Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—9th Cir.: Approval of class settlement affirmed; no need for monetary valuation of injunctive remedies, (Jun 4, 2014)

By Lorene D. Park, J.D.

In a class action against a janitorial franchising company alleging that it misclassified franchisees as independent contractors, a divided panel of the Ninth Circuit found no error in a district court’s approval of a settlement agreement that included a $475 payment and injunctive relief for each plaintiff and an attorneys’ fee award of $994,800. Contrary to the arguments of the sole objector, the attorneys’ fee award was reasonable given the contentious nature of the litigation, the skills and efforts of plaintiffs’ counsel and the risks of continued the litigation. Moreover, there was no need for the district court to assign monetary values to the injunctive remedies provided by the agreement (Laguna v. Coverall North America, Inc., June 3, 2014, Gould, R).

The plaintiffs brought this class action in 2009 against a janitorial franchising company, alleging that it misclassified its California franchisees as independent contractors, thereby avoiding the protections provided by California’s labor laws. They also alleged that the company breached its franchise agreements and committed fraud and unfair practices by removing customer accounts from franchisees without cause so it could resell the accounts to other franchisees. After two years of litigation, the parties agreed on a settlement. The sole objector filed an objection and, although it was not timely, the court considered the objection in the interest of the merits. After a fairness hearing, the court approved the settlement agreement under Rule 23(e).

On appeal by the objector, the most contested provisions in the expansive agreement included: (1) the company pledged to assign customer accounts to current franchisees, conditioned upon their payment of franchise fees in full; (2) former franchise owners would receive $475 each along with a $750 purchase credit toward a new franchise; and (3) new franchisees would have a 30-day right to rescind their franchise agreements and upon rescission would receive their money back except the $75 background investigation fee. Beyond the agreement, the objector opposed the award of $994,800 in attorneys’ fees to the plaintiffs’ attorneys.

Attorneys’ fees. Addressing attorneys’ fees first, the Ninth Circuit pointed out that the context here involved compromise and noted that it had previously made it clear that “since the proper amount of fees is often open to dispute and the parties are compromising precisely to avoid litigation, the [district] court need not inquire into the reasonableness of the fees at even the high end with precisely the same level of scrutiny as when the fee amount is litigated.” It also explained that the lodestar method is most appropriate where the relief sought is “primarily injunctive in nature,” and a fee-shifting statute authorizes “the award of fees to ensure compensation for counsel undertaking socially beneficial litigation.” That was precisely the situation here because the settlement provisions were mostly injunctive in nature and Sec. 17082 of the California Business and Professions Code is a fee shifting statute. Accordingly, the district court did not err in using the lodestar method in gauging the fairness of the fees award.

The appeals court also found that the court correctly calculated the lodestar amount, almost $3 million, and that an award of a third of that amount was reasonable. The lower court took into account that the case had been contentiously litigated for over two years and found that the over 4,500 hours billed by six attorneys, a paralegal, and a law clerk was fair and accurate. Moreover, the district court cross-checked the award amount against the alternative percentage-of-recovery method, as the appeals court had encouraged courts to do. “Generally, courts use a benchmark figure of 25 [percent] to gauge the reasonableness of an award under the percentage-of-recovery method, which is most appropriate in common fund settlement cases.”

Here, the value of the settlement, particularly the injunctive terms, was disputed. While the objector’s figure of $56,525 was clearly incorrect because it gave no value to the injunctive terms, the plaintiffs may have overstated the value of the settlement at $20 million. In the appellate court’s view, the lower court reasonably surmised that even if the value of the settlement was $4 million, the attorneys’ fee award would still be within the bounds of reasonableness. The appeals court rejected the objector’s argument that the fee award was unreasonable because the amount of the cash payments was so low. While the benefit obtained for the class is certainly important in determining whether to adjust the lodestar, the district court did not abuse it discretion in finding that the settlement contained significant non-cash benefits for the plaintiffs. The award was therefore reasonable.

Settlement was fundamentally fair. Turning to the settlement as a whole, the appeals court further found that the district court did not err in concluding that the proposed settlement was fundamentally fair as required by Rule 23(e). The court took into account that class certification might be difficult under California law following the Walmart Stores, Inc. v Dukes case and found that the poor financial health of the company here seriously increased the chance that the plaintiffs would be left with nothing if they continued to litigate their claims. The district court also determined that no governmental entity had weighed in on the matter; that the plaintiffs’ attorneys had significant experience and demonstrated skill and diligence; that only two class members had opted out of the agreement; and that the settlement would yield significant benefits to the plaintiffs given the risks and costs of continued litigation.

Non-monetary terms require no assigned monetary value. The appeals court rejected the argument by the objector that the district court was obligated to make clear, fact-based findings regarding the monetary value of the non-monetary terms of the settlement. The court explained: “we have never required a district court to assign a monetary value to purely injunctive relief. To the contrary, we have stated that courts cannot ‘judge with confidence the value of the terms of a settlement agreement, especially one in which, as here, the settlement provides for injunctive relief.’ Monetary valuation of injunctive relief is difficult and imprecise.” Thus, the district court had no obligation to make explicit monetary valuations of injunctive remedies.

Also rejected was the objector’s assertion that the district court erred by not conducting a heightened review, given “warning signs” indicating collusion. Although the district court did not explicitly outline the three warning signs set forth by the Ninth Circuit in In re Bluetooth Headset Prods. Liab. Litig., it was sufficient that the court addressed two of the three. Specifically, the lower court found the presence of a reversion clause (fees not awarded revert to the defendants rather than to the class fund), though not preferable, to be balanced against the overall benefits of the settlement to the plaintiffs and the fact that the cash payment represented a small amount of those benefits. In the appellate court’s view, balancing the reversion clause against the overall strength of the settlement was adequate. It also noted that the third warning sign (a disproportionate attorneys’ fee award) was not present. For these reasons, the district court correctly concluded that the agreement was fair, reasonable, and adequate.

Deposition requirement. The appeals court also concluded that the lower court did not abuse its discretion in approving the settlement term that objectors be available for depositions. Rule 30(a)(1) allows a party to conduct depositions and courts commonly require objectors to make themselves available given the power they hold. The court also noted the deposition’s utility and the scant possibility that the objector would be harassed or intimidated by giving a deposition.

CAFA requirements. Finally, the district court did not abuse its discretion when it approved the settlement agreement consistent with the Class Action Fairness Act (CAFA) notice requirement under 28 U.S.C. Sec. 1715(b) and (d). When a defendant violates CAFA’s notice provisions, a class member may refuse to comply with or be bound by the settlement agreement or consent decree. Here however, the objector did not ask to be exempt but demanded relief beyond Sec. 1715 by seeking rejection of the entire settlement agreement. Because he sought no relief tied to Sec. 1715, he could not show that a favorable decision would provide him redress and he therefore lacked standing on his claim.

Dissent. District judge Edward M. Chen for the Northern District of California, sitting by designation, dissented, finding that the case should be remanded for more factual development. Judge Chen found the record “bereft of crucial information” needed to fully review the adequacy of the settlement and reasonableness of the fee award. “In particular, the record is silent as to two essential matters: (1) the portion of the class eligible to receive the chief non-monetary benefit of the settlement (i.e., the assignment of customer accounts to current franchisees) and (2) the value of the monetary relief to the class (and whether there is a justification for imposing a claims process with a reverter of unclaimed funds back to the defendant).” Whether the assignment provision would actually benefit franchisees posed a “troubling question” because assignment is conditional upon the franchisee paying for a customer account in full. The record contained no information on how many franchise owners have paid their fees in full, how long it takes to pay off a fee on average, or whether franchisees typically leave before fees are fully paid. Chen also pointed out that the court did not address the fact that certain customer accounts were deemed not assignable and there was no information as to how many accounts fell within that category.

The case is No. 12-55479.

Attorneys: Norman M. Leon (DLA Piper) for Coverall North America, Inc. Shannon Liss-Riordan (Licthen & Liss-Riordan) for Amrit Singh. Raul Cadena (Cadena Churchill) for Sabrina Laguna.

Companies: Allied Capital Corp.; CNA Holding Corp.; Coverall North America, Inc.

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