JANE ROES, 1-2, on behalf of themselves and all others similarly situated, Plaintiff-Appellee, v. SFBSC MANAGEMENT, LLC; CHOWDER HOUSE, INC.; DEJA VU-SAN FRANCISCO, LLC; ROARING 20‘S, LLC; GARDEN OF EDEN, LCC; S.A.W. ENTERTAINMENT LIMITED; DEJA VU SHOWGIRLS OF SAN FRANCISCO, LLC; GOLD CLUB-S.F., LLC; BIJOU-CENTURY, LLC; BT CALIFORNIA, LCC, Defendants-Appellees, v. SARAH MURPHY; POOHRAWN MEHRABAN; DEVON LOCKE, Objectors-Appellants.
No. 17-17079
United States Court of Appeals for the Ninth Circuit
December 11, 2019
D.C. No. CV 14-3616 LB
FOR PUBLICATION
OPINION
Appeal from the United States District Court for the Northern District of California
Laurel D. Beeler, Magistrate Judge, Presiding
Argued and Submitted November 16, 2018
San Francisco, California
Filed December 11, 2019
Before: A. Wallace Tashima and Milan D. Smith, Jr., Circuit Judges, and Lawrence L. Piersol,* District Judge.
Opinion by Judge Tashima
SUMMARY**
Labor Law / Class Action Settlement
The panel reversed the district court‘s approval of a settlement notice process and a class action settlement, negotiated without a certified class, in a case in which exotic dancers working at various nightclubs in San Francisco alleged they were misclassified as independent contractors rather than being treated as employees.
The panel held that the settlement notice did not meet the “best notice that is practicable under the circumstances” due process standard of
The panel held that, in granting approval of the settlement as “fair, reasonable, and adequate” under Rule 23(e), the district court failed to apply the correct legal standard and conduct the heightened inquiry required for review of class action settlements negotiated without a certified class. Accordingly, the district court abused its discretion in approving the settlement. The panel held that, when the parties negotiate a settlement before a class has been certified, the district court must apply a higher level of scrutiny for evidence of collusion or other conflicts of interest before approving the settlement as fair. This more exacting review is warranted to ensure that class representatives and their counsel do not secure a disproportionate benefit at the expense of unnamed plaintiffs. The panel concluded that the district court failed to investigate or adequately address numerous problematic aspects of the settlement and subtle signs of implicit collusion, including a clear sailing agreement, a disproportionate cash distribution to attorneys’ fees justified in part by potentially inflated non-monetary relief, large incentive awards to two plaintiffs, and reversionary clauses. The panel reversed and remanded for further proceedings.
COUNSEL
Shannon Liss-Riordan (argued), Lichten
Douglas J. Melton (argued) and Shane M. Cahill, Long & Levit LLP, San Francisco, California, for Defendants-Appellees.
Eli Naduris-Weissman, Rothner Segall & Greenstone, Pasadena, California; Charles P. Yezbak III, Yezbak Law Offices PLLC, Nashville, Tennessee; for Amicus Curiae International Entertainment Adult Union.
OPINION
TASHIMA, Circuit Judge:
This case arises out of a dispute under federal and California labor law whether exotic dancers working at various nightclubs in San Francisco were misclassified as independent contractors rather than being treated as employees. The district court approved a class action settlement that was negotiated in the absence of a certified class. Objectors-Appellants challenge that settlement approval under
Because the notice did not meet Rule 23‘s “best notice that is practicable under the circumstances” standard, and because, in granting approval of the settlement, the district court failed to apply the correct legal standard and conduct the heightened inquiry we require for review of class action settlements negotiated without a certified class, we reverse approval of the notice and of the settlement, and remand for further proceedings.
BACKGROUND
In 2014, Plaintiffs Jane Roes Nos. 1–2 filed this putative class and collective action alleging violations of the Fair Labor Standards Act (“FLSA“),
Plaintiffs alleged that they were misclassified as independent contractors and should have been classified as employees of SFBSC. Plaintiffs sought to recover the following categories of damages on a classwide basis: unpaid minimum wages under federal, state, and San Francisco law for all hours worked on the clubs’ premises; reimbursement of stage fees paid to the clubs for each night that a dancer worked; unpaid overtime wages; liquidated damages; PAGA penalties1; and attorneys’ fees and costs.
Shortly after the case was filed, SFBSC brought a motion to compel arbitration. The district court denied that motion on March 2, 2015, holding that the relevant arbitration provision was unconscionable and therefore unenforceable. SFBSC appealed the district court‘s decision, but we affirmed, albeit on the alternative ground that SFBSC lacked standing to enforce the arbitration provisions at issue because SFBSC was not a party to the relevant contracts between the nightclubs and class members, which contained the arbitration provision. See Roes v. SFBSC Mgmt., LLC, 656 F. App‘x 828, 829 (9th Cir. 2016).
During the appeal concerning the arbitration issue, “the parties conducted three in-person mediations and multiple telephone conferences with the Ninth Circuit Mediator, exchanging information about working conditions, hours worked, compensation, and the parties’ relative control over their work, among other matters.” Ultimately, the parties executed a settlement agreement and, per the parties’ stipulation, we then dismissed the appeal without prejudice to its reinstatement if the district court did not approve the parties’ settlement. As part of the settlement, and for settlement purposes only, the parties agreed to add the eleven individual nightclubs as defendants; they submitted a proposed second amended complaint to that effect.
Meanwhile, during the appeal and negotiation process, counsel who now represents Objectors Sarah Murphy, Poohrawn Mehraban, and Devon Locke (collectively, “Objectors“) brought two separate misclassification suits directly against three of those nightclubs—Larry Flynt‘s Hustler Club, the Gold Club, and Condor Gentlemen‘s Club. The suits, Hughes v. S.A.W. Entm‘t, Ltd., 16-cv-03371-LB (N.D. Cal.), and Pera v. S.A.W. Entm‘t, Ltd., 17-cv-00138-LB (N.D. Cal.), involve the same kind of substantive claims for wage-and-hour violations as are involved here. When the plaintiffs in those cases discovered that they were part of the putative class in this case, and learned the proposed terms of the settlement in this case, they objected to preliminary approval of the settlement.
B. The Settlement and its Approval
Following dismissal of the appeal, the Roe parties moved for preliminary approval of their proposed class action settlement pursuant to Rule 23(e). The Settlement Agreement proposed to release wage claims against SFBSC, as well as against the individuals and entities—which had not been named in the original complaint—that directly owned and operated the eleven nightclubs in San Francisco. In return, the settlement included several different types of consideration.
First, the proposed settlement provided for two tiers of cash: a first tier of $2 million (“First Tier Cash Pool“) and a possible second tier of up to $1 million (“Second Tier Cash Pool“). The First Tier Cash Pool would be used for: (1) cash compensation to Settlement Class Members who timely elected to receive a Cash Payment, (2) attorneys’ fees and expenses, (3) enhancement payments of up to $71,000 total, (4) a $100,000 PAGA payment,2 and (5) administrative costs of up to $50,000. Only if the sum of those five items exceeded $2 million, would the defendants be required to fund the Second Tier Cash Pool in the
Second, the proposed settlement also provided for up to $1 million in “dance fee payments.” A “dance fee” is the published amount that a customer at the defendant nightclubs must pay to a dancer for each dance that she performs.3 The clubs normally retain a significant portion of those fees pursuant to their “Dancer Contracts.” As part of the settlement, a class member who continues to work at one of the defendants’ clubs could claim as much as $8,000 in “dance fee payments” in lieu of a cash settlement share. Such “dance fee payments” would allow a class member to, on specified nights, keep the “dance fees” that she would normally remit to the clubs. Specifically, a dancer could receive up to $5,000 in “dance fee payments” to be used at a “Primary Nightclub” she designates on her claim form, and up to $3,000 to be used at her “Secondary Nightclub.”4 The settlement required a class member to schedule, at least three business days in advance, a Date of Performance at her Primary or Secondary Nightclub during the two-year Dance Fee Redemption Period. On that Date of Performance, she would then be permitted to retain 100% of the dance fees she earned, capped at her total dance fee payment allocation for that nightclub.
If the total amount of Dance Fee Payments claimed was less than $100,000 for any of the defendant nightclubs, that nightclub would create a “Residual Dance Fee Payment Pool” for the residual amounts. Class members who did not submit an FLSA claim form during the original claims period could
claim dance fee payments from the Residual Pool by submitting a Residual Dance Fee Claim Form, which would be available from management at the clubs and would contain an acknowledgment that the claimant did not submit an FLSA claim. The dance fee payment vouchers were set to expire in two years, at which time the “value” of any unredeemed claims (i.e., of dance fee payments that class members had claimed, but had not yet cashed in by working on a scheduled Date of Performance) would revert to the defendant nightclubs.
Third, the settlement also included an injunction memorializing the clubs’ offer of employee status to prospective dancers, under which any dancer interested in working at the clubs would be given the “option” of working as an employee or independent contractor. The employee option would provide dancers with an hourly rate of $15, plus a 20% commission for total sales of private dances over $150 on any given night. Other changes made to the nightclubs’ business practices under the settlement involved reviewing employment choices (independent contractor versus
The settlement would release all state law wage claims of approximately 4,700 members of the class spanning nearly seven years, from August 8, 2010, to April 14, 2017 (the date of preliminary approval). If a class member did not exclude herself from the settlement, she released all wage claims except claims under the FLSA. If a class member submitted a claim form, she released all claims, including her FLSA claims.
Despite objections, the district court preliminarily approved the settlement and the class notice plan on April 14, 2017. The claims administrator subsequently mailed, by U.S. mail, the court-approved notice to class members at their last known address from their most recent contract with defendants, or at any more current address reflected in the National Change of Address database. When 1,546 notices of the 4,681 notices mailed were returned as undeliverable, the administrator performed address traces and resent notices, but ultimately a total of 560 notices remained undeliverable. No reminder, follow up, or electronic notice was sent to any class member. However, Plaintiffs did set up a settlement website, and “the nightclubs displayed posters in the dancers’ dressing rooms to ensure that they were seen, were confident that they were seen by all entertainers at the clubs, and responded to questions by encouraging entertainers to review the settlement notice, website, and poster.”
Following the distribution of notice and the close of the period during which class members could opt out, object, or file a claim, the parties moved for final settlement approval. They reported that only 865 out of 4,681 class members (18.5% of the class) submitted claim forms to receive payments from the settlement; of those, 790 opted for a cash payment and 75 opted for a Dance Fee Payment. Fourteen class members requested exclusion from the settlement, and several class members filed objections, challenging both the fairness of the settlement and the adequacy of the notice.
As a result of the low claims rate, defendants were not required to fund the Second Tier Cash Pool of $1 million (i.e., that money reverted to defendants). In addition, although the parties initially expected that the class members would receive approximately $350-$800 each if they submitted claims for cash payments, the individual shares ultimately ranged from $650-$1500 as a result of the low claims rate.5 At the time of final approval, 75 class members had claimed a face value of $370,000 of the Dance Fee Payment Pool. Class members could continue to claim these dance fee payment vouchers for two years after final approval; however, the vouchers would be distributed on a first come, first served basis.
to incentive payments,6 $35,000 to the costs of settlement administration, and $75,000 to the State of California (for the PAGA allocation). Objectors appealed, challenging both the adequacy of the notice to class members and the district court‘s approval of the settlement.
STANDARD OF REVIEW
We have jurisdiction under
We “review a district court‘s decision to approve a class action settlement ‘for clear abuse of discretion.‘” In re Online DVD-Rental Antitrust Litig., 779 F.3d 934, 942 (9th Cir. 2015) (quoting In re Bluetooth Headset Prods. Liab.
Litig., 654 F.3d 935, 940 (9th Cir. 2011)). “A court abuses its discretion when it fails to apply the correct legal standard or bases its decision on unreasonable findings of fact.” Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011). Although our own substantive review of class settlement fairness is “extremely limited,” we hold district courts to a “higher procedural standard when making that determination of substantive fairness.” Allen v. Bedolla, 787 F.3d 1218, 1223 (9th Cir. 2015). “That procedural burden is more strict when a settlement is negotiated absent class certification.” Id. at 1224. In such cases, the district court abuses its discretion if it fails to apply “an even higher level of scrutiny for evidence of collusion or other conflicts of interest than is ordinarily required under
The main thrust of Objectors’ argument on appeal is that the district court abused its discretion in approving a class action settlement that does not provide enough benefit to class members and contains indicia of collusion. As part of this challenge to settlement approval, Objectors also argue that the notice process that was used to inform class members about the proposed settlement was inadequate. Because the adequacy of notice can not only play a role in the overall fairness of the settlement, but is also a discrete issue subject to a de novo standard of review, we address Objectors’ challenge to the adequacy of notice first and then turn to the district court‘s approval of the settlement as a whole.
I. Adequacy of Class-Wide Settlement Notice
On appeal, Objectors argue that the settlement notice provided in this case was inadequate for two reasons: (1) content-wise, the notice was inadequate because it did not notify class members about the related Hughes and Pera lawsuits; and (2) the process used to provide notice was inadequate because notice was sent only once by mail—no reminder notice or electronic notice was given. As explained below, we reject Objectors’ first argument because the notice met the requirements to provide various information about the settlement in this case, but we agree with Objectors’ second argument that the notice process was insufficient in that it did not provide the “best notice practicable.”
A. Notice Contents: Information About Related Litigation
Objectors argue that the district court erred under Rule 23 by approving the proposed class settlement notice as written and refusing to require that the notice include information about the related Hughes and Pera lawsuits. Objectors contend that the notice should have, at minimum, informed class members of the existence of the other lawsuits and provided contact information for plaintiffs’ counsel in those cases. According to Objectors, by failing to notify class members “that another group of plaintiffs had filed cases directly against the clubs that could provide [class members] an avenue to continue to pursue their wage claims, should they not be satisfied with the result of this settlement,” the notice did not provide sufficient information to allow class members to “make an intelligent, informed decision about what to do.”
However, as the district court explained in its preliminary approval order, none of the cases cited by Objectors in support of this argument compels the inclusion in a settlement notice of such information about parallel litigation. In fact, although Rule 23 lists seven items that must be included in the required notice, information about related lawsuits is not one of them. See
Our Circuit has previously explained, in a case in which objectors similarly challenged
Objectors contend that the Settlement Notice also failed to provide a meaningful description of the terms of the settlement, including the content of objections and the expected value of fully litigating the case. In our view, the Notice contains adequate information, presented in a neutral manner, to apprise class members of the essential terms and conditions of the settlement. The Notice advises class members that a majority (hence, not all) of the class representatives approve the settlement. It describes the aggregate amount of the settlement fund and the plan for allocation, thereby complying with what we require. While the Notice does not detail the content of objections, or analyze the expected value, we do not see why it should. Settlement notices are supposed to present information about a proposed settlement neutrally, simply, and understandably—objectives not likely served by including the adversarial positions of objectors. We therefore conclude that the Notice communicated the essentials of the proposed settlement in a sufficiently balanced, accurate, and informative way to satisfy due process concerns.
Rodriguez v. W. Publ‘g Corp., 563 F.3d 948, 962–63 (9th Cir. 2009) (footnote omitted) (citations omitted).
Under Rodriguez, the district court did not err in rejecting Objectors’ proposed additional information about the Hughes and Pera lawsuits. While it may be true that such information could have allowed class members to make a more “informed” decision about their options, declining to include the information did not contravene the due process requirement to provide sufficient information about the settlement in this case. See In re Hyundai & Kia Fuel Econ. Litig., 926 F.3d 539, 567 (9th Cir. 2019) (en banc) (“Notice is satisfactory if it ‘generally describes the terms of the settlement in sufficient detail to alert those with adverse viewpoints to investigate and to come forward and be heard.‘” (quoting Rodriguez, 563 F.3d at 962).
B. Notice Process: Sufficiency of Single Mailed Notice
Next, we turn to the sufficiency of the procedures that the parties used to effect notice. In cases like this one, in which a class is certified under
Objectors argue that the notice process used in this case did not meet Rule 23‘s mandate for “the best notice practicable,” in part because “the parties did not provide for any e-mail distribution of the settlement notice” or for “any reminder notice, both of which are now routine in class action administration.” Instead, even though the parties appeared to believe that it might be difficult to reach the class members because of their “transient” nature, the claims administrator sent class members the court-approved notice by mail. When 1,546 notices of the 4,681 notices mailed were returned as undeliverable, the administrator performed address traces and resent notices, but ultimately a total of 560 notices remained undeliverable. Nor did the administrator send any follow-up notice even to those class members to whom mailed notice was deliverable. Objectors characterize this notice procedure as “halfhearted,” and fault it for the “low claims rate” of 18.5%. Amicus Curiae International Entertainment Adult Union (“Union“) similarly asserts that the notice process used in this case “does not appear to be the best notice practicable in this digital age.” The district court nevertheless concluded that the notice “met all legal requisites,” in part because, in addition to the mailing, defendants set up a settlement website, and the nightclubs displayed posters in the dancers’ dressing rooms.
Reviewing the notice process de novo, see Molski, 318 F.3d at 951, we agree with Objectors that it fell short of “the best notice that is practicable under the circumstances.”
current address, and thus were the class members who may not have received
Moreover, because there were numerous other reasonable options that could have been pursued to improve the notice process, it is not the case that, despite the shortcomings discussed above, the notice used was “the best notice that [was] practicable under the circumstances.”
That is not to say that due process would require the parties to implement all of these potential options for improving the notice process. But the parties must provide notice “reasonably calculated” to apprise all class members of the settlement, which here required the parties to at least make some reasonable attempt to reach former employees who could not be notified by mail. Mullane, 339 U.S. at 315 (“[W]hen notice is a person‘s due, process which is a mere gesture is not due process.“). This is particularly important where, as here, the proposed settlement has reversionary aspects, and those who did not receive notice and make a
For the foregoing reasons, something more was required here to meet the standard of the “best notice practicable” and to ensure that the valuable claims of absent class members were not wiped out without affording them an opportunity to opt out, object, or claim a cash payment. See
II. District Court‘s Approval of Settlement Under Rule 23
Next, Objectors argue that the district court also erred in approving the class settlement as “fair, reasonable, and adequate” under
Because of the unique due process concerns relating to absent class members and the inherent risk of collusion between class counsel and defense counsel,
[1] the strength of 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.
Rodriguez, 563 F.3d at 963 (citations omitted).
Where, however, the parties negotiate a settlement agreement before the class has been certified, “settlement approval ‘requires a higher standard of fairness’ and ‘a more probing inquiry than may normally be required under Rule 23(e).‘” Dennis, 697 F.3d at 864 (quoting Hanlon, 150 F.3d at 1026). Specifically,
(1) “when counsel receive a disproportionate distribution of the settlement;” (2) “when the parties negotiate a ‘clear sailing’ arrangement” (i.e., an arrangement where defendant will not object to a certain fee request by class counsel); and (3) when the parties create a reverter that returns unclaimed [funds] to the defendant.
Allen, 787 F.3d at 1224 (quoting In re Bluetooth, 654 F.3d at 947).
In determining whether to approve the settlement here, the district court appropriately referred to the
Not only did the district court misstate the legal standard, but the record makes clear that, in fact, the district court failed to apply the correct legal standard and to conduct the searching inquiry required, thereby abusing its discretion. See Nachshin, 663 F.3d at 1038. In particular, as discussed further below, there were numerous problematic aspects of the settlement and subtle signs of implicit collusion that the district court was obligated to—but did not—investigate or adequately address, including a clear sailing agreement, the disproportionate cash distribution to attorneys’ fees, large incentive payments seemingly untethered from service to the class, and reversionary clauses that would
its obligation to scrutinize these areas of concern requires that we vacate the settlement approval and remand for further proceedings. See Allen, 787 F.3d at 1224 (vacating final settlement approval and remanding for “a more searching inquiry” where the district court failed to scrutinize three subtle warning signs—a reversionary clause, a clear sailing agreement, and a disproportionately large attorneys’ fees award—that appeared in the settlement).
Although we leave the final fairness determination to the district court after an opportunity to apply the appropriate heightened review and further develop the record, we identify several aspects of the settlement that in our view cast serious doubt on whether the settlement meets the applicable fairness standard. See Allen, 787 F.3d at 1223 (noting that we may “overturn an approval of a compromised settlement” on substantive grounds if “the terms of the agreement contain convincing indications that . . . self-interest rather than the class‘s interests in fact influenced the outcome of the negotiations” (alteration in original) (quoting Staton, 327 F.3d at 960)). To explain our concerns and to illustrate the type of scrutiny to which the district court should have subjected these aspects of the settlement, we discuss each of them in turn.14
A. Clear Sailing Agreement and Attorneys’ Fees
First, the settlement agreement included a clear sailing agreement, whereby the defendants agreed that they would not object to an attorneys’ fees-and-expense award of up to $1 million. “Although clear sailing provisions are not prohibited, they ‘by [their] nature deprive[] the court of the advantages of the adversary process’ in resolving fee determinations and are therefore disfavored.” In re Bluetooth, 654 F.3d at 949 (alterations in original) (quoting Weinberger v. Great N. Nekoosa Corp., 925 F.2d 518, 525 (1st Cir. 1991)).
As a result, “when confronted with a clear sailing provision, the district court has a heightened duty to . . . scrutinize closely the relationship between attorneys’ fees and benefit to the class, being careful to avoid awarding ‘unreasonably high’ fees simply because they are uncontested.” Id. (quoting Staton, 327 F.3d at 954). Here, however, the district court did not scrutinize the clear sailing provision. And although the district court did examine the basis for the fee request and perform a lodestar cross-check, it did not—as was particularly important given the clear sailing provision—substantively grapple with some of the potentially problematic aspects of the “relationship between attorneys’ fees and the benefit to the class.” See id.
Here, more of the available $2 million in settlement cash ultimately went to attorneys’ fees ($950,000) than would be distributed to class members ($864,115). While this is not per se problematic, such a disproportionate cash allocation makes it all the more important for the district court closely to examine the claimed value of the non-cash portions of the settlement that were used to justify the requested attorneys’ fees. See Staton, 327 F.3d at 953 (“[C]oncerns about the fairness of settlement agreements ‘warrant special attention when the record suggests that settlement is driven by fees; that is, when counsel receive a disproportionate distribution of the settlement.‘” (quoting Hanlon, 150 F.3d at 1021)).
In this case, the district court accepted the parties’ valuation of $1 million for the injunctive relief component of the settlement and $1 million for the Dance Fee Payment Pool. Adding the $2 million First Tier Cash Pool, the district court used a total settlement value of $4 million for the lodestar cross-check, and concluded that the $950,000 in attorneys’ fees was reasonable because it was only 23.75% of the total settlement value. Objectors, however, raised concerns regarding the district court‘s valuation of both the dance fee payments and the injunctive relief, and renew those challenges once more on appeal.
First, Objectors argue that the dance fee payments are coupons and that the Dance Fee Payment Pool from which those coupons are drawn cannot be accorded its full face value of $1 million because:
The district court dismissed the Objectors’ “quarrel with the dance fee payments” by noting that the payments provide “a tangible benefit,” and by claiming that a dance fee payment “is not the ordinary illusory coupon payment with a more arguable lack of value.” However, the district court did not substantively investigate or address all of the concerns raised by Objectors, nor did it explain why the Dance Fee Payment Pool should nevertheless be valued at its $1 million maximum.17 Regardless of whether the dance fee payment vouchers are officially “coupons” within the meaning of the Class Action Fairness Act (“CAFA“), the district court should have recognized that some of the same concerns applicable to coupon settlements also apply here and warranted closer scrutiny of the Dance Fee Payments Pool.18
Typically, courts try to ensure faithful representation by tying together the interests of class members and class counsel. That is, courts aim to tether the value of an attorneys’ fees award to the value of the class recovery. Where both the class and its attorneys are paid in cash, this task is fairly effortless. The district court can assess the relative value of the attorneys’ fees and the class relief simply by comparing the amount of cash paid to the attorneys with the amount of cash paid to the class. The more valuable the class recovery, the greater the fees award. And vice versa.
But where class counsel is paid in cash, and the class is paid in some other way, for example, with coupons, comparing the value of the fees with the value of the recovery is substantially more difficult. Unlike a cash settlement, coupon settlements involve variables that make their value difficult to appraise, such as redemption rates and restrictions. For instance, a coupon settlement is likely to provide less value to class members if . . . the coupons are non-transferable, expire soon after their issuance, and cannot be aggregated. Of course, consideration of these variables necessarily increases the complexity of the district court‘s task—comparing the ultimate “value” of the coupon relief with the value of a proposed fees award. And perhaps more importantly, the additional complexity also provides class counsel with the opportunity to puff the perceived value of the settlement so as to enhance their own compensation. As one commentator succinctly put it, “[p]aying the class members in coupons masks the relative payment of the class counsel as compared to the amount of money actually received by the class members.”
In re HP Inkjet, 716 F.3d at 1178–79 (second alteration in original) (emphases added) (footnotes omitted) (citations omitted) (quoting Christopher R. Leslie, A Market-Based Approach to Coupon Settlement in Antitrust and Consumer Class Action Litigation, 49 UCLA L. Rev. 991, 1049 (2002)). Here, too, the dance fee payment vouchers had an expiration date, were not transferable, and required class members to do business with defendants again in order to redeem the dance fee payments. See In re Easysaver, 906 F.3d at 755 (noting that “potential for abuse is greatest when the coupons have value only if a class member is willing to do business again with the defendant who has injured her in some way,” and “when the coupons expire soon” and “are not transferable” (quoting In re Sw. Airlines Voucher Litig., 799 F.3d 701, 706 (7th Cir. 2015))).
Furthermore, the danger of unjustifiably inflating the settlement value of coupons is even more grave when the value of unused coupons will revert back to defendants. See id. (“[W]hen coupons that class members would not use were factored into the value
To guard against this danger and to align the interests of class counsel with the class, CAFA requires that “the portion of any attorney‘s fee award to class counsel that is attributable to the award of . . . coupons shall be based on the value to class members of the coupons that are redeemed.”
Here, however, the district court not only accepted the parties’ $1 million valuation of the Dance Fee Payment Pool, but it also used that full valuation when performing the lodestar cross-check for attorneys’ fees, despite the fact that all unclaimed and unredeemed dance fee payment vouchers would revert back to the defendants at the end of the two-year Dance Fee Redemption Period.19 While we do not hold that the district court was bound by CAFA‘s requirements for
coupon settlements, the district court was required to “scrutinize closely the relationship between attorneys’ fees and benefit to the class” in order to “avoid awarding ‘unreasonably high’ fees simply because they are uncontested,” In re Bluetooth, 654 F.3d at 948 (quoting Staton, 327 F.3d at 954), and “ensure that . . . counsel do not secure a disproportionate benefit ‘at the expense of the unnamed plaintiffs who class counsel had a duty to represent,‘” Lane, 696 F.3d at 819 (quoting Hanlon, 150 F.3d at 1027). Particularly in light of the fact that only 75 out of 865 class member claimants had requested dance fee payments totaling only $370,000 out of the $1 million Dance Fee Payment Pool, the district court should have done more to investigate whether the Dance Fee Payment Pool was really worth $1 million and was not unfairly inflating attorneys’ fees.
For example, to ensure that the $1 million valuation of the Dance Fee Payment Pool‘s benefit to class members was not wildly inflated given that only $370,000 of that pool had been claimed (although not yet even redeemed), the district court could have asked the parties to provide information about how many class members
Next, Objectors also challenge the district court‘s acceptance of the parties’ $1 million valuation of the injunctive relief that the settlement provides, arguing that the injunctive relief is essentially worthless because the supposedly changed business practices had already been adopted years prior to the settlement. The district court rejected this challenge, finding that the injunctive relief required “substantial” changes and provided “real benefits.” However, the district court did not make any findings specifically justifying the $1 million dollar valuation, noting only that “there is an economic value that attaches to this portion of the settlement.” Despite the district court‘s failure or inability to articulate any calculations to support the $1 million valuation of the injunctive relief portion of the settlement, the district court included that $1 million value in the total settlement value for purposes of its lodestar cross-check.
Our caselaw, however, demands that, because of the danger that parties will overestimate the value of injunctive relief in order to inflate fees, courts must be particularly careful when ascribing value to injunctive relief for purposes of determining attorneys’ fees, and avoid doing so altogether if the value of the injunctive relief is not easily measurable. See Staton, 327 F.3d at 974 (“Precisely because the value of injunctive relief is difficult to quantify, its value is also easily manipulable by overreaching lawyers seeking to increase the value assigned to a common fund.“). In Staton, we addressed a scenario where, like here, for purposes of comparing the putative common fund to the requested attorneys’ fees, “the district court included in the value of the putative fund the parties’ inexact, and quite probably inflated, estimate of the value of the proposed injunctive relief.” Id. at 945. We held that, because of the difficulties of valuing injunctive relief and the concomitant dangers of inflated fees, “parties ordinarily may not include an estimated value of undifferentiated injunctive relief in the amount of an actual or putative common fund for purposes of determining an award of attorneys’ fees.” Id. at 946. Instead, “[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
Under this precedent, the district court here should have, for purposes of performing the lodestar cross-check using a percentage of the total class recovery, either: (1) explained why the value of the injunctive relief‘s benefits to individual class members was readily quantifiable and worth $1 million, or (2) excluded the injunctive relief from the valuation of the settlement and explained why attorneys’ fees of 31.6% ($950,000 out of $3 million, assuming for the sake of argument that the Dance Fee Payment Pool is worth $1 million, which may not be true) or more were justified. See In re Bluetooth, 654 F.3d at 945 (“If the lodestar amount overcompensates the attorneys according to the 25% benchmark standard, then a second look to evaluate the reasonableness of the hours worked and rates claimed is appropriate.” (quoting In re Coordinated Pretrial Proceedings, 109 F.3d 602, 607 (9th Cir. 1997))).
In sum, to meet its procedural burden and to ensure that the settlement satisfied the heightened standard of fairness, the district court was required to scrutinize the clear sailing provision and the possibly pernicious reasons for its inclusion in the settlement. See id. at 948 (“By disregarding the contents of the clear sailing fee provision here, including both the disproportionate amounts negotiated and the reversionary kicker arrangement, the district court effectively ‘delete[d]’ it from the settlement—an approach that is beyond the scope of the court‘s discretion.” (alteration in original) (quoting Officers for Justice, 688 F.2d at 630)). And particularly in light of the specter of implicit collusion raised by that provision, the district court had an obligation to question the disproportionate cash distribution to attorneys’ fees, substantively address concerns that the settlement value was inflated, and clearly explain why the total benefits to the class justified the fees awarded. See id. at 949 (“Given the questionable features of the fee provision here, the court was required to examine the negotiation process with even greater scrutiny than is ordinarily demanded, and approval of the
settlement had to be supported by a clear explanation of why the disproportionate fee is justified and does not betray the class‘s interests.“).
B. Incentive Payments
Another concerning aspect of the settlement that should have been subjected to heightened scrutiny are the $20,000 “General Release Enhancement Payments” awarded from the common fund to both Jane Roe 1 and Jane Roe 2 for their execution of a general release. In contrast to the $5,000 service awards that Jane Roes 1 and 2 also received in recognition of their efforts to represent the class and secure a settlement, the $20,000 General Release Enhancement Payments appear to be completely divorced from any benefit or service to the class. In fact, the Settlement Agreement explicitly states that these incentive payments are “consideration for [Jane Roes’ 1 and 2] execution of a General Release Form.”19
Thus, while reasonable incentive awards are permitted, our cases have described such awards as being intended “to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general.” Rodriguez, 563 F.3d at 958–59; see also In re Online DVD-Rental, 779 F.3d at 943 (“[I]ncentive awards that are intended to compensate class representatives for work undertaken on behalf of a class ‘are fairly typical in class action cases.‘” (quoting Rodriguez, 563 F.3d at 958)). We have therefore directed district courts to evaluate the propriety of requested incentive payments “using ‘relevant factors includ[ing] the actions the plaintiff has taken to protect the interests of the class, the degree to which the class has benefitted from those actions, . . . the amount of time and effort the plaintiff expended in pursuing the litigation . . . and reasonabl[e] fear[s of] workplace retaliation.‘” Staton, 327 F.3d at 977 (alterations in original) (quoting Cook v. Niedert, 142 F.3d 1004, 1016 (7th Cir. 1998)). None of those factors, nor any other benefit to the class, was used as a basis to justify the General Release Enhancement Payments here.
Moreover, 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 that the defendants may have tacitly bargained for the named plaintiffs’ support for the settlement by offering them significant additional cash awards. Cf. Staton, 327 F.3d at 975 (finding that payments to certain identified class members that were “on average, sixteen times greater” than the damages that other unnamed class members would receive, and together made up roughly 6% of the total settlement, “raise[d] serious concerns as to [the settlement‘s] fairness, adequacy and reasonableness,” particularly because there was “no sufficient justification in the record for this differential in the amount of damage awards and the process for awarding them“). We have repeatedly warned that
excessive payments to named class members can be an indication that the agreement was reached through fraud or collusion. Indeed, “[i]f class representatives expect routinely to receive special awards in addition to their share of the recovery, they may be tempted to accept suboptimal settlements at the expense of the class members whose interests they are appointed to guard.”
Id. (alteration in original). Significantly, “[t]he danger is exacerbated if the named plaintiffs have an advance guarantee that a request for a relatively large incentive award will be made that is
In sum, not only do the $20,000 General Release Incentive Payments to Jane Roes 1 and 2 appear to be contrary to our caselaw on incentive payments, but they also raise concerns about a potential conflict of interest between the class representatives and unnamed class members. That conflict arises because, “[i]f . . . members of the class are provided with special ‘incentives’ in the settlement agreement, they may be more concerned with maximizing those incentives than with judging the adequacy of the settlement as it applies to class members at large.” Staton, 327 F.3d at 977; see also Rodriguez, 563 F.3d at 959–60 (“[T]he incentive agreements disjoined the contingency financial interests of the contracting representatives from the class . . . [and] created a disincentive to go to trial; going to trial would put their [large incentive payments] at risk in return for only a marginal individual gain even if the verdict were significantly greater than the settlement.“). As a result, the district court should have closely scrutinized these General Release Enhancement Payments to ensure that they were justified under our precedent, did not create an impermissible conflict of interest, and were not the result of implicit collusion. Cf. Rodriguez, 563 F.3d at 959 (“An absence of material conflicts of interest between the named plaintiffs and their counsel with other class members is central to adequacy and, in turn, to due process for absent members of the class.“).
C. Reversionary Aspects
The concerns raised by the above-described aspects of the settlement are further compounded by the settlement‘s inclusion of reversionary funds, namely, the Second Tier Cash Pool and the Dance Fee Payment Pool.20 While we have not disallowed reversionary clauses outright, we generally disfavor them because they create perverse incentives. See In re Volkswagen, 895 F.3d at 611–12. For example, allowing unclaimed funds to revert to defendants even where class members who do not respond or submit a claim are bound by the class release creates an incentive for defendants to ensure as low a claims rate as possible so as to maximize the funds that will revert.21 This perverse
eligibility conditions. See id. at 611. Moreover, “[a] reversion can benefit both defendants and class counsel, and thus raise the specter of their collusion, by (1) reducing the actual amount defendants are on the hook for, especially if the individual claims are relatively low-value, or the cost of claiming benefits relatively high; and (2) giving counsel an inflated common-fund value against which to base a fee motion.” Id. As a result, we have identified reversionary clauses as a “subtle sign[] that class counsel have allowed pursuit of their own self-interests . . . to infect the negotiations.” Allen, 787 F.3d at 1224. (alteration in original) (quoting In re Bluetooth, 654 F.3d at 947).
That is not to say that a reversionary clause can never reasonably be included in a settlement; in some cases, the reversionary clause may provide articulable benefits to the class, and any concerns about perverse incentives or collusion may be ameliorated by other aspects of the settlement. See, e.g., In re Volkswagen, 895 F.3d at 612 (“The incentives for class members to participate in the settlement, the complementary inducement for Volkswagen to encourage them to participate, the value of the claims, and the actual trend in class member participation all indicate that the reversion clause did not, in design or in effect, allow VW to recoup a large fraction of the funding pool.“). But that is not the case here. Instead, the lackluster notice process, the relatively low claims rate, the restrictive conditions on redeeming dance fee payments, and a fee award that constituted a disproportionate share of the cash distribution and was based in part on funds subject to reversion, made concerns regarding perverse incentives and implicit collusion raised by the reversionary clause all the more salient.
As a result, the district court had an obligation to scrutinize these reversionary clauses closely and seek adequate justification for their inclusion; it was required to “explain why the reversionary component of a settlement negotiated before certification is consistent with proper dealing by class counsel and defendants.”22 In re Volkswagen, 895 F.3d at 612; see also In re Bluetooth, 654 F.3d at 949 (explaining that when a district court was faced with a “questionable” provision, it “was required to examine the negotiation process with even greater scrutiny than is ordinarily demanded, and approval of the settlement had to be supported by a clear explanation of why the [provision] is justified and does not betray the class‘s interests“). The district court failed to do so here. In its approval order, the district court appeared to justify the reversionary aspects of the Second Tier Cash Pool simply by stating that “the Tier One funds are not reversionary.” But just because some of the settlement funds are not reversionary does not explain why a third of the potential cash settlement funds should be, see In re Bluetooth, 654 F.3d at 949 (“If the defendant is willing to pay a certain sum . . . , there is no apparent reason the
substantive concerns regarding perverse incentives and potential collusion discussed above. The district court therefore failed to satisfy its procedural obligation to probe more closely the reversionary clauses, by investigating whether those clauses are justified by unique benefits to the class and supported by provisions that ameliorate concerns about perverse incentives, in order to dispel any concerns that the clauses are the result of implicit collusion or self-serving dealings.
D. Overall Fairness Determination
The foregoing questionable aspects of the settlement—the clear sailing agreement, the disproportionate cash distribution to attorneys’ fees justified in part by potentially inflated non-monetary relief, the large incentive awards to Jane Roes 1 and 2, and the reversionary clauses—squarely illustrate our concerns why settlements negotiated prior to class certification are subject to a heightened risk that self-interest, even if not purposeful collusion, will seep its way into the settlement terms. See Staton, 327 F.3d at 960. These identified “subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations,” In re Bluetooth, 654 F.3d at 947, should have caused the district court to think twice, investigate further, and justify the terms’ inclusion before approving the settlement as “fair, reasonable, and adequate.” See Allen, 787 F.3d at 1224 (“While the existence of [subtle warning] signs [including a reversionary clause, clear sailing agreement, and disproportionate attorneys’ fee] does not mean the settlement cannot still be fair, reasonable, or adequate, they required the district court to examine them, and adequately to develop the record to support its final approval decision.“). Such a heightened inquiry was all the more imperative here, where concerns raised by the potentially problematic aspects of the settlement were not offset by an exceptional recovery to the class.23
Ultimately, because the district court applied the incorrect legal standard in determining whether to approve the settlement—it failed to conduct the required heightened inquiry and instead suggested that a presumption of fairness applied—we hold that the district court abused its discretion in granting approval of the settlement. See Allen, 787 F.3d at 1224.
CONCLUSION
For the foregoing reasons, we reverse the district court‘s approval of the settlement notice process and the settlement itself, including the attorneys’ fees award, and remand for further proceedings consistent with this opinion. We leave it to the district court to determine how to proceed, whether that be negotiating a new settlement, seeking re-approval of the current settlement with a new notice plan under the applicable heightened standard, reinstating
REVERSED and REMANDED.
Notes
- $1,500.77 for Cash Payment Claimants who accrued 24 or more Performance Months during the Class Period;
- $1,313.17 for Cash Payment Claimants who accrued between 12 and 23 Performance Months during the Class Period;
- $937.98 for Cash Payment Claimants who accrued between 6 and 11 Performance Months during the Class Period; and
- $650.59 for Cash Payment Claimants who accrued fewer than 6 Performance Months during the Class Period.