United States: Ninth Circuit Narrowly Upholds Class Settlement In Misclassification Case

We've commented several times recently on the increasing scrutiny courts are giving to class action settlements generally, and to attorney fee awards in particular.  A recent decision from the Ninth Circuit, although it ultimately upholds the award, reflects that this is still a troublesome area and less than entirely predictable for any of the parties.

In Laguna v. Coverall North America, Inc., Case No. 12-55479 (9th Cir. June 3, 2014), the defendant ran a janitorial franchising company.  The persons performing the actual janitorial work did so under franchise agreements and were classified as "franchisees," not employees.  Once source of discontent appeared to stem from the manner in which customers were assigned to current franchisees.   The plaintiffs brought suit under California law contending that they were employees, not independent contractors, and also asserted various breaches of the franchise agreements.  The case was litigated for two years, and was settled for largely equitable relief.  That relief involved (a) assignment of customer accounts to current franchisees subject to payment of the franchise fees; (b) a single payment of $475 in cash to each former franchisee; (c) a $750 credit for past franchisees towards future new franchise; and  (d) some rights for newer franchisees to rescind their franchise agreements.  The franchisees had to submit a claim to take advantage of the benefits, and approximately 119 did so, comprising the majority of the then current franchisees.  (Apparently there were between 750 and 1500 potential class members – the trial court notes the lack of certainty – but most were former franchisees).  The settlement also provided for nearly $1,000,000 in attorney fees, or roughly one third of the hours times rate "lodestar" figure.

So, did anyone, other than the plaintiffs at their jobs, clean up?

There wasn't much resistance to the settlement.  There were but two opt-outs.  There were no timely objections.  In a classic case of no good deed going unpunished, however, the trial court allowed consideration of a single untimely objection, which was in fact the only objection, in 2011.  When the court approved the settlement over the untimely objection, that objector then appealed.  Enter two and one half years of delay.

Based on the district court's decision, there were very good reasons for the plaintiffs to settle.  To begin with, the franchise agreements apparently contained arbitration agreements with class limitations.  At  the time the suit was filed, the Ninth Circuit authority was unfavorable to their enforcement, but by the approval hearing the United States Supreme Court had rendered its decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).  The district court opinion also reflects a favorable ruling for the company in a similar Massachusetts case, as well as issues involving the company's ability to pay a large verdict.  Although the settlement resolved all claims, reading between the lines it appears designed to improve the franchisor-franchisee relationship, something which would seem to have a long-term benefit for the class members, particularly present franchisees.

While the objector objected to the settlement generally, the Ninth Circuit's opinion focuses primarily on the attorney fee issue and the question of whether a million-dollar fee was appropriate for a settlement where the relief was primarily equitable.  Finding injunctive relief hard to quantify, the district court and Ninth Circuit resorted to a "lodestar" formula.  Under that formula, the plaintiffs incurred nearly $3,000,000 in fees, but received only $1,000,000.  The court, appropriately, refused to tie the amount of fees to some percentage of an estimate of the value of the equitable relief, and refused to find that the court had to make specific findings of fact about the value of the injunctive relief.  It isn't hard to understand this result as the parties had widely divergent views over the value of the proposed equitable remedies.

The Ninth Circuit also disposed of other challenges to the settlement.  It found that the settlement was not invalidated because of the claim procedure or due to the existence of a reversion.  It also held that the district court could properly require that objectors be subject to deposition, dismissing arguments that such discovery could be used as a tool to discourage objections.

Two Ninth Circuit judges made up the minority, but the third judge on the panel, a district judge from Northern California, dissented.  The dissent's arguments were not insubstantial.  It pointed out that the injunctive relief primarily benefited current franchisees, not past ones.  It recognized that injunctive relief might be hard to calculate, but sought a more robust effort to make some valuation determination. It questioned the administrative process, particularly for past franchisees, and noted a relatively low response rate, around 9%, for what it perceived to be a straightforward calculation.  Ultimately, in a long footnote, the majority noted that these arguments, while perhaps valid in one sense, did not rise to the level of demonstrating an abuse of discretion.

The Laguna decision is more significant for what it reflects than what it holds.  First, a settlement reached in 2011 was held up until 2014 based on a single untimely objector.  Keep in mind that the relief was primarily equitable, meaning that likely dozens of class members had wanted and expected relief on customer assignments, relief that, at a minimum, was delayed.  Second, the case reflects continued hand-wringing over deciding attorney fees when the amount recovered is small or, in this instance, primarily in the form of equitable relief.   Third, the court recognized that terms such as claim processes and reversions may raise questions, but simply warrant further explanation and should not scuttle an otherwise reasonable settlement.

The Bottom Line:  Courts have some difficulty in evaluating the reasonableness of attorney fees awards in settlements providing primarily equitable relief.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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