The California Rules of Court require revision or clarification regarding Motions for Preliminary/Final Approval of class action settlements

The California Rules of Court are just bursting with procedural rules designed to operate in conjunction with the Code of Civil Procedure.  However, while much effort clearly went into ensuring that the Rules work with each other in a smooth fashion, every now and then the Rules conflict with each other.  One area where I find this to be so arises in the context of motion page length when filing motions for preliminary (or final) approval of class action settlements. 

As most civil litigation practitioners in California would know off of the of their head, California Rules of Court, rule 3.1113(d) specifies that motions other than summary judgment or summary adjudication motions can be no longer than 15 pages, with 20 pages permitted for the summary adjudication and judgment motions.  There are no other listed exceptions in that rule. But California Rules of Court, rule 3.764(c) specifies that any motion seeking certification (or decertification) of a class action can be up to 20 pages in length.  Rule 7.764 then says that the remaining provisions of rule 3.1113 apply, apparently meaning that the page limit is intended as an exception to 3.1113.  The confusion arises in what is expected by Court ruling on motions for preliminary (or final) approval of class action settlements.  Those motions are required to discuss the key settlement terms, the settlement process, why the settlement if fair and adequate, and (and here's the rub), why certification of a settlement class is appropriate.  Now, that certification discussion is certainly more streamlined than on contested motion, but Courts still expect at least some discussion of certification requisites.  So, which page limit applies?  Is it 15 pages, or 20 pages, given that motions for preliminary (or final) approval of class action settlements discuss certification of a settlement class?

In the "Pitts" of despair, a "Terrible" attempt to pick off a class representative fails

I remember when what was probably the first Terrible Herbst gas station opened a mere block from my home in Las Vegas.  Refilled a lot of bike tires there.  But enough about my childhood.  Terrible Herbst isn't the friendly local gas station of my youth.  Now it's just another corporate slave to the whisperings of defense counsel skilled in the dark arts.  In Pitts v. Terrible Herbst, Inc. (August 9, 2011), the Ninth Circuit considered whether a rejected offer of judgment for the full amount of a putative class representative's individual claim moots a class action complaint where the offer precedes the filing of a motion for class certification.  The Ninth Circuit concluded that it did not.

Pitts filed a hybrid FLSA and Nevada labor law class action.  The defendant removed it to federal court.  With a discovery motion pending, Terrible made a Rule 68 offer of judgment in the amount of $900.  Pitts claimed $88.00 in damages but rejected the offer.  Terrible then sought to have the matter dismissed.  The Ninth Circuit rejected this attempt to impede consideration of the class certification question:

An inherently transitory claim will certainly repeat as to the class, either because “[t]he individual could nonetheless suffer repeated [harm]” or because “it is certain that other persons similarly situated” will have the same complaint. Gerstein, 420 U.S. at 110 n.11. In such cases, the named plaintiff’s claim is “capable of repetition, yet evading review,” id., and “the ‘relation back’ doctrine is properly invoked to preserve the merits of the case for judicial resolution,” McLaughlin, 500 U.S. at 52; see also Geraghty, 445 U.S. at 398; Sosna, 419 U.S. at 402 n.11.

Slip op., at 10453.  The Court then discussed the argument that the claims in this matter were not "inherrently" transitory:

We recognize that the canonical relation-back case—such as Gerstein or McLaughlin—involves an “inherently transitory” claim and, correspondingly, “a constantly changing putative class.” Wade v. Kirkland, 118 F.3d 667, 670 (9th Cir. 1997). But we see no reason to restrict application of the relation-back doctrine only to cases involving inherently transitory claims. Where, as here, a defendant seeks to “buy off” the small individual claims of the named plaintiffs, the analogous claims of the class—though not inherently transitory—become no less transitory than inherently transitory claims. Thus, although Pitts’s claims “are not ‘inherently transitory’ as a result of being time sensitive, they are ‘acutely susceptible to mootness’ in light of [the defendant’s] tactic of ‘picking off’ lead plaintiffs with a Rule 68 offer to avoid a class action.”

Slip op., at 10454.  Interestingly, the Court essentially found that the right to certify a class was an additional right not satisfied by the Rule 68 offer, and that right could not be extinguished unless certification were denied and all appellate efforts were exhausted.

Next, the Court ruled that it was error to find that Pitts failed to timely file a motion for class certification when the trial court refused to rule on a pending discovery motion to obtain evidence necessary for certification.

Other issues raised in the appeal were not addressed by the Court once it concluded that the trial court erred in its ruling regarding the timing of certification.

Order from In re Wal-Mart Stores, Inc. Wage and Hour Litigation highlights need to support incentive award requests with detailed facts when the requested award is substantial

Untited States District Court Judge Saundra B. Armstrong (Northern District of California) granted in part and denied in part the unopposed motion of plaintiffs for an award of incentive payments and attorney's fees.  In re Wal-Mart Stores, Inc. Wage and Hour Litigation, 2011 WL 31266 (N.D.Cal. Jan. 05, 2011).  Counsel requested 33.3% of the maximum settlement amount of $86 million.  The Court agreed that a departure from the 25% benchmark in the Ninth Circuit was appropriate but not to that degree.  The Court awarded a fee equal to 27% of the maximum settlement amount.

On the requested enhancement awards, the Court said:

Upon review of the record in this case, the Court finds that Plaintiffs are entitled to a reasonable incentive payment. However, the Court finds the requested award of $25,000 per named Plaintiff to be excessive, in view of the nature of their assistance in this case.  First, the Court notes that the named Plaintiffs have not indicated in their declarations the total number of hours they spent on this litigation. Rather, they generally explain that they were deposed, responded to written discovery, and assisted and met with counsel. Second, in arguing that $25,000 is an appropriate award, Plaintiffs cite to cases that are clearly distinguishable. For instance, in Brotherton v. Cleveland, 141 F.Supp.2d 907 (S.D.Ohio 2001), the court awarded $50,000 to a single named plaintiff, finding that “she has spent approximately 800 hours working on this litigation.” Id. at 914. By contrast, here, there is no evidence that the named Plaintiffs' involvement reached anywhere near this level.

Slip op., at 4.  The Court awarded $5,000 to each plaintiff.

Kullar v. Foot Locker generating more precedent, this time on a disqualification issue

So, I'm back after a vacation, and just in time.  Luckily, nothing at all happened while I was gone.  Today, however, we receive a new nugget of precedent from one of those cases that keeps on giving.  In Kullar v. Foot Locker Retail, Inc. (January 18, 2011), the Court of Appeal (First Appellate District, Division Three) reviewed a denial of a motion to disqualify counsel representing the objectors to a proposed class action settlement in Kullar.  If this doesn't ring a bell for you, let me recap.  Kullar (the 2008 opinion: Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008)) reversed an order granting approval to a proposed class action settlement after concluding that the information provided to the trial court was insufficient to permit the court to conclude that the settlement was fair, adequate and reasonable.

How does this lead to a motion to disqualify?  Glad you asked.  The Court sums up as well as I could the procedural maneuvering leading to the motion to disqualify:

Prior to the trial court's approval of the settlement in the Kullar action (Kullar v. Footlocker, No. CGC-05-447044 (Kullar)), Echeverria, represented by the same attorneys, had filed a partially overlapping putative class action against Foot Locker and others in the Alameda County Superior Court (Echeverria v. Footlocker, No. RG07317036 (Echeverria I)). Because of the pendency of the settlement in the Kullar action, the Alameda court entered an order staying Echeverria I, which remained in effect through the pendency of the Kullar appeal. On April 15, 2009, one month after issuance of the remittitur in Kullar, Echeverria and the two other objectors represented by Q&W filed an action in the San Francisco Superior Court, where Kullar was pending, asserting the same claims as were alleged in the stayed Alameda action (Echeverria v. Footlocker, No. CGC-09-487345 (Echeverria II)). Based on the pendency of identical claims in Echeverria I, the San Francisco court on July 29, 2009, stayed proceedings in Echeverria II. In subsequent proceedings in Kullar, the court considered the additional showing made to establish the fairness of the proposed settlement, the three objectors' renewed objections to settlement approval, and on October 22, 2009, the court again granted final approval of the class settlement. Echeverria dismissed the Alameda action and on November 17, 2009, the San Francisco court lifted the stay in Echeverria II.

Slip op., at 2-3.  The Court then describes the motion to disqualify filed by Foot Locker, which argued that representation of objectors on the one hand and potential class members on the other created a conflict.  The trial court rejected that argument as did the Court of Appeal.  I don't find the outcome surprising.  But the opinion does offer some interesting comments, where the Court briefly discusses the obligations of counsel to putative class members prior to certification:

Initially, since no class has yet been certified in Echeverria II (and no class was ever certified in Echeverria I), no attorney-client relationship has yet arisen between Q&W and the members of the putative class. (Atari, Inc. v. Superior Court (1985) 166 Cal.App.3d 867, 873 [“We cannot accept the suggestion that a potential (but as yet unapproached) class member should be deemed 'a party . . . represented by counsel' even before the class is certified; we respectfully disagree to this extent with the federal courts which apparently would accept it.”]; Sharp v. Next Entertainment, Inc. (2008) 163 Cal.App.4th 410, 433, citing comment 25 to rule 1.7 of the ABA Model Rules of Professional Conduct [“When a lawyer represents or seeks to represent a class of plaintiffs or defendants in a class-action lawsuit, unnamed members of the class are ordinarily not considered to be clients of the lawyer for purposes of applying paragraph (a)(1) of this Rule [that restricts representation when there are concurrent conflicts of interest] . . .”]; In re McKesson HBOC, Inc. Securities Litigation (N.D.Cal. 2000) 126 F.Supp.2d 1239, 1245; Cal. Compendium on Prof. Responsibility, L.A. County Bar Assn. Formal Opn. No. 481 (March 20, 1995).)  

Foot Locker cites cases that clearly are inapposite to establish that an attorney may incur fiduciary obligations to an individual even though an attorney-client relationship has not arisen. Most involve situations where there were preliminary consultations between the individual and the attorney looking to the retention of the attorney but the potential client did not hire the attorney. (People ex rel. Dept. of Corporations v. Speedee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135; Beery v. State Bar (1987) 43 Cal.3d 802.) Closer to the mark is the court's statement in In re GMC Pick-up Truck Fuel Tank Prod. Liab. Litig. (3rd Cir. 1995) 55 F.3d 768, 801: “Beyond their ethical obligations to their clients, class attorneys, purporting to represent a class, also owe the entire class a fiduciary duty once the class complaint is filed.” This statement—which, it should be noted, recognizes that putative class members are not clients of the attorney—was made in the context of considering the propriety of certifying a settlement class, with little application to the present situation. Moreover, assuming that Q&W assumed some fiduciary obligations to members of the putative class they seek to represent, no authority has been cited suggesting that those obligations preclude the attorneys from urging that a proposed settlement in related litigation is not in the best interests of the class. (Compare Schick v. Berg (2004) U.S. Dist. LEXIS 6842, *19 (S.D.N.Y. 2004, affd. (2d Cir. 2005) 430 F.3d 112 [attorney owed putative class member a duty not to prejudice putative class member's rights in the action in which class certification was sought, but duty did not extend to refraining from advising a third party to sue putative class member].)

Slip op., at 5-6.  After reading these remarks, I now believe that it is unclear in California whether the majority approach follows or diverges from the federal cases suggesting a fiduciary obligation extends to putative class members prior to certification.  It seems likely, however, that regardless of the answer as to where California is on the issue, the obligations to the unknown putative class members do not rise to the same level as that of the obligations to a represented client.  The ability to harmonize this question is complicated by authority indicating that class counsel can replace a proposed class representative for the good of the class, which, in one way of looking at it, suggests that the interests of the putative class can rise high enough to squeeze the initial client to the sidelines.

Cellphone Fee Termination Cases affirms class action settlement with several instructive holdings

This initially unpublished opinion in Cellphone Fee Termination Cases (July 27, 2010) follows from a consolidated appeal in one of several coordinated class actions that challenged wireless telephone carriers' practice of charging early termination fees (ETF's) on customers seeking to cancel cellular telephone contracts. The defendant in this particular case is Cellco Partnership (doing business as Verizon Wireless ("Verizon")).  The class action case against Verizon went to a jury trial on June 16, 2008, in the Alameda County Superior Court. On July 8, 2008, after plaintiffs had rested their case and the defense presentation had commenced, the parties announced that they had signed a memorandum of understanding outlining the terms of a settlement. The settlement also encompassed claims of nationwide certified class claimants (excluding California class members) in a proceeding then pending before the American Arbitration Association (AAA), as well as two actions filed in federal district courts.

Objectors challenged the settlement at final approval, contending that the notice of the settlement was inadequate,  that the settlement terms were not fair, reasonable and adequate, and that incentive payments awarded to four named class representatives were improper.  The trial court overruled the objections and approved the settlement.  The objectors appealed, but the Court of Appeal (First Appellate District, Division Five) affirmed.

In an otherwise standard, but lengthy, discussion of appellate review standards, the Court offered some useful holdings:

  • The appellants argued that the statement in the short-form publication notice was misleading in that it gave the impression that members of the Subscriber Class would share in a portion of the $21 million settlement fund.  The Court disagreed:  "That publication notice, however, (as well as the mail notice) directed potential settlement class members to the settlement Web site to learn more about the settlement, and the publication notice specifically referenced the ― detailed notice and claim form package which subscribers would need to submit to ― qualify for a payment."  Slip op., at 11.  Thus, the short form notice need not contain all information about the settlement, so long as it directs class members to a source of full information about the settlement.
  • The appellants also argued that notice was defective in failing to disclose the enormous size of the class to the EFT Assessed Class, asserting that this interfered with an informed decision about whether to participate, object, or opt out.  The Court quickly disposed of that argument: "[Appellant] cites no authority for her position that information as to the size of the potential class, or the contingencies of recovery in any particular amount, is required. Courts which have considered such objections in the context of class settlement have rejected the claim."  Slip op., at 13.
  • The appellants also contended that $10,000 incentive awards to the representatives constituted a breach of their fiduciary duty to the class. Specifically, appellant alleged that "Schroer and White received amounts grossly disproportionate to the average recovery to the ETF Assessed Class", and asserted that "Nguyen and Brown (members of the Subscriber Class) received 'pay-offs to induce them to sell out the Subscriber Class.'" Slip op., at 20. The Court commented: "While there has been scholarly debate about the propriety of individual awards to named plaintiffs, '[i]ncentive awards are fairly typical in class action cases.'"  Slip op., at 20. The Court went on, observing: "There is a surprising dearth of California authority directly addressing this question. The threshold question of whether a class representative is entitled to a fee in a California class action was recently answered in the affirmative in Clark v. American Residential Services LLC (2009) 175 Cal.App.4th 785 (Clark)." Slip op., at 21. After discussing the policies behind incentive awards and the evidence of representatives' efforts in this case, the Court concluded: "In contrast to the more detailed analysis given by the trial court to other aspects of the settlement, the discussion of the incentive awards was sparse. There is no 'presumption of fairness' in review of an incentive fee award. (Clark, supra, 175 Cal.App.4th at p. 806.) The court, however, found the awards justified in light of the total settlement on the 'substantial benefit/common fund approach' and the 'material support' provided by the named plaintiffs to the prosecution of the case. Given the familiarity of the trial court with the history of the lengthy litigation and the evidence before the court that the representatives had, over the course of the litigation, assisted with investigation, responded to discovery requests, reviewed documents and pleadings, and testified either in deposition or at trial, we find no abuse of discretion in these awards. Slip op., at 23.

Munoz v. BCI Coca-Cola Bottling Company of Los Angeles (Greenwell, objector) provides much-needed words of restraint concerning Kullar

Since Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008) (Kullar) and Clark v. American Residential Services LLC, 175 Cal. App. 4th 785 (2009) (Clark) were decided, trial courts and settling parties in class actions have been looking over their shoulder at every settlement, concerned about the amount of information necessary to meet the Kullar/Clark standard for adequate settlement review.  For example, the Los Angeles Superior Court appears to be utilizing some form of checklist derived, in part, from Kullar to analyze proposed class action settlements.  Fortunately, in Munoz v. BCI Coca-Cola Bottling Company of Los Angeles (ord. pub. July 2, 2010) (Greenwell, objector), the Court of Appeal (Second Appellate District, Division Eight) explains that much of the angst over Kullar/Clark is overblown because their requirements have been overstated and/or misconstrued.

Plaintiffs in Munoz filed a class action lawsuit against BCI Coca-Cola Bottling Company of Los Angeles (BCI), alleging unpaid overtime wages, missed meal and rest period wages, and other Labor Code violations and unfair business practices. The proposed class consisted of production supervisors and merchandising supervisors who were allegedly misclassified as exempt.  After mediation, the parties agreed to settle the matter for $1.1 million. Notice of the proposed settlement elicited one objection. Two of the 188 class members opted out.  The average net payment to each class member would be about $4,300. The trial court found the settlement fair and reasonable. The objector, Greenwell, appealed, arguing that the trial court abused its discretion in approving the settlement, principally because the parties did not provide the court with the information necessary to make a finding that the settlement was reasonable and fair.

The Court of Appeal summarized the obligation of a trial court evaluating a class action settlement:

Some cases state that a presumption of fairness exists “where: (1) the settlement is reached through arm's-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.” (Dunk, supra, 48 Cal.App.4th at p. 1802.) Kullar emphasizes that this is only an initial presumption; a trial court's approval of a class action settlement will be vacated if the court “is not provided with basic information about the nature and magnitude of the claims in question and the basis for concluding that the consideration being paid for the release of those claims represents a reasonable compromise.” (Kullar, supra, 168 Cal.App.4th at pp. 130, 133.) In short, the trial court may not determine the adequacy of a class action settlement “without independently satisfying itself that the consideration being received for the release of the class members' claims is reasonable in light of the strengths and weaknesses of the claims and the risks of the particular litigation.” (Id. at p. 129.)

Slip op., at 10.  However, after explaining that the objector complained "that the record before the trial court contained no evidence of 'the potential value of the claims,'" the Court went on to explain that Kullar is misunderstood:

Greenwell misunderstands Kullar, apparently interpreting it to require the record in all cases to contain evidence in the form of an explicit statement of the maximum amount the plaintiff class could recover if it prevailed on all its claims--a number which appears nowhere in the record of this case. But Kullar does not, as Greenwell claims, require any such explicit statement of value; it requires a record which allows “an understanding of the amount that is in controversy and the realistic range of outcomes of the litigation.”

Slip op., at 11.  Continuing, the Court noted, "Indeed, the standard list of factors a trial court should consider in determining whether a settlement is fair and reasonable does not expressly include specification of the maximum amount of recoverable damages (see Kullar, supra, 168 Cal.App.4th at p. 128), and Kullar is clear that the most important factor '"'is the strength of the case for plaintiffs on the merits, balanced against the amount offered in settlement.'"' (Id. at p. 130.)"  Slip op., at 11, n. 6.

The Court itemized the information available to the trial court in the case before it:

The information before the court included the size of the class (188) and the payroll data on all class members during the class period (including total amounts of salaries paid during the class period). It also included declarations from 30 class members (15 percent of the class) indicating the number of hours worked per week and per day (and the significant differences in those numbers): e.g., 70 hours per week, 48 hours per week, 60 hours per week, 42-44 hours per week, 55 hours per week, “no more than 50 hours per week,” 45 hours per week in winter and 50-60 hours per week at other times of the year, eight to nine hours per day, 45 hours per week, and so on. These declarations also showed significant variations....

Slip op., at 11.  In other words, the trial court had more than enough information to evaluate the "strength of the case" and compare that to the amount offered in settlement.

As an additional measure of assistance, the Court highlighted the facts from Kullar and Clark that undermined those settlements:

As a final observation on this topic, we note that the evidentiary records in Kullar and Clark, upon which Greenwell relies so heavily, are significantly different from this case. In Kullar (which did not involve the misclassification of exempt employees), there was no discovery at all on meal period claims that were added in an amended complaint and were the focal point of the objections to the settlement. (Kullar, supra, 168 Cal.App.4th at pp. 121-122.) While Kullar class counsel argued that the relevant information had been exchanged informally and during mediation (id. at p. 126), nothing was presented to the court--no discovery, no declarations, no time records, no payroll data, nothing (id. at pp. 128-129, 132)--to allow the court to evaluate the claim. And in Clark, the problem was that the trial court was not given sufficient information on a core legal issue affecting the strength of the plaintiffs' case on the merits, and therefore could not assess the reasonableness of the settlement terms. (Clark, supra, 175 Cal.App.4th at p. 798.) The record in this case contains neither of the flaws that doomed the Kullar and Clark settlements.

Slip op, at 13.

Munoz v. BCI clearly holds that there is no obligation on parties seeking approval of a class action settlement to state a specific sum that would represent the maximum possible recovery if the class prevailed on all theories.  Rather, the Court must have information that permits it to evaluate the strength of the claims compared to the amount offered in settlement.  This showing ought to be satisfied by a discussion of the specific risk factors associated with the various theories, along with data about such things as the size of the class.  In other words, if a trial court can roughly approximate the magnitude of the claims and the likelihood of recovery, it can fashion the necessary metric.

In addressing other arguments, the Court rejected a challenge to the $5,000 incentive awards approved by the trial court.