Litigating California Wage & Hour and Labor Code Class Actions
Litigating California Wage & Hour and Labor Code Class Actions Litigating California Wage & Hour and Labor Code Class Actions
which United States District Court Judge William Alsup sharply criticized numerous aspects of a negotiated class settlement on the ground that they were designed to benefit class counsel and the defendant at the expense of the class. For example, he criticized settlement terms providing that (1) class members were subject to a general release of all claims (not just claims raised by the class action) if they failed to opt out of the settlement; (2) the employer would receive back any money class members failed to claim, but the plaintiff’s attorney fee award was to be a percentage of the gross settlement; (3) the named class members were each to receive $15,000 incentive awards for acting as class representatives; and (4) no explanation was provided why class members would receive only about 11% of an amount the parties agreed was the maximum possible recovery. 479 Judge Alsup’s decision, although not binding on any other court, was quite influential on judges in the complex courts in California who rule upon most of the class action settlements. More recently, the criticism of large inventive payments to class representatives was officially enshrined in an appellate decision, Clark v. American Residential Services LLC, 480 which was written by an Orange County complex trial court judge temporarily sitting by designation on the court of appeal. C. Court Scrutiny of the Adequacy of the Settlement Amount Traditionally, if class counsel was an experienced practitioner with a good reputation and the case was settled using an experienced class action mediator, the courts would presume that the settlement amount was fair as the product of an arm’s-length negotiation between sophisticated parties. Indeed, longstanding case law for evaluating class settlements in response to objections from class members that the settlement was inadequate suggested that the court’s inquiry should not go beyond that level of scrutiny. 481 Furthermore, it has become a common practice with Labor Code class actions for counsel for the parties to agree early in the action to forego formal discovery and set the action for early mediation. The purpose of this exercise is to minimize expense and bring the matter to a more rapid conclusion. Often, discovery will be informal and limited to disclosing relevant policies, contact information for a sample of the proposed class to interview, and enough payroll data to allow the parties to assess potential exposure under whatever theory the plaintiffs advance. Problems may arise, however, when multiple lawyers representing distinct potential class representatives file essentially the same class action against the same defendant and then differ in their view of the value of the case. They may also differ on the propriety of settling 479 480 481 Id. 175 Cal. App. 4th 785 (2009). Id. at 1149. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (12th Edition) 106
the case. As any one of these class representatives could enter into a settlement with the defendant and seek to have the settlement approved, a dissenting class representative may be placed in the position of an objector. Because the law disfavors setting aside a class settlement on the ground that the objector could have obtained an even better class settlement, 482 objectors instead argue that the plaintiff failed to undertake the necessary due diligence to properly evaluate the claim. There has never been a requirement that exhaustive formal discovery be undertaken before a class settlement could be affirmed. Rather, the general standard has been that “in the context of class action settlements, formal discovery is not a necessary ticket to the bargaining table where the parties had sufficient information to make an informed decision about settlement.” 483 Most courts have generally accepted the sworn statements from counsel that they conducted the necessary investigation and settled the case in mediation and in an arms length transaction. In late 2008, however, the First District Court of Appeal decided Kullar v. Foot Locker Retail, Inc., 484 which signaled greater judicial scrutiny of the value of class settlements, especially those obtained following limited, informal discovery. In Kullar, a settlement was negotiated by experienced class action counsel (on both sides) with the assistance of a respected mediator. The parties had undertaken only informal discovery and the exchange of information had been conducted as part of the mediation, protecting the nature of the information disclosed from disclosure. The parties ultimately settled the action for $2 million. Another plaintiff who had filed a separate class action alleging similar claims objected and contended that the plaintiff’s counsel had failed to provide any evidence that counsel had conducted enough investigation to intelligently valuate the case for mediation. The trial court overruled the objections and found that sworn representations from counsel that they had exchanged necessary information in mediation and that the matter was negotiated at arms length were sufficient to support approval of the settlement. The objector appealed. 485 The court remanded the case and ordered the trial court to conduct a more searching inquiry into the investigation of class counsel. The court explained that this inquiry should require the settling parties to introduce evidence reflecting the potential recovery if the 482 483 484 485 See generally 7-Eleven Owners for Fair Franchising v. Southland Corp., 85 Cal. App. 4th 1135, 1149-50 (2000) (noting that courts are allowed to look with skepticism on claims from objectors that settlements were inadequate and should have been for more money: “proposed settlement is not to be judged against a hypothetical or speculative measure of what might have been achieved by the negotiators”). Id. at 1149. 168 Cal. App. 4th 116. Id. at 121-27. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (12th Edition) 107
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the case. As any one of these class representatives could enter into a settlement with the<br />
defendant <strong>and</strong> seek to have the settlement approved, a dissenting class representative<br />
may be placed in the position of an objector. Because the law disfavors setting aside a<br />
class settlement on the ground that the objector could have obtained an even better class<br />
settlement, 482 objectors instead argue that the plaintiff failed to undertake the necessary<br />
due diligence to properly evaluate the claim.<br />
There has never been a requirement that exhaustive formal discovery be undertaken<br />
before a class settlement could be affirmed. Rather, the general st<strong>and</strong>ard has been that “in<br />
the context of class action settlements, formal discovery is not a necessary ticket to the<br />
bargaining table where the parties had sufficient information to make an informed decision<br />
about settlement.” 483 Most courts have generally accepted the sworn statements from<br />
counsel that they conducted the necessary investigation <strong>and</strong> settled the case in mediation<br />
<strong>and</strong> in an arms length transaction.<br />
In late 2008, however, the First District Court of Appeal decided Kullar v. Foot Locker<br />
Retail, Inc., 484 which signaled greater judicial scrutiny of the value of class settlements,<br />
especially those obtained following limited, informal discovery.<br />
In Kullar, a settlement was negotiated by experienced class action counsel (on both sides)<br />
with the assistance of a respected mediator. The parties had undertaken only informal<br />
discovery <strong>and</strong> the exchange of information had been conducted as part of the mediation,<br />
protecting the nature of the information disclosed from disclosure. The parties ultimately<br />
settled the action for $2 million. Another plaintiff who had filed a separate class action<br />
alleging similar claims objected <strong>and</strong> contended that the plaintiff’s counsel had failed to<br />
provide any evidence that counsel had conducted enough investigation to intelligently<br />
valuate the case for mediation. The trial court overruled the objections <strong>and</strong> found that<br />
sworn representations from counsel that they had exchanged necessary information in<br />
mediation <strong>and</strong> that the matter was negotiated at arms length were sufficient to support<br />
approval of the settlement. The objector appealed. 485<br />
The court rem<strong>and</strong>ed the case <strong>and</strong> ordered the trial court to conduct a more searching<br />
inquiry into the investigation of class counsel. The court explained that this inquiry should<br />
require the settling parties to introduce evidence reflecting the potential recovery if the<br />
482<br />
483<br />
484<br />
485<br />
See generally 7-Eleven Owners for Fair Franchising v. Southl<strong>and</strong> Corp., 85 Cal. App. 4th 1135, 1149-50 (2000) (noting<br />
that courts are allowed to look with skepticism on claims from objectors that settlements were inadequate <strong>and</strong> should<br />
have been for more money: “proposed settlement is not to be judged against a hypothetical or speculative measure of<br />
what might have been achieved by the negotiators”).<br />
Id. at 1149.<br />
168 Cal. App. 4th 116.<br />
Id. at 121-27.<br />
Seyfarth Shaw LLP | www.seyfarth.com <strong>Litigating</strong> <strong>California</strong> <strong>Wage</strong> & <strong>Hour</strong> <strong>Class</strong> <strong>Actions</strong> (12th Edition) 107
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