Roes v. SFBSC Management, LLC: Ninth Circuit Reverses Class Settlement Approval and Outlines More Exacting Standard for Class Action Settlements
On December 11, 2019, the Ninth Circuit issued an important opinion regarding the standards for approval of class settlements. In Roes v. SFBSC Mgmt., LLC, No. 17-17079, 2019 WL 6721190 (9th Cir., Dec. 11, 2019), the Court reversed a district court’s approval of a class settlement, citing concerns about the settlement terms and counsels’ notice to class members. The Plaintiffs were exotic dancers who sued their employer in a class action for violation of the Fair Labor Standards Act (FLSA) and for various violations of state and city labor laws. The parties settled the class action, and the district court approved the settlement despite objections from absent class members regarding the benefit amount and alleged collusion between counsel.
On appeal, the Ninth Circuit agreed with the objectors and reversed the district court’s approval of the settlement. As an initial matter, the Ninth Circuit found that class notice was inadequate—both because the notice did not inform class members of related lawsuits and because it provided only for mail notice, without any electronic or reminder notice. The court determined that the latter did not meet Federal Rule of Civil Procedure 23’s mandate for the “best notice practicable,” particularly where some of the class members were transient (a notion which was reinforced by a high rate of undeliverable notices).
The Ninth Circuit also determined that the district court applied the wrong standard of review in approving the settlement. [1] The Court held that where a class settles before class certification, a “higher level of scrutiny” and a more “exacting” review must be conducted to prevent collusion. Id. at *10 (internal quotation marks omitted). The district court did not apply this higher standard and instead presumed that the settlement was fair and reasonable because it was negotiated at arms’ length with a mediator. The Court found that, had the district court applied the correct standard, there were several indicia of collusion including that the settlement had (1) a “clear sailing” agreement on the attorneys’ fees coupled with a disproportionate cash distribution to class members compared to the attorneys’ fees; (2) large incentive payments untethered from service to the class (here, $20,000 General Release Incentive Payments on top of a $5,000 incentive payment that did not appear connected to the class benefits or class members’ litigation services); and (3) a reversionary provision that would return unclaimed funds to the defendants.
Post-SFBSC Management, LLC, class action defendants should be prepared to meet a heightened standard of scrutiny in the Ninth Circuit to get class settlements approved. Here are a few other takeaways from the opinion:
- Defendants should also ensure that notice is provided not only by mail but by some electronic method as well, such as email, internet ad campaigns, or social media advertisements.
- Any notice should advise class members of any related lawsuits.
- “Clear sailing” provisions in which the defendant agrees not to challenge fee requests up to a certain amount should be approached with caution, and if they are used, the percentage of fees should not be disproportionate to the cash benefit to class members and the justification for the amount should be well documented.
- Any incentive payments to class representatives should be tied to class service and should not be tied to an additional release separate from the release that applies to the class.
- Courts are suspicious of reversionary provisions returning unclaimed funds to the defendant, and such provisions will be carefully scrutinized along with class member notice to ensure there is no evidence of collusion.
[1] Though the Court noted that the settlement had been approved prior to Congress revising Federal Rule of Civil Procedure 23(e) in 2018 to include a specific multi-factor test for review of settlement agreements, the Court noted that this did not affect its analysis and therefore did not decide whether the multi-factor test would apply retroactively.