Ninth Circuit Reverses Class Action Settlement Based on Notice Concerns and Insufficient Scrutiny
Class action settlements are complicated. They often take months to negotiate. The last thing the lawyers or their clients on either side want to happen is for the trial court to deny approval or, even worse, for an appellate court to overturn a decision approving the settlement when an objector appeals. That happened earlier this week in the Ninth Circuit. Its decision provides some guidance on how counsel can help the trial court through the approval process.
The Ninth Circuit is a hotbed of class action litigation, and it seems to apply a higher level of scrutiny than other circuits in reviewing settlement approval decisions. In Roes v. SFBSC Management, LLC, No. 170079 (9th Cir. Dec. 11, 2019), objectors appealed from a Northern District of California decision approving a settlement of an employment class action alleging that exotic dancers were misclassified as independent contractors rather than employees. The Ninth Circuit found problems with both the notice to the class and the extent of the district court’s scrutiny of the settlement terms.
Notice to the Class: Approximately 12% of the notices mailed to class members (560 out of 4,681) were undeliverable, even after the administrator searched for new addresses. The Ninth Circuit concluded that there should have been additional means attempted to try to reach former employees, for whom the only means of notice was by mail. It suggested that some form of electronic notice to the former employees should have been used. The lesson here? If it turns out that notice has not reached more than 10% of the class (depending on the circumstances), consider a supplemental form of notice before final approval is sought.
The Ninth Circuit rejected an argument that the notice to the class should have informed class members about other pending putative class cases against defendants involving the same issues. It found that is simply not required by Rule 23.
Settlement Terms: The Ninth Circuit requires a “higher level of scrutiny” and “a more probing inquiry” by district courts when a settlement is reached before a ruling on class certification (although that is very common). The district court’s opinion, however, did not cite this precedent, and suggested that there was a presumption of fairness. (Slip op. at 26.) The lesson here: the parties should make sure that they are citing the correct standard under the most recent case law in the circuit, and helping the district court apply it.
The Ninth Circuit found that the district court had not adequately explained why $950,000 of attorneys’ fees were justified, where the total available settlement cash was $2 million and the valuation of a $1 million dance fee payment pool for class members was not sufficiently justified in the Ninth Circuit’s view. The court noted that the district court had not made any specific findings regarding that valuation, or regarding why the attorneys’ fees would be reasonable even if the value of that portion of the class relief were disregarded. This is another area where the parties potentially could aid the trial court by proposing such findings.
The Ninth Circuit also found problematic that the settlement provided for $20,000 payments to two named plaintiffs in exchange for a general release. The court expressed concerns about “draw[ing] such large amounts from the common fund to pay the named plaintiffs for what is essentially a side settlement,” further stating that “the handsome amounts of those incentive payments, relative to the size of the cash payments that can be claimed by class members, raise serious red flags . . . .” (Slip op. at 41, 43.) The lesson here: incentive payments should not be a minor afterthought in negotiations; they need to be carefully justified.
The Ninth Circuit also expressed concerns about reversionary aspects of the settlement, where funds would revert to the defendants rather than be distributed to the class in some other manner, or by cy pres relief. This is another area for parties to consider carefully in structuring their deal, and in their briefing to the district court.
The Ninth Circuit noted in an footnote that the Northern District of California has published procedural guidance on class action settlements, which recommends that the parties provide various pieces of information to the district court in seeking settlement approval. (Slip op. at 47 n.22.) Even if you are not in the Northern District of California, that is a useful checklist for what you might need or want to include in your preliminary and final approval papers.
Next time you have a class settlement, don’t just take your last brief in support of preliminary or final approval and reframe it for your newest settlement. Study the most recent authority in your circuit, think through potential objections, and help the trial court through the approval process. That can save you and your client some headaches down the road.