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.
Argued
and Submitted November 16, 2018 San Francisco, California
Appeal
from the United States District Court No. CV 14-3616 LB for
the Northern District of California Laurel D. Beeler,
Magistrate Judge, Presiding
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.
Before: A. Wallace Tashima and Milan D. Smith, Jr., Circuit
Judges, and Lawrence L. Piersol, [*] District Judge.
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 Fed.R.Civ.P.
23(c)(2)(B). The content of the notice was adequate, even
though it did not include information about related
litigation, but the process used was inadequate because
notice was sent only once by mail.
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.
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
Federal Rule of Civil Procedure 23 ("Rule 23").
They contend that the settlement was inadequate because it
recovered only a fraction of the class claims' value,
accorded too much weight to worthless "coupons" and
injunctive relief, and that the district court disregarded
indicia of collusion that warranted additional scrutiny.
Objectors-Appellants also challenge the adequacy of the
notice process because it involved only a single notice sent
by U.S. mail and hanging posters in the defendant nightclubs,
and lacked any electronic outreach.
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"), 29 U.S.C. §§
201-219, and various provisions of the California Labor Code
and San Francisco municipal ordinance. The named Plaintiffs,
as well as the nearly 4, 700 members of the putative Rule 23
class, worked as exotic dancers at eleven adult entertainment
clubs in San Francisco. Plaintiffs brought suit against
Defendant SFBSC Management, LLC ("SFBSC"), which,
"broadly speaking," managed the eleven nightclubs
where class members worked.
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
penalties[1]; and attorneys' fees and costs.
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 Fed.Appx. 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 amount, up to $1 million,
sufficient to fully cover the sum of the valid claims for
cash payment, the attorneys' fees and expenses, the
enhancement payments, the PAGA payment, and administrative
costs. Under the proposed settlement, the Cash Payments were
calculated based on the number of months in which a class
member had worked for the nightclubs during the class period,
and ranged from $350 to $800, although the amount could be
increased or reduced on a pro rata basis based on the number
of claims submitted. To receive a Cash Payment, class members
had to submit an FLSA claim form by the deadline.
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 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
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.
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 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 28 U.S.C. § 1291, and "[w]e
review a district court's rulings regarding notice de
novo." Molski v. Gleich, 318 F.3d 937, 951 (9th
Cir. 2003) (citing Silber v. Mabon, 18 F.3d 1449,
1453 (9th Cir. 1994)), overruled on other grounds by
Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir.
2010), rev'd, 564 U.S. 338 (2011); see also
Lane v. Facebook, Inc., 696 F.3d 811, 834 (9th Cir.
2012) (Kleinfeld, J., dissenting) (explaining that we review
adequacy of notice de novo, rather than deferentially,
"because notice is a matter of due process of law,"
and "[i]f a person owns a claim, it is property, and the
owner of the claim is constitutionally entitled not to have
it taken from him except with reasonable notice and an
opportunity to be heard").
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 Rule 23(e)." In re Bluetooth,
654 F.3d at 946. We review a pre-certification settlement
approval not only for whether the district court has
"explored comprehensively all factors, . . . given a
reasoned response to all non-frivolous objections," and
"adequately . . . develop[ed] the record to support its
final approval decision," but also for whether the
district court has looked for and scrutinized any
"subtle signs that class counsel have allowed pursuit of
their own self-interests . . . to infect the
negotiations." Allen, 787 F.3d at 1223-24
(third alteration in original) (first quoting Dennis v.
Kellogg Co., 697 F.3d 858, 864 (9th Cir. 2012); then
quoting In re Bluetooth, 654 F.3d at 947).
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
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
...