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Federal Court’s Approval of Settlement in Litigation Over Expenses Charged to Brokers Offers Guidance on Settlement of Parallel Class Actions

On September 6, 2019, the U.S. District Court for the Northern District of California preliminarily approved a settlement in Harvey v. Morgan Stanley Smith Barney LLC.  The significance of the result is two-fold.  First, substantively, it is a reminder to financial services firms of potential liability under California labor law when advisors are required to pay for business expenses.  Second, procedurally, the court’s approval of the settlement is edifying on the subject of parallel class actions.

In the Harvey case, plaintiffs challenged Morgan Stanley Smith Barney’s (“MSSB”) Alternative Flexible Grid expense program on the grounds that it violated California labor law by failing to reimburse their reasonable and necessary business expenses.

Although the program allowed brokers to annually deduct money from pretax earnings to cover certain support staff, marketing and other costs, plaintiffs argued they were entitled to direct reimbursement of all of their expenses, rather than a tax-advantaged payroll deduction.

The settlement established a fund of more than $10 million for the class, which included at least 2,800 professionals.

Plaintiffs in another class action, Chen v. Morgan Stanley Smith Barney LLC, which involves similar claims and is pending in state court in California, had objected to the settlement on the grounds that it was a so-called “reverse auction,” which would allow MSSB to sidestep a lawsuit in state court.  As the court observed, “[a] reverse auction is said to occur when ‘the defendant in a series of class actions picks the most ineffectual class lawyers to negotiate a settlement with in the hope that the district court will approve a weak settlement that will preclude other claims against the defendant.’”

In rejecting the Chen plaintiffs’ characterization of the settlement, the court noted that “simply discussing settlement with the plaintiffs in parallel proceedings is insufficient to establish that an impermissible ‘reverse auction’ has occurred because it ‘would lead to the conclusion that no settlement could ever occur in the circumstances of parallel or multiple class actions—none of the competing cases could settle without being accused by another of participating in a collusive reverse auction.’”  The court added that the requisite “showing of impropriety” was absent here, opining that a reverse auction did not occur for several reasons, including:

  1. Plaintiffs’ counsel was not “ineffectual,” insofar as they had extensive experience in employment and consumer litigation and served as class counsel in over 80 certified class actions, including several against brokerage houses.
  2. There was “meaningful discovery” before the settlement.
  3. The parties engaged in “arm’s-length mediation.”
  4. The settlement amount—6.6% of the total liabilities alleged in the complaint—compared favorably to other recent settlements reached on behalf of financial advisors in California.
  5. The relief to the class would be “faster and more certain” than it would be in the related state court case.

The court’s analysis offers guideposts to financial services employers and other parties aiming to ensure approval of settlements where multiple class actions are concerned.

©2019 Epstein Becker & Green, P.C. All rights reserved.

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About this Author

Brian Friedman Litigation Attorney Epstein Becker Green

Brian Friedman is a Member of the Firm in the Litigation & Business Disputes practice, in the New York office of Epstein Becker Green. He has experience representing clients in a variety of industries, including financial services and securities, real estate and construction, retail goods and services, insurance, and health care. A substantial portion of his practice is devoted to representing banks, broker-dealers, futures commission merchants, swap dealers, and other leading financial institutions in litigation and regulatory matters.

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