## Facts

- After negative earnings disclosures and a sharp stock-price decline, purchasers of Rite Aid securities brought a PSLRA securities-fraud class action alleging violations of Exchange Act § 10(b) and Rule 10b-5 against Rite Aid, certain former executives, and outside auditor KPMG LLP.
- The litigation produced two related settlements: a $193 million settlement with Rite Aid and a later $126.6 million settlement primarily funded by KPMG and certain former executives.
- Class counsel sought fees of 25% of the $126.6 million settlement fund (about $31.6 million), plus expenses.
- The district court approved the KPMG settlement and awarded the requested 25% fee using the percentage-of-recovery method, with a lodestar “cross-check.”
- Notice was sent to more than 300,000 class members; only two objected. One objector, unnamed class member Walter Kaufmann, appealed the fee award.

## Issues

1. Whether the district court abused its discretion in approving a 25% attorneys’ fee award from a common fund in a § 10(b) securities class action.
2. Whether the district court’s lodestar cross-check was methodologically sound, including its use of an estimated “blended” hourly rate derived from senior partner billing rates.
3. Whether the resulting implied multiplier analysis was reliable and adequately supported in the record.

## Decision

- The Third Circuit vacated the attorneys’ fee award and remanded.
- The court accepted the district court’s primary use of the percentage-of-recovery method and found its reasonableness-factor discussion largely sound.
- The court held that the lodestar cross-check contained a material error: the district court relied on an unrealistically high average hourly rate based on senior partners’ rates rather than a blended rate reflecting the actual staffing mix.
- Because the inflated hourly rate distorted the lodestar and understated the multiplier, the appellate court required recalculation and reconsideration of the fee award on remand.

## Legal Principles

- In common-fund cases, the percentage-of-recovery method is generally favored, and courts should place primary reliance on it.
- A lodestar cross-check remains an important control on percentage fees; it must be based on a reasonable estimate of hours and a realistic blended hourly rate that reflects the mix of attorneys and paraprofessionals who worked on the case.
- A court need not conduct a full lodestar analysis for the cross-check, but must provide a reasonably specific explanation of its assumptions and calculations.
- Multiplier reasonableness depends on an accurate lodestar; distorted inputs undermine meaningful comparison to multipliers in similar complex class actions.
- Low numbers of objections and market comparisons may support reasonableness, but they do not cure a flawed lodestar cross-check methodology.

## Conclusion

The Third Circuit required a revised lodestar cross-check because the district court’s use of senior-partner rates overstated the blended hourly rate and skewed the multiplier, warranting vacatur and remand for recalculation and reconsideration of the common-fund fee award.


In re Rite Aid Corp. Sec. Litig., 396 F.3d 294 (3d Cir. 2005)