Arguing Class Actions: The Misaligned Incentives of the Lodestar Cross-Check

In class actions, the way that courts calculate attorney fees can shape not only compensation, but also litigation strategy. The “lodestar cross-check,” increasingly used by courts to evaluate fee awards in common-fund cases, undermines efficiency by incentivizing hours worked over results achieved. To further the purpose of common-fund litigation, courts should return to a simple application of the percentage-of-the-fund method, which rewards outcomes and fosters case management practices that both conserve judicial resources and promote efficiency.

Under the “American Rule,” parties involved in litigation in the United States bear their own costs and attorney fees. One of the earliest and most frequently invoked exceptions to this rule is the common-fund doctrine, which provides that an attorney who is responsible for creating a common fund that benefits a group of litigants is entitled to a fee from that fund. Court Awarded Attorney Fees: Report of the Third Circuit Task Force, 108 F.R.D. 237, 241 (1986).

Traditionally, courts relied on the “percentage-of-the-fund” method (or percentage method) when awarding fees under the common-fund doctrine. Today, courts take varying approaches to determine what percentage of the fund to award attorneys. For example, while the Ninth Circuit uses 25% as a reasonable benchmark, see In re Hyundai & Kia Fuel Economy Litigation, 926 F.3d 539, 570 (9th Cir. 2019), the Third Circuit looks to several factors to determine the appropriate percentage, including the size of the fund, the complexity of the issues, and the skill of the attorneys involved, see Halley v. Honeywell International, 861 F.3d 481, 496, (3d Cir. 2017).

After the advent of modern class actions, a second method of awarding fees in common-fund cases emerged: the lodestar method. To calculate fees under this method, courts determine the number of hours plaintiffs attorneys spent on the litigation and multiply it by a reasonable hourly rate, resulting in the “lodestar.” Courts can then adjust this amount up or down based on considerations specific to the litigation. Goldberger v. Integrated Resources, 209 F.3d 43, 47 (2d Cir. 2000).

Both methods have perceived strengths and weaknesses. The percentage method has three primary benefits: (1) it is simple to apply; (2) it promotes efficiency, as counsel has no incentive to inflate their hours; and (3) it aligns the interests of counsel and the class—as the class’s recovery increases, so does counsel’s fee award. See “Newberg and Rubenstein on Class Actions,” § 15:65 (6th ed.). Critics of the percentage method, however, argue that it can result in a windfall to class counsel when cases settle early or for large amounts, and it may incentivize attorneys to settle for less than the class deserves, since an early settlement increases their fee relative to hours worked. On the other hand, the purported benefit of the lodestar method is that the fees paid to counsel are tied to the time they invest in the case, but this can misalign the incentives between counsel and the class and may encourage counsel to unnecessarily inflate their hours to receive a larger fee award.

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 Honeywell International, 861 F.3d at 496 (“Common fund cases, such as this case, are generally evaluated using a ‘percentage-of-recovery’ approach, followed by a lodestar cross-check.”). The ratio between counsel’s requested percentage award and their lodestar is commonly referred to as a “multiplier.” Multipliers of 1 to 4 are commonly found to be appropriate in common fund cases. Courts endorsing the “lodestar cross-check” argue that it promotes the best of both methods. According to the Ninth Circuit, the percentage method “assure[s] that counsel’s fee does not dwarf class recovery,” and the lodestar cross check “confirm[s] that a percentage of recovery amount does not award counsel an exorbitant hourly rate.” In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935, 945 (9th Cir. 2011).

This reasoning, however, is flawed. Rather than promote the best qualities of both methods, the lodestar cross-check undermines the rationale behind the percentage method, by imposing upon it the worst qualities of the lodestar method. The result is a test for reasonableness that penalizes efficiency, undervalues risk, and does not meaningfully protect against excessive fee awards. Indeed, this approach combines all of the risks of contingent fee litigation with all of the inefficiencies, disincentives, and moral hazards of hourly billing—a particularly counterintuitive approach, particularly when one of the key purposes of class action litigation, and Rule 23 specifically, is to foster efficiency and economies of scale. To intentionally destroy those efficiencies and disincentivize lawyers from seeking and obtaining maximum resolution as quickly as possible by counting hours makes no sense. The lodestar cross-check—an attempt to reconcile result-based compensation with time-based billing—undermines the integrity of class action settlements, promotes inefficiency, and invites judicial second-guessing of high-quality legal work. It does more harm than good. A great result, efficiently obtained, should not be discounted because it didn’t take long enough to achieve.

By focusing on time spent, the lodestar cross-check can discourage efficiency-enhancing practices—such as narrowing discovery, stipulating to undisputed facts, or adopting AI based technologies that can reduce the amount of time spent on tasks like document review and deposition preparation. Although such strategies can conserve judicial resources and serve the class’s best interests, they reduce compensable time and may undermine the perceived reasonableness of a fee under the lodestar cross-check. By contrast, a strict application of the percentage-of-the-fund method rewards attorneys for delivering value—not for time invested. It aligns compensation with results, rewarding efficiency, not penalizing it.

Beyond discouraging efficient case management, the lodestar cross-check also fails properly to account for risk. Specifically, it can discourage attorneys from investing in complex or novel cases, since any fee award is limited by hours worked, not results achieved. In this way, the lodestar cross-check can favor low-risk, time-expensive cases over lean, high-impact ones, even though the latter may yield far greater value for absent class members. By contrast, under a strict percentage approach, the possibility of receiving a meaningful percentage of any successful recovery can incentivize plaintiffs’ counsel to take on complex cases that may provide outsized benefits to the class.

The lodestar cross-check also fails to provide the very oversight it purports to offer. Because courts have broad discretion in deciding what multiplier is appropriate, the resulting amount does little to illuminate the reasonableness of the proposed percentage award. “Newberg and Rubenstein on Class Actions” § 15:86 (6th ed.). Indeed, because the factors courts consider in selecting a percentage are often the same ones used to justify the multiplier, the lodestar cross-check often serves to validate the fee, rather than scrutinize it. See, e.g., In re Apple Inc. Device Performance Litigation, 50 F.4th 769, 784 (9th Cir. 2022) (“[S]imilar to the lodestar, the benchmark percentage can be adjusted upward or downward, depending on the circumstances.” (quotation omitted)). The lodestar cross-check, thus, creates a circular test for reasonableness that offers only the appearance of analytical rigor, all at the cost of misaligning the incentives between counsel and client.

The lodestar cross-check, though well-intentioned, distorts the purpose of common-fund litigation by rewarding time spent rather than results achieved. The percentage-of-the-fund method, in comparison, ties compensation to outcomes—encouraging efficient litigation practices, aligning counsel’s interests with those of the class, and preserving judicial resources. In an era of technology-driven litigation, courts should return to the percentage method—because it rewards performance, not process.

In class action cases, results should drive compensation—not time sheets. A meaningful fee award should reflect the value delivered, the risks taken, and the skill displayed, not the hours logged. When class counsel secure meaningful recoveries, courts should not undercut them with post hoc bean counting. Justice is not measured by the clock—but by outcomes. It’s time to discard the lodestar cross-check and reaffirm that in class action litigation, the ultimate yardstick is what was achieved—not how long it took to achieve it.

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 Elijah Savage for contributing to this column.