United States District Court, N.D. California
ORDER DENYING PRELIMINARY APPROVAL OF CLASS SETTLEMENT Re: Dkt. No. 79
JAMES DONATO, District Judge.
As this Court has held, class actions "are an engine of justice" in our federal system. Kakani v. Oracle Corp., No. C 06-06493-WHA, 2007 WL 1793774 at *1 (N.D. Cal. June 19, 2007). Our circuit has declared a strong judicial policy of favoring class action settlements. Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1276 (9th Cir. 1992). But the role of the Court is not to rubber-stamp proposed class settlements simply because counsel for the parties say it is a good result. The Court is required to review the proposed settlement to ensure that absent class members are being treated fairly and reasonably, and are not victims of a deal between attorneys for the parties to cut and run. That review is particularly critical when, as here, a proposed settlement has been reached before a class has been certified. In this context, "a higher standard of fairness" applies due to the "dangers of collusion between class counsel and the defendants, as well as the need for additional protections when the settlement is not negotiated by a court designated class representative." Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998).
The proposed settlement here has too many red flags and unanswered questions to be approved. The release imposed on class members is overbroad and gives the defendant a windfall beyond the scope of the claims in the complaint. The release also purports to settle claims under the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq., in a way that is not permitted by that statute. The potential payments to the class have been steeply discounted without any explanation other than unspecified "litigation risks." And the parties agreed to a fixed claims limit of $1 million from which plaintiff proposes to deduct substantial attorney's fees and a bloated "enhancement" payment to the named plaintiff before funds are made available to the class. They also agreed to reversion of unclaimed funds to the defendant. On top of that, the proposed notice to class members fails to provide clear and adequate notice of key terms in the settlement agreement. Taken as a whole, these factors add up to a suspect deal that the parties have failed to demonstrate is fair, adequate and reasonable for absent class members.
The Court denies preliminary approval. The parties have pending motions (Dkt. Nos. 50, 59, 61, 74) that will need to be decided and scheduling dates that will need to be changed. The Court sets a case management conference for August 15, 2014, at 11:00 a.m.
This denial is without prejudice to further attempts to settle this case, but the case schedule will not be delayed substantially. Any future settlement proposals must be consistent with this order.
Plaintiff Cory Stokes is a former account manager for CleanSource, a company that became a division of Defendant Interline Brands, Inc. The job involved travel to and communications with existing accounts and potential customers. Mr. Stokes drove his own car and used his personal cell phone for work. Dkt. No. 79 at 1-2. The gist of the complaint is that Interline failed to reimburse him and a putative class of account managers for work-related mileage and cell phone use. Dkt. No. 1, Ex. E. Mr. Stokes also alleges that Interline made improper deductions from account managers' commissions to cover business costs - including deductions when clients paid by credit cards - and did not list those deductions on wage statements. Id. The Amended Complaint states claims for violations of California Labor Code §§ 2802 and 2698 and California Business & Professions Code § 17200. Id. The Amended Complaint does not mention the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq. ("FLSA"), and no claims are made for any wages, commissions, reimbursements or other compensation aside from the mileage and cell phone reimbursements, and the allegedly unlawful deductions and inaccurate wage statements.
The parties reached a proposed settlement in a mediation. The key terms are:
(1) The proposed settlement class consists of approximately 75 account managers hired by Interline's CleanSource division in California from August 18, 2008 through the Date of Preliminary Approval. Dkt. No. 80 at 4; Dkt. No. 80-1 at 3.
(2) The settlement agreement fixes a "Gross Settlement Fund" of $1 million to cover every potential claim and expense. Immediately upon deposit of this amount, the administrator will deduct $325, 000 to pay for: (1) up to $250, 000 in attorneys' fees and $30, 000 in costs to plaintiff's counsel; (2) a $25, 000 "enhancement" payment to Mr. Stokes; (3) a $10, 000 distribution to the California Labor & Workforce Development Agency in full settlement of all claims under the California Labor Code Private Attorneys General Act of 2004; and (4) $10, 000 in claim administration fees. Dkt. No. 80 at 5. That reduces the "Net Settlement Amount" available to the class members to $675, 000. See Dkt. No. 80-1 at 5.
Plaintiff states that a class action damages analysis estimated that $1, 308, 930 is due to the class, without adding in legal fees or costs. Dkt. No. 80 at 6. Thus, the proposed settlement affords the class approximately 51% of the lost reimbursements.
The agreement provides "at a minimum, 50% of the Gross Settlement Fund will be funded and paid..." Dkt. No. 80-1 at 8. This $500, 000 minimum settlement payment is deemed the "Minimum Funding Commitment." Id.
(3) The settlement agreement states that "[a]ny portion of the Net Settlement Amount that is not paid to class members reverts to Interline." Id. at 20. Class counsel contends that the Minimum Funding Commitment decreases the amount that could potentially revert to Interline. But the provision governing the reversion does not limit what funds can revert. It states that "any portion... not claimed or distributed" will revert to Interline. Id. Further, the agreement does not ...