In re Wawa, Inc. Data Security Litigation v. ( 2023 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
No. 22-1950
______________
IN RE WAWA, INC. DATA SECURITY LITIGATION
THEODORE H. FRANK,
Appellant
______________
On Appeal from the United States District Court for the
Eastern District of Pennsylvania
(D.C. Civil No. 2:19-cv-06019)
District Judge: Honorable Gene E. K. Pratter
______________
Argued
March 30, 2023
Before: MATEY, FREEMAN, and FUENTES, Circuit
Judges.
(Filed: November 2, 2023)
______________
Theodore H. Frank
Adam E. Schulman [ARGUED]
Hamilton Lincoln Law Institute
1629 K Street, N.W.
Suite 300
Washington, DC 20006
Counsel for Appellant
Donald E. Haviland, Jr.
Haviland Hughes
201 South Maple Street
Suite 110
Ambler, PA 19002
Gerard A. Dever
Roberta D. Liebenberg
Fine Kaplan & Black
One South Broad Street
Suite 2300
Philadelphia, PA 19107
Samantha E. Holbrook
Benjamin F. Johns [ARGUED]
Jonathan Shub
Shub & Johns
200 Barr Harbor Drive
Four Tower Bridge, Suite 400
West Conshohocken, PA 19428
Counsel for Plaintiffs-Appellees
2
Kristin M. Hadgis
Gregory T. Parks [ARGUED]
Morgan, Lewis & Bockius
2222 Market Street
Philadelphia, PA 19103
Michael E. Kenneally
Morgan, Lewis & Bockius
1111 Pennsylvania Avenue, N.W.
Suite 800 North
Washington, DC 20004
Counsel for Defendants-Appellees
Melissa Holyoak
Office of Attorney General of Utah
350 North State Street
Suite 230
Salt Lake City, UT 84114
Counsel for Amicus Appellant
______________
OPINION OF THE COURT
______________
MATEY, Circuit Judge.
Convenience is king at Wawa, Inc., where guests are
invited to gas up, chow down, and swipe, tap, or click to pay
before heading on their way. Throughout 2019, uninvited
guests stopped by too. Hackers, who infiltrated Wawa’s
payment systems and helped themselves to the credit and bank
card data of some twenty-two million customers. Wawa
announced the breach on December 19, 2019; by the next day,
3
attorneys had rounded up plaintiffs and filed the first of many
class action suits seeking damages for the disclosures. A brisk
nine months later, Wawa and plaintiffs’ class counsel shook
hands on a settlement making $9 million in gift cards and some
other compensation available to customers (of which $2.9
million was claimed) and giving $3.2 million to class counsel
for fees and expenses (the “Settlement Agreement”).
Objections arrived, prompting modifications to the proposal.
But the changes are not enough to ensure class counsel receives
only a reasonable fee award, and we clarify two considerations
that loom large in that calculation: the ratio between the fee
award and amount recovered by the class members, and side
agreements between class counsel and the defendant. Because
the District Court lacked the benefit of our fresh guidance, we
will vacate the fee award and remand for further consideration.
I.
When Wawa announced that malware had been stealing
payment information for nearly a year, litigation erupted
overnight. Moving to order a ballooning docket, the District
Court consolidated the multiplying lawsuits into one class
action with three tracks: financial institutions, employees, and
consumers. The resulting master complaint asserts claims
against Wawa for negligence, negligence per se, breach of
implied contract, unjust enrichment, and violations of multiple
states’ consumer protection and data privacy laws. Our focus
is the consumer track plaintiffs who reached a proposed
settlement in September 2020 (the “Proposed Settlement
Class”).
4
The Proposed Settlement Class includes around 22
million people 1 who used electronic payments (be it credit,
debit, or something else) at a Wawa between March 4, 2019,
and December 12, 2019. The Settlement Agreement provided
three tiers of relief:
Tier 1 customers who attest that they spent at
least some time monitoring their credit can get a
$5 Wawa gift card. Total Tier 1 compensation is
subject to a $6 million cap and a $1 million floor.
Tier 2 customers who saw a fraudulent charge
that required some effort to sort out can receive
a $15 Wawa gift card for their trouble. Total Tier
2 compensation is subject to a $2 million cap
with no floor.
Tier 3 customers who show certain out-of-
pocket losses caused by the breach can receive
$500 (in currency, not Wawa gift cards). Total
Tier 3 compensation is subject to a $1 million
cap without a floor.
The Settlement Agreement also specified injunctive relief,
including upgraded security and processing systems, which
1
A mere six settlement class members opted out—a low
number not uncommon for consumer class actions. See, e.g.,
Federal Trade Commission, Consumers and Class Actions: A
Retrospective and Analysis of Settlement Campaigns 21
(2019); Theodore Eisenberg & Geoffrey Miller, The Role of
Opt-Outs and Objectors in Class Action Litigation:
Theoretical and Empirical Issues, 57 Vand. L. Rev. 1529, 1549
(2004).
5
class counsel and Wawa valued at about $35 million. For this
work, class counsel sought a lump-sum award of $3.2 million,
comprised of $3,040,060 in attorney’s fees, $45,940 in
litigation expenses, some $100,000 in settlement
administration fees, and $14,000 in class representative
awards. The parties added those fees, expenses, and awards to
the $9 million offered to the class to create what they call a
“constructive common fund” of $12.2 million. App. 19–20, 22.
That combination of attorney and class recovery into a single
amount is at center stage in this appeal. 2
2
The idea of a “common fund” traces back to the
Supreme Court’s decision in Trustees v. Greenough, 105 U.S.
527 (1881). There, the Court recognized that the “most
equitable way” to pay someone who “has worked for the
[parties entitled to participate in the benefits of the fund]” is
from that recovered fund. Greenough, 105 U.S. at 532. The
aggrieved and their advocates both take from the same pot. So
too in a common fund class action, where a lawyer who
recovers a sum “for the benefit of persons other than himself
or his client” is paid “a reasonable attorney’s fee” out of that
sum. Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980).
Courts have also discussed a variation on this classical
framework. In one, the defendant agrees to pay class counsel
and the claimants separately, meaning the plaintiffs and their
attorneys do not draw upon the same sum, a practice we called
a “constructive common fund.” In re Gen. Motors Corp. Pick-
Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 820 (3d
Cir. 1995). There, we reasoned from the “realities” of
settlement, concluding that “a defendant is interested only in
disposing of the total claim asserted against it,” making “the
allocation between the class payment and the attorneys’ fees
6
Class member Theodore H. Frank objected to the
settlement and the request for attorney’s fees. Frank argued the
constructive common fund was miscalculated and the
settlement unfair because, stripped of the labels, class counsel
would receive a disproportionate share of the amount Wawa
would pay in gift cards or cash. And he pointed to other perks
class counsel secured in the deal, including a “clear sailing”
clause, under which Wawa agreed not to contest class
counsel’s fee petition. 3 He also objected to the “fee reversion,”
. . . of little or no interest to the defense.” Id. at 819–20 (quoting
Prandini v. Nat’l Tea Co., 557 F.2d 1015, 1020 (3d Cir.
1977)). And since “the fee agreement clearly does impact
[class members’] interests . . . it is, for practical purposes, a
constructive common fund.” Id. at 820; see also Johnston v.
Comerica Mortg. Corp., 83 F.3d 241, 246 (8th Cir. 1996)
(recognizing a common fund because the “award to the class
and the agreement on attorney fees represent a package deal”
even though the attorney’s fees were technically “paid by the
defendants separate and apart from the settlement funds”).
Our decisions also recognize that common funds can
exist in the claims-made settlement context. See In re Baby
Prods. Antitrust Litig., 708 F.3d 163, 170–71, 177–78 (3d Cir.
2013); In re Prudential Ins. Co. Am. Sales Prac. Litig. Agent
Actions, 148 F.3d 283, 333–34 (3d Cir. 1998).
In any event, our focus is not nomenclature, and
whether the settlement here is structured as a “constructive
common fund” is secondary to our inquiry into whether the
attorney’s fees as part of that common fund are reasonable
under Rule 23(h).
3
A clear sailing agreement in a class action settlement
means “defendants agree not to contest class counsel’s request
7
a provision that returned any reductions in the fee award to
Wawa, and not to the class. Frank urged a different approach:
cap attorney’s fees at 25% of the actual claims made and paid,
rather than funds and gift cards offered but never used.
Amendments followed Frank’s objections. A Second
Amended Settlement clarified that the gift cards would not
expire and granted automatic eligibility for Tier 1 gift cards to
Wawa app users with valid email addresses. And a Third
Amended Settlement eliminated the fee reversion so any
reduction in fees awarded would be redistributed to Tier 1 and
Tier 2 gift card holders. Finally, a claims administrator would
email the 575,162 eligible Wawa app users, explaining that
they will receive $5 electronic gift cards once the settlement is
finalized. The administrator also plans to remind unused gift
card holders to use their credit by sending an email nine months
after distribution. These adjustments boosted the estimated
redemption rate from about 0.035% (about 8,000 claims of the
22 million class members) to as much as 2.6% (around 564,000
claims). This brought the total projected distribution amount to
$2,905,195, including $2,815,075 for Tier 1 (up from $33,720
before the amendment), $10,290 for Tier 2, and $79,830 for
Tier 3.
Frank then withdrew his objection to the settlement. But
he maintained his objection to the attorney’s fees because they
for attorneys’ fees up to an agreed amount.” Howard M.
Erichson, Aggregation as Disempowerment: Red Flags in
Class Action Settlements, 92 Notre Dame L. Rev. 859, 901,
902–03 (2016); see also In re Nat’l Football League Players
Concussion Inj. Litig., 821 F.3d 410, 447 (3d Cir. 2016), as
amended (May 2, 2016).
8
were still based on the constructive common fund, not the
amounts paid to the class, a several million-dollar difference.
He also pointed to the never-deleted clear sailing clause as
evidence of collusion between class counsel and Wawa.
The District Court disagreed, endorsing the $12.2
million calculation for the constructive common fund and
finding that class counsel’s requested $3,040,060 fee award—
totaling just shy of 25% of that fund—was not unreasonable.
Analyzing the fee award under the factors outlined in Gunter
v. Ridgewood Energy Corp., 223 F.3d 190, 195 n.1 (3d Cir.
2000), the District Court found that class counsel’s blended
$653 hourly rate was reasonable; the litigation was complex;
there was a substantial risk of nonpayment (since class counsel
worked on contingency); and the total payout fell below other
data breach settlements. Cross-checking those conclusions, the
District Court ran a lodestar analysis—resulting in an award of
roughly $3.8 million. Class counsel’s requested fees of
$3,040,060 is less than that number.
Finally, the District Court found that the clear sailing
clause was typical of class action settlements. And the District
Court was satisfied there was no collusion because an
independent mediator attested that the fee agreement was
discussed only after the terms of the class settlement were
already set. So the District Court approved the settlement and
the fee award. Having withdrawn his objection to the
settlement’s approval under Rule 23(e), Frank now appeals the
fee award as unreasonable under Rule 23(h). 4
4
The District Court had jurisdiction under 28 U.S.C.
§ 1332(d) and we have jurisdiction under 28 U.S.C. § 1291.
9
II.
Frank contests the District Court’s $3,040,060
attorney’s fee award to class counsel. 5 Attorney’s fee awards
are governed by Rule 23(h) of the Federal Rules of Civil
Procedure, 6 which demands that any awarded fees be
“The standards employed calculating attorneys’ fees awards
are legal questions subject to plenary review, but ‘[t]he amount
of a fee award . . . is within the district court’s discretion so
long as it employs correct standards and procedures and makes
findings of fact not clearly erroneous.’” In re Rite Aid Corp.
Sec. Litig., 396 F.3d 294, 299 (3d Cir. 2005) (alteration in
original) (citation omitted).
5
Class counsel requested a $3.2 million lump-sum
payment for fees and expenses, $3,040,060 of which was for
attorney’s fees.
6
As we explained in Neale v. Volvo Cars of North
America, LLC, 794 F.3d 353, 362–64 (3d Cir. 2015), the
modern class action lawsuit builds on the medieval English
tradition of “group litigation” stretching back to 1199. Stephen
C. Yeazell, From Medieval Group Litigation to the Modern
Class Action 38 (1987); see also Peter Charles Hoffer, The
Law’s Conscience: Equitable Constitutionalism in America 15
(1990) (“Though it dealt with individual injustices, the
jurisdiction of equity was multiple rather than individual.”).
Group litigation shifted from norm to exception between 1400
and 1700. See Hoffer, supra, at 100. But just as the practice
was fading in England, it was being adopted in the United
States. See Geoffrey C. Hazard, Jr., An Historical Analysis of
the Binding Effect of Class Suits, 146 U. Pa. L. Rev. 1849, 1878
(1998) (recognizing Justice Joseph Story’s Commentaries on
10
“reasonable”—a capacious phrase refined by reference to the
history that surrounds it. All with the goal of “giv[ing] effect
to the rule maker’s aim.” Epsilon Energy USA, Inc. v.
Chesapeake Appalachia, LLC, 80 F.4th 223, 230 (3d Cir.
2023) (citing Brown v. Barry, 3 U.S. (3 Dall.) 365, 367 (1797)).
We lay out that analysis below but start with the takeaway.
Equity Pleadings in 1840 as “virtually creat[ing] the American
law of class suits”); see also Equity R. 48, 42 U.S. lvi (1842)
(repealed 1912); Smith v. Swromstedt, 57 U.S. (16 How.) 288(1853); Equity R. 38, 226 U.S. 649, 659 (1912) (repealed
1938). These equitable origins are reflected in the 1938
adoption of Federal Rule of Civil Procedure 23—a “bold and
well-intentioned attempt to encourage more frequent use of
class actions.” Charles Alan Wright, Class Actions, 47 F.R.D.
169, 170 (1970); see also Benjamin Kaplan, Continuing Work
of the Civil Committee: 1966 Amendments of the Federal Rules
of Civil Procedure (i), 81 Harv. L. Rev. 356, 376–83 (1967).
In 1966, Congress amended Rule 23 to add subdivision (b)(3),
an innovation that permitted any member of that class to “‘opt
out’ by informing the court that he requests exclusion; he is
then untouched by the action and fends for himself.” Kaplan,
supra, at 391. This made class actions “the rage of the legal
profession.” Douglas Martin, The Law; The Rise and Fall of
the Class-Action Lawsuit, N.Y. Times, Jan. 8, 1988, at B7. It
also inspired harsh criticism. See, e.g., Henry Friendly, Federal
Jurisdiction: A General View 118–20 (1973). But whether
jeered or cheered, class actions remain a tool in the rules of
federal litigation. And under those rules, it remains the duty of
class counsel to represent the whole class and the function of
the courts to ensure that class interests are adequately
represented.
11
Two considerations must play central roles in the
assessment of a fee award under Rule 23(h): 1) how the amount
awarded stacks up against the benefit given to the class, using
either the amounts paid or the sums promised; 7 and 2) whether
side agreements between class counsel and the defendant
suggest an unreasonable attorney’s fee award. We will vacate
the District Court’s order approving the fee award and remand
for a hard look at these “red flags.” 8
7
The District Court concluded that the Wawa gift cards
are more like cash than coupons because they are fully
transferrable and do not expire. In re Wawa, Inc. Data Sec.
Litig., No. CV 19-6019, 2021 WL 3276148, at *11 (E.D. Pa.
July 30, 2021). On appeal, Frank does not argue that the gift
cards are coupons under the Class Action Fairness Act, 28
U.S.C. § 1712.
8
While we address only two of these practices relevant
to Rule 23(h), others may warrant similar searching scrutiny.
See In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935,
947 (9th Cir. 2011) (noting signs of collusion and other subtle
signs that “class counsel have allowed pursuit of their own self-
interests and that of certain class members to infect the
[settlement] negotiations”) (citing Court Awarded Attorney
Fees, Third Circuit Task Force, 108 F.R.D. 237, 266 (1985));
see also Erichson, supra note 3, at 873, 860–61 (identifying
features of problematic class settlements that “warrant extra
scrutiny” by judges, including “spurious injunctive relief,
nontransferable or non-stackable coupons, unjustified cy pres
remedies, burdensome or unnecessary claims procedures,
reversions, excessively broad releases, expanded class
definitions, class representative bonuses, revertible fee funds,
and clear sailing agreements”); Fed. R. Civ. P. 23, advisory
12
A.
We start with the text of Rule 23(h): “In a certified class
action, the court may award reasonable attorney’s fees and
nontaxable costs that are authorized by law or by the parties’
agreement.” Fed. R. Civ. P. 23(h) (emphasis added). 9 Frank
claims the District Court erred when it found the attorney’s fees
reasonable because the District Court: 1) considered only “the
funds made available to class members rather than the amount
actually claimed during the claims process,” App. 19; and
2) inadequately scrutinized any side agreements between class
counsel and Wawa. The text of Rule 23(h)—that the award
must be “reasonable”—when read in history and context,
explains why those objections are correct.
1.
Arguments about the reasonableness of attorney’s fees
arrived relatively recently in our profession’s history. 10 In the
committee’s note to 2003 amendments (outlining factors to
consider in evaluating attorney’s fees awards under Rule
23(h)); Manual for Complex Litigation § 21.61 (4th ed.
updated 2023).
9
We interpret the Federal Rules of Civil Procedure like
any posited law. See Elliott v. Archdiocese of New York, 682
F.3d 213, 225 (3d Cir. 2012); Epsilon Energy, 80 F.4th at 230
n.6.
10
See Wilbur F. Browder, Lawyers’ Fees Historically
Considered, 50 Am. L. Rev. 554, 554 (1916) (“Roman and
Athenian lawyers . . . performed services for their
clients . . . without the expectation of fee or reward.”); 3
13
early American colonies, fees paid to lawyers largely
resembled those paid in England, where the prevailing party
“recovered attorney fees as part of the costs, and the right to
recovery was grounded on statute.” John Leubsdorf, Toward a
History of the American Rule on Attorney Fee Recovery, 47 L.
Contemp. Probs. 9, 12 (1984) (citing 3 Blackstone,
Commentaries *399–401); see also Alyeska Pipeline Serv. Co.
v. Wilderness Soc’y, 421 U.S. 240, 247 & n.18 (1975). Juries
usually included these costs in their calculations when
determining damages, and in practice the recovered costs were
often low. See 3 Blackstone, Commentaries *399; Leubsdorf,
supra, at 11–12, 14. Lawyers in the colonies and early
Republic regularly recovered less than they wanted because of
statutory limits on attorney’s fees and cost awards. 11 The
reasonableness of fees only became an issue when legislatures
began repealing these statutory limits and American courts
started applying a new principle requiring each litigant to pay
their own attorney’s fees, “win or lose, unless a statute or
contract provides otherwise.” Hardt v. Reliance Standard Life
Ins. Co., 560 U.S. 242, 252–53 (2010); see also Leubsdorf,
Blackstone, Commentaries *28 (explaining that advocates in
the Roman Republic “practiced gratis”).
11
See, e.g., An Act for Regulating and Establishing
Fees, ch. 27 §§ 18, 35–37 (1793), in 2 Laws of the State of
Delaware 1116, 1122–23 (1797); see also John F. Vargo, The
American Rule on Attorney Fee Allocation: The Injured
Person’s Access to Justice, 42 Am. U. L. Rev. 1567, 1571
(1993). Enterprising practitioners found ways to skirt these
limits. See Leubsdorf, supra, at 13–14 n.24 (noting that
Alexander Hamilton, Andrew Jackson, and Daniel Webster
“collected on occasion more than the statutory fee”).
14
supra, at 13–14. 12 This “American Rule” has since been called
a “bedrock principle,” Baker Botts L.L.P. v. ASARCO LLC, 576
U.S. 121, 126 (2015), applied broadly with only a few long-
running exceptions.
One of the “well-recognized” exceptions to the
American Rule is the common fund. Boeing Co. v. Van
Gemert, 444 U.S. 472, 478 (1980). The theory is rooted in the
equitable principle that a “lawyer who recovers a common fund
for the benefit of persons other than himself or his client is
entitled to a reasonable attorney’s fee from the fund as a
whole.” Id.; see also Samuel R. Berger, Court Awarded
Attorneys’ Fees: What is “Reasonable”?, 126 U. Pa. L. Rev.
281, 281–82 (1977) (noting “the historic equity power of the
federal courts to compel all of the beneficiaries of a ‘common
fund’ recovered or preserved by the plaintiff to pay, out of the
fund, their proportionate share of the compensation to which
plaintiff’s attorneys are entitled”).
Reasonableness has always been the measurement for
fees in a common fund, beginning with Trustees v. Greenough,
which adopted the equitable practice of paying fees “where one
of many parties having a common interest in a trust fund, at his
own expense takes proper proceedings to save it from
12
In 1796, the Supreme Court considered and
disallowed an award of attorney’s fees because “[t]he general
practice of the United States is in opposition to it; and even if
that practice were not strictly correct in principle, it is entitled
to the respect of the court, till it is changed, or modified, by
statute.” Arcambel v. Wiseman, 3 U.S. (3 Dall.) 306, 306
(1796). From this brief statement, accompanied by no
elaboration, the American Rule was born.
15
destruction and to restore it to the purposes of the trust.” 105
U.S. 527, 532–33 (1881). Subsequent cases granting attorney’s
fees reinforced this equitable practice and evaluated awards
against “the standard of reasonableness.” United States v.
Equitable Tr. Co. of New York, 283 U.S. 738, 744, 746 (1931)
(“It is a general rule in courts of equity that a trust fund which
has been recovered or preserved [by an advocate may be]
charged with the costs and expenses, including reasonable
attorney’s fees, incurred in that behalf.”). Cases dealing with
common funds emphasized that reasonableness is tied to the
benefit rendered to the class. See, e.g., Cent. R.R. Banking Co.
of Georgia v. Pettus, 113 U.S. 116, 124–26 (1885) (approving
“reasonable compensation” for attorneys’ “professional
services . . . and that such compensation should be made with
reference to the amount of all claims filed in the cause”). The
adoption of Rule 23 in 1938 did not change this well-
established practice, and courts continued to evaluate
attorney’s fees for reasonableness. See, e.g., Powell v.
Pennsylvania R.R. Co., 267 F.2d 241, 245–46 (3d Cir. 1959)
(determining that an attorney’s fee award was “reasonable” by
“considering all the facts”). Nor did the significant
amendments to Rule 23 in 1966, which omitted any mention of
attorney’s fees and continued to commit reasonableness to
judicial discretion. 13
13
See Arthur R. Miller, Attorneys’ Fees in Class
Actions: A Report to the Federal Judicial Center 21 (1980) (the
general standard for evaluating class action attorney’s fee
awards has traditionally been the “reasonableness” of the
award “under the circumstances of the case”); see also Court
Awarded Attorney Fees: Report of the Third Circuit Task
Force, 108 F.R.D. 237, 242 (1986) (attorney’s fee awards are
16
So how was that discretion exercised? By scrutinizing
“the size of the fund or the amount of benefit produced for the
class” to calculate an award based on a “reasonable
percentage” of the amount the class recovered. Court Awarded
Attorney Fees: Report of the Third Circuit Task Force, 108
F.R.D. 237, 242 (1986). But the shift to a reasonable
percentage raised problems. Though rooted in
“reasonableness,” awards using a percentage-of-recovery
approach sometimes resulted in “strikingly large” attorney’s
fees. Id. That led to complaints from the bar and the public that
the money disbursed was disproportionately generous given
the limited work of class counsel. Id. In response, this Court
led the charge away from the percentage-of-recovery method
in Lindy Brothers Builders, Inc. of Philadelphia v. American
Radiator & Standard Sanitary Corp., 487 F.2d 161 (3d Cir.
1973). There, we coined the lodestar method of calculating
fees, which computes the reasonable hours expended by
counsel multiplied by a reasonable hourly rate, then adjusts up
or down to account for case-specific variables. Id. at 167–68.
Other federal courts soon followed our lead, agreeing that the
lodestar approach was more sensible than the percentage-of-
recovery method. 14
cabined only by a judicial assessment of “reasonableness under
the circumstances”).
14
See, e.g., Nat’l Treasury Emps. Union v. Nixon, 521
F.2d 317, 322 (D.C. Cir. 1975); Norman v. Hous. Auth. of City
of Montgomery, 836 F.2d 1292, 1299 (11th Cir. 1988); Grunin
v. Int’l House of Pancakes, 513 F.2d 114, 127 (8th Cir. 1975);
City of Detroit v. Grinnell Corp., 495 F.2d 448, 470–73 (2d
Cir. 1974).
17
But again, criticism stewed. Some, including this
Court, 15 complained the Lindy lodestar analysis replaced old
problems with new ones—like a perverse incentive for
attorneys to inflate their billing rates, “expend excessive
hours,” and “engage in duplicative and unjustified work.”
Report of the Third Circuit Task Force, 108 F.R.D. at 248.
Others lamented the widespread variation in fee awards. 16 Id.;
see also John C. Coffee, Jr., Understanding the Plaintiff’s
Attorney: The Implications of Economic Theory for Private
Enforcement of Law Through Class and Derivative Actions, 86
Colum. L. Rev. 669, 675–76 (1986). Reasonableness still
needed a reasonable standard.
2.
The Supreme Court entered the fray in Boeing Co. v.
Van Gemert, 444 U.S. 472 (1980), and affirmed the use of the
percentage-of-the-fund method in common-fund cases. In
15
See In re Fine Paper Antitrust Litig., 751 F.2d 562,
583 (3d Cir. 1984).
16
Our 1985 Task Force responded to these concerns.
See Jill E. Fisch, Taking Action Against Auctions: The Third
Circuit Task Force Report, 74 Temp. L. Rev. 813, 813 n.1
(2001). The Task Force recommended a distinction “be drawn
between fund-in-court cases and statutory fee cases since the
policies behind the two categories differ greatly.” Report of the
Third Circuit Task Force, 108 F.R.D. at 250. The percentage-
of-recovery method would apply in common-fund cases, and
the lodestar method in statutory fee cases. Id. at 255. Doing so,
the Task Force thought, would prevent the inherent subjectivity
in the Lindy lodestar analysis from undermining congressional
choices in fee statutes. Id. at 253.
18
claims-made settlements, Boeing continued, courts can
consider funds offered to the class but never used. 17 444 U.S.
at 480. But, at the same time, Boeing created no rule requiring
courts to use only the percentage of total funds the defendant
made available. Nor did it take a position on the converse:
“basing attorneys’ fees on only the amount of the fund claimed
by class members.” In re Baby Prods. Antitrust Litig., 708 F.3d
163, 177 (3d Cir. 2013) (emphasis added). That choice
remained with the district courts. 18
17
Boeing explained “the common fund doctrine reflects
the traditional practice in courts of equity,” that “whether or
not they exercise it,” the “right to share the harvest of the
lawsuit” is “a benefit in the fund created by the efforts of the
class representatives and their counsel.” 444 U.S. at 478, 480.
Courts have debated how far to extend Boeing’s logic.
Compare Pearson v. NBTY, Inc., 772 F.3d 778, 782 (7th Cir.
2014), with Gascho v. Glob. Fitness Holdings, LLC, 822 F.3d
269, 285–86 (6th Cir. 2016). But even on its facts, Boeing
forecloses excluding any consideration of available but
unclaimed class funds. As we have explained, Boeing
“confirmed the permissibility of using the entire fund as the
appropriate benchmark, at least where each class member
needed only to prove his or her membership in the injured class
to receive a distribution.” In re Baby Prods., 708 F.3d at 177.
18
Four years later, in Blum v. Stenson, the Court
affirmed in a footnote that determining fee awards in common-
fund cases “is based on a percentage of the fund bestowed on
the class.” 465 U.S. 886, 900 n.16 (1984). Courts debated that
language, with some viewing it as an express endorsement of
the percentage-of-recovery method in common-fund cases. See
Monique Lapointe, Attorney’s Fees in Common Fund Actions,
19
This Court has likewise reserved that power to the trial
judge based on the history supporting the American Rule. To
guide this analysis, we have said that district courts should
“consider the level of direct benefit provided to the class in
calculating attorneys’ fee[]” awards, which “needs to be, as
much as possible, practical and not abstract,” and “may
59 Fordham L. Rev. 843, 862 (1991). Others saw it standing
simply for the general proposition that calculating the
percentage of recovery may be a useful gauge in such cases.
Id.In line with the Task Force’s recommendation, our
Court has generally maintained a distinction between statutory
fee cases and common-fund cases. “Ordinarily,” we have said,
“a court making or approving a fee award should determine
what sort of action the court is adjudicating and then primarily
rely on the corresponding method of awarding fees”—lodestar
for statutory fee-shifting cases, and percentage-of-recovery in
common-fund disputes. In re Gen. Motors, 55 F.3d at 821; see
also In re Prudential, 148 F.3d at 333 (“The percentage-of-
recovery method is generally favored in cases involving a
common fund . . . [t]he lodestar method is more commonly
applied in statutory fee-shifting cases.”); In re Rite Aid Corp.,
396 F.3d at 300. And “regardless of the method chosen, we
have suggested it is sensible for a court to use a second method
of fee approval to cross-check its initial fee calculation.” In re
Rite Aid Corp., 396 F.3d at 300.
The District Court conducted both percentage-of-
recovery and lodestar analyses. But because we remand based
only on the former calculation, we express no opinion on the
propriety of its lodestar analysis or on the broader question of
which calculation is most appropriate.
20
consider, among other things,” the claims rate. In re Baby
Prods., 708 F.3d at 170, 174. That has led courts to “delay a
final assessment of the fee award to withhold all or a
substantial part of the fee until the distribution process is
complete.” In re Baby Prods., 708 F.3d at 179 (quoting Manual
for Complex Litigation § 21.71 (4th ed. 2008)). But regardless
of whether courts use the amount made available or the amount
claimed, we have explained the fees must be analyzed against
the benefits to the class case-by-case. See In re Prudential Ins.
Co. Am. Sales Prac. Litig. Agent Actions, 148 F.3d 283, 334,
342 (3d Cir. 1998) (“What is important is that the district court
evaluate what class counsel actually did and how it benefitted
the class.”); see also In re Gen. Motors Corp. Pick-Up Truck
Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 822 (3d Cir. 1995)
(remanding for “some reasonable assessment of the
settlement’s value and determine the precise percentage
represented by attorneys’ fees”).
Though this inquiry into reasonableness involves
discretion, it is not without detailed demands. Boeing
highlighted features of class action settlements that inform
judicial focus, such as when defendants were liable for a “sum
certain,” with each class member entitled to “logically
ascertainable shares” of the fund. 444 U.S. at 479–81. In cases
where defendants keep any unclaimed funds, making their
liabilities “contingent upon the presentation of individual
claims,” id. at 479 n.5, courts must place greater weight on the
claims rate. 19 And when class members must do more than
19
This is not necessarily true where unclaimed funds are
distributed to charities through cy pres, although courts should
be mindful that benefit to class members is the touchstone and
21
raise their hands to get their payment, the claims rate offers
valuable insight into the “effectiveness” of “the method of
processing class-member claims.” Fed. R. Civ. P.
23(e)(2)(C)(ii); see also Fed. R. Civ. P. 23, advisory
committee’s note to 2018 amendments (describing the utility
of courts reviewing the “contemplated claims process and the
anticipated rate of claims by class members”). Finally, class
members naturally value cash over gift cards and disfavor
coupons or similar “hot button indicators” that “show . . .
potential unfairness on their face.” 20 Courts should take special
notice when class members are offered discounts and tickets
while others—like counsel—get cash. See In re Gen. Motors,
55 F.3d at 803 (“[N]on-cash relief . . . is recognized as a prime
indicator of suspect settlements”); see also In re Dry Max
Pampers Litig., 724 F.3d 713, 718–21 (6th Cir. 2013) (finding
settlement provided “illusory” relief to the class when counsel
received cash and class members received the opportunity for
a refund). These, and similar considerations, help determine
the benefit class counsel provided, and how much should be
class members are not “indifferent to whether funds are
distributed to them or to cy pres recipients.” In re Baby Prods.,
708 F.3d at 178. As commentators have noted, courts should
scrutinize “cy pres remedies in settlements where class
members could have been compensated directly, cy pres
remedies that flow to organizations with which class counsel
or the judge is affiliated, and cy pres remedies that fail to
benefit class members or that serve the defendant’s self-
interest.” Erichson, supra note 3, at 883.
20
See Barbara J. Rothstein and Thomas E. Willging,
Federal Judicial Center, Managing Class Action Litigation: A
Pocket Guide for Judges, 12–15 (2005); see also Newberg and
Rubenstein on Class Actions § 12:8 (6th ed. updated 2023).
22
used to calculate a reasonable fee percentage. Cf. Lowery v.
Rhapsody Int’l, Inc., 75 F.4th 985, 993 (9th Cir. 2023);
Pearson v. NBTY, Inc., 772 F.3d 778, 782 (7th Cir. 2014).
3.
With the background painted, we return to Rule 23(h)
and its instruction that a “court may award reasonable
attorney’s fees and nontaxable costs that are authorized by law
or by the parties’ agreement.” Fed. R. Civ. P. 23(h). 21 Prior to
21
Rule 23(h) applies only to fee awards when the case
has been “certified as a class action.” But “[t]his includes
cases,” like this one, “in which there is a simultaneous proposal
for class certification and settlement even though technically
the class may not be certified unless the court approves the
settlement pursuant to review under Rule 23(e).” Fed. R. Civ.
P. 23(h), advisory committee’s note to 2003 amendments.
Meaning a court may evaluate the reasonableness of a
proposed fee award under Rule 23(h) at the same time it
reviews the proposed settlement under Rule 23(e). See Fed. R.
Civ. P. 23(e), advisory committee’s note to 2018 amendments
(“Examination of the attorney-fee provision may also be
valuable in assessing the fairness of the proposed settlement.
Ultimately, any award of attorney’s fees must be evaluated
under Rule 23(h), and no rigid limits exist for such awards.”).
We also pause to recognize that the advisory
committee’s notes provide context that can bring clarity to
what Justice Story called “comprehensive” or “large” terms in
the law. Joseph Story, Commentaries on the Constitution,
Book III, Chapter V, § 403 (1873). That is why review of the
advisory committee’s notes is a proper tool for interpreting the
23
adding subdivision (h) in 2003, awards of attorney’s fees were
governed by Rule 54, which included no reasonableness
requirement. See Fed. R. Civ. P. 23, advisory committee’s note
to 2003 amendments; see generally Report of the Judicial
Conference of the United States to the Committees on the
Judiciary of the Senate and House of Representatives, Class
Action Settlements (2006). But Rule 23(h) was added in 2003
to incorporate the reasonableness standard that had long been
“customary” in common fund cases and class actions. See
Report of the Judicial Conference at 2–4; Linda S. Mullenix,
No Exit: Mandatory Class Actions in the New Millennium and
the Blurring of Categorical Imperatives, 2003 U. Chi. Legal F.
177, 177 (2003).
legal meaning of a specific rule. See, e.g., United States v.
Vonn, 535 U.S. 55, 64 n.6 (2002) (“[T]he Advisory Committee
Notes provide a reliable source of insight into the meaning of
a rule”); Weisgram v. Marley Co., 528 U.S. 440, 449 n.5, 450
(2000) (quoting the advisory committee’s note to 1963
amendments to Fed. R. Civ. P. 50); Epsilon Energy, 80 F.4th
at 233 n.13 (quoting the advisory committee’s note to 1966
amendments to Fed. R. Civ. P. 19); Fischer v. Fed. Express
Corp., 42 F.4th 366, 382 n.8 (3d Cir. 2022) (quoting the
advisory committee’s note to 2001 amendments to Fed. R. Civ.
P. 82); see also Catherine T. Struve, The Paradox of
Delegation: Interpreting the Federal Rules of Civil Procedure,
150 U. Pa. L. Rev. 1099, 1152–68 (2002) (defending use of the
advisory committee’s notes). Doing so follows faithfully our
charge to determine the best ordinary meaning of the written
law. See Hohn v. United States, 524 U.S. 236, 255 (1998)
(Scalia, J., dissenting).
24
The advisory committee’s note recognizes the rich
discussion on reasonableness—its utility and its limitations—
that had been occurring before the adoption of subdivision (h).
It notes that determining the reasonableness of an award turns
on a “variety of factors,” including the calculation of the award
using either the lodestar or percentage-of-recovery method.
See Fed. R. Civ. P. 23, advisory committee’s note to 2003
amendments. Whatever the methodology, one focus remained
“fundamental”—“the result actually achieved for class
members.” Id. If the award were calculated as a percentage of
the class’s recovery, “results achieved is the basic starting
point.” Id. Though the committee suggested that courts may
consider the percentage of an award using the amount “actually
paid to the class,” it refrained from imposing that amount as
the required denominator in every case. Id. Indeed, courts can
evaluate the reasonableness of a percentage-based award by
reference to either amounts paid or amounts made available.
See Manual for Complex Litigation § 14.121 (4th ed. updated
2023).
Assessing a reasonable fee award also requires courts to
take a hard look at side agreements 22 between class counsel and
the defendant. See Fed. R. Civ. P. 23, advisory committee’s
22
The term “side agreements” appears in the Fed. R.
Civ. P. 23, advisory committee’s note to 2003 amendments.
There they are described as agreements negotiated between
class counsel and others, usually regarding fees, that though
“seemingly separate . . . may have influenced the terms of the
settlement by trading away possible advantages for the class in
return for advantages for others.” Id.; see also 7B Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure
§ 1797.5 (3d ed. updated 2023).
25
note to 2003 amendments (“Courts have also given weight to
agreements among the parties regarding the fee motion, and to
agreements between class counsel and others about the fees
claimed by the motion.”). Courts, for instance, must be on the
lookout for clear sailing clauses, which amount to
“agreement[s] by a settling party not to oppose a fee
application up to a certain amount.” Id. So too with fee
reversions, which “provide[] that if the judge reduces the
amount of fees that the proposed settlement awards to class
counsel, the savings shall enure not to the class but to the
defendant.” Pearson, 772 F.3d at 786.
B.
Against this framework, we will vacate the District
Court’s grant of class counsel’s fee petition and remand to
consider whether “the funds made available to class members
rather than the amount actually claimed during the claims
process” is the best measure of reasonableness, App. 19; and
whether the fee award is reasonable in light of any side
agreements between class counsel and Wawa.
First, the District Court saw itself as bound to consider
only the funds made available to the class. 23 But that limitation
23
See, e.g., App. 19 (“In evaluating the size of the fund
created and the number of persons benefitted, courts consider
the funds made available to class members rather than the
amount actually claimed during the claims process.”) (citing
Boeing, 444 U.S. at 480); App. 21 (“[A]ttorney’s fees should
be analyzed based on the entire constructive fund rather than
the claims filed.”); App. 22 (“Mr. Frank incorrectly calculates
26
is not required by history or precedent. Rather, we have
“recognize[d] the difficulty a district court faces” in calculating
attorney’s fees before class relief is given out, In re Baby
Prods., 708 F.3d at 179, and for that reason, “[i]t is common to
delay a final assessment of the fee award and to withhold all or
a substantial part of the fee until the distribution process is
complete.” Manual for Complex Litigation § 21.71 (4th ed.
updated 2023). And while that practice is not required by Rule
23, it seems a sensible starting line to begin the fee award
analysis. So we remand for consideration of the amounts
distributed to and expected to be claimed by the class.
Next, side agreements between class counsel and Wawa
require deeper inquiry to assess whether the fee award is
reasonable. Start with the clear sailing provision, where Wawa
promised as part of the settlement not to challenge class
counsel’s request for an agreed-upon attorney’s fee award.
Though not an automatic bar to settlement approval, 24 such
terms still “deserve careful scrutiny” when calculating a
reasonable fee award. In re Nat’l Football League Players
Concussion Inj. Litig., 821 F.3d 410, 447 (3d Cir. 2016), as
amended (May 2, 2016). “The concern with a clear sailing
provision is collusion,” and class counsel’s desire to maintain
its expected fees could tempt it to take money from the class in
return for a defendant’s agreement to swiftly settle. Id. So a
“district court faced with such a provision in a class action
the ‘common fund’ as only the $6.4 million in claims actually
made and fees and expenses requested.”).
24
This Court and others have declined to find that clear
sailing provisions automatically disqualify a proposed
settlement. See In re Nat’l Football League, 821 F.3d at 447(collecting cases).
27
settlement should review the process and substance of the
settlement and satisfy itself that the agreement does not
indicate collusion or otherwise pose a problem.” Id.The same concerns apply when assessing fee petitions.
The District Court correctly identified that clear sailing
provisions require close attention. But we will remand for
closer scrutiny based on our refreshed guidance. The District
Court found that the clear sailing provision was not collusive
because an independent mediator helped the negotiations and
explained the provision arrived after there was agreement on
the tiered terms for class relief. That outside oversight, while
not irrelevant, is alone insufficient, because “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.” In re Bluetooth Headset Prods. Liab.
Litig., 654 F.3d 935, 948 (9th Cir. 2011).
Nor does the fact that the agreement came after the
parties had settled class compensation end the inquiry. See In
re Gen. Motors, 55 F.3d at 803–05, 805 n.24. That is because
“[c]lass counsel cannot be unaware that fee negotiations are
nigh—that is, after all, how plaintiffs’ lawyers finance their
work—and that knowledge simply might cause them to push
less hard for the interests of their clients, even if they fail to
realize that they are doing so.” Gascho v. Glob. Fitness
Holdings, LLC, 822 F.3d 269, 302 (6th Cir. 2016) (Clay, J.,
dissenting). Defendants, too, are already estimating the
impending fee request. “Caring only about his total liability,
the defendant will not agree to class benefits so generous that
when added to a reasonable attorney’s fee award for class
counsel they will render the total cost of settlement
28
unacceptable to the defendant.” Pearson, 772 F.3d at 786.
Concerns like these make close and careful review of a clear
sailing provision necessary when evaluating the
reasonableness of a fee award.
Finally, there is the puzzling fee reversion (also known
as a reverter or kicker clause), providing that any court-ordered
reduction in the attorney’s fee award would be returned to
Wawa—not the class. Ordinarily, as is the case here, class
members who suspect class counsel has taken an excessive
share of the common fund in attorney’s fees can object and ask
the court to reduce that share. But “when parties agree to a
‘kicker,’ a 23(h) challenge cannot increase class recovery
because the excessive fees wind up back in the defendant’s
pockets.” Briseño v. Henderson, 998 F.3d 1014, 1027 (9th Cir.
2021). It is a bewildering proviso: why would class counsel
agree to give part of the common fund they secured to the
defendant instead of their clients? The unfortunate conclusion
is that class counsel asks for it as a “gimmick for defeating
objectors.” Pearson, 772 F.3d at 786. A trick that strips class
members of their standing to challenge the fee award, because
“any action taken by the court would not redress the class
member’s purported injury.” Briseño, 998 F.3d at 1027. And
when combined with a clear sailing clause, in which the
defendant does not object to the fee award, any action under
23(h) is foreclosed. Id.
The original Settlement Agreement contained a fee
reversion eventually removed in the Third Amended
Settlement. A welcome change, but not as welcome as if the
fee reversion had never existed. That is because a fee reversion
need not stay in the final approved settlement to serve its
deterrent purpose, so courts should investigate potential
29
collusion by considering the “evidence in the negotiation
process or the final terms of the settlement.” In re Nat’l
Football League, 821 F.3d at 447. On remand, the District
Court should explore how the reversion arrived, what purpose
it served, and whether its presence, even temporary, suggests
coordinated rather than zealous advocacy, that makes the fee
request unreasonable. 25
***
We will vacate and remand the attorney’s fee award for
the District Court to take a closer look at the reasonableness of
the attorney’s fees in proportion to class benefit and to
scrutinize the presence of side agreements.
25
Judge Freeman would not instruct the District Court
to consider the since-removed reversion upon remand. In her
view, the presence of a reversion in a prior version of the
parties’ settlement agreement has no bearing on the sole issue
before the Court: whether the attorney’s fee award is
reasonable relative to the class members’ recovery in the Third
Amended Settlement. No party has argued that the since-
removed reversion is relevant to that issue. Because the
reversion was removed before the District Court adopted the
Third Amended Settlement, the attorney’s fee award will not
account for any funds that may revert to a defendant.
30