On May 7, 2021, the Tenth Circuit affirmed a district court’s approval of a class action settlement that contained “kicker” and “clear sailing” agreements—two frequently contested provisions related to attorneys’ fees—but held, for the first time, that such provisions are subject to heightened scrutiny. The opinion serves as a useful guide to class action litigants concerning the types of evidence necessary to ensure that such “kicker” and “clear sailing” agreements withstand scrutiny under Rule 23(e), thereby enabling the court to determine that the proposed settlement is “fair, reasonable, and adequate.”

• Defendant Samsung sold top-load washing machines, some of which included allegedly faulty door mechanisms that caused the doors to detach mid-cycle and water to spew out of the machine. Consumers filed class action suits against Samsung and various retailers. [Disclosure: King & Spalding represents one of the retailers in this litigation.] Those actions were consolidated into an MDL, where the parties commenced settlement negotiations with the help of a mediator. Class counsel and Samsung ultimately developed a settlement structure that gave class members various options for relief, such as an enhanced repair or a refund.
• The parties agreed that Samsung would pay fees and costs up to $6.55 million. But there were two catches. The agreement provided that if the court awarded fees and costs below $6.55 million, the difference would revert to Samsung (not the class). This was the “kicker.” And Samsung also agreed not to dispute class counsel’s request for fee awards. This was the “clear sailing” provision. Objector John Douglas Morgan (represented by Theodore Frank, a frequent objector to class settlements) took issue with both provisions, arguing that they were proof that class counsel had engaged in self-dealing at the expense of compensation for the class. Morgan and Samsung attempted to negotiate a side deal that would distribute some of the leftover fee award to the class and allow Morgan’s counsel to seek fees. After class counsel opposed the side deal, Morgan walked away, citing fear that he would be sued by class counsel. The district court ultimately approved the settlement. Class counsel sought $5,996,079.46 in fees and $242,764.47 in costs, and the court awarded a total amount of $3,836,387.75.
• Morgan argued on appeal that the settlement agreement was inadequate because of the kicker and clear sailing provisions. The Tenth Circuit stated that the proper standard of review for agreements including both a kicker and a clear-sailing provision was an issue of first impression.
  • The court observed that kicker agreements could “valuably further negotiations by allowing defendants to establish their maximum liability with the expectation that their actual liability [would] ultimately be less.” The court also noted that, even absent the kicker, the district court retained discretion to give Samsung the difference between permissible fees and costs and the actual award, which showed that kickers were not inherently problematic.
  • As for clear-sailing agreements, the court observed that they also played an important role in class action settlement negotiations by protecting plaintiffs from being sandbagged on a fee request.
  • Based on those considerations, the court rejected a per se prohibition on agreements that contain both provisions.
  • But the court found that kicker and clear-sailing provisions could nevertheless be evidence of collusion between a defendant and class counsel. It noted that kicker agreements prioritized fee awards at the expense of class compensation, pointing out that, from the “selfish standpoint of class counsel and the defendant . . ., the optimal settlement is one modest in overall amount but heavily tilted toward attorneys’ fees.” And clear-sailing provisions “cut against the general adversarial nature of our legal system.”
• Because kicker and clear-sailing agreements play a useful role in settlement negotiations but could be evidence of collusion, the Tenth Circuit held that district courts should apply “heightened scrutiny” to settlement agreements including both provisions. Under that standard, district courts must: (1) take “special care” to ensure that class members are fairly compensated, (2) consider the fees and costs award in comparison to the settlement value, (3) consider the structure of the negotiation process, including whether the parties engaged a mediator, and (4) search for “indicia of self-dealing by class counsel.” The court also held that “before awarding fees and costs, a district court must make findings” as to the value of the settlement and “the estimated financial impact on the defendant based on the terms of the settlement and in light of then-prevailing information on the class participation rate.” And where a settlement agreement includes a clear-sailing provision, district courts should resolve any doubts regarding hourly rates and billed hours against class counsel, effectively imposing a “heightened burden” on class counsel to support its fee request.
• Applying that standard, the Tenth Circuit affirmed the approval of the settlement. It emphasized that the average class claimant would receive compensation in excess of damages provable at trial (a point Morgan did not contest), citing this fact as evidence of no collusion or self-dealing. Moreover, the district court “crosschecked” its attorneys’ fee award against the total estimated value of the settlement to ensure that the fee award did not constitute an outsized allocation relative to the settlement benefits. It also pointed to the mediator’s declaration regarding settlement negotiations as further evidence of no collusion, including his statements that the negotiations were “quite adversarial” and that the parties only discussed attorneys’ fees on the final day of a nine-day mediation (after the terms of class member compensation had already been agreed upon).
• The Tenth Circuit’s decision shows that defendants should take extra care when negotiating settlement agreements with kicker and clear-sailing provisions, as such agreements may be targets for objectors and subject to heightened scrutiny. With proper evidence about the settlement value and the structure of negotiations, however, the presence of these provisions alone should not be a barrier to final approval.
• The case is In re: Samsung Top-Load Washing Machine Marketing, Sales Practices and Products Liability Litigation, and you can read more here.