Yesterday’s
decision by the Ninth Circuit in Allen
v. Bedolla is yet another
reason that class counsel should not agree to a reversionary settlement. As
discussed in previous posts to this blog in 2009 and 2014, as
well as other publications in 2010 and 2014,
such settlements should generally be rejected out of hand.
In Bedolla,
the Ninth Circuit vacated final approval of a settlement agreement with a reversion
to the defendant, again signaling its strong disapproval of such clauses. Allen v. Bedolla, WL 3461537
(9th Cir. June 2, 2015).
At issue in Bedolla were wage and hour complaints
regarding uncompensated waiting time violations and cash disbursement machines
that charged employees a fee to receive their paychecks. The parties settled
the case pre-certification for a gross settlement fund of $4.5 million.
However, the devil is in the details. All the money not paid towards attorney’s
fees, administrations costs, or to class members who submitted claims was
reverted to the defendant employer.
In vacating this settlement, the Ninth Circuit only reviewed the
settlement’s procedural fairness, i.e., whether the trial court properly
explained its decision that the settlement was fair, reasonable, and adequate –
not whether the settlement itself was a good deal. Id. Following its decision in In re Bluetooth Headset Products
Liability Litigation, the court was troubled by the presence of a reverter
to the defendant because reversionary settlements are a “subtle sign[] that
class counsel have allowed pursuit of their own self-interests … to infect the
negotiations.” Id.
(internal citation omitted). Even more troubling was the fact that the
attorney’s fees award was three times the “maximum possible amount of class
monetary relief.” Id. The
appellate court was dismayed that these seemingly self-interested terms were
not thoroughly explained by the trial court, and accordingly, remanded the case
to seek more thorough justification of the reversionary provision (among other
worrisome settlement conditions).
The Ninth Circuit’s decision makes sense. As explained by the
Federal Judicial Center’s publication,
“Managing Class Action Litigation: A Pocket Guide for Judges”:
A reversion clause creates perverse incentives for a defendant to
impose restrictive eligibility conditions and for class counsel and defendants
to use the artificially inflated settlement amount as a basis for attorney fees.
If you anticipate a low participation rate, as the attorneys in Bedolla did, then direct any unclaimed funds
on a pro rata basis to those class members who previously submitted claims. Bedolla, WL 3461537 at *5 n. 4
(“class counsel said that he would consider it a success if even 10% or 15% of
the class made claims”). For example, if a class member in the Bedolla case initially received $25, then that
member would receive $2.50 for every additional $1 received by a class member
that initially received $10. Pro rata distribution can be done in a second
payment, or (more cost-effectively) by increasing the allocations before the
initial distribution.
Another option is to designate a cy
pres beneficiary that
receives any unclaimed funds. This option is particularly advantageous when it
is difficult to contact class members or when the recovery for any one class
member is likely to be relatively low. One famous example is class members that
were overcharged on their taxi fares. Daar
v. Yellow Cab. Co., 135 Cal. 2d. 695 (1967). In such cases, the defendant
should not be able to benefit from low participation. Instead, a nonprofit that
serves the affected community should be awarded any unclaimed funds. For
example, in workers’ rights cases, funds should go to the Legal Aid
Society-Employment Law Center; Impact Fund; National Employment Law Association
Institute; the Foundation for Advocacy, Inclusion & Resources, or a similar
organization.
Whatever choice you make, avoid problematic reversionary
clauses, or risk your carefully negotiated settlement getting struck down on
appeal.
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