In O'Connor v. Uber Technologies, Inc., U.S.D.C. N.D. Cal. 13-cv-03826-EMC, and Yucesoy v. Uber Technologies, Inc., case no. 15-cv-00262-EMC, on August 18, 2016, District Court Judge Edward M. Chen denied plaintiffs' motion for preliminary approval of a proposed class action settlement. Plaintiff in O'Connor alleged that Uber misclassified its drivers as independent contractors rather than employees and denied them rights provided under California's Labor Code. For example, if the drivers are employees they would be entitled to be reimbursed for expenses such as gas and use of their vehicle. Plaintiffs also claimed Uber failed to remit gratuities as required by Labor Code § 351. Plaintiffs alleged this same conduct violated California's Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq.

In September 2015 the court first certified a class including approximately 8,000 drivers out of an estimated 160,000 California drivers. Later the court ruled that an arbitration provision was unenforceable because it purported to waive claims under California's Private Attorneys General Act of 2004 (PAGA), and the attempted waiver was invalid as a matter of public policy. As a result of that ruling, on December 9, 2015 the court re-visited class certification and certified a much broader class that included over 240,000 drivers. (On April 5, 2016, the Ninth Circuit Court of Appeals granted Uber's petition for permission to appeal the December 9, 2015 class certification ruling. Uber also filed a motion to stay proceedings in the trial court pending the ruling on that appeal.)  

After three years of contentious litigation and on the verge of trial, the parties entered into a Settlement Agreement. Under the Settlement Agreement, Uber agreed to pay $84 million plus an additional $16 million contingent on an initial public offering reaching an agreed valuation. The agreement allowed Plaintiffs' counsel to seek a fee and expense award up to 25% of the Settlement Fund ($21 to $25 million), but during the approval process Plaintiffs' counsel agreed to reduce her fee request by $10 million, thus resulting in an additional $10 million for distribution to the class. As part of the settlement Uber also agreed to certain non-monetary relief. This included publishing a deactivation policy only allowing deactivation of drivers for cause, providing for a Driver Appeal Panel, and other grievance review procedures.

The Settlement Agreement covered all drivers in California and Massachusetts who used the Uber App from August 16, 2009 up to the date of preliminary approval. Although the O'Connor and Yucesoy actions only alleged claims based on expense reimbursement and payment of tips, the Settlement Agreement called for a broad release of all claims based on or reasonably related to the employment misclassification claim, i.e., overtime, minimum wage, meal and rest breaks, and workers' compensation. As a result of the broad release the settlement would effectively terminate 15 other pending suits. Another part of the agreement is that it would settle all civil penalties potentially due under PAGA. The Settlement Agreement allocated $1 million to settlement of the PAGA claim.

In ruling on the motion for preliminary approval of the settlement, the court recognized that its task was to decide whether, taken as a whole, the proposed settlement is "fundamentally fair, adequate, and reasonable." The court concluded that "close review is particularly warranted where Plaintiffs seek to add new claims and drivers not previously certified, and the settlement would settle not only the instant case but claims brought in at least fifteen other pending lawsuits for relatively modest value." The proposed settlement drew numerous objections (including from plaintiffs' counsel in the other actions who would see their own cases effectively terminated – with no attorneys' fees to them – if this agreement was approved).

In assessing the settlement the court recognized that both sides faced significant risks if the case did not settle. For example, both sides were at risk of an adverse ruling by the trier of fact on the key misclassification issues. Prior to that there was also risk to the class that the Court of Appeals could reverse the district court's rulings on the enforceability of the arbitration provision and/or class certification.

Because it was unclear whether the contingent $16 million payment would be triggered, the court analyzed the settlement assuming only the $84 million monetary component would be paid. The court concluded, "looking solely at the monetary relief, the settlement of $84 million constitutes about 10% of the full verdict value of the non – PAGA claims – i.e. a 90% discount off the verdict value of the non – PAGA claims." "[T]he Court would be inclined, after weighing the Hanlon factors, to find the consideration afforded by the settlement to be adequate for release of the non – PAGA claims."

What tipped the scale against approval of the settlement is that Plaintiffs' counsel had previously argued that the PAGA claim alone could result in penalties over $1 billion. The California LWDA agreed that the verdict value of the PAGA claim exceeds $1 billion and expressed concern that Plaintiffs proposed to allocate only $1 million to the settlement of the PAGA claim – "0.1% of its estimated full worth." The court ruled, "[t]he parties have failed to demonstrate how the Hanlon factors or any other coherent analysis justifies settling the PAGA claim for such relatively meager value." The court commented, "Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber's benefit, even though the PAGA claim alone is worth more than half of the full verdict value of all claims being released." The court concluded, "viewing all the claims combined (PAGA and non – PAGA), the Settlement Agreement yields less than 5% of the total verdict value of all claims being released ... . The settlement as a whole as currently structured is not fair, adequate and reasonable." For this reason, the motion for preliminary approval was denied.

Few class actions proceed to trial when the risks faced by both sides are as large as in this case. Time will tell whether this is one of the rare few cases that make it to trial or whether the parties return with a new settlement for the court to consider.

Going forward it will be interesting to watch how allocation of settlement proceeds is handled for PAGA claims. There are some signs that LWDA is becoming more a more active participant in pending litigation and may itself oppose approval of wage and hour class action settlements where the state views too little of the settlement being allocated to the PAGA claim. Seeing how plaintiffs' counsel's arguments that the PAGA claim alone could be worth a billion dollars came back to derail an effort to settle that claim for much less, another ripple effect of this high profile ruling may be that counsel shy away from grand valuations of PAGA claims during the litigation process.  

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