Opinion ID: 223635
Heading Depth: 3
Heading Rank: 2

Heading: Approval of the Settlement Agreement in the Present Case

Text: 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 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 economically beneficial concession with regard to the merits provisions, in the form of lower monetary payments to class members or less injunctive relief for the class than could otherwise have been obtained, id. at 964. 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 attorneys' fee provision because (1) the parties claimed to negotiate the core terms of the settlement agreement 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) 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, 327 F.3d at 960 (emphasis in original). In a Third Circuit class action settlement where class counsel provided verbal assurances that attorneys' fees 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 mitigating the potential for collusion while still facilitating successful 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 existence 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 confronted 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 settlement  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 settlement 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 provided 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 (quoting In re Gen. Motors, 55 F.3d at 819-20). A district court therefore must ensure that both the amount and mode of payment 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 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, 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. 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, 117 S.Ct. 2231, 138 L.Ed.2d 689 (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]