ agreement, Fed. R. Civ. P. 23(h), courts have an indepen-

dent obligation to ensure that the award, like the settlement

itself, is reasonable, even if the parties have already agreed to

an amount. See Staton v. Boeing Co., 327 F.3d 938, 963-64

(9th Cir. 2003); Knisley v. Network Assoc., 312 F.3d 1123,

1125 (9th Cir. 2002); Zucker v. Occidental Petroleum Corp.,

192 F.3d 1323, 1328-29 & n.20 (9th Cir. 1999). The reason-

ableness of any fee award must be considered against the

backdrop of the “American Rule,” which provides that courts

generally are without discretion to award attorneys’ fees to a

prevailing plaintiff unless (1) fee-shifting is expressly autho-

rized by the governing statute; (2) the opponents acted in bad

faith or willfully violated a court order; or (3) “the successful

litigants have created a common fund for recovery or

extended a substantial benefit to a class.” Alyeska Pipeline

Serv. Co. v. Wilderness Soc., 421 U.S. 240, 275 (1975) (Bren-

nan, J., dissenting); accord Zambrano v. City of Tustin, 885

F.2d 1473, 1481 & n.25 (9th Cir. 1989).

The award of attorneys’ fees in a class action settlement is

often justified by the common fund or statutory fee-shifting

exceptions to the American Rule, and sometimes by both. See

Staton, 327 F.3d at 972; see also Court Awarded Attorney

Fees, Third Circuit Task Force, 108 F.R.D. 237, 250 (1985)

(purpose of common-fund exception is to “avoid the unjust

enrichment of those who benefit from the fund that is created,

protected, or increased by the litigation and who otherwise

would bear none of the litigation costs”). We have approved

two different methods for calculating a reasonable attorneys’

fee depending on the circumstances.

The “lodestar method” is appropriate in class actions

brought under fee-shifting statutes (such as federal civil

11106 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

rights, securities, antitrust, copyright, and patent acts), where

the relief sought—and obtained—is often primarily injunctive

in nature and thus not easily monetized, but where the legisla-

ture has authorized the award of fees to ensure compensation

for counsel undertaking socially beneficial litigation. See

Hanlon v. Chrysler Corp., 150 F.3d 1011, 1029 (9th Cir.

1998); In re General Motors Corp. Pick-up Truck Fuel Tank

Prods. Liability Litig., 55 F.3d 768, 821 (3d Cir. 1995).

The lodestar figure is calculated by multiplying the number

of hours the prevailing party reasonably expended on the liti-

gation (as supported by adequate documentation) by a reason-

able hourly rate for the region and for the experience of the

lawyer. Staton, 327 F.3d at 965. Though the lodestar figure is

“presumptively reasonable,” Cunningham v. Cnty. of Los

Angeles, 879 F.2d 481, 488 (9th Cir. 1988), the court may

adjust it upward or downward by an appropriate positive or

negative multiplier reflecting a host of “reasonableness” fac-

tors, “including the quality of representation, the benefit

obtained for the class, the complexity and novelty of the

issues presented, and the risk of nonpayment,” Hanlon, 150

F.3d at 1029 (citing Kerr v. Screen Extras Guild, Inc., 526

F.2d 67, 70 (9th Cir. 1975)7). Foremost among these consider-

7

Kerr identifies twelve factors relevant to a determination of reasonable

attorneys’ fees:

(1) the time and labor required; (2) the novelty and difficulty of

the questions involved; (3) the skill requisite to perform the legal

service properly; (4) the preclusion of other employment by the

attorney due to acceptance of the case; (5) the customary fee; (6)

whether the fee is fixed or contingent; (7) time limitations

imposed by the client or the circumstances; (8) the amount

involved and the results obtained; (9) the experience, reputation,

and the ability of the attorneys; (10) the ‘undesirability’ of the

case; (11) the nature and length of the professional relationship

with the client; and (12) awards in similar cases.

526 F.2d at 70. Many of these factors are “subsumed within the initial cal-

culation of hours reasonably expended at a reasonable rate.” Hensley v.

Eckerhart, 461 U.S. 424, 434 n.9 (1983), and the Kerr factors only war-

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11107

ations, however, is the benefit obtained for the class. See Hen-

sley v. Eckerhart, 461 U.S. 424, 434-36 (1983); McCown v.

City of Fontana, 565 F.3d 1097, 1102 (9th Cir. 2009) (ulti-

mate reasonableness of the fee “is determined primarily by

reference to the level of success achieved by the plaintiff”).

Thus, where the plaintiff has achieved “only limited success,”

counting all hours expended on the litigation—even those rea-

sonably spent—may produce an “excessive amount,” and the

Supreme Court has instructed district courts to instead “award

only that amount of fees that is reasonable in relation to the

results obtained.” Hensley, 461 U.S. at 436, 440.

[3] Where a settlement produces a common fund for the

benefit of the entire class, courts have discretion to employ

either the lodestar method or the percentage-of-recovery

method. In re Mercury Interactive Corp., 618 F.3d 988, 992

(9th Cir. 2010) (citing Powers v. Eichen, 229 F.3d 1249, 1256

(9th Cir. 2000)). Because the benefit to the class is easily

quantified in common-fund settlements, we have allowed

courts to award attorneys a percentage of the common fund in

lieu of the often more time-consuming task of calculating the

lodestar. Applying this calculation method, courts typically

calculate 25% of the fund as the “benchmark” for a reason-

able fee award, providing adequate explanation in the record

of any “special circumstances” justifying a departure. Six (6)

Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301,

1311 (9th Cir. 1990); accord Powers, 229 F.3d at 1256-57;

Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 272

(9th Cir. 1989).

[4] Though courts have discretion to choose which calcula-

tion method they use, their discretion must be exercised so as

rant a departure from the lodestar figure in “rare and exceptional cases,”

Fischer v. SJB-P.D., Inc., 214 F.3d 1115, 1119 n.4 (9th Cir. 2000) (quot-

ing Penn. v. Del. Valley Citizens’ Council for Clean Air, 478 U.S. 546,

565 (1986) (quotation marks omitted). At least one factor is no longer

valid—whether the fee was fixed or contingent. See Davis v. City and

Cnty. of S.F., 976 F.2d 1536, 1546 (9th Cir. 1992).

11108 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

to achieve a reasonable result. See In re Coordinated Pretrial

Proceedings, 109 F.3d at 607 (citing In re Wash. Pub. Power

Supply Sys. Sec. Litig., 19 F.3d 1291, 1294-95 n.2 (9th Cir.

1994)). Thus, for example, where awarding 25% of a “mega-

fund” would yield windfall profits for class counsel in light of

the hours spent on the case, courts should adjust the bench-

mark percentage or employ the lodestar method instead. Six

Mexican Workers, 904 F.2d at 1311; see In re Prudential Ins.

Co. America Sales Practice Litig. Agent Actions, 148 F.3d

283, 339 (3d Cir. 1998) (explaining that basis for inverse rela-

tionship between size of fund and percentage awarded for fees

is that “in many instances the increase in recovery is merely

a factor of the size of the class and has no direct relationship

to the efforts of counsel” (internal quotation marks omitted)).

B. Approval of the Attorneys’ Fee Award in the

Present Case

The district court here applied the lodestar method,

although it never announced a lodestar figure. After finding

numerous defects in class counsel’s proposed computation of

its $1.6 million lodestar, including duplicative entries, exces-

sive charges for most categories of services, a substantial

amount of block billing, and use of an inflated hourly rate, the

court announced that its own analysis revealed the lodestar

still “substantially exceeds” the $800,000 defendants agreed

to pay.

Citing our previous observation that a “defendant is inter-

ested only in disposing of the total claim asserted against it,”

Staton, 327 F.3d at 964, Objectors argue the district court

should have treated this settlement as producing a “construc-

tive common fund” and employed a percentage-of-recovery

method to assess the reasonableness of the $800,000 fee

award, rather than relying exclusively on a lodestar calcula-

tion. Several courts have embraced the constructive common

fund approach, warning that “private agreements to structure

artificially separate fee and settlement arrangements” should

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11109

not enable parties to circumvent the 25% benchmark require-

ment on “what is in economic reality a common fund situa-

tion.” In re Gen. Motors, 55 F.3d at 821; see Johnston v.

Comerica Mortg. Corp., 83 F.3d 241, 246 (8th Cir. 1996)

(“[I]n essence the entire settlement amount comes from the

same source. The award to the class and the agreement on

attorney fees represent a package deal.”); cf. Manual for Com-

plex Litig. § 21.75 (4th ed. 2008) (“If an agreement is reached

on the amount of a settlement fund and a separate amount for

attorney fees . . . the sum of the two amounts ordinarily

should be treated as a settlement fund for the benefit of the

class.”). Plaintiffs insist this is not a common-fund case

because the relief obtained was primarily injunctive in nature

and because, as prevailing parties under California Civil Code

§ 1750’s fee-shifting provision, they are entitled to attorneys’

fees calculated under the lodestar method.

[5] Whether or not we view this as a common-fund case,

we agree with Objectors that the district court needed to do

more to assure itself—and us—that the amount awarded was

not unreasonably excessive in light of the results achieved.

Notably, the district court made (1) no explicit calculation of

a reasonable lodestar amount; (2) no comparison between the

settlement’s attorneys’ fees award and the benefit to the class

or degree of success in the litigation; and (3) no comparison

between the lodestar amount and a reasonable percentage

award. On this record, we lack a sufficient basis for determin-

ing the reasonableness of the award.

First, our discomfort is not with the choice of the lodestar

method as a primary basis for calculation, but rather the

absence of explicit calculation or explanation of the district

court’s result. The district court “s[aw] no need” to calculate

a precise lodestar amount in light of defendants’ willingness

to pay and because reducing the award below $800,000 would

in no way benefit the class or enhance the cy pres award. But

a defendant’s advance agreement not to object cannot relieve

the district court of its duty to assess fully the reasonableness

11110 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

of the fee request. See Staton, 327 F.3d at 963-64; Knisley,

312 F.3d at 1125. Under the lodestar method, the district court

must calculate the lodestar figure based on the number of

hours reasonably expended on the litigation, adjusting the fig-

ure to account for the degree of success class counsel attained,

along with other factors. From the face of the Fee Order, how-

ever, we do not have sufficient information from which to

conclude that the district court included a reasonable number

of hours in its lodestar “calculation” or that it “considered the

relationship between the amount of the fee awarded and the

results obtained.” Hensley, 461 U.S. at 437 (“It [is] important

. . . for the district court to provide a concise but clear expla-

nation of its reasons for the fee award.”); accord McCown,

565 F.3d at 1102 (“Once the district court completes its analy-

sis of the final lodestar amount, it must explain how it arrived

at its determination with sufficient specificity to permit an

appellate court to determine whether the district court abused

its discretion in the way the analysis was undertaken.”).

Instead, we know only that the district court believed the

lodestar figure to be less than $1.6 million but greater than

$800,000.

Second, the district court declined to reduce the award

because the injunctive relief and cy pres payment provided “at

least minimal benefit,” even while acknowledging that “the

settlement did not achieve all the goals of the suit.” The dis-

trict court appears to have conflated the Rule 23(e) standard

for approval of a settlement agreement (which requires con-

sideration of whether the settlement agreement offers plain-

tiffs more than they are likely to achieve at trial) with the

requirement that the fee award be “reasonable in relation to

the results obtained.” Hensley, 461 U.S. at 440. Although the

court stated that the “substantial reduction” below the lodestar

accounted for the fact that “there were a number of claims for

which class counsel achieved no relief,” we remain in the

dark both as to how substantial a reduction it was and what

level of success plaintiffs in fact achieved. The district court

made no findings in its Approval Order with regard to the

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11111

value vel non of the injunctive relief, noting only that the cy

pres award was an appropriate form of relief given the large

class size. Nor did it discuss in the Fee Order the value of the

injunctive relief or whether it in fact was “socially beneficial”

as would justify a fee award under California Civil Code

§ 1750’s fee-shifting provision. Cf. Fed. R. Civ. P. 23(h),

2003 Advisory Cmte. Notes (“Settlements involving non-

monetary provisions for class members also deserve careful

scrutiny to ensure that these provisions have actual value to

the class.”); In re TD Ameritrade Accountholder Litig., 266

F.R.D. 418, 423 (N.D. Cal. 2009) (“[T]he standard [under

Rule 23(e)] is not how much money a company spends on

purported benefits, but the value of those benefits to the

class.” (citing O’Keefe v. Mercedes-Benz United States, LLC,

214 F.R.D. 266, 304 (M.D. Pa. 2003))). With neither a lode-

star figure nor a sense of what degree of success this settle-

ment agreement achieved, we have no basis for affirming the

fee award as reasonable under the lodestar approach.

Third, even though a district court has discretion to choose

how it calculates fees, we have said many times that it

“abuses that ‘discretion when it uses a mechanical or formu-

laic approach that results in an unreasonable reward.’ ” In re

Mercury Interactive Corp., 618 F.3d at 992 (quoting Powers,

229 F.3d at 1256). Thus, even though the lodestar method

may be a perfectly appropriate method of fee calculation, we

have also encouraged courts to guard against an unreasonable

result by cross-checking their calculations against a second

method. See, e.g., Vizcaino v. Microsoft Corp., 290 F.3d

1043, 1050-51 (9th Cir. 2002); see also In re Gen. Motors, 55

F.3d at 820. Just as the lodestar method can “confirm that a

percentage of recovery amount does not award counsel an

exorbitant hourly rate,” the percentage-of-recovery method

can likewise “be used to assure that counsel’s fee does not

dwarf class recovery.” In re Gen. Motors, 55 F.3d at 821 n.40.

“If the lodestar amount overcompensates the attorneys

according to the 25% benchmark standard, then a second look

to evaluate the reasonableness of the hours worked and rates

11112 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

claimed is appropriate.” In re Coordinated Pretrial Proceed-

ings, 109 F.3d at 607.

[6] If the district court here took that second look, the

record does not reflect it. 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, viewing the $800,000 allotment for attor-

neys’ fees, the $12,000 allotment for an incentive award, the

$100,000 cy pres award, and the $50,000 allotment for fees

as a “constructive common fund.” Twenty-five percent of this

$962,000 fund, by contrast, would have yielded only

$240,500 in attorneys’ fees. Even if we included the $1.2 mil-

lion notice costs in the constructive fund (and accordingly

reduced the fees to $38,000), the attorneys’ fees awarded

would constitute 37.2% of this $2.15 million fund, in contrast

to a 25% benchmark figure of $537,500. Plaintiffs urge us to

find that the fee award is justified because the injunctive relief

confers a valuable benefit and was the primary objective of

the lawsuit, but the district court did not make findings on the

value of the injunctive relief, so we cannot evaluate whether

it justifies an otherwise disproportionate award.8

[7] While we cannot say the disproportion between the fee

award and the benefit obtained for the class was per se unrea-

sonable, in the absence of an adequate explanation of the

award, “we have no choice but to remand the case to the dis-

trict court to permit it to make the necessary calculations and

provide the necessary explanations.” McCown, 565 F.3d at

1102 (citing Tutor-Saliba Corp. v. City of Hailey, 452 F.3d

1055, 1065 (9th Cir. 2006)).

8

We note, however, that the value of the injunctive relief is not apparent

to us from the face of the complaint, which seeks to recover significant

monetary damages for alleged economic injury, nor from the progression

of the settlement talks, the last of which occurred after defendants had

already voluntarily added new warnings to their websites and product

manuals.

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11113

On remand, the district court should (1) decide whether to

treat the settlement as a common fund; (2) choose the lodestar

or percentage method for calculating a reasonable fee and

make explicit calculations; (3) ensure that the fee award is

reasonable considering, inter alia, the degree of success in the

litigation and benefit to the class; and (4) if standard calcula-

tions yield an unjustifiably disproportionate award, adjust the

lodestar or percentage accordingly.

II. Approval of the Settlement Agreement

A. Applicable Legal Standards

[8] Approval of the settlement agreement was not condi-

tioned on the award of attorneys’ fees and costs or an incen-

tive award, and therefore our vacatur of the fee award does

not necessitate invalidation of the approval order. See, e.g.,

Rodriguez, 563 F.3d at 969 (affirming approval of the settle-

ment but reversing and remanding the award of attorneys’

fees). Nonetheless, 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, we must vacate

and remand the Approval Order as well, so that the court may

appropriately factor this into its Rule 23(e) analysis. On

remand, the district court should reconsider its approval of the

settlement after recalculating a reasonable amount of fees for

class counsel.

[9] Courts have long recognized that “settlement class

actions present unique due process concerns for absent class

members.” Hanlon, 150 F.3d at 1026. One inherent risk is that

class counsel may collude with the defendants, “tacitly reduc-

ing the overall settlement in return for a higher attorney’s

fee.” Knisley, 312 F.3d at 1125; see Evans v. Jeff D., 475 U.S.

717, 733 (1986) (recognizing that “the possibility of a tradeoff

between merits relief and attorneys’ fees” is often implicit in

11114 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

class action settlement negotiations); In re Gen. Motors, 55

F.3d at 805.

[10] To guard against this potential for class action abuse,

Rule 23(e) of the Federal Rules of Civil Procedure requires

court approval of all class action settlements, which may be

granted only after a fairness hearing and a determination that

the settlement taken as a whole is fair, reasonable, and ade-

quate. Fed. R. Civ. P. 23(e)(2); see Staton, 327 F.3d at 972

n.22 (court’s role is to police the “inherent tensions among

class representation, defendant’s interests in minimizing the

cost of the total settlement package, and class counsel’s inter-

est in fees”); Hanlon, 150 F.3d at 1026.

The factors in a court’s fairness assessment will naturally

vary from case to case, but courts generally must weigh:

(1) the strength of the plaintiff’s case; (2) the risk,

expense, complexity, and likely duration of further

litigation; (3) the risk of maintaining class action sta-

tus throughout the trial; (4) the amount offered in

settlement; (5) the extent of discovery completed and

the stage of the proceedings; (6) the experience and

views of counsel; (7) the presence of a governmental

participant; and (8) the reaction of the class members

of the proposed settlement.

Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 575 (9th

Cir. 2004); Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370,

1375 (9th Cir. 1993).

The district court considered each of these factors and

found that several of them favored settlement approval: (1)

plaintiffs’ case was not particularly strong in light of defen-

dants’ significant defenses; (2) further litigation would be

time-consuming, complex, and expensive for both sides; (3)

the settlement provided injunctive and cy pres awards, which

did not do the class any harm and which was more than plain-

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11115

tiffs might achieve at trial given the litigation risks; (4) the

parties had already consulted experts and exchanged signifi-

cant discovery permitting an informed decision about settle-

ment; and (5) the settlement was negotiated over an extended

period of time by experienced counsel on both sides, and was

mediated and approved by a retired judge.

But where, as here, a settlement agreement is negotiated

prior to formal class certification, consideration of these eight

Churchill factors alone is not enough to survive appellate

review.

[11] Prior to formal class certification, there is an even

greater potential for a breach of fiduciary duty owed the class

during settlement. Accordingly, such agreements must with-

stand an even higher level of scrutiny for evidence of collu-

sion or other conflicts of interest than is ordinarily required

under Rule 23(e) before securing the court’s approval as fair.

Hanlon, 150 F.3d at 1026; accord In re Gen. Motors, 55 F.3d

at 805 (courts must be “even more scrupulous than usual in

approving settlements where no class has yet been formally

certified”); Mars Steel Corp. v. Continental Ill. Nat’l Bank &

Trust Co. of Chicago, 834 F.2d 677, 681 (7th Cir. 1987) (Pos-

ner, J.) (“[W]hen class certification is deferred, a more careful

scrutiny of the fairness of the settlement is required.”); Wein-

berger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982) (Friendly,

J.) (reviewing courts must employ “even more than the usual

care”); see also Manual for Complex Litig. § 21.612 (4th ed.

2004). The district court’s approval order must show not only

that “it has explored [the Churchill] factors comprehensive-

ly,” but also that the settlement is “not [ ] the product of collu-

sion among the negotiating parties.” In re Mego Fin. Corp.,

213 F.3d at 458.

[12] Collusion may not always be evident on the face of a

settlement, and courts therefore must be particularly vigilant

not only for explicit collusion, but also for more subtle signs

that class counsel have allowed pursuit of their own self-

11116 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

interests and that of certain class members to infect the nego-

tiations. Staton, 327 F.3d at 960; see also Third Circuit Task

Force, 108 F.R.D. at 266. A few such signs are:

(1) “when counsel receive a disproportionate distri-

bution of the settlement, or when the class receives

no monetary distribution but class counsel are amply

rewarded,” Hanlon, 150 F.3d at 1021; see Murray v.

GMAC Mortg. Corp., 434 F.3d 948, 952 (7th Cir.

2006); Crawford v. Equifax Payment Servs., Inc.,

201 F.3d 877, 882 (7th Cir. 2000);

(2) when the parties negotiate a “clear sailing”

arrangement providing for the payment of attorneys’

fees separate and apart from class funds, which car-

ries “the potential of enabling a defendant to pay

class counsel excessive fees and costs in exchange

for counsel accepting an unfair settlement on behalf

of the class,” Lobatz, 222 F.3d at 1148; see Weinber-

ger v. Great N. Nekoosa Corp., 925 F.2d 518, 524

(1st Cir. 1991) (“[L]awyers might urge a class settle-

ment at a low figure or on a less-than-optimal basis

in exchange for red-carpet treatment on fees.”); and

(3) when the parties arrange for fees not awarded to

revert to defendants rather than be added to the class

fund, see Mirfasihi v. Fleet Mortg. Corp., 356 F.3d

781, 785 (7th Cir. 2004) (Posner, J.).

B. Approval of the Settlement Agreement in the

Present Case

[13] Here, the pre-certification settlement agreement

included all three of these warning signs. As discussed earlier,

the settlement’s provision for attorneys’ fees is apparently dis-

proportionate to the class reward, which includes no monetary

distribution. The settlement included a “clear sailing agree-

ment” in which defendants agreed not to object to an award

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11117

of attorneys’ fees up to eight times the monetary cy pres relief

afforded the class. Moreover, the settlement also contained a

“kicker”: all fees not awarded would revert to defendants

rather than be added to the cy pres fund or otherwise benefit

the class. Confronted with these multiple indicia of possible

implicit collusion, the district court had a special “obligat[ion]

to assure itself that the fees awarded in the agreement were

not unreasonably high,” Staton, 327 F.3d at 965, for if they

were, “the likelihood is that the defendant obtained an eco-

nomically beneficial concession with regard to the merits pro-

visions, in the form of lower monetary payments to class

members or less injunctive relief for the class than could oth-

erwise have been obtained,” id. at 964.

[14] The Approval Order, however, does not provide ade-

quate assurance. Rather than inquire further into why the par-

ties had negotiated such a disproportionate distribution

between fees and relief, the district court did not scrutinize the

clear sailing attorneys’ fee provision because (1) the parties

claimed to negotiate the “core terms” of the settlement agree-

ment with a neutral mediator before turning to fees, (2) the

attorneys’ fee provision was severable from the agreement,

and (3) the fees were to come from a separate fund and thus

would have no bearing on the amount of class recovery.

But these factors did not obviate the need to examine the

fee provision in light of the rest of the agreement. First, the

mere presence of a neutral mediator, though a factor weighing

in favor of a finding of non-collusiveness, is not on its own

dispositive of whether the end product is a fair, adequate, and

reasonable settlement agreement. While the Rule 23(a) ade-

quacy of representation inquiry is designed to foreclose class

certification in the face of “actual fraud, overreaching or col-

lusion,” the Rule 23(e) reasonableness inquiry is designed

precisely to capture instances of unfairness not apparent on

the face of the negotiations. Staton, 327 F.3d at 960 (emphasis

in original). In a Third Circuit class action settlement where

class counsel provided verbal assurances that “attorneys’ fees

11118 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

were negotiated separately, after we agreed on everything

else,” the Third Circuit refused “to place such dispositive

weight on the parties’ self-serving remarks.” In re Gen.

Motors, 55 F.3d at 804; see generally Third Circuit Task

Force, 108 F.R.D. at 266-70 (suggesting guidelines for miti-

gating the potential for collusion while still facilitating suc-

cessful settlement). Similarly here, the district court should

have pressed the parties to substantiate their bald assertions

with corroborating evidence.

Second, the district court should not have ignored the clear

sailing fee provision simply because approval of the award

was not dependent on the approval of fees. “[T]he very exis-

tence of a clear sailing provision increases the likelihood that

class counsel will have bargained away something of value to

the class.” Weinberger, 925 F.2d at 525. Therefore, when con-

fronted with a clear sailing provision, the district court has a

heightened duty to peer into the provision and scrutinize

closely the relationship between attorneys’ fees and benefit to

the class, being careful to avoid awarding “unreasonably

high” fees simply because they are uncontested. Staton, 327

F.3d at 954.

Furthermore, that a provision is severable does not render

it irrelevant to the overall reasonableness of the agreement,

for “[i]t is the settlement taken as a whole, rather than the

individual component parts, that must be examined for overall

fairness. . . . The settlement must stand or fall in its entirety.”

Hanlon, 150 F.3d at 1026 (citing Officers for Justice v. Civil

Serv. Comm’n of S.F., 688 F.2d 615, 628 (9th Cir. 1982))

(emphasis added). By disregarding the contents of the clear

sailing fee provision here, including both the disproportionate

amounts negotiated and the reversionary kicker arrangement,

the district court effectively “delete[d]” it from the settle-

ment—an approach that is beyond the scope of the court’s

discretion. Officers for Justice, 688 F.2d at 630 (noting that,

while “the district court may suggest modifications,” it “may

not delete, modify, or substitute certain provisions” of the set-

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11119

tlement agreement but rather “must consider the proposal as

a whole and as submitted”); accord Hanlon, 150 F.3d at 1026.

Simply put, a severable clause simply may not be severed

from the court’s Rule 23(e) analysis.

Finally, “[t]hat the defendant in form agrees to pay the fees

independently of any monetary award or injunctive relief pro-

vided to the class in the agreement does not detract from the

need carefully to scrutinize the fee award.” Staton, 327 F.3d

at 964. Even when technically funded separately, the class

recovery and the agreement on attorneys’ fees should be

viewed as a “package deal.” Johnston, 83 F.3d at 245-46.

Although we do not go so far as to hold that the district court

must treat the package as a constructive common fund for

purposes of analyzing the reasonableness of the fee award,

assessment of the settlement’s overall reasonableness must

take into account the defendant’s overall willingness to pay.

Ordinarily, “ ‘a defendant is interested only in disposing of

the total claim asserted against it,” and “ ‘the allocation

between the class payment and the attorneys’ fees is of little

or no interest to the defense.’ ” Staton, 327 F.3d at 964 (quot-

ing In re Gen. Motors, 55 F.3d at 819-20). A district court

therefore must ensure that both the amount and mode of pay-

ment of attorneys’ fees are fair, regardless of “whether the

attorneys’ fees come from a common fund or are otherwise

paid.” Zucker, 192 F.3d at 1328 & n.20.

For this same reason, a kicker arrangement reverting

unpaid attorneys’ fees to the defendant rather than to the class

amplifies the danger of collusion already suggested by a clear

sailing provision. If the defendant is willing to pay a certain

sum in attorneys’ fees as part of the settlement package, but

the full fee award would be unreasonable, there is no apparent

reason the class should not benefit from the excess allotted for

fees. The clear sailing provision reveals the defendant’s will-

ingness to pay, but the kicker deprives the class of that full

potential benefit if class counsel negotiates too much for its

fees. Although the district court here reasoned that class coun-

11120 IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY

sel’s possibility of recovering nothing in fees rendered the

clear sailing provision fair, awarding class counsel nothing

would not cure an otherwise unfair settlement if those funds

should have been negotiated to revert to the class rather than

to the “putative wrongdoer[s].” See Mirfasihi, 356 F.3d at

785. Unless the district court is able to conclude that in this

particular case, a kicker provision is in the class’ best interest

as part of the settlement package, the kicker makes it less

likely that the settlement can be approved if the district court

determines the clear sailing provision authorizes unreasonably

high attorneys’ fees.

[15] Although clear sailing provisions are not prohibited,

they “by [their] nature deprive[ ] the court of the advantages

of the adversary process” in resolving fee determinations and

are therefore disfavored. Weinberger, 925 F.2d at 525; see

Malchman v. Davis, 761 F.2d 893, 907-08 (2d Cir. 1985)

(Newman, J., concurring), abrogated on other grounds by

Amchem. Prods., Inc. v. Windsor, 521 U.S. 591 (1997). Given

the questionable features of the fee provision here, the court

was required to examine the negotiation process with even

greater scrutiny than is ordinarily demanded, and approval of

the settlement had to be supported by a clear explanation of

why the disproportionate fee is justified and does not betray

the class’s interests. Because the district court did not provide

such explanation, we must vacate the Approval Order and

remand for further consideration.9

9

Because we vacate both orders, we need not address whether Objectors

would have independent standing to challenge the Fee Order alone were

the Approval Order to remain intact. See Zucker, 192 F.3d at 1326;

Lobatz, 222 F.3d at 1147; Powers v. Eichen, 229 F.3d 1249, 1256 (9th Cir.

2000); but see Glasser v. Volkswagen of Am., 2011 U.S. App. LEXIS

9943, at *10-11 (9th Cir. May 17, 2011) (no standing to challenge fee

award alone where objector expressly disclaimed recovery under a “con-

structive common fund” theory).

IN RE BLUETOOTH HEADSET PRODUCTS LIABILITY 11121

CONCLUSION

On remand, the district court may reach any number of

conclusions: it may find the $800,000 attorneys’ fee award

reasonable in light of the hours reasonably expended and the

results achieved, and re-approve both orders; it may deter-

mine the fee request is excessive but find no further evidence

that class counsel betrayed class interests for their own bene-

fit, and thus uphold the agreement while lowering the fee

award; or it may find the fee request excessive and conclude

that class counsel therefore negotiated an unreasonable settle-

ment and direct the parties back to the negotiating table.

In vacating the Approval and Fee Orders, we express no

opinion on the ultimate fairness of what the parties have nego-

tiated, for we have no business “substitut[ing] our notions of

fairness for those of the district judge.” Officers for Justice,

688 F.2d at 626 (internal citations omitted). Rather, we vacate

and remand to allow the district court to properly exercise its

discretion in accordance with the principles discussed here.

VACATED and REMANDED. Each party shall bear its

own costs on appeal.