District Courts in Ninth Circuit Increase Scrutiny of Reversions After Allen v. Bedolla (9th Cir. 2015)

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? 

Ninth Circuit Again Strongly Disapproves of Reversionary Settlements

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.