Approval of Class Action Settlement Required Reversal because (1) Record did not Support Trial Court’s Valuation of Class Claims, (2) Incentive Award of 44 Times Average Recovery of Class Members was Excessive, and (3) Trial Court could not Award Costs in Excess of Amount set forth in Class Notice without Further Notice to Class California Appellate Court Holds
Plaintiffs filed a putative class action in California state court against their employer, American Residential Services alleging labor law violations; the class action complaint alleged that defendant failed to pay minimum wage or overtime, and failed to provide meal and rest periods. Clark v. American Residential Services LLC, ___ Cal.App.4th ___, 96 Cal.Rptr.3d 441, 444 (Cal.App. 2009). Defense attorneys removed the class action to federal court under the Class Action Fairness Act (CAFA), but the district court granted plaintiffs’ motion to remand the class action to state court. Id., at 445. Eventually, the parties negotiated a settlement of the class action whereby the two named plaintiffs would receive $25,000 each, and the 2360 class members would receive an average of $560 each. Id., at 444. Additionally, plaintiffs’ attorneys would receive $640,000 in fees and costs as part of the class action settlement, id., at 445. Following notice, 20 members of the putative class objected to the settlement on the grounds that they “worked at least two hours of unpaid overtime every workday, that they would be compensated for only about 1% of the total value of their claims, and that no evidence was presented to the court to justify the settlement.” Id., at 444. According to the objectors, class members would receive only $6 for each week that they had worked for defendant. Id., at 445. Plaintiffs’ counsel responded that the overtime claim had “absolutely no” value, id., at 453. The trial court approved the class action settlement, but the Court of Appeal reversed.
The Court of Appeal noted that its review of class action settlements was “limited in scope.” Clark, at 451. The objectors argued that the trial court apparently relied on plaintiffs’ counsel’s belief that the overtime claim had “‘absolutely no’ value” despite objectors’ counsel’s belief that this evaluation was based on a “staggering mistake of law.” Id., at 444. The appellate court agreed, concluding that the trial court “did not receive and consider sufficient information on a core legal issue, affecting the strength of the case for plaintiffs on the merits, to make the requisite independent assessment of the reasonableness of the terms of the settlement.” Id., at 451 (citation omitted). Additionally, the Court held that “the enhancement or incentive awards were excessive” and that the trial court erred in awarding costs in excess of the maximum amount set forth in the notice to the class, id. The appellate court rejected the argument that the objectors had to prove the settlement was unfair, holding at page 453 that “it is the trial court’s duty, whether or not there are objectors, to employ those factors to evaluate independently the fairness of a proposed settlement.” And in this case, “the record before the trial court…did not contain the information required for ‘an understanding of the amount that is in controversy and the realistic range of outcomes of the litigation.’” Id. (citation omitted). The Court of Appeal held that “the trial court is obligated, at a minimum, to determine whether a legitimate controversy exists on a legal point, if that legal point significantly affects the valuation of the case for settlement purposes.” Id., at 455.
The appellate court further concluded that the trial court abused its discretion in awarding the named plaintiffs $25,000 each as an incentive award. Clark, at 455. The trial court gave no explanation for why it found the enhancement to be “fair and reasonable,” and the evidence provided by plaintiffs’ counsel consisted of “only conclusory declarations,” id., at 456. The appellate court concluded at page 457, “An enhancement that gives the named plaintiffs at least 44 times the average payout to a class member simply cannot be justified on the record in this case.” The Court of Appeal rejected plaintiffs’ claim that incentive awards are “presumed to be fair.” Id., at 457. Moreover, the award of costs could not stand because the notice to class members disclosed reimbursement of costs up to $40,000, but the trial court awarded more than $44,000. Id., at 458. In light of the express language of the notice, “the trial court was not at liberty to award an amount exceeding $40,000 in costs without further notice to the class.” Id.