IP Law Daily, COPYRIGHT—9th Cir.: Excessive $1.7 million fee award to class counsel reversed where musicians recovered only $50,000 in settlement with streaming service, (Jun 8, 2023)

By Robert Margolis, J.D.

On remand, the district court must evaluate the actual benefit provided to the class and base reasonable attorney fees on that benefit.

Holding that an award of attorney fees to class action counsel under the Copyright Act must bear a reasonable relation to the actual monetary benefit recovered by the plaintiff class, the U.S. Court of Appeals for the Ninth Circuit Court has reversed a $1.7 million award to counsel for a class of musicians who received approximately $50,000 in compensation from Rhapsody International, Inc. (now rebranded as Napster), in settlement of copyright infringement claims. The appellate court remanded the matter to the district court, to determine an appropriate fee award that is related to the actual benefit the settlement provided to the class (Lowery v. Rhapsody International, Inc., June 7, 2023, Lee, K.).

In early 2016, David Lowery and other named plaintiffs sued Rhapsody on behalf of a putative class of copyright owners whose musical compositions were streamed on the Napster service. They alleged that Rhapsody had failed to obtain either a voluntary or compulsory license and nonetheless reproduced and distributed the plaintiffs’ musical compositions on Napster.

At the time the lawsuit was filed, Rhapsody could either (1) directly negotiate a voluntary license from a copyright owner, or (2) obtain a “compulsory license” through the procedures set forth in the Copyright Act. The compulsory license process was unworkable in the digital music streaming era, because it required the service to send a “notice of intention” on the copyright owner within 30 days after copying the work and before distributing it, or if the owner could not be identified, serving it on the Copyright Office. Given the volume of songs Rhapsody and other streaming services offer, they struggled to serve the notice of intention for every one of the millions of works available on their services. This failure formed the basis of the putative class action.

Changing landscape. Subsequent to the filing of the complaint (but as the culmination of discussions that had begun before filing), Rhapsody reached an agreement with the National Music Publishers Association (NMPA), to resolve the copyright licensing problem. To get paid under the NMPA settlement, musicians had to renounce their right to make claims in the class action. In April 2018, Rhapsody informed plaintiffs about the NMPA settlement, and that roughly 98% of the copyright holders of musical works available on Napster had opted to participate in the NMPA settlement, which “effectively decimat[ed]” the putative class in the lawsuit, rendering it clear that there would be little compensation to be had in the continued class action. Also, in October 2018, Congress enacted the Music Modernization Act (MMA), which permits digital music providers to obtain a blanket license, rather than deal with the cumbersome compulsory license regime.

Settlement. The parties then turned their attention to settling the case, and in January 2019, Rhapsody and plaintiffs executed a settlement agreement, by which Rhapsody agreed to pay a maximum of $20 million to musicians who filed claims for compensation. Likely due to the NMPA settlement, very few class members actually submitted claims, such that Rhapsody paid only $52,841.05. Rhapsody also was required to establish an Artist Advisory Board, with an annual budget of at least $30,000, to promote artists’ rights and Rhapsody’s business.

Fee award. The parties petitioned the district court to approve the settlement as required by Federal Rule of Civil Procedure 23, and plaintiffs’ counsel submitted a request for attorney fees. They sought more than $6 million in fees. A magistrate calculated the attorneys’ lodestar (the number of hours worked multiplied by a reasonable hourly rate) to be $1.7 million, and applied a negative 0.5 multiplier, given the limited benefit to the class from the settlement. The district court accepted that lodestar, but removed the multiplier, and awarded counsel $1.7 million. The district court cited the fact that the settlement could have provided as much as $20 million to the class.

Class benefit. The appellate court held that awarding $1.7 in attorney fees for an approximately $50,000 recovery is not reasonable and must be reversed, noting that the attorney fee award is more than 30 times larger than the amount paid to class members. The appellate court remanded the case to the district court to come up with a fee award that correlates to the actual benefit received by the class. In doing so, the district court must “disregard the illusory $20 million settlement cap,” the appellate court advised. What matters is the actual or realistically expected benefit, not the maximum or hypothetical amount. In this case, given the NMPA settlement, there was no realistic chance that the class benefit would approach the $20 million cap, and the attorneys knew that when negotiating the settlement. Only in unusual cases, such as where a significant non-monetary benefit is provided, should the attorney fee award exceed the monetary benefit to the class. This was not an unusual case justifying such an award.

Finally, the appellate court rejected the attorneys’ attempt to analogize claims under the Copyright Act to those in civil rights cases, where the fee awards to attorneys need not be strictly proportional to the monetary damages recovered. Civil rights lawsuits provide substantial societal benefits such as ending civil rights abuses or clarifying what conduct meets constitutional standards, so fee awards must be structured to incentivize attorneys to take on those cases, even where monetary awards may not be significant. In contrast, the policies served by the Copyright Act are more complex and measured than encouraging meritorious lawsuits. The appellate court noted that the Supreme Court has thus rejected the analogy to the civil rights fee-shifting statute when interpreting the Copyright Act’s fee-shifting provision.

The Case is No. 22-15162.

Attorneys: Reuben A. Ginsburg (Michelman & Robinson LLP) for David Lowery, Victor Krummenacher, Greg Lisher and David Faragher. Karin Kramer (Quinn Emanuel Urquhart & Sullivan LLP) for Rhapsody International, Inc.

Companies: Rhapsody International, Inc.

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