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Khanna v. Intercon Security Systems, Inc.

United States District Court, E.D. California

April 8, 2014

PRIYANKA KHANNA, , Plaintiffs,
v.
INTERCON SECURITY SYSTEMS, INC., , Defendant.

ORDER

KIMBERLY J. MUELLER, District Judge.

This case was on calendar on December 6, 2013, for a hearing on the final approval of the class settlement in this case. Jeffrey Edwards, Mastagni, Holstedt, Amick, Miller & Johnsen appeared for plaintiff; Jeffrey Grube, Law Offices of Jeff Grube, appeared for defendants.

I. PROCEDURAL BACKGROUND

On August 11, 2009, plaintiff Shashi Khanna, suing individually and as successor in interest of Amankumar Khanna, and on behalf of all others similarly situated, filed a complaint against Inter-Con Security Systems, Inc., d/b/a Healthcare Security Services Group, and Enrique Hernandez, Neil Martau, Lance Mueller, Roland Hernandez, Paul Miller, Michael Marcharg, Jeanne Gervin, Michale Sutkaytis, Jana Fanning, Brittany Moore, Catherine Ross, Linda Saayad, Mark Chamberlin, and James Latham. She alleged generally that her deceased husband Amankumar Khanna had been employed as a security guard by defendant Inter-Con Security Services (Inter-Con), also doing business as Healthcare Security Services Group (HSSG), to provide security services to defendants' customers, including Kaiser Foundation Hospitals and the State of California. ECF No. 1 ¶¶ 8-9. She alleged that Inter-Con required Khanna and others in his position to work more than eight hours a day or forty hours a week without overtime compensation under the pretense that HSSG was a separate entity and so any hours attributed to HSSC were not overtime as to Inter-con. Id. ¶¶ 11-12. The complaint contained six causes of action: (1) violation of the Fair Labor Standards Act (FLSA), 29 U.S.C. § 201, et seq., for failure to pay overtime wages; (2) violation of California Labor Code §§ 218.6, 510, 511, 558, 1194, 1198 and 1199 for failure to pay overtime wages; (3) violation of California Labor Code §§ 201, 202, 203, 204, 1194 and 1199 for failure to pay full wages when due; (4) violation of California Labor Code §§ 226, 226.3, 1174 and 1174.5 for failure to adhere to California law regarding accurate wage statements; (5) violation of California Business and Professions Code § 17200 (UCL), unfair business practices stemming from defendants' failure to pay legally required wages, to pay wages when due and to provide itemized statements of hours worked; and (6) a claim under California's Private Attorneys General Act (PAGA), California Labor Code § 2699.3, based on the previously described Labor Code violations. Plaintiff also sought certification of the case as an FLSA collective action and a class action for the state claims.

Defendants filed a motion to dismiss or to strike portions of the second, third, fourth, fifth and sixth causes of action and some of the claims for relief. ECF No. 22. Specifically, defendants asked the court to strike the class action allegations on the ground that plaintiff, as successor in interest to her husband's claim, was not an adequate class representative. They also sought to strike the collective action allegations on the ground that plaintiff was not similarly situated to actual employees. They asked the court to dismiss plaintiff's attempt to recover civil penalties under PAGA, and the claims for injunctive relief and for violation of California Business and Professions Code § 17200. The court granted the motion to dismiss plaintiff's claim for injunctive relief, finding that she lacked standing, and her PAGA claim, finding that a right to bring suit under those provisions was not assignable and so did not survive Mr. Khanna's death. The court otherwise denied the motion. ECF No. 31.

On August 3, 2010, the court granted plaintiff's unopposed request to substitute as plaintiff Priyanka Khanna, daughter of Amankumar and Shashi Khanna, in light of the death of Shashi Khanna. ECF No. 43.

On June 27, 2011, plaintiff filed a motion seeking (1) appointment of class counsel, (2) preliminary certification of the class and the collective action, and (3) preliminary approval of a settlement. ECF No. 52.

The court approved the appointment of class counsel and certified the class and collective action. It declined preliminary approval of the proposed settlement because the materials submitted did not provide sufficient information about the potential range of recovery or about the proposal to surrender claims relating to meals and rest breaks so as to allow the court to determine whether the proposed settlement was fair. The court also questioned why a portion of the FLSA settlement would revert to Inter-Con. In addition, it requested further information about class counsel's fee request, the justification for the class representative's incentive payment, and the selection of CPT as claims administrator. Finally, the court found the proposed notice confusing and inadequate in several respects. See ECF 58.

Thereafter plaintiff provided additional information about the range of expected recovery should the case proceed to trial and about the proposed class administrator and submitted a redesigned notice to class members. ECF No. 59.

On March 22, 2013, the court gave preliminary approval to the settlement and to a revised notice. ECF No. 64. That notice provided information about the proposed settlement and explained that class members would be required to submit a claim form in order to participate in the settlement. ECF No. 59-1 at 6-13.

II. THE SETTLEMENT

The proposed settlement contains the following provisions: defendants will provide a maximum amount of $390, 000 "inclusive of all settlement payments to Settlement Class Members; Plaintiff's class representative payment; Class Counsel's attorney's fees and expenses; payroll taxes; and the Settlement Administrator's fees and expenses." ECF No. 52-1 at 13 ¶ 3 & 29 ¶ 32. Of the net settlement amount, that is, the amount of the fund to be paid to class members, two-thirds shall be applied to the state law claims and is non-reversionary. Id. at 13 ¶¶ 4, 5a. One-third of the net settlement amount shall be allocated to the FLSA claims but shall revert to Inter-Con if not claimed by class members' returning opt-in forms. Id. ¶ 5B. Fifty percent of the payments will be treated as wages, subject to deductions for payroll taxes and withholding. Id. at 14 ¶ 6. Inter-Con will not oppose class counsel's application for fees and costs not to exceed $130, 000, or one-third of the maximum settlement payment, or a request for a class representative payment of $10, 000 in addition to plaintiff's share of the class settlement. Id. at 31 ¶¶ 44-45.

The settlement contemplates that by submitting a timely claim form for an allocated share, a class member will thereby opt-in to the FLSA collective action and will be so notified. Id. at 34 ¶ 54. The notice packet will also include an exclusion form to allow any potential class member to opt-out of the class for the state law claims. Id. at 36 ¶ 58. Class members who do not submit exclusion forms will be bound by the settlement and release of state law claims, but not the FLSA claims. Id. at 36 ¶ 59. Class members who submit a claim form will be bound by the settlement and release of the FLSA claims as well. Id. If class members submit both exclusion and claim forms, the exclusion form will be disregarded. Id. at 37 ¶ 60.

Class members who submit valid exclusion forms will not be permitted to file objections to the settlement, but those who return claim forms may also submit objections to the settlement itself as well as the application for attorney's fees and will be given the opportunity to appear at the fairness hearing if they give notice of their intent to appear. Id. at 35 ¶ 57, 37 ¶ 61. Class members who dispute the Administrator's approximation of their share of the settlement amount, which will be included on the claim form and which the Administrator will calculate based on information supplied by Inter-Con, must submit a written, signed challenge along with any supporting documentation to the Claims Administrator, who will resolve the challenge without a hearing. Id. at 38 ¶¶ 65-67 & 34 ¶ 50.

The releases provide that class members release and discharge Inter-Con, along with successors, assigns, and its current and former employees and directors as well as the individual defendants

from any and all claims, known or unknown, that were brought or could have been brought in the operative complaint in the Action, including but not limited to, statutory, constitutional, contractual or common law claims for wages, damages, unpaid costs, penalties, liquidated damages, punitive damages, interest, attorneys' fees, litigation costs, restitution, or equitable relief, for the following categories of allegations: (a) allegations for unpaid wages; unpaid overtime compensation; unpaid hourly premiums; failure to pay overtime compensation based on the regular rate of pay or otherwise; and any and all claims for the failure to provide meal and/or rest periods; and (b) any and all claims for recordkeeping or pay stub violations or waiting time penalties or any other statutory penalties ("Released Claims"), arising from the period from August 11, 2005, through the date of final Court approval of the Settlement ("Released Period"). Released claims include claims meeting the above definition under any and all applicable statutes (other than the FLSA), including without limitation the California Labor Code (including, but not limited to, sections 201, 202, 203, 204, 210, 218.6, 226, 226.3, 227.3, 510, 511, 558, 1174, 1174.5, 1194, 1198, 1199 and 2698, et seq.); the wage orders of the California Industrial Welfare Commission; California Business and Professions Code section 17200, et seq.; and the California common law of contract.

ECF No. 52-1 at 39 ¶ 68. In addition, the claimants "fully release and discharge Released Persons from any and all claims, debts, liabilities, demands, obligations, penalties, guarantees, costs, expenses, attorneys' fees, damages, action or causes of action of whatever kind or nature under the FLSA, whether known or unknown, that were alleged or that reasonably could have arisen out of Plaintiffs' allegations in the Action up to and including the date the Court grants final approval of the material terms of the Settlement." Id. at 39-40 ¶ 78. Finally, class members who do not submit valid exclusion forms "acknowledge that the Settlement is intended to include in its effect all claims that were or could have been asserted in the Action, including any claims that each Class Member does not know or suspect to exist in his or her favor against Released Persons. Consequently, with regard to claims that were brought or reasonably could have arisen out of the facts Plaintiffs allege in the Action, the Class Members also waive all rights and benefits afforded by section 1542 of the California Civil Code, and do so understanding the significance of that waiver." Id. at 40 ¶ 70. In return, Qualified Claimants (defined as class members who timely submit a valid claim form), will receive their "allocated share" (defined as the pro rata portion of the Final Settlement Payment). Id. at 30 ¶ 36.

The agreement provides that "if 10% or more of the Class Members or a number of Class Members whose share of the Class Settlement Proceeds represents 10% or more of the available Net Settlement Amount, validly elect not to participate in the Settlement, or if fewer than 50% of the Settlement Class Members submit Claim Forms and validly opt into the Fair Labor Standards Act settlement, or the number of Class Members who do not submit Claim Forms represents 40% or more of the total share of the Net Settlement Amount, Inter-Con will have the sole and exclusive right to rescind the Settlement, and the Settlement and all actions taken in furtherance will be null and void. Inter-Con must exercise this right within 14 calendar days after the Settlement Administrator notifies the parties of the valid elections not to participate and the participation rate on submission of claims forms...." Id. at 43 ¶ 76. Inter-Con has not elected to rescind the agreement.

If the court finally approves the settlement, the Administrator will mail settlement checks to those who filed claim forms. The checks will remain negotiable for ninety days after mailing; thereafter the Administrator will void the checks and return the value of uncashed checks to Inter-Con. A class member's failure to cash the check will be deemed an irrevocable waiver of any right to the Allocated Share but will not relieve the claimant of the binding effect of the settlement agreement. ECF No. 52-1 at 37 ¶ 63.

III. NOTICE TO, RESPONSE FROM, AND PAYMENT TO CLASS MEMBERS

In connection with the instant motion, plaintiff has filed the declaration of Alejandra Zarate, an employee of CPT Group, Inc., the claims administrator. Decl. of Alejandra Zarate, ECF No. 67-2. CPT Group prepared a packet for each of the sixty class members, consisting of the class notice, an opt-out form and a claim/opt-in form, which listed the total compensable work weeks and the estimated settlement amount for each class member. Id. ¶¶ 5-6. Thereafter it ran a National Change of Address search in order to update addresses for the class list and on May 20, 2013, mailed the packets to the class members. Id. ¶¶ 7-8. CPT Group followed up with a reminder card to class members before the expiration of the time to submit claims. Id. ¶ 10. One packet was returned by the post office as undeliverable. Id. ¶ 11.

Eighteen class members returned claim forms, but one is deficient because the class member failed to provide a complete Social Security number. Id. ¶¶ 12, 15. No one who returned a claim disputed the amount and no one has asked for exclusion. Id. ¶¶ 13, 15.

Based on compensable workweeks, the largest state law claim is $12, 880.72, the smallest is $247.41, and the average is $4899.09. Second Decl. of Alexandra Zarate, ECF No. 74-1 ¶¶ 3-4. From the eighteen claims, $88, 183.47 of the $162, 000.03 earmarked to compensate for state overtime has been claimed, leaving $73, 816.53 for proportional distribution to the class members who returned claim forms. Id., Ex. A. When this distribution is made, the largest and smallest claims based on compensable workweeks are $23, 662.92 and $455.06, respectively, with the average payout being $9, 000. Id. ¶¶ 5-6.

The settlement agreement sets aside $81, 000 for the FLSA claims. Based on the eighteen claims returned, $53, 638.27 will be paid to claimants for their FLSA claims, while $27, 361.73 will be returned to defendants. Id. ¶ 7 & Ex. A.

IV. THE SETTLEMENT AND FAIRNESS

A. Legal Framework

Under the FLSA, an employer must pay a non-exempt employee at a rate not less than time and a half his or her regular rate of pay if the employee works more than forty hours in one week. 29 U.S.C. § 207(a)(1); Troy v. Kehe Food Distribs., Inc., 276 F.R.D. 642, 647 (W.D. Wash. 2011). An employee may pursue an FLSA action to recover unpaid overtime wages and may bring the action "for and in behalf of himself or themselves and other employees similarly situated. No employee shall be a party plaintiff to any such action unless he gives his consent in writing to become such a party...." 29 U.S.C. § 216(b); Knepper v. Rite Aid Corp., 675 F.3d 249, 257 (3d Cir. 2012). Accordingly, an employee must "opt-in" to the FLSA action to be bound by its resolution.

Similarly in California, an employer must pay an employee at the rate of one and a half times the usual rate of pay for work over eight hours in any day or forty hours in any week; a failure to pay overtime may also give rise to a number of other violations of California labor law relating to payment of complete wages upon termination and the provision of proper wage statements as well as a violation of California's prohibition of unfair business practices. Cal. Lab. Code §§ 201, 202, 226(a), 510; Cal. Bus. & Prof. Code § 17200; Sullivan v. Oracle Corp., 51 Cal.4th 1191, 1205 (2011). When a state wage and hour case is pursued as a class action under Rule 23(b)(3), a potential class member must be given the opportunity to "opt-out" of the action. See Fed.R.Civ.P. 23(c); Ervin v. OS Restaurant Services, Inc., 632 F.3d 971, 976 (7th Cir. 2011). Because of these differences, courts have held that employees cannot use opt-out class actions to enforce the FLSA, but rather must bring a collective action. Knepper, 675 F.3d at 257. Despite the differences in the two types of actions and the potential for confusion, courts have held that employees may pursue a "hybrid" or combined opt-in FLSA action and opt-in class action to enforce state wage and hour laws. Busk v. Integrity Staffing Solutions, 713 F.3d 525, 530 (9th Cir. 2013), pet. for writ of cert. granted, __ U.S. __, 2014 WL 801096 (Mar. 3, 2014); Murillo v. P. Gas & Elec. Co., 266 F.R.D. 468, 472 (E.D. Cal. 2010).

When the parties reach settlement of a class action, the court cannot simply accept the parties' resolution but must also satisfy itself that the proposed settlement is "fundamentally fair, adequate, and reasonable." Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998). After the initial certification and notice to the class, the court conducts a fairness hearing before finally approving any proposed settlement. Narouz v. Charter Commc'ns, Inc., 591 F.3d 1261, 1266-67 (9th Cir. 2010); Fed.R.Civ.P. 23(e)(2) ("If the proposal would bind class members, the court may approve it only after a hearing and on finding that it is fair, reasonable, and adequate."). The court must balance a number of factors in determining whether the proposed settlement is fair, adequate and reasonable:

the strength of the plaintiffs' case; the risk, expense, complexity, and likely duration of further litigation; the risk of maintaining class action status throughout the trial; the amount offered in settlement; the extent of discovery completed and the stage of the proceedings; the experience and views of counsel; the presence of a governmental participant; and the reaction of the class members to the proposed settlement.

Hanlon, 150 F.3d at 1026; Adoma v. Univ. of Phoenix, 913 F.Supp.2d 964, 975 (E.D. Cal. 2012); see also In re Microsoft I-V Cases, 135 Cal.App.4th 706, 723 (2006) (under California law, a court must ensure the fairness of any class settlement by considering similar list of factors); Wershba v. Apple Computers, Inc., 91 Cal.App.4th 224, 245 (2001) (stating a settlement is presumed to be fair when it was reached through arm's-length bargaining, investigation and discovery are sufficient to inform counsel's and the court's views, counsel is experienced in similar litigation, and the percentage of objectors is small). The list is not exhaustive and the factors may be applied differently in different circumstances. Officers for Justice v. Civil Serv. Comm., 688 F.2d 615, 625 (9th Cir. 1982).

The court must consider the settlement as a whole, rather than its component parts, in evaluating fairness and it "must stand or fall in its entirety." Hanlon, 150 F.3d at 1026. Ultimately, the court must reach "a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned." Officers for Justice, 688 F.2d at 625.

Before approving a settlement of an FLSA collective action, the court must undertake a similar inquiry. Lewis v. Vision Value, LLC, No. 1:11-cv-01055 LJO-BAM, 2012 WL 2930867, at *2 (E.D. Cal. July 18, 2012). After members have opted in to the collective action, the court must determine whether a collective action is warranted and whether the ultimate settlement is fair. Knipsel v. Chrysler Group, LLC, No. 11-11886, 2012 WL 553722, at *1 (E.D. Mich. Feb. 21, 2012); Khait v. Whirlpool Corp., No. 06-6381 (ALC), 2010 WL 2025106, at *7 (E.D.N.Y. Jan. 20, 2010). As there is no set of factors for evaluating an FLSA collective action settlement, some courts adopt the factors for approving a class action settlement even though some will not apply "because of the inherent differences between class actions and FLSA actions...." Almodova v. City & Cnty. of Honolulu, Civil No. 07-00378 DAE-LEK, 2010 WL 1372298, at *4 (D. Haw. Mar. 31, 2010), recommendation adopted by 2010 WL 1644971 (D. Haw. Apr. 20, 2010); see also Clesceri v. Beach City Investigations & Protective Servs., Inc., No. CV-10-3873-JST (Rzx), 2011 WL 320998, at *4 (C.D. Cal. Jan. 27, 2011) (finding FLSA requirement satisfied when Rule 23 standard is met).

B. Strength of Plaintiff's Case

Although the strength of the case is an important consideration, "the settlement or fairness hearing is not to be turned into a rehearsal for trial on the merits, " and the court is not "to reach any ultimate conclusions on the merits of the dispute...." Officers for Justice, 688 F.2d at 626. Here, plaintiffs' case is potentially undercut by the settlement in Adams v. Inter-Con Security Systems, Inc., No. 06-5428 MHP (N.D. Cal. 2007), a dispute about overtime wages for training and its accompanying release, which might foreclose any claims in this case arising before March 1, 2008. The claims in this action likely extended only an additional year, to March 2009. In addition, the statute of limitations for FLSA claims is two years, which extends to three years only if the violations are willful; a violation is willful if the employer knew of or recklessly disregarded the risk that its conduct violated the FLSA. McLaughlin v. Richland Shoe Co., 486 U.S. 128, ...


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