Ruling that “the benefit to the class was minimal,” an appellate court reduced a $1.7 million attorneys’ fees reward in a copyright infringement class action case because it was based on hypothetical, not actual, monetary relief.

Lowrey et. al. v Rhapsody International, Inc. began when a group of copyright holders filed a class action suit against their music publishing company, Rhapsody International, Inc. (now rebranded as Napster). A unanimous three-justice panel from the Ninth Circuit Court of Appeals reversed the decision of District Judge Jeffrey S. White of the U.S. District Court for the Northern District of California. In an opinion written by Justice Kenneth K. Lee on June 7, the Ninth Circuit panel found that White had incorrectly tabulated the actual benefit that class members received from their settlement.

Lee wrote that under the Copyright Act, courts must consider the reasonableness of the award in order to obtain a just balance between the award and the benefit accrued to class members. Rather than relying on the “Lodestar” method for award calculation, White should have followed Federal Rule of Civil Procedure 23 which considers the “actual benefit” to class members, rather than the “hypothetical $20 million cap” that could have been paid if the class prevailed.

The opinion begins with a scenario envisioned by Lee. “This case will likely make the average person shake her head in disbelief,” he wrote. He then explained that the plaintiffs’ only received a total of just over $50,000, while their lawyers got $1.7 million in attorneys’ fees. This was less than the $6 million plaintiffs’ attorneys had requested, but still way too much according to the Ninth Circuit. In fact, the lawyers got 30 times more than the amount received by the class. “Here, the benefit from this litigation was minimal: the class received a measly $52,841.05 and obtained no meaningful injunctive or nonmonetary relief,” Lee wrote.

The Ninth Circuit thus reversed Lee’s award and remanded it with specific instructions that the District Court “rigorously evaluate the actual benefit provided to the class and award reasonable attorneys’ fees considering that benefit.” Actual, not hypothetical value, must be used and a “cross-check analysis” should be used to determine whether the proportional benefit was accurately calculated.

The opinion then explained how music copyrights are calculated. When a song is played via digital streaming through services such as Apple Music or Spotify, royalties are to be paid to the copyright owner. Rhapsody had a choice of how the copyright amount would be calculated. They could have negotiated a “voluntary license” or obtained a “compulsory license,” which tabulated fees according to the Copyright Act. Compulsory licenses required Rhapsody to serve a “notice of intention” to the copyright owner within 30 days. Lee pointed out that the current digital streaming era has made compulsory licenses “unworkable.” Calling it “antiquated,” because of the vast number of music choices that are now available, Rhapsody had been trying to resolve the “copyright conundrum” via negotiations with the National Music Publishers Association (NMPA).

A settlement was reached, but it required the copyright owners to avoid “double-dipping” by waiving their claims to any future lawsuit. In 2018, Rhapsody informed the plaintiffs about the settlement. The music publisher also told the plaintiffs that a winning lawsuit would likely “not yield much compensation,” even if they won. A settlement agreement was reached in 2019, under which Rhapsody denied liability for copyright infringement, but agreed to pay $20 million. Because of the settlement agreement, very few plaintiffs went forward with the suit, and a mere $52,841.05 was actually paid.

As an update, Congress passed the Music Modernization Act (MMA) in 2018. MMA now permits “blanket licenses” that permit unlimited copying and distribution of digitally streamed music.

What does all this mean for attorneys’ fees, the key consideration in this case? Lee explained that the Federal Rules of Civil Procedure require parties to seek court approval of class action settlements. Courts in the Ninth Circuit, however, use different methods to calculate approved amounts. Some courts use the “Lodestar” method, while others employ the “percentage-of-recovery” method. Under “Lodestar,” the court multiplies the lawyers’ hours by a reasonable hourly rate, while “percentage-of-recovery” gives the class’s attorneys a percentage of the total settlement fund or amount the class claims, plus a potential increase if the court approves a “multiplier.”

Here, plaintiffs’ counsel used Lodestar to request $2.1 million, plus a multiplier of 2.8 because they said they “achieved “exceptional results in a difficult and complex case.” The magistrate, who had to approve the settlement, disagreed and reduced the amount to $1.7 million with a negative 0.5 multiplier. The District Court accepted her $1.7 million award but decided to use neither a positive nor negative multiplier.

The Ninth Circuit found that the $1.7 was not reasonable under the Copyright Act, because it was 30 times more than the amount received by the class. Reasonableness is determined by the benefit received by the class, and Judge White failed to apply the correct calculation, which Lee called a “glowing disparity.” He added, “District Courts have a responsibility to guard against such an outcome.”

Next, Lee explained that on remand, the District Court should “cross-check” the amount of attorneys’ fees they calculate, by comparing the fees that were calculated under Lodestar to the sums actually collected. He said the amount the District Court approved should have raised a “red flag that signifies that lawyers are being overcompensated and that they achieved only meager success for the class.”

This case, like so many others, demonstrates the legal difficulties in balancing new technologies with current law. And it also warns attorneys that payments in class action cases will be based on the actual value to the class. The opinion said, “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.”