Monday, December 14, 2009

Death to the Reversionary, "Claims-Made" Settlement

One wage/hour settlement practice which both California and federal courts have rejected in recent years is the reversionary, or “claims-made,” settlement. In a reversionary or claims-made settlement, defendants receive a complete waiver and agree to pay an amount of money – and plaintiffs’ attorneys collect fees based upon a percentage of this amount of money – even though both sides know that defendants will only, in actuality, be paying a fraction of the agreed-upon amount.

The idea of a reversionary, claims-made settlement is that the defendants will actually be paying “up to” the amount indicated, depending on the number and value of the claims that are submitted. So, if only 50% of eligible claims are submitted, then defendants may wind up paying only half of the agreed-upon amount, with the rest reverting to defendants, though the plaintiffs’ attorneys still collect fees on the full settlement amount. Though many courts no longer permit this practice, defendants still frequently try to offer claims-made (aka reversionary) settlements (which can be easy to sell to the corporate client – “I know X sounds bad, but you’re really only paying Y, so don’t worry!”). Some plaintiffs’ counsel may still agree to claims-made/reversionary settlements, too – but I urge you not to do so!

One top plaintiffs' firm that now has an absolute policy not to enter into any claims-made, reversionary settlements is Schneider Wallace Cottrell Brayton Konecky, of San Francisco. In Kakani v. Oracle Corp., 2007 WL 1793774 (N.D.Cal. June 19, 2007) (Alsup, J.), the Northern District of California – an epicenter of nationwide wage/hour class and collective action litigation – denied preliminary approval to a claims-made settlement of $9 million, which would have awarded $2.25 million (25%) in attorneys’ fees to Schneider Wallace and their co-counsel for plaintiffs, regardless of how many claims were submitted. As Judge Alsup explained, rejecting the deal, the “$2.25 million might wind up being more in fees than the class receives in payments.” Id. at *5. See also Zucker v. Occidental Petroleum Corp., 192 F.3d 1323, 1329 (9th Cir. 1999) (after parties to a securities class action had agreed in settlement that class counsel would receive almost $3 million in fees, despite not securing any actual damages payable to class members, Ninth Circuit affirmed district court’s right to drastically reduce fee award, based on the rule that “the reasonableness of attorneys' fees is within the overall supervisory responsibility of the court in a class action”).

In Kakani, the Court explained that, “Such a [reversionary] scheme would be a bonanza for the company,” because Oracle would have eliminated all liability as to class members, regardless of how many claims they actually paid. Kakani, 2007 WL 1793774 at *5. Ultimately, the Northern District of California rejected the Kakani agreement, finding, “Without doubt, the main losers under this proposal would be those absent class members who wind up not submitting a timely claim and/or who never receive a notice letter in the first place.” The Court continued to state, “The Settlement Agreement expressly recognizes that some workers will never get any actual notice [e.g., because of bad addresses] and/or submit claims …. Nonetheless, Oracle specifically extracted a concession that all settlement amounts attributable to those workers would revert to Oracle…, yet those workers' rights would be erased.” Id.

The Kakani court effectively concluded what any lay person would know instinctively, looking at a class action settlement in which a company gets off the hook cheaply while the plaintiffs’ lawyers and representative plaintiffs make out big: that such a settlement does not suggest arms’-length bargaining, but rather, stinks of collusion. The inference may not be justified in every case - certainly even the most highly-regarded plaintiffs' attorneys, like Schneider Wallace, have at times (in the past) agreed to claims-made, reversionary agreements - but even this appearance of conspiracy can be and should be avoided, in my view.

California state courts have followed the Northern District of California’s lead in looking with disfavor upon reversionary, claims-made settlements, with one superior court judge in the complex litigation unit of Alameda County – a favorite place for plaintiffs to file wage/hour class actions – ruling unequivocally that, “The Court will not approve a settlement that contains a reversion to a defendant,” and denying proposed settlements on that ground. The judge in question, Steven A. Brick, relies upon “Managing Class Action Litigation: A Pocket Guide for Judges,” published by the Federal Judicial Center, which addresses reversion clauses and explains:

“A reversion clause creates perverse incentives for a defendant to impose restrictive eligibility conditions and for class counsel and defendants to agree to an inflated settlement amount as a basis for counsel fees. Instead of approving a settlement with a reversion clause, consider encouraging the parties to use an alternative approach, such as pro-rating the total settlement amount among the class members who file claims. Prorating is a straightforward way to avoid the possibility of unclaimed funds and has become a standard practice in class settlements."

Managing Class Action Litigation at p13.

Judge Brick has also issued guidelines for obtaining approval of a class settlement -

These guidelines cite the influential decision in Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal. App. 4th 116, 129-133, requiring parties seeking approval of a class settlement to demonstrate the true value to the class of the settlement, and showing that such represents a reasonable compromise. It is impossible to show the value of a settlement to the class, and hence, that the settlement value is reasonable, if a settlement promises money which ultimately reverts to the employer under the agreement’s terms.

There are many ways to avoid the pitfall of a reversionary, claims-made settlement – the first of which is for plaintiffs and their counsel, when negotiating an agreement, to absolutely reject any offer containing such a term, like Bryan Schwartz Law does and Schneider Wallace does. Defendants and their counsel should be made to understand that the dollar value reached at the end of the negotiation is the actual amount defendants are spending – and not a penny less. Waived claims should be paid claims. It is up to plaintiffs’ advocates to do everything we can to make sure that employers do not get off easy for their wage/hour violations – and claims-made, reversionary settlements are inherently an easy out for employers.

Rather than having a reversion, a settlement can contain terms having any unclaimed funds be distributed to the participating class members in a second allocation. If the remainder amount is modest, it should go directly to a suitable cy pres recipient. Indeed, if a claims-made settlement agreement does not state where unclaimed funds will go, then – at least in California – such funds will go to a cy pres recipient (under Cal. Code Civ. Pro. §384), and will not revert to defendants. Cundiff v. Verizon California, Inc. (2008) 167 Cal.App.4th 718, 721-722.

Without a reversionary/claims-made term of the agreement, the parties to settlement and absent class members share a common interest – maximizing participation in the settlement, so the largest number of people benefit from the agreement, and hence, release claims. The parties will thus collaborate on ensuring that class members are actually contacted and appropriately encouraged to step forward and assert their claims. This way, the settlement value will be the amount that gets into class members’ hands to quiet their claims – as it should be – and plaintiffs’ counsel will have amply justified his/her fee as a percentage of the common fund.

PS - I note, only as a footnote, because of its very limited application, that the Ninth Circuit has permitted, in one instance, a limited reversionary clause in an unpublished opinion, in Glass v. UBS Financial Services, Inc., 331 Fed.Appx. 452 (9th Cir. 2009), in which any attorneys' fees allocated in the settlement which were not approved by the Court would revert to the defendants. While describing the pitfalls of a reversionary provision, and noting that reversionary provisions are generally "problematic," the Ninth Circuit permitted this limited reverter in the Glass case based upon a specific finding that the class received "exceptional" results from the agreement notwithstanding the provision. Id. at **2.

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