Court Opinion

ID: 9400200
Source: CourtListenerOpinion
Date Created: 2023-06-07 17:01:03.625943+00
Date Added: 2024-06-11T17:19:42.883911
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

DAVID LOWERY; VICTOR                        No. 22-15162
KRUMMENACHER; GREG
LISHER; DAVID FARAGHER,                        D.C. No.
individually and on behalf of               4:16-cv-01135-
themselves and all others similarly              JSW
situated,
               Plaintiffs-Appellees,
                                              OPINION
 v.

RHAPSODY INTERNATIONAL,
INC., a Delaware corporation,
              Defendant-Appellant.

         Appeal from the United States District Court
            for the Northern District of California
          Jeffrey S. White, District Judge, Presiding

          Argued and Submitted December 9, 2022
                   Pasadena, California

                      Filed June 7, 2023

      Before: Milan D. Smith, Jr., Daniel P. Collins, and
              Kenneth K. Lee, Circuit Judges.

                    Opinion by Judge Lee
2           LOWERY V. RHAPSODY INTERNATIONAL, INC.

                          SUMMARY*

                 Copyright / Attorneys’ Fees

    The panel reversed the district court’s award of
attorneys’ fees to plaintiffs’ counsel in a copyright action
and remanded.
     Counsel filed a class action lawsuit on behalf of
copyright holders of musical compositions and recovered a
little over $50,000 for the class members from defendant
Rhapsody International, Inc. (now rebranded as Napster), a
music streaming service. The class members obtained no
meaningful injunctive or nonmonetary relief in the
settlement of their action. The district court nonetheless
authorized $1.7 in attorneys’ fees under the “lodestar”
method.
    Reversing, the panel held that the touchstone for
determining the reasonableness of attorneys’ fees in a class
action under Federal Rule of Civil Procedure 23 is the
benefit to the class. Here, the benefit was minimal. The
panel held that the district court erred in failing to calculate
the settlement’s actual benefit to the class members who
submitted settlement claims, as opposed to a hypothetical
$20 million cap agreed on by the parties.
    The panel held that district courts awarding attorneys’
fees in class actions under the Copyright Act must still
generally consider the proportion between the award and the
benefit to the class to ensure that the award is

*
 This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
           LOWERY V. RHAPSODY INTERNATIONAL, INC.             3

reasonable. The panel recognized that a fee award may
exceed the monetary benefit provided to the class in certain
copyright cases, such as when a copyright infringement
litigation leads to substantial nonmonetary relief or provides
a meaningful benefit to society, but this was not such a case.
    The panel instructed that, on remand, the district court
should rigorously evaluate the actual benefit provided to the
class and award reasonable attorneys’ fees considering that
benefit. In determining the value of the “claims-made” class
action settlement, the district court should consider its actual
or anticipated value to the class members, not the maximum
amount that hypothetically could have been paid to the
class. The district court should also consider engaging in a
“cross-check” analysis to ensure that the fees are reasonably
proportional to the benefit received by the class members.

                         COUNSEL

Karin Kramer (argued), Quinn Emanuel Urquhart &
Sullivan LLP, San Francisco, California; William B. Adams,
Quinn Emanuel Urquhart & Sullivan LLP, New York, New
York; Thomas C. Rubin, Quinn Emanuel Urquhart &
Sullivan LLP, Seattle, Washington; for Defendant-
Appellant.
Reuben A. Ginsburg (argued), Sanford L. Michelman, Mona
Z. Hanna, and Jennifer A. Mauri, Michelman & Robinson
LLP, Los Angeles, California, for Plaintiffs-Appellees.
4          LOWERY V. RHAPSODY INTERNATIONAL, INC.

                         OPINION

LEE, Circuit Judge:

    This case will likely make the average person shake her
head in disbelief: the plaintiffs’ lawyers filed a class action
lawsuit on behalf of copyright holders of musical
compositions and ended up recovering a little over $50,000
for the class members. The lawyers then asked the court to
award them $6 million in legal fees. And the court
authorized $1.7 million in legal fees—more than thirty times
the amount that the class received.
    We reverse and remand. The touchstone for determining
the reasonableness of attorneys’ fees in a class action is the
benefit to the class. It matters little that the plaintiffs’
counsel may have poured their blood, sweat, and tears into a
case if they end up merely spinning wheels on behalf of the
class. What matters most is the result for the class members.
Here, the benefit from this litigation was minimal: the class
received a measly $52,841.05 and obtained no meaningful
injunctive or nonmonetary relief.
    On remand, the district court should rigorously evaluate
the actual benefit provided to the class and award reasonable
attorneys’ fees considering that benefit. In determining the
value of this “claims-made” class action settlement, the court
should consider its actual or anticipated value to the class
members, not the maximum amount that hypothetically
could have been paid to the class. The court should also
consider engaging in a “cross-check” analysis to ensure that
the fees are reasonably proportional to the benefit received
by the class members.
           LOWERY V. RHAPSODY INTERNATIONAL, INC.           5

                     BACKGROUND
   I.      Rhapsody faces hurdles navigating the pre-
           Music Modernization Act compulsory
           licensing copyright regime.
    Rhapsody International (now rebranded as Napster)
offers music for digital streaming. Rhapsody—like other
online music services such as Apple Music or Spotify—must
pay royalties both to the owners of the copyrighted musical
compositions (as in this case) and to the owners of the
copyright in the particular sound recording of that
composition. See Johnson v. Copyright Royalty Bd., 969
F.3d 363, 367–68 (D.C. Cir. 2020).
    Before 2018, Rhapsody had two paths to get a license to
play (or “copy and distribute” in copyright parlance)
copyrighted music: (1) it could directly negotiate a voluntary
license from the copyright owner, or (2) it could obtain a
“compulsory license” through the procedures set by the
Copyright Act. See 17 U.S.C. § 115 (2010) (amended 2018).
This compulsory licensing scheme required Rhapsody to
serve a “notice of intention” on the copyright owner within
thirty days after copying the work and before distributing it–
–or, if the copyright owner could not be identified, to file
that notice with the Copyright Office. Id. § 115(b)(1).
    But this compulsory licensing system became
unworkable in the digital music streaming era. Rhapsody
and other streaming services offer not only popular songs but
also millions of other, often obscure, copyrighted songs.
They thus struggled to serve or file a notice of intention for
every one of the millions of works available on their
services. See generally Kenneth J. Abdo & Jacob M. Abdo,
What You Need to Know About the Music Modernization
Act, Ent. & Sports Law., Winter 2019, at 5, 6.
6          LOWERY V. RHAPSODY INTERNATIONAL, INC.

    In early 2016, David Lowery and other named plaintiffs
sued Rhapsody on behalf of a putative class of copyright
owners whose musical compositions were played on the
streaming service. The plaintiffs asserted that Rhapsody had
infringed their copyrights by reproducing and distributing
their musical compositions without obtaining a voluntary or
compulsory license to do so.
    II.    The legal landscape begins to shift in the
           copyright world.
    By the time the plaintiffs sued, Rhapsody had been
negotiating with the National Music Publishers Association
(NMPA) to resolve the same copyright conundrum
stemming from the antiquated compulsory licensing system.
Rhapsody and the NMPA eventually reached a settlement.
To receive payment under that settlement, copyright owners
had to waive their right to make claims in this lawsuit against
Rhapsody. Otherwise, the copyright holders would be
double-dipping and receiving compensation from two
settlements.
    By April 2018, Rhapsody had informed the plaintiffs in
this lawsuit about this NMPA settlement. It advised them
that copyright holders of around 98% of the musical works
available on its streaming service had opted to participate in
the NMPA settlement, “effectively decimating” the putative
class in this lawsuit. In other words, it became clear by April
2018 that this lawsuit would not yield much compensation,
even if the plaintiffs prevailed.
           LOWERY V. RHAPSODY INTERNATIONAL, INC.          7

   III.    Rhapsody and the plaintiffs agree on a
           settlement that results in barely $50,000 in
           monetary relief to the class.
     The parties devoted significant hours and resources to
this case, but they focused on reaching a settlement rather
than substantively litigating the claims. Within weeks after
the plaintiffs filed their complaint, the parties stayed the
litigation to pursue settlement. Except for a handful of
discovery disputes and a motion to dismiss that was never
decided, settlement talks dominated the parties’ dealings.
    In January 2019, Rhapsody and the plaintiffs finally
executed a settlement agreement. Rhapsody denied liability
for copyright infringement but agreed to pay class members
for musical compositions played on its streaming service. In
turn, the plaintiffs agreed that Rhapsody would pay a
maximum of $20 million on class members’ claims. But
probably because the NMPA settlement had gutted the
potential class, very few class members submitted claims for
this settlement. In the end, Rhapsody paid only $52,841.05
to satisfy class members’ claims.
     The settlement agreement also required Rhapsody to
establish an Artist Advisory Board with an annual budget of
at least $30,000 to advance both parties’ goals of protecting
artists’ rights and promoting Rhapsody’s business.
    The agreement did not require Rhapsody to make any
other changes to its licensing practices: the Music
Modernization Act (MMA) took care of that. See 17 U.S.C.
§ 115(d) (2018). While the parties litigated this case,
Congress altered the legal landscape for licensing of
copyrighted musical compositions when it enacted the
MMA in October 2018. Recognizing the cumbersome
nature of the compulsory licensing system, the MMA allows
8          LOWERY V. RHAPSODY INTERNATIONAL, INC.

digital music providers to obtain a blanket license. Id. One
blanket license allows them to copy and distribute all
musical compositions available for compulsory licensing.
Id. § 115(d)(1)(B)(i). No longer must they scamper to obtain
thousands or millions of compulsory licenses.
    IV.    The district court awards over $1.7 million in
           attorneys’ fees.
    Under Rule 23 of the Federal Rules of Civil Procedure,
parties must seek the court’s approval of a class action
settlement as well as any request for attorneys’ fees for class
counsel. Fed. R. Civ. P. 23(e), (h).
    Our circuit allows two ways to determine attorneys’ fees
awards in class actions: (1) the “lodestar” method and (2) the
“percentage-of-recovery” method. In re Hyundai & Kia
Fuel Econ. Litig., 926 F.3d 539, 570 (9th Cir. 2019) (en
banc). Under the lodestar method, the court multiplies the
number of hours reasonably spent on the case by a
reasonable hourly rate. Id. Though the lodestar amount is
presumptively reasonable, the court can then apply a positive
or negative multiplier to that amount to ratchet the attorneys’
fees up or down, depending on various factors. Id. at 571–
72. By contrast, the percentage-of-recovery approach
provides attorneys a percentage of the total settlement fund
or amount claimed by the class. Id. at 570. The typical
benchmark for the percentage-of-recovery approach is 25%,
but a court can—as in the lodestar method—adjust that
benchmark up or down. Id.
    Here, the plaintiffs’ counsel calculated their fee request
using the lodestar method and arrived at an approximately
$2.1 million figure. They then requested a 2.87 multiplier,
claiming that they achieved “exceptional” results in a
“difficult” and “complex” case. In all, the plaintiffs’ counsel
           LOWERY V. RHAPSODY INTERNATIONAL, INC.           9

asked the court to award them over $6 million in attorneys’
fees.
    The district court tasked the magistrate judge with
evaluating the fees request. The magistrate judge first
reduced the lodestar to $1.7 million, noting that almost 20%
of the hours spent on the case were unreasonable or
improperly block-billed. She then rejected the requested
2.87 multiplier, and instead applied a negative 0.5 multiplier
to the lodestar, given the minor benefit to the class. She
concluded that the class action settlement provided
$358,903.77 in benefit to the class: besides the $52,841.05
paid to the class members, the magistrate judge included
settlement administration costs of $251,400.72, class
representative     enhancement      awards      and    travel
reimbursements of $11,500, the Artist Advisory Board’s
annual budget of $30,000, and litigation costs of $13,162.
After applying the negative 0.5 multiplier, the magistrate
judge recommended awarding about $860,000 in fees to the
plaintiffs’ counsel.
    The district court accepted the magistrate judge’s
lodestar calculation of $1.7 million but rejected her
recommendation to apply a 0.5 negative multiplier. Stating
that “no bright-line rule” exists to determine whether the
“lodestar should be cross-checked against the claimed
amount (here, $52,841.05) or the total amount of the cap
placed on possible recovery (here, $20,444,567),” the
district court declined to place a value on the benefit to the
class. Instead, it concluded that it would apply no
multiplier—positive or negative—to the lodestar amount,
balancing two competing factors: “In an effort to find a sum
that adequately reimburses Plaintiffs’ counsel for the work
they performed, but without the claimed amount
[$52,841.05] coming even close to the agreed-upon cap for
10         LOWERY V. RHAPSODY INTERNATIONAL, INC.

the settlement [$20 million], the Court finds that no
multiplier at all would be the most appropriate measure.”
With that, the district court awarded over $1.7 million in
attorneys’ fees.
   This appeal followed. We have jurisdiction under 28
U.S.C. § 1291.
                STANDARD OF REVIEW
    We review a district court’s attorneys’ fees award for
abuse of discretion and the factual findings supporting such
an award for clear error. Kim v. Allison, 8 F.4th 1170, 1178
(9th Cir. 2021).
                        ANALYSIS
    The district court’s fee award is not reasonable under
Rule 23, given that the $1.7 million fee award is more than
thirty times larger than the amount paid to class members.
On remand, the district court must justify any fee award it
makes by comparing it to the benefit provided to the class.
In evaluating the benefit to the class, the district court must
disregard the illusory $20 million settlement cap and focus
instead on the approximately $50,000 paid to class members,
along with any other benefits to the class. We also
encourage the court to cross-check the fees against the
benefit to the class and ensure that the fees are reasonably
proportional to that benefit. That this is a copyright case
makes little difference––attorneys’ fees awarded under the
Copyright Act must still be reasonably proportional to the
benefit to the class.
              LOWERY V. RHAPSODY INTERNATIONAL, INC.                      11

    I.        The district court erred in approving $1.7
              million in fees because this award is
              unreasonable given the small benefit to the
              class.
    District courts must ensure that attorneys’ fees awards in
class action cases are reasonable. In re Bluetooth Headset
Prods. Liab. Litig., 654 F.3d 935, 941 (9th Cir. 2011). When
evaluating reasonableness, a district court must mainly
consider the benefit that class counsel obtained for the class.
Id. at 941–42. It must also provide an adequate explanation
for a fee award to facilitate appellate review, detailing “how
it weighed the various competing considerations” supporting
the award. Stanger v. China Elec. Motor, Inc., 812 F.3d 734,
739 (9th Cir. 2016). In particular, district courts awarding
fees must expressly consider the value that the settlement
provided to the class, including the value of nonmonetary
relief, and explain how that justifies the fee award. In re
Bluetooth, 654 F.3d at 943–45.1

1
  We recognize that assigning a precise dollar amount to the class benefit
may prove difficult where—unlike here—the relief obtained for the class
is “primarily injunctive in nature and thus not easily monetized.” See In
re Bluetooth, 654 F.3d at 941. In such cases, the district court’s
assessment of the litigation’s success will have to be more contextual
than in a case like this one in which the fees-to-results ratio is readily
calculated. See id. at 941–42; cf. Roes, 1–2 v. SFBSC Mgmt., LLC, 944
F.3d 1035, 1055 (9th Cir. 2019) (holding that, where the value of
injunctive relief is too difficult to quantify, courts should exclude it from
a common-fund calculation and instead consider it as a factor when
determining what percentage of the fund is an appropriate award).
12         LOWERY V. RHAPSODY INTERNATIONAL, INC.

     A. The district court must calculate the settlement’s
        actual value to the class to assess the
        reasonableness of the fees.
    The district court erred in failing to calculate the class
action settlement’s benefit to the class members. It
acknowledged the glaring disparity between the amount paid
to the class ($52,841.05) and the hypothetical settlement cap
($20 million), but did not resolve which number to consider,
concluding instead that “there is no bright-line rule”
governing this question.
    We hold that courts must consider the actual or
realistically anticipated benefit to the class—not the
maximum or hypothetical amount—in assessing the value of
a class action settlement. In Kim, we held that a district court
must compare the reasonableness of a fee award against the
amount anticipated to be paid based on existing claims
(which was $45,000 in that case), not the maximum payable
amount (which was $6 million). 8 F.4th at 1181–82. We
thus reversed a fee award because “the district court should
have considered the amount of anticipated monetary relief
based on the timely submitted claims,” rather than the
maximum amount that the defendant would have paid if all
class members had submitted claims. Id. at 1181.
    On remand, the district court should disregard the
theoretical $20 million settlement cap and instead start with
the $52,841.05 that the class claimed. This rule is especially
important when the class redemption rate is low. The
plaintiffs’ counsel had to know that the redemption rate—
and thus the ultimate class recovery—would be extremely
low here: there was no realistic possibility that the actual
payout to class members would approach anywhere near $20
million, given that the NMPA settlement foreclosed many
           LOWERY V. RHAPSODY INTERNATIONAL, INC.           13

class members from making claims here. Any other
approach would allow parties to concoct a high phantom
settlement cap to justify excessive fees, even though class
members receive nothing close to that amount. District
courts have the responsibility to guard against such an
outcome. See Chambers v. Whirlpool Corp., 980 F.3d 645,
658–59 (9th Cir. 2020).
    The plaintiffs cannot rely on Boeing Co. v. Van Gemert,
444 U.S. 472 (1980), to argue that the hypothetical $20
million settlement cap supports the district court’s fee award.
In Boeing, the Supreme Court held that a fee award to class
counsel could be calculated based on the entire settlement
fund––even if part of the fund went unclaimed––because the
defendant had been held liable for a “sum certain” of about
$3 million no matter how many class members exercised
their right to make a claim. Id. at 478–79 & n.5. But the
Court suggested that this holding would not apply if the
amount of the defendant’s liability had been “contingent
upon the presentation of individual claims.” Id. at 479 n.5.
    Here, Rhapsody is not liable for any “sum certain” but
only for the claims submitted. The settlement agreement
established Rhapsody’s willingness to pay up to $20 million
if necessary to satisfy class members’ claims. But Rhapsody
never agreed to pay class members a penny more than the
amount that class members claimed. Because Rhapsody’s
monetary liability remained contingent upon the amount
claimed by the class, we join the Seventh Circuit in holding
that Boeing does not govern a case like this one in which the
defendant “did not surrender a sum certain that inured to the
collective benefit of the class.” See Camp Drug Store, Inc.
14           LOWERY V. RHAPSODY INTERNATIONAL, INC.

v. Cochran Wholesale Pharm., Inc., 897 F.3d 825, 832 &
n.22 (7th Cir. 2018).2
    In short, on remand the district court should value the
settlement by starting off with the $52,841.05 payment to the
class members, not the hypothetical $20 million cap.3
     B. On remand, the district court should consider
        cross-checking its lodestar calculation to ensure
        that it is reasonably proportional to the benefit
        provided to the class.
    We have “encouraged courts to guard against an
unreasonable result by cross-checking their [attorneys’ fees]
calculations against a second method.” In re Bluetooth, 654
F.3d at 944–45 (comparing fees calculated using the lodestar
method against a reasonable fee amount calculated using the
percentage-of-recovery method). A cross-check can “assure
that counsel’s fee does not dwarf class recovery.” Id. at 945
(quoting In re Gen. Motors Corp. Pick-Up Truck Fuel Tank
Prods. Liab. Litig., 55 F.3d 768, 821 n.40 (3d Cir. 1995)). If
the cross-check reveals that a contemplated fee award
exceeds 25% of the benefit to the class, the court should take

2
  The settlement agreement reinforces this conclusion: the plaintiffs
promised not to “claim in any manner” that the settlement cap
established a fixed fund to benefit the class. See Williams v. MGM-Pathe
Commc’ns Co., 129 F.3d 1026, 1027 (9th Cir. 1997) (deferring to
settlement agreement terms in evaluating reasonableness of fee award).
3
 Unlike the magistrate judge, the district court did not expressly consider
whether or how to include settlement administration costs, the Artist
Advisory Board, and class representative travel reimbursements and
enhancement awards in its calculation of the benefit to the class. Nor do
the parties address those issues in their argument before this court. We
thus do not decide how the district court should treat these costs on
remand.
           LOWERY V. RHAPSODY INTERNATIONAL, INC.           15

a hard and probing look at the award because this disparity
may suggest that the fee amount is unreasonable. See id.;
Johnson v. MGM Holdings, Inc., 943 F.3d 1239, 1242 (9th
Cir. 2019).
    Here, no matter the final valuation of the settlement, the
$1.7 million lodestar amount will greatly exceed 25% of the
value of the settlement. Indeed, it will be multiple times the
settlement’s value. And that is a major red flag that signifies
that lawyers are being overcompensated and that they
achieved only meager success for the class. See In re
Bluetooth, 654 F.3d at 942 (stating that district courts should
“award only that amount of fees that is reasonable in relation
to the results obtained” (quoting Hensley v. Eckerhart, 461
U.S. 424, 440 (1983))).
    Except in extraordinary cases, a fee award should not
exceed the value that the litigation provided to the class. Cf.
Pearson v. NBTY, Inc., 772 F.3d 778, 782 (7th Cir. 2014)
(Posner, J.) (“[T]he presumption should . . . be that
attorneys’ fees awarded to class counsel should not exceed a
third or at most a half of the total amount of money going to
class members and their counsel.”). No rational person
would spend, say, $1 million in legal fees—and endure the
hassles and headaches of litigation—to recover only relief
that is a small fraction of that amount. Likewise, it is
unreasonable to award attorneys’ fees that exceed the
amount recovered for the class, absent meaningful
nonmonetary relief or other sufficient justification.
     It does not matter that class action attorneys may have
devoted hundreds or even thousands of hours to a case. The
key factor in assessing the reasonableness of attorneys’ fees
is the benefit to the class members. See In re Bluetooth, 654
F.3d at 942. Here, the benefit to the class is meager. Not
16         LOWERY V. RHAPSODY INTERNATIONAL, INC.

only that, class counsel harbored little realistic probability
that they would recover substantial compensation for the
class. It was clear by April 2018 that Rhapsody’s NMPA
settlement would likely gut the putative class here so that
this lawsuit would yield only minimal financial recovery
(and the plaintiffs never argued that their lawsuit somehow
precipitated the NMPA settlement). And it was obvious that
no meaningful nonmonetary relief would be possible by
October 2018 at the latest when Congress passed the MMA.
In short, an award of $1.7 million in attorneys’ fees is
unreasonable and not proportional to the benefit received by
the class.
     II.   Even if the district court awards fees under
           the Copyright Act, it must consider whether
           the award is proportional to the benefit to the
           class.
    The plaintiffs try to wave away our case law on
reasonable attorneys’ fees by arguing that courts have
recognized that fees do not have to be proportional to the
monetary recovery in some cases.
    True, we have held that attorneys’ fees awarded in civil
rights cases need not be strictly proportional to monetary
damages. Even though damages in civil rights cases are
often small, we have held that these lawsuits can provide
considerable benefit to society through nonmonetary relief
such as “ending institutional civil rights abuses or clarifying
standards of constitutional conduct.” Gonzalez v. City of
Maywood, 729 F.3d 1196, 1209–10 (9th Cir. 2013). Civil
rights fee-shifting provisions thus “ensure that lawyers
would be willing to represent persons with legitimate civil
rights grievances.” See City of Riverside v. Rivera, 477 U.S.
561, 578–79 (1986) (plurality opinion). In other words, civil
           LOWERY V. RHAPSODY INTERNATIONAL, INC.          17

rights cases can provide significant nonmonetary and
injunctive relief to plaintiffs.
    But “the policies served by the Copyright Act are more
complex, more measured, than simply maximizing the
number of meritorious suits for copyright infringement.”
Fogerty v. Fantasy, Inc., 510 U.S. 517, 526 (1994).
Therefore, because the “goals and objectives” of the statutes
are “not completely similar,” the Supreme Court has rejected
an analogy to a civil rights fee-shifting statute when
interpreting the Copyright Act’s fee-shifting provision. Id.
at 522–25.
    We do the same here. District courts awarding attorneys’
fees in class actions under the Copyright Act must still
generally consider the proportion between the award and the
benefit to the class to ensure that the award is reasonable.
We recognize that a fee award may exceed the monetary
benefit provided to the class in certain copyright cases, such
as when a copyright infringement litigation leads to
substantial nonmonetary relief or provides a meaningful
benefit to society. But this is not such a case.
                      CONCLUSION
    We reverse the district court’s attorneys’ fees award of
$1.7 million. On remand, the district court should determine
the class action settlement’s actual value to the class
members and then award attorneys’ fees proportional and
reasonable to the benefit received by the class.
   REVERSED AND REMANDED.