Last year, this blog covered the Ninth Circuit’s
opinion in Allen v. Bedolla, vacating
a class action settlement for, among other reasons, the parties’ agreement to a
reversionary settlement. 787 F.3d 1218 (9th Cir. 2015). Since Bedolla was handed down from on high,
district courts throughout the Ninth Circuit have applied the teachings in Bedolla by increasing their scrutiny of
class action settlements containing reversions.
In a variation on the common
pairing of a claims-made, reversionary settlement, the parties in Banks v. Nissan North America, Inc., a
consumer class action related to faulty car brakes, agreed to a reversion of
any reduction in attorney’s fees ordered by the court. No. 11-CV-2022-PJH, 2015
WL 7710297, at *13 (N.D. Cal. Nov. 30, 2015). The district court denied
plaintiffs’ motion for final approval of class action settlement because, not
only did class counsel attempt to receive twelve times the amount paid to class
members, class counsel agreed to revert to defendant any “reduction of the
attorneys’ fee award.” Id. at *12. Put
more plainly, if the court found that class counsel was asking for too much
money from the class, then defendant would have received a windfall instead of
the class benefiting from the savings. Id.
at *13. While there were additional reasons given by the court for its denial
of final approval, the presence of a reversion was an important indication that
the proposed settlement was not “fair, reasonable, and adequate.” Fed. R. Civ.
Proc. 23(e).
Bedolla
has also been invoked to strike down a proposed class settlement where any funds
not claimed by the class would have been used to pay defendants’ employer taxes
instead of the class or cy pres. The
court in Sanchez v. Frito-Lay, Inc.
rightfully wondered “why it would be fair to the putative class members to
satisfy Defendant's employer payroll tax obligation out of the residual
settlement amount” instead of directing those funds to the cy pres. No. 1:14-CV-00797
AWI, 2015 WL 4662636, at *11 (E.D. Cal. Aug. 5, 2015) report and recommendation adopted, No. 1:14-CV-797-AWI-MJS, 2015 WL
5138101 (E.D. Cal. Aug. 26, 2015); see
also Millan v. Cascade Water Servs.,
Inc., 310 F.R.D. 593, 612 (E.D. Cal. 2015) (also citing to Bedolla, denying proposed class
settlement, and noting that “[i]f
unclaimed funds are to revert to a defendant the parties should explain why
those funds should revert to Defendant.”)
Furthermore, the court pointed out
that “[t]o the extent that the parties contend that this does not act as a reversion,
as the money is not directly returned to Defendant, the net effect is the same”
because “there is no indication that class members benefit from that provision
of the settlement.” Id. Just like
calling a clerical employee a “manager” does not make him so, parties cannot fix
the inherent problems with reversions in class settlements by sending the
class’s money to the IRS on behalf of the defendant instead of directly
returning the money to the defendant. Accordingly, the court kiboshed
plaintiffs’ motion for class and conditional certification.
Even where a proposed settlement is eventually
approved, a court is given pause by the presence of a reversionary settlement,
especially when attorney’s fees are pegged to the nominal common fund instead
of the percentage of the fund actually claimed by the class. For example, the
court in Tait v. BSH Home Appliances
Corporation was “concerned” about the presence of all three factors laid
out in Bedolla that indicate “class
counsel have allowed pursuit of their own self-interests … to infect
negotiations”:
(1) ‘when counsel
receive a disproportionate distribution of the settlement;’
(2) ‘when the
parties negotiate a “clear sailing” arrangement’ (i.e., an arrangement where
defendant will not object to a certain fee request by class counsel); and
(3) when the parties create a reverter that
returns unclaimed fees to the defendant.
No. SACV100711DOCANX, 2015 WL 4537463, at *5 (C.D. Cal. July
27, 2015), appeal dismissed (Jan. 13,
2016) (internal citations omitted) (emphasis added). Predictably, the court’s
reluctance to grant final approval was due, in part, to the caution in Bedolla “that proportionality should be
determined with reference to the actual amount paid to the class” rather than
the nominal value of the settlement without taking into account the unclaimed
funds that would revert to the defendant. Id.
at *6.
Importantly, the “problematic incentives
inherent” in reversionary settlements caused the court to discount the views of
counsel regarding the quality of the settlement despite acknowledging that
“[c]ounsel on both sides of this case are experienced litigators” and that
“[c]lass counsel competently investigated and litigated the factual and legal
issues raised in this action….” Id.
at *8. Thus, a court might take a dim view of class counsel, even exceptionally
qualified and diligent class counsel, if they support a reversionary settlement
on behalf of the class.
In sharp
contrast to the cases discussed above, the court in Aichele v. City of Los Angeles – a class action brought on behalf
of peaceful protestors whose constitutional rights were violated by Los Angeles
police officers – granted plaintiffs’ motion for attorney’s fees because “none
of the warning signs for a settlement that may be influenced by improper
favorable treatment of class counsel exists here.” No. CV1210863DMGFFMX, 2015
WL 5286028, at *6 (C.D. Cal. Sept. 9, 2015). The court supported its decision,
in part, by reference to the fact that none of the “class fund revert to
Defendants, and [do not] result in a highly disproportionate fee in relation to
the actual (as opposed to theoretical) monetary recovery of the class.” Id.; see
also In re High-Tech Employee Antitrust Litig., No. 11-CV-02509-LHK, 2015 WL 5158730,
at *14 (N.D. Cal. Sept. 2, 2015) (approving ~$40m in attorney’s fees for class
counsel in part because “Class Counsel [did not] agree that any portion of the
$415 million common fund could revert back to Defendants.”)
At best, reversionary
settlement agreements result in heightened judicial scrutiny of your proposed
class settlement and a judicial stink eye that may affect your reputation with
the court in the future. At worst, including a reversion will cause a court to
strike down what you have worked tirelessly to secure. With district courts
vigorously applying Bedolla and its
forbearers to class settlements, why risk including a reversion in your
hard-fought settlement?
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