The standards for adequate class settlement review received a confirmatory boost in Clark v. American Residential Services LLC, et al.

Last year, in Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008), the Court of Appeal held that a trial court reviewing a class action settlement must receive and independently consider information sufficient to assess the reasonableness of the terms of the settlement.  Id. at 130, 133.  In Kullar, the Court of Appeal vacated a trial court's approval of a class action settlement because the court was 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."  Id. at 133.  In Clark v. American Residential Services LLC, et al. (July 6, 2009), the Court of Appeal (Second Appellate District, Division Eight) articulated the same standard, to the same result.

Adopting the Kullar analysis, the Court said:

In Kullar, the court pointed out that "neither Dunk . . . nor any other case suggests that the court may 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."

Slip op., at 14.  Elaborating on what the trial court must do to assess the validity of a class action settlement, the Court continued:

Kullar further explains that, while there is usually an initial presumption of fairness when a proposed class action settlement was negotiated at arm's length by counsel for the class, "'to protect the interests of absent class members, the court must independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interests of those whose claims will be extinguished.'"  (Kullar, supra, 168 Cal.App.4th at p. 130.) To make that determination, "'the factual record before the . . . court must be sufficiently developed,'" and the initial presumption to which Dunk refers "'must then withstand the test of the plaintiffs' likelihood of success.'" (Ibid.) Again, "'"The most important factor is the strength of the case for plaintiffs on the merits, balanced against the amount offered in settlement."'"  (Ibid.)  In Kullar, because the trial court was not presented with data permitting it to review class counsel's evaluation of the sufficiency of the settlement, the order approving the settlement was vacated.  (Kullar, supra, 168 Cal.App.4th at p. 131.)  As we shall see, the same result is required here.

Slip op., at 15.  The Court of Appeal was particularly concerned about the absence of information in the record that would permit the trial court to independently assess whether an overtime claim in the case was essentially valueless:

When the objectors protested, at the fairness hearing, that overtime is to be calculated on the technician's actual commission wages, not on the minimum wage, and contended that class counsel's evaluation was thus based on a "staggering mistake of law," the trial court made no comment, and proceeded to approve the settlement. This, it seems to us, demonstrates the court made no independent assessment of the strength of the plaintiffs' case, simply accepting class counsel's assessment of value, including his assertion that the overtime claim – which "is what this [case] was about" – had "absolutely no" value. But if in fact there is a legitimate dispute on the appropriate way to calculate overtime, then the class's overtime claim obviously has some value, and if the objectors were correct on the law, the claim may have had considerable value. None of these possibilities was considered or evaluated when the trial court approved the settlement; instead, the trial court simply accepted class counsel's assessment. Without some kind of evaluation of this legal point – and in light of declarations from objectors stating they worked at least 10 hours of overtime every week without compensation – we cannot see how the trial court could "satisfy itself that the class settlement is within the 'ballpark' of reasonableness." (Kullar, supra, 168 Cal.App.4th at p.133.)

Slip op., at 17-18.  On a second issue in the appeal, the Court reversed class representative enhancement awards of $25,000, noting that they were approximately 44 times more than what the average class member received in the proposed settlement.

The consequences of this standard are likely to be seen first in the realm of mediation.  Parties interested in settling a class action are going to need to be a bit more forthcoming with concrete data that can then be provided, at least in summary form, to the trial court asked to give its blessing to a proposed class action settlement.