OPINION
The settlement agreement approved in this products liability class action provides the class $100,000 in cy pres awards and zero dollars for economic injury, while setting aside up to $800,000 for class counsel and $12,000 for the class representatives— 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 district court may conduct a more searching inquiry into the fairness 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 loss
Plaintiffs’ Second Amended Consolidated Complaint sought money damages on behalf of millions of individuals who had purchased Bluetooth headsets since June 30, 2002,
Class counsel spent considerable time researching legal and industry standards on acceptable noise levels, surveying warnings 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 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 purporting 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 prevention of hearing loss;
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, magazine advertisements, and a dedicated Internet website, reaching about 80% of potential class members an average of more than 2.5 times each. Of the millions of potential class members, 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 opportunity 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, reasonable, and adequate.
IV. Award of Fees and Costs
After ordering class counsel to produce additional unredacted billing records and reviewing the files submitted, the district 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 distributed 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 settlement for clear abuse of discretion. Rodriguez v. W. Publ’g Corp.,
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.,
DISCUSSION
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 unreasonably 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,
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 fairness 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 reasonableness of the fee award first, before then returning to review the Approval Order itself.
I. Attorneys’ Fee Award A. Applicable Legal Standards
While attorneys’ fees and costs may be awarded in a certified class action where so authorized by law or the parties’ agreement, Fed.R.Civ.P. 23(h), courts have an independent 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.,
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,
The “lodestar method” is appropriate in class actions brought under fee-shifting statutes (such as federal civil 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 legislature has authorized the award of fees to ensure compensation for counsel undertaking socially beneficial litigation. See Hanlon v. Chrysler Corp.,
The lodestar figure 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. Staton,
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.,
Though courts have discretion to choose which calculation method they use, their discretion must be exercised so as to achieve a reasonable result. See In re Coordinated Pretrial Proceedings,
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, excessive 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 interested only in disposing of the total claim asserted against it,” Sta-ton,
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 determining 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 of the fee request. See
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 district court appears to have conflated the Rule 23(e) standard for approval of a settlement agreement (which requires consideration of whether the settlement agreement offers plaintiffs 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,
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 formulaic approach that results in an unreasonable reward.’ ” In re Mercury Interactive Corp.,
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 attorneys’ 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 million 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.
While we cannot say the disproportion between the fee award and the benefit obtained for the class was per se unreasonable, in the absence of an adequate explanation of the award, “we have no choice but to remand the case to the district court to permit it to make the necessary calculations and provide the necessary explanations.” McCown,
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 calculations yield an unjustifiably disproportionate award, adjust the lodestar or percentage accordingly.
II. Approval of the Settlement Agreement
A. Applicable Legal Standards
Approval of the settlement agreement was not conditioned on the award of attorneys’ fees and costs or an incentive award, and therefore our vacatur of the fee award does not necessitate invalidation of the approval order. See, e.g., Rodriguez,
Courts have long recognized that “settlement class actions present unique due process concerns for absent class members.” Hanlon,
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 adequate. Fed.R.Civ.P. 23(e)(2); see Staton,
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 plaintiffs case;
(2) the risk, expense, complexity, and likely duration of further litigation; (3) the risk of maintaining class action status 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.,
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 defendants’ 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 plaintiffs might achieve at trial given the litigation risks; (4) the parties had already consulted experts and exchanged significant discovery permitting an informed decision about settlement; 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.
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 withstand an even higher level of scrutiny for evidence of collusion or other conflicts of interest than is ordinarily required under Rule 23(e) before securing the court’s approval as fair. Hanlon,
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-interests and that of certain class members to infect the negotiations. Staton,
(1) “when counsel receive a disproportionate distribution 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 carries “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 Weinberger v. Great N. Nekoosa Corp.,925 F.2d 518 , 524 (1st Cir.1991) (“lawyers might urge a class settlement 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
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 disproportionate to the class reward, which includes no monetary distribution. The settlement included a “clear sailing agreement” in which defendants agreed not to object to an award 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 “obligation] to assure itself that the fees awarded in the agreement were not unreasonably high,” Staton,
The Approval Order, however, does not provide adequate assurance. Rather than inquire further into why the parties had negotiated such a disproportionate distribution between fees and relief, the district court did not scrutinize the clear sailing
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) adequacy of representation inquiry is designed to foreclose class certification in the face of “actual fraud, overreaching or collusion,” the Rule 23(e) reasonableness inquiry is designed precisely to capture instances of unfairness not apparent on the face of the negotiations. Staton,
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 existence of a clear sailing provision increases the likelihood that class counsel will have bargained away something of value to the class.” Weinberger,
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,
Finally, “[t]hat the defendant in form agrees to pay the fees independently of any monetary award or injunctive relief provided to the class in the agreement does not detract from the need carefully to scrutinize the fee award.” Staton,
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 willingness 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 counsel’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,
Although clear sailing provisions are not prohibited, they “by [their] nature deprivet ] the court of the advantages of the adversary process” in resolving fee determinations and are therefore disfavored. Weinberger,
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
In vacating the Approval and Fee Orders, we express no opinion on the ultimate fairness of what the parties have negotiated, for we have no business “substituting] our notions of fairness for those of the district judge.” Officers for Justice,
VACATED and REMANDED. Each party shall bear its own costs on appeal.
Notes
. Plaintiffs define noise-induced hearing loss as the gradual and permanent loss of hearing over time caused by unsafe levels of noise.
. 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 Practices Act, 815 ILCS 510,
. Another lawsuit raising similar questions of law and fact, Kirkpatrick v. Motorola, No. 07-5570(DSF), was subsequently filed and also consolidated with the multi-district litigation.
. 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 defendants. More than 100 million Bluetooth headsets were sold during that period.
.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.
. 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.
. Ken 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 calculation of hours reasonably expended at a reasonable rate.” Hensley v. Eckerhart,
. 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.
. 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,