After a data breach at Wawa, the “consumer track” reached a class action settlement agreement:

“Tier 1” customers, who attest that they spent at least some time monitoring their credit, could get a $5 Wawa gift card. 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, could receive a $15 Wawa gift card. 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, could receive $500 in cash, (not Wawa gift cards). Tier 3 compensation is subject to a $1 million cap without a floor.

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 a “constructive common fund” of $12.2 million.  (The Settlement Agreement also specified injunctive relief, including upgraded security and processing systems, which class counsel and Wawa valued at $35 million.)

Ted Frank objected, arguing that the fund was miscalculated and class counsel were receiving a disproportionate share of the recovery. Frank also pointed to a “clear sailing” provision, and objected to a “fee reversion” under which any unapproved fees would revert to Wawa, as opposed to the class. (Frank urged a different approach: capping fees at 25% of the actual claims made and paid, rather than funds and gift cards offered but never used)

In response to the objection, an amended settlement agreement 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. The fee reversion was also eliminated, so that any reduction in fees awarded would be re-distributed 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 un-used 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 maintained his objection to the fees because they 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 provision as evidence of collusion between class counsel and Wawa.

Approving the fee award, the District Court found that the clear sailing provision was typical of class action settlements, and was satisfied that 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.

The U.S. Third Circuit Court of Appeal, however, vacated and remanded the fee award:

“Prior to adding subdivision (h) to Rule 23 in 2003, awards of attorney’s fees were governed by Rule 54, which included no reasonableness requirement…. 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. Whatever the methodology, one focus remained fundamental — the result actually achieved for class members. If the award were calculated as a percentage of the class’s recovery, results achieved is the basic starting point. 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. Indeed, courts can evaluate the reasonableness of a percentage-based award by reference to either amounts paid or amounts made available. Assessing a reasonable fee award also requires courts to take a hard look at side agreements between class counsel and the defendant. Courts, for instance, must be on the lookout for clear sailing clauses, which amount to agreements by a settling party not to oppose a fee application up to a certain amount. 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.

“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; 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. But that limitation is not required by history or precedent. Rather, we have recognized the difficulty a district court faces in calculating attorney’s fees before class relief is given out, and for that reason, it 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. 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, such terms still deserve careful scrutiny when calculating a reasonable fee award. 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. So a district court faced with such a provision in a class action 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.

“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.

“Nor does the fact that the agreement came after the parties had settled class compensation end the inquiry. That is because class 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. 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 unacceptable to the defendant. 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. 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. 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. 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.

“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 collusion by considering the evidence in the negotiation process or the final terms of the settlement. 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.”

 

In re Wawa Data Security Litigation, No.22-1950, 2023 U.S.App.LEXIS 29114 (3^rd  Cir. Nov. 2, 2023).