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
OPINION
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, 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.
Shannon Liss-Riordan (argued), Lichten & Liss-Riordan P.C., Boston, Massachusetts, for Objectors-Appellants.
F. Paul Bland Jr. (argued) and Karla Gilbride, Public Justice P.C., Washington, D.C.; Steven G. Tidrick and Joel B. Young, The Tidrick Law Firm, Oakland, California; for Plaintiffs-Appellees.
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
A. Litigation History
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
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.
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
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
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 employee status) with dancers, the context in which those choices are permitted to be made (not while intoxicated or nude), provisions allowing dancers to change their status to an employee, control over clothing choices for independent contractors, a prohibition against tip-sharing for independent contractors, training videos, and guaranteed average earnings for independent contractors.
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
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.
Despite vigorous objections, the district court granted final approval, deemed the notice adequate, and awarded the requested attorneys’ fees and service awards. Overall, the settlement provided $2 million in cash, of which $950,000—more than the class would receive in total cash distribution—was allocated to attorneys’ fees. Specifically, beside the $950,000 in attorneys’ fees, $864,115 went to payments to class members, $4,884.21 to expenses, $71,000
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.
DISCUSSION
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
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
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 the adequacy of the settlement notice, the rationale for not requiring additional information beyond that specified in Rule 23:
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
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
current address, and thus were the class members who may not have received a mailed notice, also would not have seen the posters.8 As to those former employees for whom the claims administrator was able to identify a valid address, the lack of reminder notices is particularly relevant, given that the posters would serve no function. In sum, the notice process was not “reasonably calculated, under all the circumstances,” to apprise all class members of the proposed settlement, because the “circumstances” included the district court‘s and parties’ belief that class members were “transient” and thus might be difficult to reach by mail, and the posters also were not reasonably calculated to reach all of the absent class members who could not be notified by mail or to serve as a reminder to those who did receive the single mailed notice. Mullane, 339 U.S. at 315.
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
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).
(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
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
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
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: (1) the coupons expire in two years; (2) any unredeemed coupons or unclaimed portion of the Dance Fee Payment Pool will revert to defendants after that two year period; (3) many class members likely no longer work at the defendant nightclubs, but redeeming the dance fee payments requires just that, so it is unlikely that the full value of the Dance Fee Payment Pool will be claimed and redeemed; (4) the dance fee payment coupons fail to disgorge ill-gotten gains from the defendants, because in order to “cash in” and redeem dance fee payment coupons, a class member must first pay a stage fee in order to be able to perform at the club, and her work will also generate additional revenue for defendants through sales of food and beverages; and (5) the terms of the settlement show that the parties themselves considered the coupons to be worth approximately 10% of their face value, because a dancer who worked more than two years during the class period could claim either $800 in cash or $8,000 in dance fee payment coupons.16
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.”
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 of a settlement, they inflated the nominal size of a settlement fund without a concomitant increase in the actual value of relief for the class. And when a court relied on the size of such a settlement fund to calculate attorney‘s fees, this inflation dramatically increased the size of the fee award—allowing class counsel to reap the lion‘s share of the benefits.” (citation omitted)). Unchecked, such reversions would allow defendants to create a larger coupon pool than they know will be claimed or used, just to inflate the value of the settlement and the resulting attorneys’ fees, because they know that they will not be on the hook for the full coupon pool since the value of all unredeemed coupons will revert to them.
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
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 who had not responded to the settlement were current dancers who might still claim part of the Residual Dance Fee Payment Pool. In addition, to better understand how the dance fee payment vouchers’ expiration date potentially limited the vouchers’ value, the district court might have inquired roughly how many scheduled Dates of Performance might be required to redeem the full $8,000 worth of vouchers that a class member could claim, and whether completing that many Dates of Performance within the two-year Dance Fee Redemption Period was realistic for the average class member. In other words, in response to concerns that the value of the Dance Fee Payment Pool had
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.
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
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
Yet neither the parties nor the district court cite any caselaw suggesting it is appropriate to draw such large amounts from the common fund to pay the named plaintiffs for what is essentially a side settlement between themselves and the defendants covering additional claims not covered in the class settlement. To the contrary, we have noted that “special rewards for counsel‘s individual clients are not
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 untethered to any service or value they will provide to the class.” Rodriguez, 563 F.3d at 960 (emphasis added). That is exactly what appears to have happened here. Even though there is no indication that named plaintiffs’ general release of their individual claims provides any value
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
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.
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
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
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.