Opinion
No. 1:14-cv-00797-DAD-MJS
05-24-2016
ELIAZAR SANCHEZ, on behalf of himself and all others similarly situated, Plaintiff, v. FRITO-LAY, INC., Defendant.
ORDER DENYING MOTION FOR PRELIMINARY APPROVAL OF CLASS ACTION SETTLEMENT AND CONDITIONAL CLASS CERTIFICATION
(Doc. No. 20)
This putative class action arises from alleged violations of California wage and hour laws relating to maintenance mechanics. Before the court is plaintiff's unopposed motion for preliminary settlement approval and conditional class certification. (Doc. No. 20.) On May 3, 2016, this matter came before the court for hearing. Attorney Jerusalem Beligan appeared on behalf of plaintiff Eliazar Sanchez. Attorney Ashley Hirano appeared on behalf of defendant Frito-Lay, Inc. ("Frito-Lay"). For the reasons stated below, plaintiff's motion will be denied.
BACKGROUND
A. Procedural History
Plaintiff Eliazar Sanchez filed this putative class action in state court on April 11, 2014. The complaint states ten causes of action under California law: (1) failure to pay regular hourly wages, (2) failure to pay overtime wages, (3) failure to pay the correct overtime rate of pay, (4) failure to pay premium wages for denial of meal and rest periods, (5) failure to pay vested vacation wages, (6) illegal deductions of vested vacation wages, (7) breach of contract for failure to pay vested wages, (8) failure to pay final wages due upon termination, (9) failure to provide accurate itemized wage statements, and (10) violations of California Unfair Competition Law. (Doc. No. 1-3.) The putative class comprises non-exempt hourly employees of defendant, the owner and operator of distribution centers throughout California. Plaintiff generally alleges that defendant Frito-Lay implemented policies and practices that resulted in the alleged violations of employment laws. On May 23, 2014, defendant Frito-Lay removed the case to this court. (Doc. No. 1.)
After the class action was filed, class counsel investigated the claims further and determined that the contemplated class needed to be narrowed to cover only alternative work week employees (e.g., those working four ten-hour days a week) in the position of "Maintenance Mechanic." (Doc. No. 20-2 ¶ 11.) Accordingly, plaintiff proceeded on two primary allegations related to these employees. First, plaintiff alleges defendant Frito-Lay engaged in a company-wide practice by which employees were denied a second meal period for every shift of ten or more hours. Second, plaintiff alleges Frito-Lay's company-wide practice and written rest break policy failed to authorize and permit a third rest break for shifts of ten or more hours.
After submitting to mediation, the parties executed a settlement agreement. (See Doc. No. 9-3.) On December 11, 2014, plaintiff filed an unopposed motion for preliminary approval of the class action settlement and conditional certification of the class. (Doc. No. 9.) On January 30, 2015, the matter was presented before the assigned magistrate judge for a hearing. (Doc. No. 11.) The parties were directed by the magistrate judge to file supplemental briefing regarding a number of perceived deficiencies in the motion. (See id.) On August 5, 2015, the assigned magistrate judge issued findings and recommendations recommending that the motion be denied after concluding that plaintiff failed to provide sufficient information to establish a class or to permit a determination that the proposed settlement falls within the range of possible approval. (Doc. No. 16.) The then-assigned district judge adopted those findings and recommendations and denied plaintiff's motion. (Doc. No. 17.)
On December 4, 2015, this case was reassigned to the undersigned. (Doc. No. 18.) On January 14, 2016, plaintiff filed a renewed motion for preliminary approval and conditional class certification in response to the court's findings and included additional factual evidence supported by declarations of plaintiff Sanchez and his counsel. (Doc. No. 20.) On February 16, 2016, the matter came before the undersigned for hearing. At that hearing, the court noted that plaintiff's motion did not fully address the court's previously expressed concerns. The matter was continued for further hearing, and on April 19, 2016, plaintiff filed supplemental briefing and a revised settlement agreement in response to the modifications to the settlement terms suggested by the court at the February 16, 2016 hearing. (Doc. No. 27.)
B. The Proposed Amended Settlement Agreement
In response to the court's concerns, the parties executed an amended settlement agreement ("Amended Settlement"). (Doc. No. 27-2.) The Amended Settlement includes the following key provisions:
Class Definition (Amended Settlement § VIII.2). For settlement purposes, the class is defined as "all present and former employees of Frito-Lay, Inc. in the State of California who have held the title of Maintenance Mechanic or any similar position at any point between April 11, 2010, and March 10, 2015."
Settlement Fund (Amended Settlement § VIII.5). The parties agree to establish a settlement fund of $600,000.00, inclusive of attorney's fees, costs, and expenses; the incentive payment to the named plaintiff; payment to the Labor Workforce Development Agency; and all costs of administration, including settlement administration fees.
Attorneys' Fees and Costs (Amended Settlement § VIII.6). The Amended Settlement authorizes an award of up to $150,000.00 to class counsel in attorney's fees, which represents 25% of the total settlement fund. The Amended Settlement further authorizes an award of up to $20,000.00 to class counsel for costs.
Incentive Payment (Amended Settlement § VIII.8). The Amended Settlement authorizes an award of up to $7,500.000 to the named plaintiff as an incentive award. /////
Allocation Method (Amended Settlement § VIII.7). After deducting amounts for awards for fees, costs, incentive payment, PAGA payment, and claims administration expenses, the remaining fund will be allocated to settlement class members, which include those class members who submit a timely and properly completed claim form. The payout fund will be distributed based on the number of weeks each plaintiff worked as a Maintenance Mechanic during the applicable period. This figure is inclusive of the weeks worked by class members who have opted out or have not submitted claim forms.
Releases (Amended Settlement § VIII.3). "Class Members" (those who have not requested exclusion from the class) shall fully and finally release Frito Lay of any and all state law claims. "Settlement Class Members" (only those who return a claim form) also release Frito Lay of any and all federal law claims.
Unclaimed Settlement Funds (Amended Settlement § VIII.7(b)(iii)). All unclaimed settlement funds will be first used to pay any employer-owed payroll tax obligations arising from the payments made under the settlement agreement. Any remaining funds will be distributed cy pres to the United Way, with 50% of that distribution to be earmarked for a veterans' organization affiliated the United Way, if practicable.
LEGAL STANDARD & PROCESS FOR APPROVAL OF CLASS SETTLEMENTS
"Courts have long recognized that settlement class actions present unique due process concerns for absent class members." In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 946 (9th Cir. 2011) (citation and internal quotations omitted). To protect the rights of absent class members, Rule 23(e) of the Federal Rules of Civil Procedure requires the court approve all class action settlements "only after a hearing and on finding that it is fair, reasonable, and adequate." Fed. R. Civ. P. 23(e)(2); Bluetooth, 654 F.3d at 946. However, it has been recognized that when parties seek approval of a settlement agreement negotiated prior to formal class certification, "there is an even greater potential for a breach of fiduciary duty owed the class during settlement." Bluetooth, 654 F.3d at 946. Thus, the court must review such agreements with "a more probing inquiry" for evidence of collusion or other conflicts of interest than what is normally required under the Federal Rules. Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998); see also Bluetooth, 654 F.3d at 946.
When parties seek class certification for settlement purposes only, Rule 23 "demand[s] undiluted, even heightened, attention" to the requirements for certification. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997). Although here the parties do not dispute that the class exists for the purposes of settlement, the district court must examine the propriety of certification under Rule 23 both at this preliminary stage and at a later fairness hearing. See, e.g., Ogbuehi v. Comcast, No. 2:13-cv-00672-KJM-KJN (E.D. Cal. Oct. 2, 2014); West v. Circle K Stores, Inc., No. 04-cv-0438 WBS GGH, 2006 WL 1652598, at *2 (E.D. Cal. June 13, 2006).
Review of a proposed class action settlement ordinarily proceeds in three stages. See Manual for Complex Litigation (4th) § 21.632. First, the court conducts a preliminary fairness evaluation and, if applicable, considers conditional class certification. Id. Second, if the court makes a preliminary determination on the fairness, reasonableness, and adequacy of the settlement terms, the parties are directed to prepare the notice of certification and proposed settlement to the class members. Id. Third, the court holds a final fairness hearing to determine whether to approve the settlement. Id.; see also Narouz v. Charter Commc'ns, Inc., 591 F.3d 1261, 1266-67 (9th Cir. 2010).
DISCUSSION
Plaintiff asks this court to make a preliminary finding of fairness, reasonableness, and adequacy as to the Amended Settlement. For the reasons set forth below, the court concludes plaintiff has failed to establish that the Amended Settlement is fair or reasonable in light of the evidence before the court.
To assess the fairness of a settlement under Rule 23(e), district courts generally should weigh
(1) the strength of the plaintiff's 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 of the proposed settlement.Bluetooth, 654 F.3d at 946 (citing Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004). Prior to formal class certification, a preliminary fairness determination is appropriate "[i]f the proposed settlement appears to be the product of serious, informed, non-collusive negotiations, has no obvious deficiencies, does not improperly grant preferential treatment to class representatives or segments of the class, and falls within the range of possible approval." In re Tableware Antitrust Litig., 484 F. Supp. 2d 1078, 1079 (N.D. Cal. 2007).
In denying plaintiff's original motion for preliminary settlement approval, the court noted as follows:
Plaintiffs' assumed violation rate is further illustrative of the inadequacy of Plaintiffs' submission; this Court cannot satisfy its obligation to determine the fairness of the settlement agreement on behalf of the absent putative class members without requiring proof of a violation rate based on something more than Plaintiffs' conclusion. A full explanation of Defendant's relevant employment policies complimented by an explanation of how and how often they impacted the putative class members would likely go far to resolve those issues.(Doc. No. 17 at 2) (citation omitted). Plaintiff has submitted additional information and supplemental briefing in support of the instant motion. While plaintiff has now addressed some of the court's prior expressed concerns, counsel's explanation of how he determined a violation rate in this case raises significant concerns about the reasonableness of the settlement value and the degree to which the Amended Settlement was the product of serious and informed negotiations.
In this regard, plaintiff argues that in the face of the risks inherent in further litigation, the parties agreed to a compromise of $600,000.00, which represents roughly 44% of the $1,366,089.60 in liability resulting from defendant's alleged failure to provide adequate meal periods and rest breaks. (Doc. No. 20-1 at 12-13.) To establish a total value for plaintiff's meal period and rest break claims, plaintiff's counsel describes his review and analysis of a random sampling of time and payroll data of 31 of the 137 putative class members. (Doc. No. 20-1 at 17-18; see also Doc. Nos. 20-2 ¶¶ 12-17; 27 at 5.) Based on this sampling, plaintiff determined that class members routinely worked ten-hour shifts but took only one meal period and no more than two rest breaks. (Doc. No. 20-1 at 17.) Plaintiff's counsel assumed that on average, putative class members were subject to one meal period violation and one rest break violation per week. (Id. at 18.) Further, plaintiff's counsel calculated the total number of relevant workweeks by multiplying the number of class members (137 class members) by the number of weeks in the class period (241 weeks). (Id.) Based on pay stub data, plaintiff's counsel estimated that class members worked an average 33.6 full-time weeks per year, or 65% of the year. (Id.) To obtain a value for the claims at issue, plaintiff's counsel multiplied the assumed violation rate (1 violation/week), by the adjusted number of relevant workweeks (21,520 weeks), by the average hourly rate to be paid per violation ($31.74/violation). (Id.; Doc. No. 27-1 ¶ 5.) This resulted in a value of $683,044.80 for each type of violation, and a total value of $1,366,089.60 for both meal period and rest break violations. (Doc. No. 27-1 ¶¶ 5-6.)
Plaintiff's counsel states the adjusted number of relevant workweeks is 21,520. The court notes that according to plaintiff's own figures, this number should apparently be 21,461.05 (i.e., 137 x 241 x 0.65).
In response to the court's inquiry as to how plaintiff arrived at an assumed violation rate, plaintiff's counsel provided additional information in his supplemental briefing. (See Doc. No. 27.) Therein, plaintiff's counsel explains that the sampling of pay stubs indicated an average rate of two meal period violations and two rest break violations per week. (Doc. No. 27-1 ¶¶ 5-6.) Plaintiff's counsel multiplied this violation rate (2 violations/week) by 65%, based on reasoning that putative class members worked 65% of the year, to arrive at a violation rate of 1.3 violations per week. (Id.) Plaintiff's counsel then rounded this number down to the nearest whole number, or one violation per week, to obtain an assumed violation rate. (Id.)
Plaintiff's counsel's method for obtaining an assumed violation rate is perplexing at best, for at least two reasons. First, while it is certainly reasonable to adjust the number of relevant workweeks by the average percentage of weeks actually worked, it is unclear why such an adjustment needs to be made on a per-week violation rate as well. Such an adjustment effectively discounts plaintiff's total recovery value a second time. Second, plaintiff's counsel provides no explanation, in written submissions or at the further hearing on the pending motion, as to why the adjusted violation rate (1.3 violations/week) needed to be rounded down to a whole number. A violation rate represents the average number of violations each putative class member suffered on a weekly basis—not the actual number of real-world violations that occurred every week. As a result of counsel's discounting the violation rate (i.e., from two violations per week to one), plaintiff's valuation of his claims was effectively reduced by half. Thus, the parties' compromise represents only 22% of the class's potential recovery.
Despite the concerns expressed by the court at hearing, plaintiff's counsel requested preliminary approval of the Amended Settlement so that class members would be given notice and an opportunity to object to the settlement terms. The court is unmoved by this suggestion as plaintiff's proposed notices to class members provide no information as to plaintiff's valuation methodology. In any event, given counsel's apparent confusion about his own calculations, it would be unrealistic to expect class members to be able to raise such an issue in objections. --------
In light of the foregoing, this court cannot conclude that plaintiff has made an adequate showing sufficient to warrant a preliminary finding that the proposed Amended Settlement is fair, reasonable, and adequate. Although it is true that a settlement agreement amounting to a low percentage of the class's potential recovery does not render the agreement per se inadequate or unfair, see Officers for Justice v. Civil Serv. Comm'n of City & Cty. of San Francisco, 688 F.2d 615, 628 (9th Cir. 1982), plaintiff's counsel's miscalculations in this case raise significant concerns on the part of the court about whether he adequately represented the interests of the absent putative class members in settlement negotiations and the extent to which the Amended Settlement is the product of a well-informed negotiation. Procedurally, the parties appear to have engaged in a good-faith effort to engage in arms-length, non-collusive negotiations. However, assuming plaintiff's counsel relied on a faulty valuation, he severely compromised any potential recovery before arriving at the negotiating table and before the parties could account for other factors, such as the strength of plaintiff's claims and the risks and expenses of continued litigation. Thus, the settlement value as proposed appears to represent an unnecessary and unjustified discounting of plaintiff's claims.
Substantively, such an unjustified discounting of the putative class's claims presents a clear deficiency in the Amended Settlement. To address whether a proposed settlement is substantively fair or adequate, courts must "consider plaintiffs' expected recovery balanced against the value of the settlement offer." Tableware, 484 F. Supp. 2d at 1080. Here, the Amended Settlement provides 22% of the potential recovery value of the claims on which plaintiff has chosen to proceed. Without more, it is questionable that recovery under the Amended Settlement is reasonable or "within the range of possible approval." See id. at 1079. Moreover, under the terms of the Amended Settlement, all class members who do not affirmatively exclude themselves from the litigation release all state claims against the defendant, and class members who submit claim forms also waive their federal claims. Plaintiff has failed to make a preliminary showing that the value of the Amended Settlement is reasonable in light of such a broad release provision. Because the court cannot presume that such a settlement is reasonable, the court denies preliminary approval.
Because the court denies preliminary approval of the proposed settlement, it also declines to address whether plaintiff has provided sufficient information to certify the class for settlement purposes.
ORDER
For the reasons set forth above,
1. Plaintiff's motion for preliminary settlement approval and conditional class certification (Doc. No. 20) is denied; andIT IS SO ORDERED. Dated: May 24 , 2016
2. The matter is referred to the assigned magistrate judge for purposes of re-scheduling further proceedings in this action.
/s/_________
UNITED STATES DISTRICT JUDGE