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A federal appeals court has tossed out a settlement of hearing loss claims involving Motorola’s Bluetooth headsets, ruling that the trial judge failed to adequately test whether the attorney fees were excessive. The U.S. Court of Appeals for the 9th Circuit on Aug. 19 reversed and remanded the settlement, which provided for $100,000 in cy pres awards — gifts to various charitable organizations — and $800,000 to the plaintiffs’ lawyers. The plaintiffs received no economic recovery other than $12,000 allocated for nine class representatives. Several objectors appealed U.S. District Judge Dale Fischer’s approval of the deal and the fee award on the ground that they appeared disproportionate — essentially, that the lawyers received eight times more than the potential class members. “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,” wrote Senior Circuit Justice Michael Hawkins. The panel cited Fischer’s failure to recognize several “red flags” that warranted greater scrutiny. “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,” Hawkins wrote. The court stopped short of concluding that the deal was unfair or unreasonable. Ted Frank, founder of the Center for Class Action Fairness in Washington, one of the seven objectors, called the panel’s ruling a “landmark decision.” “It will now be much more difficult for attorneys to abuse the class action system to negotiate low-value settlements that provide handsome compensation for themselves,” he said in a prepared statement. Daniel Warshaw, a partner at Pearson, Simon, Warshaw & Penny in Sherman Oaks, Calif., one of the plaintiffs’ firms in the case and the firm that handled the appeal, said the panel failed to account for Fischer’s extensive in camera review of the lawyers’ time records. “We feel Judge Fischer got it right the first time,” he said. “She’ll get it right the second time and find that the settlement is fair, adequate and reasonable, and the attorney fees are appropriate in the case.” Other lawyers and law firms receiving the fees in the case are the Garcia Law Firm in Long Beach, Calif.; Wasserman, Comden, Casselman & Esensten in Tarzana, Calif.; Chicago’s Segal McCambridge Singer & Mahoney; the Law Offices of James Holmes P.C. in Henderson, Texas; John Mercy of Mercy Carter Tidwell in Texarkana, Texas; and James McHugh, of McHugh Fuller Law Group in Hattiesburg, Miss. Terrence Dee, a partner at Kirkland & Ellis who represents two of the defendants — Motorola Inc. and Plantronics Inc. — did not return a call for comment. Angel Garganta, a partner at Arnold & Porter in San Francisco who represents a third defendant, GN Netcom Inc., declined to comment. The settlement resolved more than 25 proposed class actions coordinated in multidistrict litigation alleging that the defendants failed to publicize risks about hearing loss associated with prolonged use of Bluetooth headsets. The suits claimed violations of state laws protecting against consumer fraud and unfair business practices. They sought economic damages of between $70 and $150 per headset, along with injunctive relief, punitive damages and attorney fees and costs. In addition to the cy pres award and attorney fees, the settlement provided that defendants post acoustic safety warnings on their Web sites and in product manuals and packaging. The defendants agreed to spend $1.2 million to post notices to potential class members. The class was estimated to comprise millions of Bluetooth customers, of whom 715 opted out of the deal and 50 objected, according to the panel’s opinion. The panel concluded that Fischer, who found that the fees charged by attorneys in the case “substantially exceeds” $800,000 under the lodestar method, failed to explicitly calculate that figure other than to deduce that it was less than $1.6 million. “With neither a lodestar figure nor a sense of what degree of success this settlement agreement achieved, we have no basis for affirming the fee award as reasonable under the lodestar approach,” the panel concluded. Fischer also failed to compare the lodestar amount to what attorneys would have received had their fees been based on a percentage of the settlement, the court said. In fact, the fees amounted to 83.2% of the total defendants agreed to pay, it said, and if that amount had been structured as a common fund instead, attorney fees, based on 25% of the settlement, would have been $240,500. In rejecting the settlement, the panel found that Fischer failed to scrutinize certain elements of the deal, such as a “clear sailing agreement” in which defendants agreed not to object to the attorney fees, and a “kicker,” which requires that fees not awarded would revert to the defendants rather than a cy pres fund or the class. Frank, of the Center for Class Action Fairness, said the panel’s ruling could affect other cases, since both provisions have become common. The opinion also could encourage judges to more heavily scrutinize lodestar fees, he said. Contact Amanda Bronstad at [email protected].  

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