SABRINA LAGUNA, an individual; CARLOS ACEVEDO, an individual; TERESA SALAS, an individual; ROES 3–50, on behalf of themselves and in a representative capacity for all others similarly situated, Plaintiffs-Appellees, AMRIT SINGH, Objector-Appellant, v. COVERALL NORTH AMERICA, INC., a Delaware corporation; ALLIED CAPITAL CORPORATION, a Maryland corporation; ARES CAPITAL CORPORATION, a Maryland corporation; CNA HOLDING CORPORATION, a Delaware corporation; TED ELLIOTT, an individual; DOES 5–50, inclusive, Defendants-Appellees.
No. 12-55479
D.C. No. 3:09-cv-02131-JM-BGS
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Filed June 3, 2014
Before: Ronald M. Gould and Jay S. Bybee, Circuit Judges, and Edward M. Chen, District Judge.
Argued and Submitted November 8, 2013—Pasadena, California
SUMMARY**
Settlement Agreement
The panel affirmed the district court’s approval of a proposed class action settlement agreement pursuant to
The panel held that the district court correctly used the lodestar method in gauging the fairness of the attorneys’ fee award, correctly calculated the lodestar amount, and reasonably concluded the agreed upon award was appropriate. The panel also held that the district court did not abuse its discretion in applying the factors of Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004), when examining the fairness of the proposed settlement. The panel held that the district court had no obligation to make explicit
District Judge Chen dissented because he believed that the record below is bereft of crucial information without which the district court could not fully review either the adequacy of the settlement or the reasonableness of the fee award. He would remand the case for fuller development of the record.
COUNSEL
Shannon Liss-Riordan (argued), Licthen & Liss-Riordan, P.C., Boston, Massachusetts; Monique Olivier, Duckworth Peters Lebowitz Olivier, LLP, San Francisco, California, for Objector-Appellant.
Raul Cadena & Nicole R. Roysdon, Cadena Churchill, LLP, San Diego, California; L. Tracee Lorens & Wayne Alan Hughes, Lorens & Associates, APLC, San Diego California, for Plaintiffs-Appellees.
Norman M. Leon (argued), DLA Piper LLP, Chicago, Illinois; Mazda K. Antia, Cooley LLP (argued), San Diego, California; Jeffrey A. Rosenfeld & Nancy Nguyen Sims, DLA Piper LLP, Los Angeles, California, for Defendants-Appellees.
GOULD, Circuit Judge:
This case asks us to decide whether a settlement agreement reached before class certification between Plaintiffs and Defendants is fair, reasonable, and adequate. We agree with the district court that the settlement merits approval, and we affirm.
I
Coverall North America, Inc. (“Coverall”) is a janitorial franchising company operating in California. Plaintiffs brought a class action suit against Coverall in 2009 alleging that (1) Coverall misclassified its California franchisees as independent contractors, thereby avoiding the protections afforded by California’s labor laws to franchisees; and (2) Coverall breached its franchise agreements, and committed fraudulent and unfair practices, by removing customer accounts from franchisees without cause so that it could resell those accounts to other franchisees. In August 2011, after about two years of significant litigation, the parties agreed on a settlement. The sole objector, Amrit Singh, filed an objection to the proposed settlement on November 14, 2011, and although the objection was not timely, the district court accepted the filing “in the interest of determining the issues on the merits.” After a fairness hearing on November 21, 2011, the district court approved the settlement agreement on February 23, 2012 pursuant to
The settlement agreement is expansive, but the most contested provisions include the following: (1) Coverall
II
We review the district court’s approval of a proposed class action settlement agreement for abuse of discretion. Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 963 (9th Cir. 2009); see also United States v. Hinkson, 585 F.3d 1247, 1250 (9th Cir. 2009) (en banc) (giving general abuse of discretion standard in contexts beyond class actions). Our review of a class action settlement is “extremely limited,” In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 458 (9th Cir. 2000), and we will only reverse upon “a strong showing that the district court’s decision was a clear abuse of discretion,” Staton v. Boeing Co., 327 F.3d 938, 960 (9th Cir. 2003) (quotation marks and citations omitted). We also review for abuse of discretion the calculation and award of attorneys’ fees. In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 940 (9th Cir. 2011).
When a class action settlement agreement is submitted for approval, “[t]he initial decision to approve or reject a settlement proposal is committed to the sound discretion of the trial judge.” Officers for Justice v. Civil Serv. Comm’n, 688 F.2d 615, 625 (9th Cir. 1982). The district court judge must determine whether the settlement is “fundamentally fair, adequate and reasonable.” Id.
We start with fees. Although the parties have agreed on the award of attorneys’ fees, the district court has an “independent obligation to ensure that the award, like the settlement itself, is reasonable.” Bluetooth, 654 F.3d at 941. However, we recognize that in the settlement context fees are a subject of compromise. Staton, 327 F.3d at 966. We have made clear that “since the proper amount of fees is often open to dispute and the parties are compromising precisely to avoid litigation, the [district] court need not inquire into the reasonableness of the fees at even the high end with precisely the same level of scrutiny as when the fee amount is litigated.” Id.
We note at the outset that two different methods may be used “for calculating a reasonable attorneys’ fee depending on the circumstances.” Bluetooth, 654 F.3d at 941. The lodestar method is most appropriate where the relief sought is “primarily injunctive in nature,” and a fee-shifting statute authorizes “the award of fees to ensure compensation for counsel undertaking socially beneficial litigation.” Id.; see also Hanlon v. Chrysler Corp., 150 F.3d 1011, 1029 (9th Cir. 1998). That is precisely the situation we face here, because the settlement provisions that Plaintiffs have sought and agreed upon are mostly injunctive in nature and a fee shifting
The district court also correctly calculated the lodestar amount and reasonably concluded that the agreed upon award, $994,800, was appropriate. In its analysis, the district court noted that the case had been contentiously litigated for over two years, and that the report submitted by Plaintiffs’ counsel showing that over 4,500 hours had been billed by six attorneys, a paralegal, and a law clerk was fair and accurate. Using that number, the district court calculated that the lodestar amount reached almost $3 million. At a third of the lodestar amount, the district court soundly concluded that the attorneys’ fee award of $994,800 was reasonable.
Moreover, the district court prudently cross-checked the award amount against the alternative percentage-of-recovery method. We have “encouraged courts to guard against an unreasonable result by cross-checking their calculations against a second method.” Bluetooth, 654 F.3d at 944–45. Generally, cоurts use a benchmark figure of 25% to gauge the reasonableness of an award under the percentage-of-recovery method, which is most appropriate in common fund settlement cases. Id. at 942; In re Mercury Interactive Corp. Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010); Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1311 (9th Cir. 1990). Here, the district court correctly noted that the value of the settlement, and particularly its injunctive terms, was disputed. While Singh’s figure of $56,525 is clearly incorrect because it gives no value to the injunctive terms of the settlement, Plaintiffs may certainly be overstating the value of the settlement at $20 million. The
Singh’s main argument against the reasonableness of the attorneys’ fee award is that the actual value of the settlement, which he characterizes as primarily the amount of the cash payments, is so low that the award is unreasonable. Singh correctly notes that “the benefit obtained for the сlass” is important in determining whether to adjust the lodestar amount and by how much, Hanlon, 150 F.3d at 1029, but any such adjustment is equitable and squarely at the discretion of the district court, Hensley v. Eckerhart, 461 U.S. 424, 437 (1983), and Singh presents no evidence that the district court abused its discretion in declining further adjustment from the lodestar amount. Moreover, the district court acted within its proper discretion when it found that the settlement contains significant benefits for Plaintiffs beyond the cash recovery, and thus that the award, at about a third of the lodestar amount, was reasonable.
IV
Turning to the settlement as a whole,
(1) the strength of the plaintiffs’ case; (2) the risk, expense, complexity, and likely duration of further litigation; (3) the risk of maintaining class action status throughout the trial; (4) the amount offered in settlement; (5) the extent of discovery completed and the stage of the proceedings; (6) the experience and views of counsel; (7) the presence of a governmental participant; and (8) the reaction of the class members to the proposed settlement.
Churchill Vill., 361 F.3d at 575; Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370, 1375 (9th Cir. 1993). In its analysis under the Churchill factors, the district court noted that the risks of moving forward with litigation were significant, both in terms of the likelihood of success and cost. Plaintiffs expressed justified concern that the class members could be forced into individual arbitration after the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and conflicting case law supports those concerns.
The district court also agreed with Plaintiffs that California employment law would likely make obtaining class certification particularly difficult. Following the Supreme Court’s decision in Wal-mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), there was a real prospect that California’s multi-factor test for employee classification
Further, the district court reasonably found that the settlement would yield significant benefits for Plaintiffs given the risks and costs of continuing litigation. The district court found that, beyond the cash for former franchisees, “assignment of customer accounts and pledges for programmatic changes are significant victories.” The district court elaborated that “once franchises are assigned, franchisees will own a valuable business they can choose to sell or continue to operate.” Viewed together, the district court determined that the Churchill factors supported the conclusion that the settlement was fair, reasonable, and adequate.
Singh claims that the district court was “under a special obligation to make clear, fact-based findings regarding the value of the non-monetary terms of the settlement,” by which he seems to contend that the district court should have assigned a monetary value to the non-monetary terms of the settlement. But we have never required a district court to assign a monetary value to purely injunctive relief. To the contrary, we have stated that courts cannot “judge with confidence the value of the terms of a settlement agreement, especially one in which, as here, the settlement provides for
Singh also argues that the district court аbused its discretion in not exercising heightened review given the alleged presence of “warning signs” indicating collusion.
In Bluetooth, we outlined three settlement arrangements that could indicate collusion because they may improperly favor counsel at the expense of the plaintiffs. 654 F.3d at 946–47. These are:
(1) when counsel receive a disproportionate distribution of the settlement, or when the class receives no monetary distribution but class counsel are amply rewarded; (2) when the parties negotiate a “clear sailing” arrangement providing for the payment of attorneys’ fees separate and apart from class funds . . . ; and (3) when the parties arrange for fees not awarded to revert to defendants rather than be added to the class fund.
Id. at 947 (internal quotation marks and citations omitted). Although the district court did not explicitly outlinе these “warning signs,” contrary to Singh’s assertion, it did specifically address two of the three. The district court found the third sign, the presence of a reversion clause, to “not [be] a preferable result,” but balanced it with the overall benefits of the settlement to Plaintiffs and the fact that the cash payment represented a small amount of those benefits.
V
The district court’s decision to grant discovery is reviewed for abuse of discretion. Hallett v. Morgan, 296 F.3d 732, 751 (9th Cir. 2002). As a threshold matter, Singh has standing to appeal the settlement’s deposition requirement because the district court ordered that objectors comply with the relevant settlement provision, and he was later required to sit for a deposition as the sole objector.
The district court also did not abuse its discretion in approving the settlement term that objectors be available for depositions.
VI
Finally, the district court did not abuse its discretion when it approved the settlement agreement consistent with the Class Action Fаirness Act (“CAFA”) notice requirement described in
The district court did not abuse its discretion in finding the settlement agreement and its attorneys’ fee award to be fair, reasonable, and adequate. The district court also appropriately exercised its discretion in ordering that Singh be available for a deposition.2
AFFIRMED.
With reluсtance, I dissent from the majority decision affirming the district court’s approval of the proposed class action settlement. The record below is bereft of crucial information – information without which the district court could not fully review either the adequacy of the settlement or the reasonableness of the fee award. In particular, the record is silent as to two essential matters: (1) the portion of the class eligible to receive the chief non-monetary benefit of the settlement (i.e., the assignment of customer accounts to current franchisees) and (2) the value of the monetary relief to the class (and whether there is a justification for imposing a claims process with a reverter of unclaimed funds back to the defendant). The case should be remanded for fuller development of the record. I also believe this case affords this Court an opportunity to provide additional guidance to the district courts in their assessment of proposed class action settlements.
I am well aware that there are good reasons for a district judge to afford deference to a settlement reached by agreement between the parties. See Lane v. Facebook, Inc., 696 F.3d 811, 819 (9th Cir. 2012) (noting that one factor for a court to consider in determining the fairness of a class action settlement is thе experience and views of counsel). The parties know more about the case and the factors that lead to settlement than the trial judge does; often there are facts beyond the record (such as the finances or future business plans of the defendant or infirmities with the plaintiff’s ability to prosecute the case) which can have a substantial and legitimate influence on settlement negotiations. I also recognize that there are good reasons for an appellate court to defer to the trial judge’s approval of a
Nevertheless, the district court has an important and meaningful role to play in the settlement of a putative class action. In particular, the district judge has a fiduciary duty to safeguard the interests of the absent and putativе class members. See, e.g., Sullivan v. DB Invs., Inc., 667 F.3d 273, 319 (3d Cir. 2011) (stating that “‘trial judges bear the important responsibility of protecting absent class members,’ and must be ‘assur[ed] that the settlement represents adequate compensation for the release of the class claims’”); Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1078 (2d Cir. 1995) (noting that “the district court has a fiduciary responsibility to ensure that the settlement is fair and not a product of collusion, and that the class members’ interests were represented adequately”) (internal quotation marks omitted). That duty is especially important when the interests of the class and its counsel negotiating on its behalf are not aligned. See Reynolds v. Benefit Nat’l Bank, 288 F.3d 277, 279–80 (7th Cir. 2002) (stating that the problem that class counsel “may, in derogation of their professional and fiduciary obligations, place their pecuniary self-interest ahead of that of the class . . . requires district judges to exercise the highest degree of vigilance in scrutinizing proposed settlements of class actions”). Moreover, where the
The terms and structure of the proposed settlement herein warrant meaningful scrutiny. Its approval must be supported by the record. Unfortunately, though the district judge plainly took this duty seriously, I believe the requisite scrutiny was not possible given the deficiencies in the record. The district court’s task was compounded by the lack of clarity in this Circuit’s law on particular issues discussed below.
I.
Although the majority addresses the reasonableness of the fee award before addressing the reasonableness of the settlement’s substantive terms, review ordinarily begins with the adequacy of the settlement itself. See Bluetooth, 654 F.3d at 941. Therefore, I address the adequacy of the settlement first.
Under
the strength of the plaintiffs’ case; the risk, expense, complexity, and likely duration of further litigation; the risk of maintaining class action status throughout the trial; the amount offered in settlement; the extent of discovery completed and the stage of the proceedings; the experience and views of counsеl; the presence of a governmental participant; and the reaction of the class members to the proposed settlement.
Id. See Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004).
In the case at bar, the district court adequately considered many of the Lane/Churchill factors, including the risk of further litigation. It properly found, for example, that there was a risk class claims could have been forced into individual arbitration pursuant to AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). There was also a risk in obtaining class certification in light of Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). Many of the other factors supported approval.
However, in my view, the district court’s order – although thorough in most respects – did not adequately assess a critical factor: the amount offered in settlement. Although Lane does not expressly order the importance of the assessment factors, inescapably, the core of any settlement is “the amount offered in settlement.” In this regard, the district
Under the settlement, there were two classes that would receive benefits: (1) current franchisees and (2) former franchisees. Current franchisees obtained certain equitable relief — most notably, the assignment of customer accounts which would confer upon the franchisees economic value that could not summarily be taken away. As for former franchisees, each was entitled to $475 in cash and a credit of $750 (in effect, a coupon) which could be used to purchase a new Coverall franchise. For the reasons discussed below, both aspects of the settlement are problematic, and a fuller record is required in order to properly assess the fairness, reasonableness, and adequacy of the settlement.
A.
Current Franchisees: Assignment of Customer Accounts
For current franchisees, the primary benefit of the settlement was the assignment of customer accounts. The centrality of this benefit is clear: a major claim asserted by Plaintiffs in this action was a breach of contract based on Coverall’s “churning” of customers accounts. Churning involves taking a customer account away from a franchise owner for a pretextual reason in order to resell the customer
The importance of the assignment provision is underscored by the district court’s order as well as the parties’ briefs presented to this Court. The district court stated in its order that “[t]he [Settlement] Agreement provides separate benefits for current and former franchisees. Principally, Coverall pledges to assign customer accounts to current franchisees.” ER 23 (emphasis added); see also ER 25 (stating that “assignment of customer accounts and pledges for programmatic changes are significant victories”1). Similarly, in Plaintiffs’ appellate brief, the first benefit highlighted is the assignment of accounts, with Plaintiffs touting that “[t]he value of the assignment . . . is estimated to be worth $18 to $20 million per year in California alone.”2 Pls.’ Resp. Br. at 6. Defendants did the same in their own appellate brief. See Defs.’ Resp. Br. at 36–40.
Because the assignment was the primary benefit of the settlement for current franchisees, the district court had a duty to ensure that this benefit had real value. Notably, the burden of proving that the assignment had real value lay with the settling parties; it was not Mr. Singh’s burden to disprove it. See In re Dry Max Pampers Litig., 724 F.3d at 719 (“[T]o the
As to whether the assignment provision of the settlement would actually benefit current franchisees, that posed a troubling question because, under the proposed settlement, the assignment is conditional. See ER 73. That is, until a current or new franchise owner pays for a customer account in full (i.e., the full franchise fee, including any financed portion), there is no actual assignment, and customer accounts can continue to be taken away pursuant to the old just or good cause standard.3 But the record contains no information as to how many or what percentage of franchise owners have paid their fees in full. In particular, there is no information about how many franchise owners still owe money on their franchise fees (and if so, how much); how long it takes an average franchise owner to pay off a franchise fee; and whether franchise owners typically leave before they are able to pay off their franchise fees in full.4 This is significant because Mr. Singh, the objector, asserted in argument before this Court that a substantial number of franchisees finance their franchise fees. See also Pls.’ Op. Br. at 10 n.3 (claiming that, “[t]ypically, Coverall workers make a down payment toward [the franchise] fee [which ranges from approximately
Moreover, even if a significant portion of current franchisees were actually able to pay off their franchise fees and thus get an assignment, the parties’ claim that the value of the assignment was $18–20 million is still problematic. The parties asserted this value because the gross billing of customer contracts in California in the year 2010 was $18–20 million. See Pls.’ Resp. Br. at 6. But under the settlement agreement, certain customer accounts are deemed not assignable. See ER 73 (providing that “certain accounts, including National Accounts, customer prepared contracts that preclude assignment, and local multiple location customer contracts are not assignable“). There does not appear to be any information in the record as to how many customer contracts fall within this category, or their worth. Thus, the claimed $18–20 million value of the assignment may well be inflated. The district court’s order did not address this issue.
Furthermore, although the district court acknowledged that the assignment of accounts may not have the full $18–20 million value claimed by the parties because of the conditional nature of the assignment, see ER 30 (“Indeed, it is unclear whether the assignment of all accounts to franchisees will reach the $ 18-20 million Plaintiffs claim,
In the case at bar, the assignment of accounts is capable of quantitative valuation, even if that value cannot be precisely determined. See, e.g., Staton, 327 F.3d at 978 (noting that value of benefits from injunctive relief may be included in common fund calculation where value can be accurately ascertained — e.g., in a prior case, there was clearly a measurable benefit of one replacement latch for each minivan owned, and thus the court could, “with some degree
Absent anything in the record which would shed light on this cruсial variable, the district court was not in a position to
B.
Former Franchisees: Monetary Relief
With respect to the monetary portion of the settlement, former franchisees are each entitled to $475 in cash and a credit of $750 towards a purchase of a new Coverall franchise. There were approximately 750 former franchisees in the class. Therefore, Defendants would, in theory, pay a maximum of $918,750 to former franchises.
The monetary terms of the settlement, however, are suspect. Although the $918,750 class fund was identified as a potential pay-out, neither side expected Defendants would
As district courts have pointed out, “in a reversionary common fund or a claims-made settlement, the defendant is likely to bear only a fraction of the liability to which it agrees.” In re TJX Cos. Retail Sec. Breach Litig., 584 F. Supp. 2d 395, 405 (D. Mass. 2008) (emphasis added); see also Sylvester v. Cigna Corp., 369 F. Supp. 2d 34, 52 (D. Me. 2005) (stating that parties’ evidence indicated that “‘claims made’ settlements regularly yield response rates of 10 percent or less“; adding that “the parties’ expectations of a low response rate gives the reverter clause real value for Defendants“). Researchers and commentators have also confirmed that, while results vary from case to case depending on a number of factors, it is common that only a fraction of the class in class action settlements actually submit claims. See, e.g., Max Helveston, Promoting Justice Through Public Interest Advocacy in Class Actions, 60 Buff. L. Rev. 749, 782–83 (2012) (noting that there are “a variety of different explanations” for low claims rates — e.g., “the difficulty of notifying class members, the overly complex and technical notifications that class members receive, the effort required to pursue a claim, the lack of interest of class members in the types of relief available, and the failure of fund designers tо design claim procedures in ways that take into account cognitive biases” — but adding that, at the end of the day, “class members in large class action suits typically file claims at rates that are much lower than one would
That is precisely, and predictably, what happened here. With respect to the $475 cash payment, only 119 out of 750 former franchisees actually submitted claims. This amounts to a response rate of about 16%, for a total of $56,525 out of $356,250. As for the $750 coupon, of the 750 former franchisees, only 34 made a claim for the coupon — a response rate of about 4.5%. Thus, instead of a true pay-out of $562,500 (with respect to coupons), Defendants would be obligated to pay (or credit) at most $25,500, and this assumes that all 34 former franchisees will actually use the coupon once received.
At the end of the day, the purported settlement value of $918,750 for former franchisees (covering both the $475 pay-out and the $750 coupon) amounted to, at most, a true value of only $82,025 (or а response rate of approximately 9%) — and likely even less because some of the coupons claimed probably will not be used. The unclaimed funds did not benefit the class as they would revert back to Defendants.
This result was entirely predictable once the parties stipulated to a claims process. This then begs the question why the parties chose to require a claims process in the first place. While there are situations in which a claims process is unavoidable (such as a consumer class action where there is no readily accessible record of purchases to identify class
“In too many cases, the parties may negotiate a claims process which serves as a choke on the total amount paid to class members. When the defendant already holds information that would allow at least some claims to be paid automatically, those claims should be paid directly without requiring claim forms.”
De Leon v. Bank of Am., N.A., No. 6:09-cv-1251-Orl-28KRS, 2012 U.S. Dist. LEXIS 91124, at *61 (M.D. Fla. Apr. 20, 2012) (quoting the 2010 version of the “Judges’ Class Action Notice and Claims Process Checklist and Plain Language Guide” produced by the Federal Judicial Center).
Here, the necessity of a claims process is not apparent from the record. There was a set sum to be paid to each former franchisee, so a claims process was not needed in order for the parties to determine the appropriate amount of damages for each former franchisee. No proof of claim was needed to identify class members because Defendants already had within their possession information identifying the former franchisees. And presumably Defendants had the last best address for each former franchisee: how else could they send the claim forms to the franchisees? The record fails to indicate why it was not feasible to send checks and coupons
The decision to use coupons (or credit) as a benefit for former franchisees towards the price of a new franchise also raises questions about the adequacy of the settlement. As noted in the Manual for Complex Litigation, coupons are often illusory monetary benefits. See Manual for Complex Litig., 4th § 21.61, at 310 (noting that a judge “should be wary” of a proposed settlement that “grant[s] class members illusory nonmonetary benefits, such as discount coupons for more of defendants’ products, while granting substantial monetary attorney fee awards“). The illusory value of the coupon is particularly acute here: each former franchisee was entitled to a $750 coupon to be used towards purchase for a new Coverall franchise, but a franchise costs at least $10,000 and can be as high as $32,000. See ER 138. It was unlikely that many of the $750 coupons would ever be claimed or used. It is not surprising that only 4.5% of former franchisees filed a claim for the coupon.
Finally, even if the claims process were justified, that does nothing to justify the reverter of any unclaimed funds to Defendants. The parties could have agreed (as many settlements have) to a second distribution of residual funds to
In sum, the monetary benefits to the former franchisees was vastly overstated and largely illusory, thus raising significant questions that deserve a meaningful degree of scrutiny by the district court. Cf. In re Classmates.com Consolidated Litig., No. C 09-45 RAJ, 2011 U.S. Dist. LEXIS 17761, at *24 (W.D. Wash. Feb. 23, 2011) (stating that, “where class counsel points to an illusory $9.5 million benefit as justification for its own fee award, without acknowledging that counsel expected the benefit to be dramatically smaller, it illustrates the danger of deferring to counsel’s view of a settlement that misaligns the interests of class members and class counsel“). This is particularly troubling given that Plaintiffs’ counsel was guaranteed (subject only to court approval where Defendants agreed not to oppose the motion) nearly $1 million regardless of the amount of money actually claimed by the class.
The requirement of a claims process (without a substantial justification) combined with a reversion of unclaimed class funds back to the defendant was not a factor presented or expressly discussed in Bluetooth. This Court in Bluetooth identified three “subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations” — inсluding an
II.
Because the reasonableness of the settlement’s substantive terms could not be adequately determined based on the record before the district court, the reasonableness of the fee award also could not be appropriately assessed.
As noted above, where a case is settled prior to formal class certification, a higher standard of fairness is required. This higher standard is necessary precisely because, before formal class certification, “there is an even greater potential for breach of fiduciary duty owed the class” — i.e., there is an even greater chance of collusion or conflicts of interest on the part of the named plaintiffs and their attorneys. Bluetooth, 654 F.3d at 946. Moreover, it is important to take into account that,
[i]n class-action settlements, the adversarial process . . . extends only to the amount the defendant will pay, not the manner in which that amount is allocated between the class representatives, class counsel, and unnamed class members. For “the economic reality [is] that a settling defendant is concerned only
with its total liability[,]” and thus a settlement’s “allocation between the class payment and the attorneys’ fees is of little or no interest to the defense.”
In re Dry Max Pampers Litig., 724 F.3d at 717 (citations omitted).
In Bluetooth, this Court underscored that “[c]ollusion may not always be evident on the face of a settlement, and courts therefore must be particularly vigilant not only for explicit collusion, but also for more subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations.” Bluetooth, 654 F.3d at 947. As indicated above, Bluetooth identified three such subtle signs:
- “when counsel receive a disproportionate distribution of the settlement, or when the class receives no monetary distribution but class counsel are amply rewarded“;
- “when the parties negotiate a ‘clear sailing’ arrangement providing for the payment of attorneys’ fees separate and apart from class funds, which carries ‘the potential of enabling a defendant to pay class counsel excessive fees and costs in exchange for counsel accepting an unfair settlement on behalf of the class’“; and
“when the parties arrange for fees not awarded to revert to defendаnts rather than be added to the class fund.”
In the case at bar, the second and third factors above are clearly applicable, as the majority recognizes. This puts a premium on the district court’s evaluation of the first Bluetooth factor. However, the district court could not evaluate whether the $1 million fee award constituted a “disproportionate” distribution of the settlement without first having a fair sense of the value of the overall settlement, particularly the settlement’s key terms discussed above.
Furthermore, although not necessarily a subtle sign of collusion in and of itself, the fact that the fee award here was not tied to the magnitude of relief actually obtained by the class amplifies the need for scrutiny. Here, class counsel had no particular incentive to negotiate a settlement that would ensure substantial benefits would actually accrue to the class. Counsel’s fee was a stipulated sum unaffected by the actual pay-out to the class. To the extent the parties based the fee award in part upon a claimed settlement fund of over $900,000 and the promised assignment of accounts, that basis is misleading given that the class fund was largely illusory and it was uncertain whether a substantial portion of the class will benefit from the assignment. Although this Circuit has sanctioned using the full class fund theoretically available as a basis for evaluating the reasonableness of a negotiated fee award, see Williams v. MGM-Pathe Communs. Co., 129 F.3d 1026, 1027 (9th Cir. 1997) (holding that the lower court had “abused its discretion by basing the fee on the class members’ claims against the fund rather than on a percentage of the
That scrutiny is particularly warranted here where, as noted above, two of the three Bluetooth factors were clearly met (i.e., the clear sailing and reverter arrangements). Without a full record as to the value of the settlement, the district court could not ensure that the fee award was not disproportionate compared to the benefits to the class as required by the third Bluetooth factor.
For example, the district court’s lodestar analysis was problematic without a more fully developed record. In the settlement, the parties had agreed to a fee award of approximately $1 million. According to the district court, this was a reasonable award because class counsel had incurred approximately $3 million in fees in the course of litigating the action. But even accepting that counsel had legitimately incurred $3 million in fees (based on hours spent and rates charged), that does not reflect a full lodestar analysis. “[T]he fairness of the lodestar amount should be gauged against the overall class recovery, adjusting the lodestar fees upward or downward as necessary to ensure their reasonableness. In doing so, the district court must
The district court also performed a percentage method analysis as a cross-check on the fee award. According to the district court, “even if the cash settlement [for former franchisees], the assignment of accounts [for current franchisees], and the pledged programmatic changes [for current franchisees] . . . were worth only about $4 million, the requested fee award [of $1 million] would fit with[in] normal bounds of class action recovery.” ER 31. Presumably, the district court’s statement was informed by case law from this Court using 25% of the common fund as a benchmark under the percentage method. See Bluetooth, 654 F.3d at 942 (stating that, under the percentage method, “courts typically calculate 25% of the fund as the ‘benchmark’ for a reasonable fee award“); cf. Staton, 327 F.3d at 945–46 (noting that injunctive “relief should generally be excluded from the value of a common fund when calculating the appropriate attorneys’ fee award, as the benefit of that relief to the class members is most often not sufficiently measurable,” but “[t]he fact that counsel obtained injunctive relief in addition to monetary relief for their clients is . . . a relevant circumstance to consider in determining what percentage of the fund is reasonable as fees“). However, there is nothing in the record upon which the district court could have based an
III.
On the record before this Court, I cannot conclude that the proposed settlement was fair, reasonable, and adequate and the fee award reasonable. Crucial information about the value of the benefits obtained for the class (i.e., how many franchisees will benefit from the assignment of accounts) is missing. Also lacking is the justification for requiring former franchisees to submit claims and providing for a reverter of undistributed funds back to Coverall — while guaranteeing a $1 million fee award to counsel.9
The district court’s task in cases such as this could be made more manageable were this Court to provide more specific guidance on: (1) the centrality of the Lane/Churchill factor “the amount оffered in settlement” in assessing the adequacy of class action settlements, and (2) the explicit inclusion as a factor in Bluetooth the unjustified use of a claims process and/or reverter of unclaimed class funds back to the defendant — particularly if Williams continues to allow fees to be based on size of the potential class fund rather than actual pay-out to the class. This case affords the Court an opportunity to provide that clarity.
I do not express any opinion whether ultimately the substantive terms of the settlement or the fee award may in fact be fair, reasonable and adequate, as the majority concludes. Rather, I diverge from the majority because I believe there are substantial questions about the fairness, reasonableness, and adequacy of the proposed settlement that cannot be answered without a fuller record and more complete analysis.
For the foregoing reasons, I respectfully dissent.
Notes
The majority points out that, under the settlement, there were also programmatic changes made for the benefit of current franchisees. However, several of the benefits seem relatively modest; others appear to depend on an account actually being assigned to a current franchisee. Benefits in the latter category have no value if there is not an assignment in the first place. The programmatic changes include the following:
- “Commencing sixty (60) days after the Effective Date, New Franchise Owners shall be granted a thirty (30) day option to rescind their [Janitorial Franchise Agreements],” and “all monies they paid to Coverall, less the then-current cost of Coverall’s background investigation, which is currently $75.00,” shall be returned to them. ER 74. Notably, this benefit accrues to new franchisees only — i.e., those persons or entities who enter into a JFA after the effective date of the settlement. See ER 71. Furthermore, the new franchisees would simply be getting their money back in return for giving back the franchises, and the amount of money would likely be limited given that only a 30-day period is covered and it is not unusual for franchises to be financed. See ER 138.
- “Coverall will agree to re-purchase from Current and New Franchise Owners all accounts that are in good standing, both financially and operationally . . . .” ER 74. It is not clear whether Coverall can re-purchase customer accounts unless the franchisees actually have been assigned the accounts in the first place. Although Defendants’ brief suggests that repurchase without assignment is possible, that is not evident from the face of the settlement agreement, and the record does not clarify this point.
- “Current and New Franchise Owners may cease servicing a customer for non-payment at any time they see fit . . . .” ER 75. Plaintiffs’ brief indicates that this right applies only where there has been an assignment of an account in the first place. See Pls.’ Resp. Br. at 6 (“As part of Coverall’s assignment of customer accounts to current franchisees, franchisees shall have the right to cease servicing a customer for non-payment at any time they see fit . . . .“); see also AR 171 (declaration of class counsel, noting the same).
- “[T]he term of the post-termination and post-expiration noncompetition clause set forth in the FJAs shall be reduced from eighteen (18) months to twelve (12) months.” ER 75.
- “Coverall will offer to replace any customer account that is lost with one or more customer accounts of equal or greater monthly dollar volume within a reasonable period of time of the account loss, as long as the customer account is lost through no fault of the Franchise Owner . . . ; and (ii) the customer account is lost within the applicable guarantee period as set forth in the JFA.” AR 75. Similar to above, it is not clear from the face of the settlement agreement or the record below whether this benefit applies only if the franchisee actually owns (i.e., has been assigned) the account.
- “Coverall . . . represents that it shall continue to attempt to offer Franchise Owners accounts that are located within a reasonable proximity of each other.” AR 75.
- “Coverall shall provide, and all new Franchise Owners shall be required to attend, Initial Training on the operation of a franchise business, record keeping, and the bidding of customer accounts. Current Franchise Owners will be permitted, but are not required, to attend such training. . . . Coverall’s training materials shall be available in both English and Sрanish.” AR 75.
- “Coverall will include in the disclosure document it gives to prospective franchisees the terms and conditions of coverage under the commercial general liability policy that it is then making available to Franchise Owners.” AR 76.