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Tenth Circuit Blesses Class Action Settlements with “Kicker” and “Clear-Sailing” Provisions

by | May 28, 2021

On May 7, 2021, the Tenth Circuit issued an important decision affirming the Western District of Oklahoma’s approval of a class action settlement that contained both a “kicker” and “clear-sailing” provision relative to the award of attorneys’ fees and costs.  In re Samsung Top-Load Washing Machine marketing, Sales Practices and Prods. Liability Litig., No 20-6097 (10th Cir. 2021).  The thorough decision explains why such provisions can be appropriate and what type of scrutiny lower courts should apply to settlements including them.  Before getting to that, first a bit on the underlying settlement.

The Settlement

In 2015, 34 models of Samsung top-load washing machines experienced “weakness issues with the top-load door mechanism.”  Basically, the door would come off during spin cycles, allowing water to spill out.  Not ideal.  

After consumers filed a slew of lawsuits, the JPML order the cases combined into an MDL in the Western District of Oklahoma.  Following this consolidation, the parties spent months negotiating a settlement with the help of a mediator.  Of the nine days spent with the mediator, the first eight were spent discussing compensation to the class, while the final day was spent on the award of attorneys’ fees and costs.  Overall, the parties estimated the settlement’s value to the class at between $6.55 and $11.42 million.

As for attorneys’ fees and costs, the parties agreed that Samsung would not contest any requested award of fees and costs up to $6.55 million (the “clear-sailing” provision).  Should the court reduce the award of attorneys’ fees and costs below $6.55 million, the settlement agreement permitted Samsung to retain the differential (the “kicker”).  

The District Court Weighs In

The district court reviewed the settlement agreement and “concluded compensation under the Settlement Agreement was fair and adequate to the class.”  Indeed, the court relied on the evidence of an expert offered by class counsel to value the future warranty protection at between $6.44 and $11.31 million.  And the court found that the settlement offered class members a rebate of 15.5% of the purchase price, which exceeded the 7% the class likely would have received had plaintiffs prevailed in a trial.  

With respect to attorneys’ fees and costs, Samsung had asked the court to approve approximately $5.99 million in fees and $242,000 in costs, which was less than the $6.55 million Samsung had promised not to contest.  The court “critically analyz[ed]” the request and ultimately awarded a base fee amount of $2.95 million and a lodestar multiplier of 1.3 for a total of $3.84 million. 

The Appeal

On appeal, a class member argued that the “district court abused its discretion by granting final approval to the Settlement Agreement where it included both a kicker and a clear-sailing provision.”  The Tenth Circuit framed the relevant question here as what degree of scrutiny should a district court apply to a settlement agreement containing both a “kicker” and “clear-sailing” provision?  At the outset of its opinion, the Tenth Circuit identified four possible standards:

  1. a per se prohibition;
  2. a presumption against the fairness and reasonableness of such settlement agreements; 
  3. a requirement that the district court apply “increased or heightened scrutiny”; or 
  4. the “normal standard governing the approval of settlement agreements in class action litigation.”

If you guessed option 3 – you would be correct.  The Tenth Circuit found that heightened scrutiny was appropriate “because while ‘kicker’ and ‘clear-sailing’ agreements may serve a purpose in the negotiation process, the presence of both agreements in a settlement agreement also suggests the class members may not be receiving all reasonable benefits.”  

The Value of a “Kicker” and “Clear-Sailing Provision

After endorsing the heightened scrutiny approach, the Tenth Circuit explicitly defined “kickers” and “clear-sailing” provisions and then explained the importance of each:

  • Kicker:  
    • Definition:  
      • “[A]llows all fees not awarded to class counsel to revert to defendants rather than be added to the cy pres fund or otherwise benefit the class.”
    • Importance:
      • “Can valuably further negotiations by allowing defendants to establish their maximum liability with the expectation that their actual liability will ultimately be less once the district court scrutinizes class counsel’s fees and costs request.”
      • “In settlements providing fair and reasonable compensation to class members,” kickers “avoid situations where participating class members receive a windfall, well above their actual damages, at the expense of the defendant.”  
  • Clear-Sailing
    • Definition:  
      • An agreement “where the defendant agrees not to object to an award of attorneys’ fees specified in a settlement agreement.”
    • Importance:
      • Can “play an important role in class action settlement negotiations ‘because the defendants want to know their total maximum exposure and the plaintiffs do not want to be sandbagged.”

After noting how these provisions can be important, the Tenth Circuit emphasized that it was cognizant of the fact that a settlement agreement with both can be an “indication of possible implicit collusion.”  Given this, the Tenth Circuit described how a district court should apply heightened scrutiny.

What Does Heightened Scrutiny Mean?

For district courts in the Tenth Circuit, when evaluating a class action settlement agreement with both a kicker and clear-sailing provision, here’s the non-exhaustive list of factors they should consider:  

  • “whether the settlement was negotiated at arm’s-length”;
  • whether “class members receive fair and reasonable compensation based on record evidence of their actual damages and the likelihood of success at trial”;
  • “the fees and costs award provided for by the settlement in comparison to the value of the settlement to the class”;
  • “the structure of the negotiation process, including whether the parties negotiated attorneys’ fees and costs while negotiating class compensation or whether negotiations on fees and costs were reserved until after the parties reached an agreement on class compensation”;
  • whether there has been an “independent verification of any claims by the parties that attorneys’ fees and costs were negotiated subsequent to and apart from class compensation”; and  
  • “whether the parties relied upon a neutral mediator to aid settlement negotiations”

In addition, the Tenth Circuit instructed district courts to “consider the litigation and settlement agreement as a whole, searching for other indicia of self-sealing by class counsel through negotiations with the defendant.” 

Did the District Court Apply Heightened Scrutiny to the Samsung Settlement? 

In affirming the district court’s approval of the class settlement, the Tenth Circuit found that district court “applied sufficient scrutiny and acted well within its discretion to grant final approval of the Settlement Agreement.”  Indeed, the Tenth Circuit commended the lower court for relying on expert evidence to determine the valuation of certain parts of the settlement.  Finally, the Tenth Circuit laid down a marker for future cases, noting that in Samsung, “where class members were receiving compensation equivalent to or in excess of actual damages, it cannot be said that class counsel and defendants negotiated terms that favored attorneys’ fees and costs at the expense of adequate and reasonable compensation for the class.”

Takeaways

Samsung contains several valuable lessons for class action practitioners looking to garner final approval for a class action settlement that includes a kicker and/or clear-sailing provision.  Those include, but are not limited, to the following:

  • Experts are critical to (i) valuing tough-to-value parts of a settlement (e.g. injunctive relief, warranties, etc.) and (ii) assessing the benefit(s) the class received through trial vs. what the class could have received at trial;
  • Well-established mediators can help give settlements imprimatur of fairness; and
  • It is better to negotiate attorneys’ fees and costs after concluding negotiations on benefits to the class.

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About the Author

Ross Weiner is the Legal Director at Risk Settlements, where he helps evaluate new business, assess legal and financial risk, and create optimal settlement designs and risk transfer options.

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