Sabrina Laguna v. Coverall North America, Inc. ( 2014 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SABRINA LAGUNA, an individual; No. 12-55479
CARLOS ACEVEDO, an individual;
TERESA SALAS, an individual; ROES D.C. No.
3–50, on behalf of themselves and in 3:09-cv-02131-
a representative capacity for all JM-BGS
others similarly situated,
Plaintiffs-Appellees,
OPINION
AMRIT SINGH,
Objector-Appellant,
v.
COVERALL NORTH AMERICA, INC., a
Delaware corporation; ALLIED
CAPITAL CORPORATION, a Maryland
corporation; ARES CAPITAL
CORPORATION, a Maryland
corporation; CNA HOLDING
CORPORATION, a Delaware
corporation; TED ELLIOTT, an
individual; DOES 5–50, inclusive,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of California
Jeffrey T. Miller, Senior District Judge, Presiding
Argued and Submitted
November 8, 2013—Pasadena, California
2 LAGUNA V. COVERALL NORTH AMERICA
Filed June 3, 2014
Before: Ronald M. Gould and Jay S. Bybee, Circuit Judges,
and Edward M. Chen, District Judge.*
Opinion by Judge Gould;
Dissent by Judge Chen
SUMMARY**
Settlement Agreement
The panel affirmed the district court’s approval of a
proposed class action settlement agreement pursuant to
Federal Rule of Civil Procedure 23(e), and the award of
attorneys’ fees to the attorneys for the proposed class.
The panel held that the district court correctly used the
lodestar method in gauging the fairness of the attorneys’ fee
award, correctly calculated the lodestar amount, and
reasonably concluded the agreed upon award was appropriate.
The panel also held that the district court did not abuse its
discretion in applying the factors of Churchill Vill., L.L.C. v.
Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004), when
examining the fairness of the proposed settlement. The panel
held that the district court had no obligation to make explicit
*
The Honorable Edward M. Chen, District Judge for the U.S. District
Court for the Northern District of California, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
LAGUNA V. COVERALL NORTH AMERICA 3
monetary valuations of injunctive remedies. The panel
further held that the district court did not abuse its discretion
in approving the settlement term that objectors be available
for depositions. Finally, the panel held that the district court
did not abuse its discretion when it approved the settlement
agreement consistent with the Class Action Fairness Act’s
notice requirement described in 28 U.S.C. § 1715(b) and (d).
District Judge Chen dissented because he believed that the
record below is bereft of crucial information without which
the district court could not fully review either the adequacy of
the settlement or the reasonableness of the fee award. He
would remand the case for fuller development of the record.
COUNSEL
Shannon Liss-Riordan (argued), Licthen & Liss-Riordan,
P.C., Boston, Massachusetts; Monique Olivier, Duckworth
Peters Lebowitz Olivier, LLP, San Francisco, California, for
Objector-Appellant.
Raul Cadena & Nicole R. Roysdon, Cadena Churchill, LLP,
San Diego, California; L. Tracee Lorens & Wayne Alan
Hughes, Lorens & Associates, APLC, San Diego California,
for Plaintiffs-Appellees.
Norman M. Leon (argued), DLA Piper LLP, Chicago,
Illinois; Mazda K. Antia, Cooley LLP (argued), San Diego,
California; Jeffrey A. Rosenfeld & Nancy Nguyen Sims,
DLA Piper LLP, Los Angeles, California, for Defendants-
Appellees.
4 LAGUNA V. COVERALL NORTH AMERICA
OPINION
GOULD, Circuit Judge:
This case asks us to decide whether a settlement
agreement reached before class certification between
Plaintiffs and Defendants is fair, reasonable, and adequate.
We agree with the district court that the settlement merits
approval, and we affirm.
I
Coverall North America, Inc. (“Coverall”) is a janitorial
franchising company operating in California. Plaintiffs
brought a class action suit against Coverall in 2009 alleging
that (1) Coverall misclassified its California franchisees as
independent contractors, thereby avoiding the protections
afforded by California’s labor laws to franchisees; and
(2) Coverall breached its franchise agreements, and
committed fraudulent and unfair practices, by removing
customer accounts from franchisees without cause so that it
could resell those accounts to other franchisees. In August
2011, after about two years of significant litigation, the
parties agreed on a settlement. The sole objector, Amrit
Singh, filed an objection to the proposed settlement on
November 14, 2011, and although the objection was not
timely, the district court accepted the filing “in the interest of
determining the issues on the merits.” After a fairness
hearing on November 21, 2011, the district court approved
the settlement agreement on February 23, 2012 pursuant to
Federal Rule of Civil Procedure 23(e).
The settlement agreement is expansive, but the most
contested provisions include the following: (1) Coverall
LAGUNA V. COVERALL NORTH AMERICA 5
pledges to assign customer accounts to current franchisees,
with the assignments remaining conditional until franchisees
have paid their franchise fees in full; (2) former franchise
owners will receive $475 each and will receive a $750
purchase credit toward a new Coverall franchise; and (3) new
franchisees will have a 30-day right to rescind their franchise
agreements, and upon rescission will receive all the of money
they have paid during that period under the franchise
agreement except for the $75 background investigation fee.
The settlement agreement also outlines other changes to the
franchise agreements and Coverall’s operating procedures.
Beyond the agreement generally, Singh contests the award of
$994,800 in attorneys’ fees to Plaintiffs’ attorneys. As of the
fairness hearing on November 21, 2011, two class members
had opted out of the agreement and Singh is the only objector.
II
We review the district court’s approval of a proposed
class action settlement agreement for abuse of discretion.
Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 963 (9th Cir.
2009); see also United States v. Hinkson, 585 F.3d 1247,
1250 (9th Cir. 2009) (en banc) (giving general abuse of
discretion standard in contexts beyond class actions). Our
review of a class action settlement is “extremely limited,” In
re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 458 (9th Cir.
2000), and we will only reverse upon “a strong showing that
the district court’s decision was a clear abuse of discretion,”
Staton v. Boeing Co., 327 F.3d 938, 960 (9th Cir. 2003)
(quotation marks and citations omitted). We also review for
abuse of discretion the calculation and award of attorneys’
fees. In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d
935, 940 (9th Cir. 2011).
6 LAGUNA V. COVERALL NORTH AMERICA
III
When a class action settlement agreement is submitted for
approval, “[t]he initial decision to approve or reject a
settlement proposal is committed to the sound discretion of
the trial judge.” Officers for Justice v. Civil Serv. Comm’n,
688 F.2d 615, 625 (9th Cir. 1982). The district court judge
must determine whether the settlement is “fundamentally fair,
adequate and reasonable.” Id.
We start with fees. Although the parties have agreed on
the award of attorneys’ fees, the district court has an
“independent obligation to ensure that the award, like the
settlement itself, is reasonable.” Bluetooth, 654 F.3d at 941.
However, we recognize that in the settlement context fees are
a subject of compromise. Staton, 327 F.3d at 966. We have
made clear that “since the proper amount of fees is often open
to dispute and the parties are compromising precisely to avoid
litigation, the [district] court need not inquire into the
reasonableness of the fees at even the high end with precisely
the same level of scrutiny as when the fee amount is
litigated.” Id.
We note at the outset that two different methods may be
used “for calculating a reasonable attorneys’ fee depending
on the circumstances.” Bluetooth, 654 F.3d at 941. The
lodestar method is most appropriate where the relief sought
is “primarily injunctive in nature,” and a fee-shifting statute
authorizes “the award of fees to ensure compensation for
counsel undertaking socially beneficial litigation.” Id.; see
also Hanlon v. Chrysler Corp., 150 F.3d 1011, 1029 (9th Cir.
1998). That is precisely the situation we face here, because
the settlement provisions that Plaintiffs have sought and
agreed upon are mostly injunctive in nature and a fee shifting
LAGUNA V. COVERALL NORTH AMERICA 7
statute exists, California Business and Professions Code
§ 17082. We conclude that the district court correctly used
the lodestar method in gauging the fairness of the attorneys’
fee award.
The district court also correctly calculated the lodestar
amount and reasonably concluded that the agreed upon
award, $994,800, was appropriate. In its analysis, the district
court noted that the case had been contentiously litigated for
over two years, and that the report submitted by Plaintiffs’
counsel showing that over 4,500 hours had been billed by six
attorneys, a paralegal, and a law clerk was fair and accurate.
Using that number, the district court calculated that the
lodestar amount reached almost $3 million. At a third of the
lodestar amount, the district court soundly concluded that the
attorneys’ fee award of $994,800 was reasonable.
Moreover, the district court prudently cross-checked the
award amount against the alternative percentage-of-recovery
method. We have “encouraged courts to guard against an
unreasonable result by cross-checking their calculations
against a second method.” Bluetooth, 654 F.3d at 944–45.
Generally, courts use a benchmark figure of 25% to gauge the
reasonableness of an award under the percentage-of-recovery
method, which is most appropriate in common fund
settlement cases. Id. at 942; In re Mercury Interactive Corp.
Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010); Six (6)
Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301,
1311 (9th Cir. 1990). Here, the district court correctly noted
that the value of the settlement, and particularly its injunctive
terms, was disputed. While Singh’s figure of $56,525 is
clearly incorrect because it gives no value to the injunctive
terms of the settlement, Plaintiffs may certainly be
overstating the value of the settlement at $20 million. The
8 LAGUNA V. COVERALL NORTH AMERICA
district court reasonably surmised that even if the value of the
settlement was $4 million—only a part of the amount claimed
by Plaintiffs—the attorneys’ fee award would still be within
the normal bounds of reasonableness. The district court was
within its discretion to find the attorneys’ fee award to be fair,
reasonable, and adequate because it was both significantly
below the lodestar amount and represented an
unobjectionable percentage of recovery once the value of
injunctive relief was considered.
Singh’s main argument against the reasonableness of the
attorneys’ fee award is that the actual value of the settlement,
which he characterizes as primarily the amount of the cash
payments, is so low that the award is unreasonable. Singh
correctly notes that “the benefit obtained for the class” is
important in determining whether to adjust the lodestar
amount and by how much, Hanlon, 150 F.3d at 1029, but any
such adjustment is equitable and squarely at the discretion of
the district court, Hensley v. Eckerhart, 461 U.S. 424, 437
(1983), and Singh presents no evidence that the district court
abused its discretion in declining further adjustment from the
lodestar amount. Moreover, the district court acted within its
proper discretion when it found that the settlement contains
significant benefits for Plaintiffs beyond the cash recovery,
and thus that the award, at about a third of the lodestar
amount, was reasonable.
IV
Turning to the settlement as a whole, Federal Rule of
Civil Procedure 23(e) “requires the district court to determine
whether a proposed settlement is fundamentally fair.”
Hanlon, 150 F.3d at 1026. As a general rule, a district court
LAGUNA V. COVERALL NORTH AMERICA 9
must consider the following factors when examining the
fairness of a proposed settlement:
(1) the strength of the plaintiffs’ case; (2) the
risk, expense, complexity, and likely duration
of further litigation; (3) the risk of
maintaining class action status throughout the
trial; (4) the amount offered in settlement;
(5) the extent of discovery completed and the
stage of the proceedings; (6) the experience
and views of counsel; (7) the presence of a
governmental participant; and (8) the reaction
of the class members to the proposed
settlement.Churchill Vill., L.L.C. v. Gen.
Elec., 361 F.3d 566, 575 (9th Cir. 2004);
Torrisi v. Tucson Elec. Power Co., 8 F.3d
1370, 1375 (9th Cir. 1993). In its analysis
under the Churchill factors, the district court
noted that the risks of moving forward with
litigation were significant, both in terms of the
likelihood of success and cost. Plaintiffs
expressed justified concern that the class
members could be forced into individual
arbitration after the Supreme Court’s decision
in AT&T Mobility LLC v. Concepcion, 131 S.
Ct. 1740 (2011), and conflicting case law
supports those concerns.
The district court also agreed with Plaintiffs that
California employment law would likely make obtaining
class certification particularly difficult. Following the
Supreme Court’s decision in Wal-mart Stores, Inc. v. Dukes,
131 S. Ct. 2541 (2011), there was a real prospect that
California’s multi-factor test for employee classification
10 LAGUNA V. COVERALL NORTH AMERICA
would have proven fatal to any eventual class certification in
this case. As an additional risk, the district court found that
the poor financial health of Coverall seriously increased the
chance that Plaintiffs would be left with nothing if they
continued to litigate their claims. Rounding out its analysis,
the district court noted that no governmental entity had
weighed in on the matter, that Plaintiffs’ attorneys had
significant experience and had demonstrated skill and
diligence throughout the litigation, and that only two class
members had opted out of the agreement.
Further, the district court reasonably found that the
settlement would yield significant benefits for Plaintiffs given
the risks and costs of continuing litigation. The district court
found that, beyond the cash for former franchisees,
“assignment of customer accounts and pledges for
programmatic changes are significant victories.” The district
court elaborated that “once franchises are assigned,
franchisees will own a valuable business they can choose to
sell or continue to operate.” Viewed together, the district
court determined that the Churchill factors supported the
conclusion that the settlement was fair, reasonable, and
adequate.
Singh claims that the district court was “under a special
obligation to make clear, fact-based findings regarding the
value of the non-monetary terms of the settlement,” by which
he seems to contend that the district court should have
assigned a monetary value to the non-monetary terms of the
settlement. But we have never required a district court to
assign a monetary value to purely injunctive relief. To the
contrary, we have stated that courts cannot “judge with
confidence the value of the terms of a settlement agreement,
especially one in which, as here, the settlement provides for
LAGUNA V. COVERALL NORTH AMERICA 11
injunctive relief.” Staton, 327 F.3d at 959. Monetary
valuation of injunctive relief is difficult and imprecise.1 As
such, we “put a good deal of stock in the product of an arms-
length, non-collusive, negotiated resolution, and have never
prescribed a particular formula by which that outcome must
be tested.” Rodriguez, 563 F.3d at 965 (internal citations
omitted). The district court has no obligation to make explicit
monetary valuations of injunctive remedies, and it did not
abuse its discretion in applying the Churchill factors to this
case.
Singh also argues that the district court abused its
discretion in not exercising heightened review given the
alleged presence of “warning signs” indicating collusion.
1
The dissent contends that our precedents contradict this statement. The
dissent relies on Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012), and
Staton, 327 F.3d at 973, referring to Hanlon, 150 F.3d at 1029. See
Dissent 26–27. Neither of those cases is controlling. In Dennis, we held
that a district court must give a valuation where the bulk of the settlement
was a charity cy pres award of “$5.5 million worth of food” without
reference to whether the food was to be valued at cost, wholesale, or retail
value. 679 F.3d at 867 (internal quotation marks omitted). In that case,
the settlement term was not injunctive, could not be determined without
a valuation, and the information would readily be available to the
defendant. Similarly, in Staton, we noted that valuation for injunctive
relief may be considered when there is a “clearly measurable benefit,” and
referred to the cost of a replacement latch for minivans at issue in Hanlon.
327 F.3d at 973. But in Hanlon, “the district court used its valuation of
the fund only as a cross-check of the lodestar amount” because the
valuation of the injunctive relief was still too uncertain. Staton, 327 F.3d
at 973. We have not required a district court to assign a monetary value
to injunctive relief as amorphous as the right to own a franchise with its
attendant rights and responsibilities. See Dennis, 697 F.3d at 864
(requiring that the district court “explore[] comprehensively all factors”
and “give a reasoned response to all non-frivolous objections” (internal
quotation marks and citation omitted)).
12 LAGUNA V. COVERALL NORTH AMERICA
Although we must be particularly vigilant in the pre-class
certification context, when there are typically more
opportunities for attorney collusion, Hanlon, 150 F.3d at
1026, we will rarely overturn an approval of a compromised
settlement “unless the terms of the agreement contain
convincing indications that the incentives favoring pursuit of
self-interest rather than the class’s interests in fact influenced
the outcome of the negotiations and that the district court was
wrong in concluding otherwise,” Staton, 327 F.3d at 960.
In Bluetooth, we outlined three settlement arrangements
that could indicate collusion because they may improperly
favor counsel at the expense of the plaintiffs. 654 F.3d at
946–47. These are:
(1) when counsel receive a disproportionate
distribution of the settlement, or when the
class receives no monetary distribution but
class counsel are amply rewarded; (2) when
the parties negotiate a “clear sailing”
arrangement providing for the payment of
attorneys’ fees separate and apart from class
funds . . . ; and (3) when the parties arrange
for fees not awarded to revert to defendants
rather than be added to the class fund.
Id. at 947 (internal quotation marks and citations omitted).
Although the district court did not explicitly outline these
“warning signs,” contrary to Singh’s assertion, it did
specifically address two of the three. The district court found
the third sign, the presence of a reversion clause, to “not [be]
a preferable result,” but balanced it with the overall benefits
of the settlement to Plaintiffs and the fact that the cash
payment represented a small amount of those benefits.
LAGUNA V. COVERALL NORTH AMERICA 13
The district court’s analysis, balancing the reversion
clause against the overall strength of the settlement, was
adequate. The first warning sign was not present because the
district court correctly concluded that the attorneys’ fee
award was entirely reasonable. This conclusion has broad
implications for the district court’s obligation to ensure “that
the settlement is not the product of collusion among the
negotiating parties.” Id. (internal quotation marks, citation,
and alteration omitted). Because collusion is the product of
attorneys pursuing their self-interest to the detriment of the
class’s interests, one would expect primarily to find collusion
where attorneys disproportionately benefitted from the
settlement. Id. at 947–48; see Staton, 327 F.3d at 964 (“If
fees are unreasonably high, the likelihood is that the
defendant obtained an economically beneficial concession
with regard to the merits provisions [of the settlement].”). A
settlement may still be the product of collusion when
attorneys’ fees are reasonable. But when, as in this case, the
fee award is clearly reasonable as viewed through the
appropriate application of either the lodestar or percentage-
of-recovery methods, the chance of collusion narrows to a
slim possibility. In these cases, it is sufficient that a district
court recognizes and balances potentially collusive
provisions, such as the reversion to defendants of unclaimed
funds, against the other terms of the settlement agreement.
See Bluetooth, 654 F.3d at 948 (“But these factors did not
obviate the need to examine the fee provision in light of the
rest of the agreement.”); Staton, 327 F.3d at 961 (“[I]t will be
rare that we will reverse a district court’s approval . . . unless
the fees and relief provisions clearly suggest the possibility
that class interests gave way to self-interest.”); Hanlon,
150 F.3d at 1026 (“[I]t is the settlement taken as a whole,
rather than the individual component parts, that must be
examined for overall fairness.”).
14 LAGUNA V. COVERALL NORTH AMERICA
Plaintiffs faced real dangers in proceeding on their case
in light of menacing precedents from the United States
Supreme Court. At the same time, the class gained
significant benefits from the settlement, and Plaintiffs’
lawyers received fees that are overall reasonable. The district
court correctly examined the settlement agreement and did
not abuse its discretion in finding the agreement to be fair,
reasonable, and adequate.
V
The district court’s decision to grant discovery is
reviewed for abuse of discretion. Hallett v. Morgan, 296 F.3d
732, 751 (9th Cir. 2002). As a threshold matter, Singh has
standing to appeal the settlement’s deposition requirement
because the district court ordered that objectors comply with
the relevant settlement provision, and he was later required to
sit for a deposition as the sole objector.
The district court also did not abuse its discretion in
approving the settlement term that objectors be available for
depositions. Federal Rule of Civil Procedure 30(a)(1) allows
a party to conduct depositions, and courts commonly require
objectors to make themselves available for deposition given
the power held by objectors. See, e.g., In re Netflix Privacy
Litig., 289 F.R.D. 548, 554 (N.D. Cal. 2013) (finding that
objectors “have voluntarily inserted themselves into this
action, and as such, depositions . . . are relevant and proper”);
In re TFT-LCD (Flat Panel) Antitrust Litig., No. M 07-
1827SI, 2013 WL 621791 (N.D. Cal. Feb. 19, 2013) (holding
objectors in contempt for refusing to be deposed); In re
Cathode Ray Tube (CRT) Antitrust Litig., 281 F.R.D. 531,
533 (N.D. Cal. 2012). The district court considered the
totality of the circumstances when it concluded that a
LAGUNA V. COVERALL NORTH AMERICA 15
deposition of Singh was appropriate, including the
deposition’s utility to the court and the scant possibility that
Singh would be harassed or intimidated by giving a
deposition, and the district court was well within its
discretion in so concluding.
VI
Finally, the district court did not abuse its discretion when
it approved the settlement agreement consistent with the
Class Action Fairness Act (“CAFA”) notice requirement
described in 28 U.S.C. § 1715(b) and (d). CAFA requires
that defendants in a class action suit send notice to all
relevant state and federal authorities where class members
reside. 28 U.S.C. § 1715(b). A court may not issue an order
giving final approval of a proposed settlement until 90 days
have passed since the relevant authorities were served with
notice. 28 U.S.C. § 1715(d). When violations of the
28 U.S.C. § 1715(b) notice requirement occur, “[a] class
member may refuse to comply with and may choose not to be
bound by a settlement agreement or consent decree.”
28 U.S.C. § 1715(e)(1). Rather than asking to be exempt
from the settlement agreement, Singh demands relief beyond
the scope of 28 U.S.C. § 1715—the rejection of the entire
settlement agreement. Because Singh requests no relief tied
to § 1715, he cannot show that a “favorable decision will
provide redress,” and thus he lacks standing on this claim.
See Knisley v. Network Assocs., Inc., 312 F.3d 1123, 1126
(9th Cir. 2002). And even if Singh had standing to pursue
this claim, it is without merit because the class was clearly
limited to “individuals in the State of California,” and
Coverall properly notified the Attorney General of California.
16 LAGUNA V. COVERALL NORTH AMERICA
VII
The district court did not abuse its discretion in finding
the settlement agreement and its attorneys’ fee award to be
fair, reasonable, and adequate. The district court also
appropriately exercised its discretion in ordering that Singh
be available for a deposition.2
AFFIRMED.
2
Although we do not agree with the thoughtful comments of our
dissenting colleague, class action settlement approval is important, and
bench and bar benefit from the expression of more than one view. We
diverge from the dissent on the level of deference to be given to the
district court overseeing the adversarial process, and our disagreements
largely follow from that. Neither our precedent nor that of the Supreme
Court requires the approach taken in dissent. The dissent urges positions
that our precedent to date has not required, such as the assignment of a
particular monetary value to injunctive relief. This case was hard fought
by skilled lawyers for years, the injunctive terms of the settlement are in
our view not illusory because they have practical value, and Plaintiffs’
class action theory was under serious threat by developing Supreme Court
precedents. The district court was well positioned to follow the case’s
progress. The development of the parties’ settlement was aided by a
retired federal judge acting as mediator. We review the district court’s
approval of the settlement for abuse of discretion, and here the district
court did not proceed illogically, improbably or without support from
inferences drawn from facts in the record. Hinkson, 585 F.3d at 1251. All
things considered, we view the settlement as reasonable and within the
range that we should approve.
LAGUNA V. COVERALL NORTH AMERICA 17
CHEN, District Judge, dissenting:
With reluctance, I dissent from the majority decision
affirming the district court’s approval of the proposed class
action settlement. The record below is bereft of crucial
information – information without which the district court
could not fully review either the adequacy of the settlement
or the reasonableness of the fee award. In particular, the
record is silent as to two essential matters: (1) the portion of
the class eligible to receive the chief non-monetary benefit of
the settlement (i.e., the assignment of customer accounts to
current franchisees) and (2) the value of the monetary relief
to the class (and whether there is a justification for imposing
a claims process with a reverter of unclaimed funds back to
the defendant). The case should be remanded for fuller
development of the record. I also believe this case affords
this Court an opportunity to provide additional guidance to
the district courts in their assessment of proposed class action
settlements.
I am well aware that there are good reasons for a district
judge to afford deference to a settlement reached by
agreement between the parties. See Lane v. Facebook, Inc.,
696 F.3d 811, 819 (9th Cir. 2012) (noting that one factor for
a court to consider in determining the fairness of a class
action settlement is the experience and views of counsel).
The parties know more about the case and the factors that
lead to settlement than the trial judge does; often there are
facts beyond the record (such as the finances or future
business plans of the defendant or infirmities with the
plaintiff’s ability to prosecute the case) which can have a
substantial and legitimate influence on settlement
negotiations. I also recognize that there are good reasons for
an appellate court to defer to the trial judge’s approval of a
18 LAGUNA V. COVERALL NORTH AMERICA
settlement. See Hanlon v. Chrysler Corp., 150 F.3d 1011,
1026 (9th Cir. 1998) (stating that “[o]ur review of the district
court’s decision to approve a class action settlement is
extremely limited”). The trial judge generally is in a better
position to ferret out the relevant factors and to discern the
subtle dynamics of the litigation warranting approval of a
negotiated settlement. See id. (stating that “the decision to
approve or reject a settlement is committed to the sound
discretion of the trial judge because he is ‘exposed to the
litigants, and their strategies, positions and proof’”).
Nevertheless, the district court has an important and
meaningful role to play in the settlement of a putative class
action. In particular, the district judge has a fiduciary duty to
safeguard the interests of the absent and putative class
members. See, e.g., Sullivan v. DB Invs., Inc., 667 F.3d 273,
319 (3d Cir. 2011) (stating that “‘trial judges bear the
important responsibility of protecting absent class members,’
and must be ‘assur[ed] that the settlement represents adequate
compensation for the release of the class claims’”); Maywalt
v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1078 (2d
Cir. 1995) (noting that “the district court has a fiduciary
responsibility to ensure that the settlement is fair and not a
product of collusion, and that the class members’ interests
were represented adequately”) (internal quotation marks
omitted). That duty is especially important when the interests
of the class and its counsel negotiating on its behalf are not
aligned. See Reynolds v. Benefit Nat’l Bank, 288 F.3d 277,
279–80 (7th Cir. 2002) (stating that the problem that class
counsel “may, in derogation of their professional and
fiduciary obligations, place their pecuniary self-interest ahead
of that of the class . . . requires district judges to exercise the
highest degree of vigilance in scrutinizing proposed
settlements of class actions”). Moreover, where the
LAGUNA V. COVERALL NORTH AMERICA 19
settlement agreement is negotiated prior to final class
certification, “There is an even greater potential for a breach
of fiduciary duty owed the class during settlement.” In re
Bluetooth Headset Products Liability Litigation, 654 F.3d
935, 946 (9th Cir. 2011). Thus, in this case, an “even higher
level of scrutiny than that ordinarily required under Rule
23(e)” is warranted. Id.
The terms and structure of the proposed settlement herein
warrant meaningful scrutiny. Its approval must be supported
by the record. Unfortunately, though the district judge
plainly took this duty seriously, I believe the requisite
scrutiny was not possible given the deficiencies in the record.
The district court’s task was compounded by the lack of
clarity in this Circuit’s law on particular issues discussed
below.
I.
Although the majority addresses the reasonableness of the
fee award before addressing the reasonableness of the
settlement’s substantive terms, review ordinarily begins with
the adequacy of the settlement itself. See Bluetooth, 654 F.3d
at 941. Therefore, I address the adequacy of the settlement
first.
Under Federal Rule of Civil Procedure 23(e), a class
action may be settled only with the approval of the district
court, and “[a] district court’s approval . . . must be
accompanied by a finding that the settlement is ‘fair,
reasonable, and adequate.’” Lane, 696 F.3d at 818. Here, a
higher standard of fairness is required because the settlement
took place before formal class certification. See id. at 819.
20 LAGUNA V. COVERALL NORTH AMERICA
A district court must consider a number of factors in
determining whether a proposed settlement is fair and
adequate; these include:
the strength of the plaintiffs’ case; the risk,
expense, complexity, and likely duration of
further litigation; the risk of maintaining class
action status throughout the trial; the amount
offered in settlement; the extent of discovery
completed and the stage of the proceedings;
the experience and views of counsel; the
presence of a governmental participant; and
the reaction of the class members to the
proposed settlement.
Id. See Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566,
575 (9th Cir. 2004).
In the case at bar, the district court adequately considered
many of the Lane/Churchill factors, including the risk of
further litigation. It properly found, for example, that there
was a risk class claims could have been forced into individual
arbitration pursuant to AT&T Mobility v. Concepcion, 131 S.
Ct. 1740 (2011). There was also a risk in obtaining class
certification in light of Wal-Mart Stores, Inc. v. Dukes, 131 S.
Ct. 2541 (2011). Many of the other factors supported
approval.
However, in my view, the district court’s order – although
thorough in most respects – did not adequately assess a
critical factor: the amount offered in settlement. Although
Lane does not expressly order the importance of the
assessment factors, inescapably, the core of any settlement is
“the amount offered in settlement.” In this regard, the district
LAGUNA V. COVERALL NORTH AMERICA 21
court’s order did not determine whether the most significant
terms of the settlement were real or largely illusory. See In
re Dry Max Pampers Litig., 724 F.3d 713, 721 (6th Cir. 2013)
(stating that “[t]he relief that this settlement provides to
unnamed class members is illusory” and therefore finding the
settlement unfair); cf. Dennis v. Kellogg Co., 697 F.3d 858,
868 (9th Cir. 2012) (stating that dollar value of the cy pres
fund should not be fictitious).
Under the settlement, there were two classes that would
receive benefits: (1) current franchisees and (2) former
franchisees. Current franchisees obtained certain equitable
relief – most notably, the assignment of customer accounts
which would confer upon the franchisees economic value that
could not summarily be taken away. As for former
franchisees, each was entitled to $475 in cash and a credit of
$750 (in effect, a coupon) which could be used to purchase a
new Coverall franchise. For the reasons discussed below,
both aspects of the settlement are problematic, and a fuller
record is required in order to properly assess the fairness,
reasonableness, and adequacy of the settlement.
A.
Current Franchisees: Assignment of Customer Accounts
For current franchisees, the primary benefit of the
settlement was the assignment of customer accounts. The
centrality of this benefit is clear: a major claim asserted by
Plaintiffs in this action was a breach of contract based on
Coverall’s “churning” of customers accounts. Churning
involves taking a customer account away from a franchise
owner for a pretextual reason in order to resell the customer
account to a different franchise owner. If accounts were
22 LAGUNA V. COVERALL NORTH AMERICA
assigned to franchise owners, that would prevent the practice
of churning.
The importance of the assignment provision is
underscored by the district court’s order as well as the
parties’ briefs presented to this Court. The district court
stated in its order that “[t]he [Settlement] Agreement provides
separate benefits for current and former franchisees.
Principally, Coverall pledges to assign customer accounts to
current franchisees.” ER 23 (emphasis added); see also ER
25 (stating that “assignment of customer accounts and
pledges for programmatic changes are significant victories”1).
Similarly, in Plaintiffs’ appellate brief, the first benefit
highlighted is the assignment of accounts, with Plaintiffs
touting that “[t]he value of the assignment . . . is estimated to
be worth $18 to $20 million per year in California alone.”2
Pls.’ Resp. Br. at 6. Defendants did the same in their own
appellate brief. See Defs.’ Resp. Br. at 36–40.
Because the assignment was the primary benefit of the
settlement for current franchisees, the district court had a duty
to ensure that this benefit had real value. Notably, the burden
of proving that the assignment had real value lay with the
settling parties; it was not Mr. Singh’s burden to disprove it.
See In re Dry Max Pampers Litig., 724 F.3d at 719 (“[T]o the
extent the parties here argue that the settlement was fair
1
As noted below, the district court “lumped” the programmatic changes
together and did not call out any of the changes as being particularly
meaningful. See note 5, infra.
2
Plaintiffs also argue that it is fair for current franchisees not to get a
monetary award because they “would receive a significant benefit by way
of the assignment of customer accounts.” Pls.’ Resp. Br. at 9.
LAGUNA V. COVERALL NORTH AMERICA 23
because the refund program has actual value for consumers,
it was the parties’ burden to prove the fact, rather than [the
objector’s] burden to disprove it.”).
As to whether the assignment provision of the settlement
would actually benefit current franchisees, that posed a
troubling question because, under the proposed settlement,
the assignment is conditional. See ER 73. That is, until a
current or new franchise owner pays for a customer account
in full (i.e., the full franchise fee, including any financed
portion), there is no actual assignment, and customer accounts
can continue to be taken away pursuant to the old just or good
cause standard.3 But the record contains no information as to
how many or what percentage of franchise owners have paid
their fees in full. In particular, there is no information about
how many franchise owners still owe money on their
franchise fees (and if so, how much); how long it takes an
average franchise owner to pay off a franchise fee; and
whether franchise owners typically leave before they are able
to pay off their franchise fees in full.4 This is significant
because Mr. Singh, the objector, asserted in argument before
this Court that a substantial number of franchisees finance
their franchise fees. See also Pls.’ Op. Br. at 10 n.3 (claiming
that, “[t]ypically, Coverall workers make a down payment
toward [the franchise] fee [which ranges from approximately
3
See ER 76 (providing that “[n]othing in this Agreement shall modify,
amend, or otherwise alter . . . the rights and obligations of Coverall and
Current and Former Franchise Owners under their respective Janitorial
Franchise Agreements, which, except as expressly set forth herein, remain
in full force and effect”).
4
The fact that the named Plaintiffs might have been entitled to an actual
assignment does not speak to whether this was true of the remaining class
members (approximately 750 current franchise owners).
24 LAGUNA V. COVERALL NORTH AMERICA
$10,000 to $32,000] and then finance the remaining portion
of the fee by borrowing it from Coverall for a two or three-
year period (at 12% interest)”; adding that, “[w]hen workers
lose accounts and want to obtain more work, they may do so
by then paying fees for ‘additional business,’” and these fees
must also be paid off before any assignment). On the current
record, we do not know whether 5%, 50%, or 95% of the
class will or will likely receive the benefit of the assignment
of accounts.
Moreover, even if a significant portion of current
franchisees were actually able to pay off their franchise fees
and thus get an assignment, the parties’ claim that the value
of the assignment was $18–20 million is still problematic.
The parties asserted this value because the gross billing of
customer contracts in California in the year 2010 was $18–20
million. See Pls.’ Resp. Br. at 6. But under the settlement
agreement, certain customer accounts are deemed not
assignable. See ER 73 (providing that “certain accounts,
including National Accounts, customer prepared contracts
that preclude assignment, and local multiple location
customer contracts are not assignable”). There does not
appear to be any information in the record as to how many
customer contracts fall within this category, or their worth.
Thus, the claimed $18–20 million value of the assignment
may well be inflated. The district court’s order did not
address this issue.
Furthermore, although the district court acknowledged
that the assignment of accounts may not have the full $18–20
million value claimed by the parties because of the
conditional nature of the assignment, see ER 30 (“Indeed, it
is unclear whether the assignment of all accounts to
franchisees will reach the $ 18-20 million Plaintiffs claim,
LAGUNA V. COVERALL NORTH AMERICA 25
especially because assignments are only conditional until
franchises are paid for in full.”), it did not estimate – indeed,
had no basis in the record to estimate – what portion of the
class would actually benefit from the assignment. The
district court could only state that, “once franchisees are
assigned, franchisees will own a value business they can
choose to sell or continue to operate.” ER 30.5
5
The majority points out that, under the settlement, there were also
programmatic changes made for the benefit of current franchisees.
However, several of the benefits seem relatively modest; others appear to
depend on an account actually being assigned to a current franchisee.
Benefits in the latter category have no value if there is not an assignment
in the first place. The programmatic changes include the following:
(1) “Commencing sixty (60) days after the Effective Date, New
Franchise Owners shall be granted a thirty (30) day option to rescind
their [Janitorial Franchise Agreements],” and “all monies they paid
to Coverall, less the then-current cost of Coverall’s background
investigation, which is currently $75.00,” shall be returned to them.
ER 74. Notably, this benefit accrues to new franchisees only – i.e.,
those persons or entities who enter into a JFA after the effective date
of the settlement. See ER 71. Furthermore, the new franchisees
would simply be getting their money back in return for giving back
the franchises, and the amount of money would likely be limited
given that only a 30-day period is covered and it is not unusual for
franchises to be financed. See ER 138.
(2) “Coverall will agree to re-purchase from Current and New Franchise
Owners all accounts that are in good standing, both financially and
operationally . . . .” ER 74. It is not clear whether Coverall can re-
purchase customer accounts unless the franchisees actually have been
assigned the accounts in the first place. Although Defendants’ brief
suggests that repurchase without assignment is possible, that is not
evident from the face of the settlement agreement, and the record
does not clarify this point.
(3) “Current and New Franchise Owners may cease servicing a customer
for non-payment at any time they see fit . . . .” ER 75. Plaintiffs’
26 LAGUNA V. COVERALL NORTH AMERICA
The majority correctly states that the district court
ordinarily need not necessarily place a specific monetary
brief indicates that this right applies only where there has been an
assignment of an account in the first place. See Pls.’ Resp. Br. at 6
(“As part of Coverall’s assignment of customer accounts to current
franchisees, franchisees shall have the right to cease servicing a
customer for non-payment at any time they see fit . . . .”); see also AR
171 (declaration of class counsel, noting the same).
(4) “[T]he term of the post-termination and post-expiration
noncompetition clause set forth in the FJAs shall be reduced from
eighteen (18) months to twelve (12) months.” ER 75.
(5) “Coverall will offer to replace any customer account that is lost with
one or more customer accounts of equal or greater monthly dollar
volume within a reasonable period of time of the account loss, as long
as the customer account is lost through no fault of the Franchise
Owner . . . ; and (ii) the customer account is lost within the applicable
guarantee period as set forth in the JFA.” AR 75. Similar to above,
it is not clear from the face of the settlement agreement or the record
below whether this benefit applies only if the franchisee actually
owns (i.e., has been assigned) the account.
(6) “Coverall . . . represents that it shall continue to attempt to offer
Franchise Owners accounts that are located within a reasonable
proximity of each other.” AR 75.
(7) “Coverall shall provide, and all new Franchise Owners shall be
required to attend, Initial Training on the operation of a franchise
business, record keeping, and the bidding of customer accounts.
Current Franchise Owners will be permitted, but are not required, to
attend such training. . . . Coverall’s training materials shall be
available in both English and Spanish.” AR 75.
(8) “Coverall will include in the disclosure document it gives to
prospective franchisees the terms and conditions of coverage under
the commercial general liability policy that it is then making available
to Franchise Owners.” AR 76.
LAGUNA V. COVERALL NORTH AMERICA 27
value on injunctive relief. See, e.g., Staton v. Boeing Co.,
327 F.3d 938, 959 (9th Cir. 2003) (stating that courts cannot
“judge with confidence the value of the terms of a settlement
agreement [in which] the settlement provides for injunctive
relief”). Still, given the importance of the “amount offered in
settlement” in assessing the fairness and adequacy of a class
settlement, valuation of benefits should be “examined with
great care.” Dennis, 697 F.3d at 868 (finding the settlement
valuation “unacceptably vague and possibly misleading” and
noting that “[t]he issue of the valuation . . . must be examined
with great care to eliminate the possibility that it serves only
the ‘self-interests’ of the attorneys and the parties, and not the
class, by assigning a dollar number to the fund that is
fictitious”). In any event, while it is true that equitable relief
sometimes is not capable of quantitative valuation (for
example, where equitable relief is directed to dignitary
interests such as privacy rights), where that relief has some
calculable monetary value and is central to the relief
obtained, some meaningful effort should be made to
determine the “amount offered in settlement.” Cf. Fed. R.
Civ. P. 23(h), 2003 advisory committee notes (stating that
“[s]ettlements involving nonmonetary provisions for class
members also deserve careful scrutiny to ensure that these
provisions have actual value to the class”).
In the case at bar, the assignment of accounts is capable
of quantitative valuation, even if that value cannot be
precisely determined. See, e.g., Staton, 327 F.3d at 978
(noting that value of benefits from injunctive relief may be
included in common fund calculation where value can be
accurately ascertained – e.g., in a prior case, there was clearly
a measurable benefit of one replacement latch for each
minivan owned, and thus the court could, “with some degree
28 LAGUNA V. COVERALL NORTH AMERICA
of accuracy, value the benefits conferred”).6 Indeed, as noted
above, the parties themselves valued the assignment at
approximately $18–20 million.7 See Pls.’ Resp. Br. at 6; see
also ER 74 (providing that “Coverall represents that, in 2010,
the gross billing of the customer contracts in the State of
California was approximately $20 million”). The factor that
is missing from the calculus (and missing from the record) is
the number or percentage of current franchisees who actually
will or, at least, will likely receive the benefit.
Absent anything in the record which would shed light on
this crucial variable, the district court was not in a position to
6
The majority correctly notes that Staton discussed the value of
injunctive relief in the context of analyzing fees. However, Ninth Circuit
law requires a district court to consider the “amount offered in settlement”
as a factor in deciding whether to approve a class action settlement, and
district courts have naturally considered the value of injunctive relief
under this factor (which is reasonable as there is no other factor that
accommodates consideration of the value of injunctive relief). See, e.g.,
Ko v. Natura Pet Prods., No. C 09-02619 SBA, 2012 U.S. Dist. LEXIS
128615, at *12–13 (N.D. Cal. Sept. 10, 2012). It makes little sense to say
that the value of injunctive relief should be considered for purposes of
evaluating fees but not for purposes of evaluating the value of the
settlement. Cf. Reynolds v. Beneficial Nat. Bank, 288 F.3d 277, 283 (7th
Cir. 2002) (reversing district court approval of class action settlement
based on various grounds, including the fact that there was “injunctive
relief the value of which no one has attempted to monetize and which is
barely discussed in the briefs or by the judge”).
7
The majority suggests that “the right to own a franchise with its
attendant rights and responsibilities” has an “amorphous” value. Maj. Op.
at 11 n.1. However, the value of the accounts that accompany the
ownership has real dollar value. Accordingly, the parties gave the
injunctive relief a quantitative value. Moreover, the district court did not
find that the right to own a franchise had less value because of “attendant
rights and responsibilities.”
LAGUNA V. COVERALL NORTH AMERICA 29
conclude that the settlement was fair, reasonable, and
adequate. Although “[w]e review the district court’s approval
of a class-action settlement for abuse of discretion,” Radcliffe
v. Experian Info. Solns., 715 F.3d 1157, 1162 (9th Cir. 2013),
and, under such review, “[w]e are not permitted to ‘substitute
our notions of fairness for those of the district court and the
parties to the agreement,’” Class Plaintiffs v. Seattle,
955 F.2d 1268, 1276 (9th Cir. 1992), a district court’s
approval cannot be affirmed where its “findings of fact were
. . . without support in the record.”8 Radcliffe, 715 F.3d at
1162. Here, the record was not sufficiently developed on
what should be a central factor in assessing the fairness,
reasonableness, and adequacy of the class settlement – “the
amount offered in settlement.” Lane, 696 F.3d at 819.
B.
Former Franchisees: Monetary Relief
With respect to the monetary portion of the settlement,
former franchisees are each entitled to $475 in cash and a
credit of $750 towards a purchase of a new Coverall
franchise. There were approximately 750 former franchisees
in the class. Therefore, Defendants would, in theory, pay a
maximum of $918,750 to former franchises.
The monetary terms of the settlement, however, are
suspect. Although the $918,750 class fund was identified as
a potential pay-out, neither side expected Defendants would
8
The majority concedes in its opinion that, even under
abuse-of-discretion review, a settlement cannot be approved if the district
court proceeded without support from inferences drawn from facts in the
record. See Maj. Op. at 16 n.2.
30 LAGUNA V. COVERALL NORTH AMERICA
actually pay anywhere close to this sum under the structure of
the proposed settlement. This is because, under the
settlement, (1) pay-outs would be made only to those class
members who submitted claims, and (2) any unclaimed funds
would revert back to Defendants rather than being
redistributed to claiming class members or distributed to a cy
pres beneficiary.
As district courts have pointed out, “in a reversionary
common fund or a claims-made settlement, the defendant is
likely to bear only a fraction of the liability to which it
agrees.” In re TJX Cos. Retail Sec. Breach Litig., 584 F.
Supp. 2d 395, 405 (D. Mass. 2008) (emphasis added); see
also Sylvester v. Cigna Corp., 369 F. Supp. 2d 34, 52 (D. Me.
2005) (stating that parties’ evidence indicated that “‘claims
made’ settlements regularly yield response rates of 10 percent
or less”; adding that “the parties’ expectations of a low
response rate gives the reverter clause real value for
Defendants”). Researchers and commentators have also
confirmed that, while results vary from case to case
depending on a number of factors, it is common that only a
fraction of the class in class action settlements actually
submit claims. See, e.g., Max Helveston, Promoting Justice
Through Public Interest Advocacy in Class Actions, 60 Buff.
L. Rev. 749, 782–83 (2012) (noting that there are “a variety
of different explanations” for low claims rates – e.g., “the
difficulty of notifying class members, the overly complex and
technical notifications that class members receive, the effort
required to pursue a claim, the lack of interest of class
members in the types of relief available, and the failure of
fund designers to design claim procedures in ways that take
into account cognitive biases” – but adding that, at the end of
the day, “class members in large class action suits typically
file claims at rates that are much lower than one would
LAGUNA V. COVERALL NORTH AMERICA 31
expect”); Mayer Brown LLP, Do Class Actions Benefit Class
Members?, available at http://www.mayerbrown.com/files/
uploads/Documents/PDFs/2013/December/DoClassActions
BenefitClassMembers.pdf (last visited Apr. 30, 2014)
(stating that “extremely small claim-filing rates [in several
cases] are consistent with the few other reports of claim rates
in class action settlements that have come to light”).
That is precisely, and predictably, what happened here.
With respect to the $475 cash payment, only 119 out of 750
former franchisees actually submitted claims. This amounts
to a response rate of about 16%, for a total of $56,525 out of
$356,250. As for the $750 coupon, of the 750 former
franchisees, only 34 made a claim for the coupon – a response
rate of about 4.5%. Thus, instead of a true pay-out of
$562,500 (with respect to coupons), Defendants would be
obligated to pay (or credit) at most $25,500, and this assumes
that all 34 former franchisees will actually use the coupon
once received.
At the end of the day, the purported settlement value of
$918,750 for former franchisees (covering both the $475 pay-
out and the $750 coupon) amounted to, at most, a true value
of only $82,025 (or a response rate of approximately 9%) –
and likely even less because some of the coupons claimed
probably will not be used. The unclaimed funds did not
benefit the class as they would revert back to Defendants.
This result was entirely predictable once the parties
stipulated to a claims process. This then begs the question
why the parties chose to require a claims process in the first
place. While there are situations in which a claims process is
unavoidable (such as a consumer class action where there is
no readily accessible record of purchases to identify class
32 LAGUNA V. COVERALL NORTH AMERICA
members and their contact information), in this case, it is not
obvious why a claims process was necessary. Compare In re
Wells Fargo Loan Processor Overtime Pay Litig., No. C-07-
1841 EMC, 2011 U.S. Dist. LEXIS 84541, at *22–23 (N.D.
Cal. Aug. 2, 2011) (explaining why “there is a valid and
substantial justification for the claims process”). As noted in
a Federal Judicial Center publication, a claims process is not
necessary in all cases:
“In too many cases, the parties may negotiate
a claims process which serves as a choke on
the total amount paid to class members.
When the defendant already holds information
that would allow at least some claims to be
paid automatically, those claims should be
paid directly without requiring claim forms.”
De Leon v. Bank of Am., N.A., No. 6:09-cv-1251-Orl-28KRS,
2012 U.S. Dist. LEXIS 91124, at *61 (M.D. Fla. Apr. 20,
2012) (quoting the 2010 version of the “Judges’ Class Action
Notice and Claims Process Checklist and Plain Language
Guide” produced by the Federal Judicial Center).
Here, the necessity of a claims process is not apparent
from the record. There was a set sum to be paid to each
former franchisee, so a claims process was not needed in
order for the parties to determine the appropriate amount of
damages for each former franchisee. No proof of claim was
needed to identify class members because Defendants already
had within their possession information identifying the
former franchisees. And presumably Defendants had the last
best address for each former franchisee: how else could they
send the claim forms to the franchisees? The record fails to
indicate why it was not feasible to send checks and coupons
LAGUNA V. COVERALL NORTH AMERICA 33
directly to class members rather than requiring a claims
process. See De Leon, 2012 U.S. Dist. LEXIS 91124, at *61
(finding a claim form procedure unreasonable because, inter
alia, defendant had databases that “enabled it to identify
approximately 500,000 cardholders who were assessed late
fees on timely payments made”); see also Mayer Brown LLP,
Do Class Actions Benefit Class Members? (noting that
automatic distribution settlements are possible where “class
members whose eligibility and alleged damages could be
ascertained and calculated – such as retirement-plan
participants in ERISA class actions”).
The decision to use coupons (or credit) as a benefit for
former franchisees towards the price of a new franchise also
raises questions about the adequacy of the settlement. As
noted in the Manual for Complex Litigation, coupons are
often illusory monetary benefits. See Manual for Complex
Litig., 4th § 21.61, at 310 (noting that a judge “should be
wary” of a proposed settlement that “grant[s] class members
illusory nonmonetary benefits, such as discount coupons for
more of defendants’ products, while granting substantial
monetary attorney fee awards”). The illusory value of the
coupon is particularly acute here: each former franchisee was
entitled to a $750 coupon to be used towards purchase for a
new Coverall franchise, but a franchise costs at least $10,000
and can be as high as $32,000. See ER 138. It was unlikely
that many of the $750 coupons would ever be claimed or
used. It is not surprising that only 4.5% of former franchisees
filed a claim for the coupon.
Finally, even if the claims process were justified, that
does nothing to justify the reverter of any unclaimed funds to
Defendants. The parties could have agreed (as many
settlements have) to a second distribution of residual funds to
34 LAGUNA V. COVERALL NORTH AMERICA
those former franchisees who did submit claims and/or a
distribution to a cy pres beneficiary. See, e.g., Garner v.
State Farm Mut. Auto. Ins. Co., No. CV 08 1365 CW (EMC),
2010 U.S. Dist. LEXIS 49477, at *49 (N.D. Cal. Apr. 22,
2010) (noting that, under the settlement, uncashed settlement
checks and unspent portions of the administrative cost reserve
will be redistributed to the class or given to a cy pres
beneficiary). At least this would have guaranteed a
meaningful and substantial payment to the class.
In sum, the monetary benefits to the former franchisees
was vastly overstated and largely illusory, thus raising
significant questions that deserve a meaningful degree of
scrutiny by the district court. Cf. In re Classmates.com
Consolidated Litig., No. C 09-45 RAJ, 2011 U.S. Dist.
LEXIS 17761, at *24 (W.D. Wash. Feb. 23, 2011) (stating
that, “where class counsel points to an illusory $9.5 million
benefit as justification for its own fee award, without
acknowledging that counsel expected the benefit to be
dramatically smaller, it illustrates the danger of deferring to
counsel’s view of a settlement that misaligns the interests of
class members and class counsel”). This is particularly
troubling given that Plaintiffs’ counsel was guaranteed
(subject only to court approval where Defendants agreed not
to oppose the motion) nearly $1 million regardless of the
amount of money actually claimed by the class.
The requirement of a claims process (without a substantial
justification) combined with a reversion of unclaimed class
funds back to the defendant was not a factor presented or
expressly discussed in Bluetooth. This Court in Bluetooth
identified three “subtle signs that class counsel have allowed
pursuit of their own self-interests and that of certain class
members to infect the negotiations” – including an
LAGUNA V. COVERALL NORTH AMERICA 35
arrangement for attorney fees not awarded to revert to the
defendant rather than to the class fund. Bluetooth, 654 F.3d
at 947. But for the same reason why a reverter of unawarded
attorney fees is a risk factor indicative of potential collusion,
the use of a claims process coupled by a reversion of
unclaimed class funds likewise presents such a risk. Indeed,
where the magnitude of the reverter of class funds is great, it
should raise even more serious questions than reverter of
unawarded fees.
II.
Because the reasonableness of the settlement’s
substantive terms could not be adequately determined based
on the record before the district court, the reasonableness of
the fee award also could not be appropriately assessed.
As noted above, where a case is settled prior to formal
class certification, a higher standard of fairness is required.
This higher standard is necessary precisely because, before
formal class certification, “there is an even greater potential
for breach of fiduciary duty owed the class” – i.e., there is an
even greater chance of collusion or conflicts of interest on the
part of the named plaintiffs and their attorneys. Bluetooth,
654 F.3d at 946. Moreover, it is important to take into
account that,
[i]n class-action settlements, the adversarial
process . . . extends only to the amount the
defendant will pay, not the manner in which
that amount is allocated between the class
representatives, class counsel, and unnamed
class members. For “the economic reality [is]
that a settling defendant is concerned only
36 LAGUNA V. COVERALL NORTH AMERICA
with its total liability[,]” and thus a
settlement’s “allocation between the class
payment and the attorneys’ fees is of little or
no interest to the defense.”
In re Dry Max Pampers Litig., 724 F.3d at 717 (citations
omitted).
In Bluetooth, this Court underscored that “[c]ollusion may
not always be evident on the face of a settlement, and courts
therefore must be particularly vigilant not only for explicit
collusion, but also for more subtle signs that class counsel
have allowed pursuit of their own self-interests and that of
certain class members to infect the negotiations.” Bluetooth,
654 F.3d at 947. As indicated above, Bluetooth identified
three such subtle signs:
(1) “when counsel receive a disproportionate
distribution of the settlement, or when the
class receives no monetary distribution but
class counsel are amply rewarded”;
(2) when the parties negotiate a “clear sailing”
arrangement providing for the payment of
attorneys’ fees separate and apart from class
funds, which carries “the potential of enabling
a defendant to pay class counsel excessive
fees and costs in exchange for counsel
accepting an unfair settlement on behalf of the
class”; and
LAGUNA V. COVERALL NORTH AMERICA 37
(3) when the parties arrange for fees not
awarded to revert to defendants rather than be
added to the class fund.
Bluetooth, 654 F.3d at 947.
In the case at bar, the second and third factors above are
clearly applicable, as the majority recognizes. This puts a
premium on the district court’s evaluation of the first
Bluetooth factor. However, the district court could not
evaluate whether the $1 million fee award constituted a
“disproportionate” distribution of the settlement without first
having a fair sense of the value of the overall settlement,
particularly the settlement’s key terms discussed above.
Furthermore, although not necessarily a subtle sign of
collusion in and of itself, the fact that the fee award here was
not tied to the magnitude of relief actually obtained by the
class amplifies the need for scrutiny. Here, class counsel had
no particular incentive to negotiate a settlement that would
ensure substantial benefits would actually accrue to the class.
Counsel’s fee was a stipulated sum unaffected by the actual
pay-out to the class. To the extent the parties based the fee
award in part upon a claimed settlement fund of over
$900,000 and the promised assignment of accounts, that basis
is misleading given that the class fund was largely illusory
and it was uncertain whether a substantial portion of the class
will benefit from the assignment. Although this Circuit has
sanctioned using the full class fund theoretically available as
a basis for evaluating the reasonableness of a negotiated fee
award, see Williams v. MGM-Pathe Communs. Co., 129 F.3d
1026, 1027 (9th Cir. 1997) (holding that the lower court had
“abused its discretion by basing the fee on the class members’
claims against the fund rather than on a percentage of the
38 LAGUNA V. COVERALL NORTH AMERICA
entire fund or on the lodestar”), such a practice tends to
divorce the class counsel’s incentives from the best interests
of the class. It is perhaps for this reason the Fifth Circuit
takes a different approach. See Strong v. Bellsouth
Telecomms., Inc., 137 F.3d 84, 852–53 (5th Cir. 1998)
(indicating that fee awards may be based on actual pay-out to
class rather than reversionary fund). Where fees are tied to
actual pay-out to the class, counsel has a strong incentive to
negotiate a real, rather than illusory, class fund. Under this
Circuit’s decision in Williams, however, that incentive may
be absent, and thus there is a need for meaningful scrutiny of
the settlement and fee award.
That scrutiny is particularly warranted here where, as
noted above, two of the three Bluetooth factors were clearly
met (i.e., the clear sailing and reverter arrangements).
Without a full record as to the value of the settlement, the
district court could not ensure that the fee award was not
disproportionate compared to the benefits to the class as
required by the third Bluetooth factor.
For example, the district court’s lodestar analysis was
problematic without a more fully developed record. In the
settlement, the parties had agreed to a fee award of
approximately $1 million. According to the district court,
this was a reasonable award because class counsel had
incurred approximately $3 million in fees in the course of
litigating the action. But even accepting that counsel had
legitimately incurred $3 million in fees (based on hours spent
and rates charged), that does not reflect a full lodestar
analysis. “[T]he fairness of the lodestar amount should be
gauged against the overall class recovery, adjusting the
lodestar fees upward or downward as necessary to ensure
their reasonableness. In doing so, the district court must
LAGUNA V. COVERALL NORTH AMERICA 39
weigh the requested lodestar figure against a variety of
factors, foremost among them the results obtained for the
class, monetary and non-monetary alike.” In re HP Inkjet
Printer Litig., 716 F.3d 1173, 1190 (9th Cir. 2013). Here,
even if we assume that the district court did an adjustment
based on results obtained (i.e., a downward adjustment from
$3 million to $1 million), the district court did not have a
complete basis for making the adjustment without a fuller
understanding of the value of the assignment of accounts –
the central benefit of the settlement.
The district court also performed a percentage method
analysis as a cross-check on the fee award. According to the
district court, “even if the cash settlement [for former
franchisees], the assignment of accounts [for current
franchisees], and the pledged programmatic changes [for
current franchisees] . . . were worth only about $4 million, the
requested fee award [of $1 million] would fit with[in] normal
bounds of class action recovery.” ER 31. Presumably, the
district court’s statement was informed by case law from this
Court using 25% of the common fund as a benchmark under
the percentage method. See Bluetooth, 654 F.3d at 942
(stating that, under the percentage method, “courts typically
calculate 25% of the fund as the ‘benchmark’ for a reasonable
fee award”); cf. Staton, 327 F.3d at 945–46 (noting that
injunctive “relief should generally be excluded from the value
of a common fund when calculating the appropriate
attorneys’ fee award, as the benefit of that relief to the class
members is most often not sufficiently measurable,” but
“[t]he fact that counsel obtained injunctive relief in addition
to monetary relief for their clients is . . . a relevant
circumstance to consider in determining what percentage of
the fund is reasonable as fees”). However, there is nothing in
the record upon which the district court could have based an
40 LAGUNA V. COVERALL NORTH AMERICA
assumption that the benefits of the settlement could be worth
$4 million. The value of the assignment to the class was on
this record entirely unknown since there is no information as
to the number or percentage of franchise owners who are
actually able or likely to receive the assignments of accounts.
While the district court is entitled to make estimates in
evaluating the reasonableness of the fee award, its
assumptions must have some basis in the record. Cf.
Radcliffe, 715 F.3d at 1162 (stating that a district court’s
approval of a class action settlement cannot be affirmed
where its “findings of fact were . . . without support in the
record”). In this case, that basis is absent. Cf. Bluetooth,
654 F.3d at 947 (district court must guard against risk that a
high fee award was traded for “lower monetary payments to
class members or less injunctive relief for the class than could
otherwise have been obtained”).
III.
On the record before this Court, I cannot conclude that the
proposed settlement was fair, reasonable, and adequate and
the fee award reasonable. Crucial information about the
value of the benefits obtained for the class (i.e., how many
franchisees will benefit from the assignment of accounts) is
missing. Also lacking is the justification for requiring former
franchisees to submit claims and providing for a reverter of
undistributed funds back to Coverall – while guaranteeing a
$1 million fee award to counsel.9
9
The majority cites the abuse of discretion standard of review
articulated in United States v. Hinkson, 585 F.3d 1247, 1250 (9th Cir.
2009) (en banc). Maj. Op. at p. 16 n.2. Although as a general matter, that
standard applies, Bluetooth provides a more specific application of that
standard to the situation at bar – review of a class action settlement prior
LAGUNA V. COVERALL NORTH AMERICA 41
The district court’s task in cases such as this could be
made more manageable were this Court to provide more
specific guidance on: (1) the centrality of the Lane/Churchill
factor “the amount offered in settlement” in assessing the
adequacy of class action settlements, and (2) the explicit
inclusion as a factor in Bluetooth the unjustified use of a
claims process and/or reverter of unclaimed class funds back
to the defendant – particularly if Williams continues to allow
fees to be based on size of the potential class fund rather than
actual pay-out to the class. This case affords the Court an
opportunity to provide that clarity.
I do not express any opinion whether ultimately the
substantive terms of the settlement or the fee award may in
fact be fair, reasonable and adequate, as the majority
concludes. Rather, I diverge from the majority because I
believe there are substantial questions about the fairness,
reasonableness, and adequacy of the proposed settlement that
cannot be answered without a fuller record and more
complete analysis.
For the foregoing reasons, I respectfully dissent.
to class certification where there are “subtle signs that class counsel have
allowed pursuit of their own self-interests . . . to infect the negotiations.”
Bluetooth, 654 F.3d at 947. Hence, even abuse of discretion review in this
context is not toothless. In any event, under Hinkson, for the reasons
stated above regarding the deficient record, the district court’s conclusion
as to the adequacy and fairness of the settlement and reasonableness of the
fee award was “without support in inferences that may be drawn from
facts in the record.” Hinkson, 585 F.3d at 1251.