Arguing Class Actions is a monthly column by Adam J. Levitt for the National Law Journal.
Reprinted with permission from the December 1, 2025, edition of the National Law Journal. © 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Imagine a class action against a car manufacturer alleging that it knowingly sold cars with defective anti-theft systems. The car manufacturer moves to dismiss, raising a bevy of complex legal and technical arguments relating to constitutional standing, the efficacy of the manufacturer’s remedies, mootness, and the like. Shortly after the court’s denial of the dismissal motion, the parties reach a classwide settlement of their dispute for $150 million, a significant portion of the claimed damages. The attorneys representing the settlement class then request $50 million in attorney fees for their efforts, one-third of the $150 million settlement fund. Is this request “reasonable,” as required by Rule 23(h) of the Federal Rules of Civil Procedure?
In determining whether the request is reasonable, courts apply two main methods. See In re T-Mobile Customer Data Sec. Breach Litigation, 111 F.4th 849, 858 (8th Cir. 2024). One is the lodestar method, where the court will determine the number of hours the plaintiffs attorneys spent on the litigation and multiply it by a reasonable hourly rate, resulting in the “lodestar.” The second is the percentage method, where the court awards a percentage of the fund that the attorneys helped recover. Today, many courts employ a hybrid of the two methods, in which the court first applies the percentage method and then “cross-checks” the reasonableness of that amount with the lodestar method. See Halley v. Honeywell International, 861 F.3d 481, 496 (3d Cir. 2017) (“Common fund cases, such as this case, are generally evaluated using a ‘percentage-of-recovery’ approach, followed by a lodestar cross-check.”) (citation omitted). The ratio between counsel’s requested percentage award and their lodestar is commonly referred to as a “multiplier.” Multipliers of up to four are commonly found to be appropriate in common fund cases. See Health Republic Insurance v. United States, 58 F.4th 1365, 1375 (Fed. Cir. 2023).
The cross-check method breaks down, however, when the settlement results in what some commentators and courts have called a “megafund,” which was originally defined (in the mid-1990s) as a settlement involving $100 million or more. See William B. Rubenstein, Newberg on Class Actions Section 15:81 (6th ed. June 2025 update) (noting that “most courts define mega-funds as those in excess of $100 million”). In our scenario, for instance, a request of $50 million in attorney fees for work that concluded before substantial discovery had begun would likely reflect a multiplier in excess of the typical range. And so, some courts have advanced a rule that caps attorney fees when the common fund exceeds a certain value; this has been referred to as the “megafund rule.” See In re Broiler Chicken Antitrust Litigation, 80 F.4th 797, 804 n.5 (7th Cir. 2023).
The problem, however, is that while certain courts have concluded that common funds in excess of $100 million are considered “megafunds,” see, e.g., Alexander v. Fedex Ground Package System, 2016 WL 1427358, at *8 (N.D. Cal. Apr. 12, 2016), the entire “megafund” construct creates the perverse incentive for counsel to burn more of the parties’ and the court’s resources and limit the eventual recovery. The fact is that plaintiffs’ counsel capable of obtaining large settlements in substantial cases should be rewarded and fairly compensated, rather than vilified and ground down. As Judge Easterbrook—rejecting the district court’s attempted fee reduction on purported “megafund” grounds—said more than a quarter century ago in In re Synthroid Marketing Litigation, 264 F.3d 712, 718 (7th Cir. 1999), “we have held repeatedly that, when deciding on appropriate fee levels in common-fund cases, courts must do their best to award counsel the market price for legal services, in light of the risk of nonpayment and the normal rate of compensation in the market at the time.” That was the truth then, and it’s the truth now.
Regardless, in megafund cases, courts have held that, “the economies of scale often reveal a disconnect between recovery and the amount of labor required to achieve it.” T-Mobile, 862 F.3d at 859. In short, “it isn’t 10 times as hard to try a $100 million case as it is a $10 million case.” In re Optical Disk Drive Products Antitrust Litigation, 959 F.3d 922, 933 (9th Cir. 2020). Consequently—and blithely ignoring, among other things, fundamental risk premium concepts that underscore contingent fee litigation—the argument goes, megafunds “are the product of a class’s size rather than counsel’s effort, and so attorneys shouldn’t receive as high a percentage of the settlement fund in such cases.” T-Mobile, 862 F.3d at 859.
This argument works best in certain megafund cases: those that are resolved at a very early stage of litigation, perhaps before any briefing has occurred. One such example would be a class action that is settled for $200 million one month after the complaint is filed. In that situation, the size of the recovery could potentially be considered a product of the class’s size rather than of counsel’s efforts.
But there are at least two flaws with applying the megafund rule across all megafund cases. Perhaps most obviously, the rule penalizes attorneys for quick success. Indeed, one of the key purposes of class action litigation, and Rule 23 specifically, is to foster efficiency and economies of scale. Yet, the megafund rule destroys those efficiencies by disincentivizing attorneys from seeking and obtaining maximum resolution as quickly as possible. Would plaintiffs attorneys decline settlements early in the case if they know their fees will be reduced? Would plaintiffs’ attorneys choose less favorable settlement terms to avoid scrutiny under the megafund rule? These questions would surely arise if the megafund rule was widely adopted.
Beyond disincentivizing efficient resolution of cases, the megafund rule discourages attorneys from investing in complex or novel cases. As one court aptly explained: “in common fund cases, attorneys whose compensation depends on their winning the case must make up in compensation in the cases they win for the lack of compensation in the cases they lose.” See Vizcaino v. Microsoft, 290 F.3d 1043, 1051 (9th Cir. 2002) (cleaned up). To this end, the megafund rule rewards low-risk, time-intensive cases while discouraging lean, high-impact ones, even though the latter may yield greater value for class members.
For these reasons, the downward adjustment in megafund cases should be the exception, not the rule. Application of the megafund rule should be reserved only for cases where the relatively large recovery is solely based on the size of the class, and the amount recovered bears no relationship to the efforts of counsel, leading to a windfall in attorneys’ fees. But in the typical case, the megafund rule should not be applied.
Now, let’s go back to our opening scenario. Counsel recovered what some courts would consider a megafund: $150 million. Would the attorneys’ request of $50 million in fees be considered a “windfall”? The answer should be “no.” This is not the rare situation where the recovery has no relation to the efforts of counsel, which results in a windfall; the plaintiffs’ claims survived a difficult motion to dismiss and, presumably, counsel were prepared to begin engaging in discovery. If the megafund rule were applied, it would discount the risks of the case and the exceptional results that plaintiffs’ counsel obtained: recovery of $150 million.
Indeed—consistent with Fed. R. Civ. P. 1, as well as equity—counsel should be rewarded, not penalized, for obtaining a large settlement.
Courts should thus apply the percentage method without a cross-check in most megafund cases. Certainly, the size of the fund can be one factor in determining the reasonableness of attorney fees. But focus should be given to the complexity of the issues and the skill and efficiency of the attorneys involved, among other factors, in determining the reasonableness of the requested fee amount. See Halley v. Honeywell International, 861 F.3d 481, 496 (3d Cir. 2017). This approach makes sense. As one court noted, the percentage method is “generally favored in common fund cases because it allows courts to award fees from the fund in a manner that rewards counsel for success and penalizes it for failure.” See Sullivan v. DB Investments, 667 F.3d 273, 330 (3d Cir. 2011) (cleaned up). When attorneys are compensated on a contingency basis, they receive payment only if they succeed in the case; if they lose, they receive nothing. They should not be penalized for obtaining large settlements early in the litigation. The size of the settlement fund should not be the end all, be all when determining the reasonableness of attorney fees.
Finally, even in instances where courts are considering applying the wrongheaded megafund approach to support a downward suppression of plaintiffs counsel’s attorney fees to (counterintuitively) preclude them from being fairly compensated for obtaining a stellar result, the $100 million “megafund” threshold that was established more than 30 years ago needs to be updated to present value, which, regardless of the propriety of the concept, would create a 2025 megafund floor exceeding $206 million. So, even if the concept is wrong, if courts are going to apply it, they should at least get the math right.
Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups. He can be reached at alevitt@dicellolevitt.com.
Thank you to DiCello Levitt associate Joseph “JJ” Nelson for contributing to this column.
