APPEAL from an order of the Superior Court for the County of Los Angeles. Mark V. Mooney, Judge. Reversed and remanded. (Los Angeles County Super. Ct. No. BC332632).
The opinion of the court was delivered by: Bauer, J.
CERTIFIED FOR PUBLICATION
Derain Clark and Maxine Gaines filed a class action lawsuit against American Residential Services LLC (ARS), a purveyor of plumbing and related services, seeking damages and penalties for allegedly unpaid minimum and overtime wages, failure to provide meal and rest periods, and other Labor Code violations and unfair business practices. Eighteen months later, after a one-day mediation before a respected mediator, the parties agreed to settle the matter for $2 million, out of which Clark and Gaines would receive $25,000 each, and the other 2,360 class members would receive an average payment of $561.44. Notice of the proposed settlement elicited objections from 20 putative class members, who alleged that they worked at least two hours of unpaid overtime every workday, that they would be compensated for only about 1% of the total value of their claims, and that no evidence was presented to the court to justify the settlement. After a hearing, the trial court gave final approval to the settlement. The objectors appealed.
We conclude the order approving the settlement must be vacated because the trial court lacked sufficient information to make an informed evaluation of the fairness of the settlement. This was due to the court‟s apparent reliance on counsel‟s evaluation of the class‟s overtime claim as having "absolutely no" value, without regard to the objectors‟ claim that counsel‟s evaluation was based on an allegedly "staggering mistake of law." While the court need not determine the ultimate legal merit of a claim, it is obliged to determine, at a minimum, whether a legitimate controversy exists on a legal point, so that it has some basis for assessing whether the parties‟ evaluation of the case is within the "ballpark" of reasonableness. We further conclude that the court abused its discretion in finding that the $25,000 enhancements for Clark and Gaines were fair and reasonable, and that it erred in awarding costs greater than the maximum amount specified in the notice given to the class.
FACTUAL AND PROCEDURAL BACKGROUND
On April 28, 2005, Clark and Gaines (collectively, Clark) filed their class action complaint against ARS and related defendants. Clark asserted causes of action for unpaid minimum and overtime wages, failure to provide meal and rest periods, failure to fully reimburse employees for business expenses, illegal uniform deductions, failure to timely furnish accurate itemized wage statements, violations of Labor Code section 203 (penalties for late payment of wages to terminated employees), and unfair business practices.*fn1 The complaint involved two types of workers: (1) service technicians (Clark‟s job), paid on a commissioned basis or hourly wage, whichever was higher, and (2) hourly-paid positions, including dispatchers and customer service representatives (Gaines‟s job), paid on an hourly basis.*fn2
ARS filed an answer on June 16, 2005.
In December 2005, ARS removed the case to federal court, but in February 2006, Clark‟s motion to remand was granted, the federal court finding ARS did not meet its burden of proving that the amount in controversy exceeded $5 million (as required under the Class Action Fairness Act of 2005 (28 U.S.C. § 1332(d)(2)). After additional discovery, including depositions of Clark and Gaines in May 2006, ARS filed another notice of removal on August 10, 2006. ARS, with a supporting expert declaration, asserted that, assuming the allegations in the complaint and the deposition testimony of Clark and Gaines were true (which it did solely for purposes of the removal motion), the amount in controversy was between $21.7 million and $32.8 million. On December 20, 2006, the federal court again remanded the case to the Superior Court, finding that, because ARS did not identify how many of the putative class members worked under conditions similar to the named plaintiffs, and its expert‟s calculations were based entirely on the assumption that the plaintiffs‟ damages were the same or similar to every class member‟s damages, the calculations were "fatally vague."
Meanwhile, on October 18, 2006, a one-day mediation was held before a well-respected mediator with significant experience in wage and hour class action suits, who negotiated the principal terms of a settlement, with a more formal agreement to be memorialized in the future; ARS agreed to pay a total amount of $2 million, inclusive of attorney fees and costs.
Clark filed a motion for preliminary approval of the class action settlement, presenting the court with a proposed stipulated settlement agreement. The proposed settlement called for a class of all persons who were employed by ARS any time from April 28, 2001 through December 31, 2006 as service technicians, customer service representatives and/or dispatchers. Clark‟s motion stated the settlement would provide a payment of approximately $6.43 per workweek for each class member submitting a claim,*fn3 attorney fees of $600,000, costs of up to $40,000, and class representative enhancements of $50,000 ($25,000 each). The evidentiary support for the settlement consisted of the declaration of plaintiffs‟ counsel, Kevin Barnes, who stated:
"[T]he settlement for each participating Class Member is fair, reasonable, and adequate given the inherent risk, cost and length of litigation. The amount recoverable for each Class Member . . . is fair and reasonable based in a review of all objective evidence. The parties‟ assessment of the matter is based on extensive research for and during the litigation, written discovery, Depositions of the Plaintiff Class Representatives, and after consultation with an economist regarding potential damage exposure."*fn4
Counsel believed the $25,000 enhancements for Clark and Gaines were also fair and reasonable, because they initially informed counsel of ARS‟s illegal policies and procedures; spent several hours in consultation with counsel‟s office; remained in contact with counsel‟s office throughout the litigation and settlement process; reviewed thousands of pages of documents for the mediation; Gaines attended the mediation, which lasted a full day; and Clark and Gaines had their depositions taken for a full day. In addition, they assumed the financial risk of paying costs "of tens of thousands of dollars" if ARS prevailed at trial.
On May 8, 2007, the court gave preliminary approval to the class action settlement, and on May 22, 2007, notice of pendency of the settlement was mailed to 2,821 potential class members.
A month later, Clark moved for final approval of the settlement, arguing the settlement agreement was entitled to a presumption of fairness where the agreement is reached through arm‟s length bargaining; investigation and discovery are sufficient to allow counsel and the court to act intelligently; counsel is experienced in similar litigation; and the percentage of objectors is small (citing Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1802 (Dunk)), all of which conditions were present.*fn5 Only 23 of the 2,821 class members opted out.
In support of the motion for final approval, Clark presented a declaration from class counsel Barnes who, on the issue of fairness, stated that:
"Class Counsel are experienced and qualified to evaluate the Class claims and viability of the defenses. The recovery for each Class Member in the present is very generous on account of the close proximity of the Class Members‟ recovery to what they would have received had they received compensation for all hours worked. This settlement is fair, adequate and reasonable and in the best interests of the Class."
As to the $25,000 enhancements for Clark and Gaines, Barnes repeated the information given in the request for preliminary approval of the settlement, and noted as well that Clark and Gaines agreed to a complete release of all claims (wage related or not) in exchange for the enhancement. Declarations to the same effect were submitted from Clark and Gaines, both also noting they risked "the potential stigma of being a Class Representative in a class action labor dispute which may affect my future employability in this industry," and that other class members they spoke to felt the enhancement was fair and reasonable.
On July 5, 2007, twenty class members, represented by the Law Office of Randall Crane, filed objections to the proposed settlement. Their declarations stated they had approached the Crane office for representation in mid-May, unaware of the Clark action, because ARS was not paying them for overtime, among other reasons; they declared that they worked, on average, more than two hours of overtime every workday; frequently worked more than 12 consecutive hours without being paid overtime; and in fact were never paid for any overtime. They argued that the proposed settlement was "a near-total loss for class members," compensating them for approximately 1% of the total value of their claims; and no evidence had been presented to the court to justify the settlement: no evidence regarding the likelihood of success of any of the ten causes of action, or the number of unpaid overtime hours estimated to have been worked by the class, or the average hourly rate of pay, or the number of meal periods and rest periods missed, or the value of minimum wage violations, and so on. As a result, they contended, the court had no basis on which to exercise its discretion to determine whether the settlement was fair, adequate and reasonable.
On July 13, 2007, in opposition to the objections, ARS‟s counsel, Amanda Sommerfeld, filed a declaration describing the evidence ARS presented at the mediation. Sommerfeld stated:
Putative class members were paid for daily and weekly overtime during the class period, and both named plaintiffs validated the accuracy of their time records. Thus:
Clark was clocked in and out of work by a dispatcher and was paid overtime for every hour over 8 in a day or 40 in a week; he received 85.4 hours of overtime pay in 2003 and 84.3 hours of overtime pay in 2004. Clark admitted he clocked in and out by calling dispatchers, and at his deposition he verified his signature on all but one of his timecards; he had no specific recollection whether any of the records were inaccurate when he signed them, kept no personal calendars of his hours and had no way to reconstruct his hours independently from the time cards.
Gaines‟s payroll records showed she worked and was paid for 48.8 hours of overtime in 2001, 122 hours in 2002, 66 hours in 2003 and 52.8 hours in 2004. Gaines verified that all ...