California District Court Rejects Proposed Class Action Settlement

by BakerHostetler

Court Finds No Support For 33%+ Attorney Fee Award

It is axiomatic that the class action vehicle exists for the benefit of the claimants. An inherent conflict of interest may arise between the class and plaintiffs’ counsel over the issue of attorney fees, and resolution of that conflict may ultimately cause a court to reject a proposed settlement, as a recent case demonstrates. In Plaisted v. The Dress Barn, Inc., Case No. 2:12-CV-10451-ODW (SHx) (C.D. Cal. Apr. 8, 2013), the plaintiffs brought employment claims for underpayment of wages under California law both as a class and under the California Private Attorney General Act, better known as PAGA. The case, which involved approximately 300 class members, was settled for a total of $400,000. We’ll put aside for the moment the effect of claims being brought pursuant to PAGA.

The parties divided the $400,000 among two sets of claims, with $300,000 for one set and $100,000 for the other. The agreement provided that the plaintiffs’ attorneys would receive up to 33% of the $300,000 fund for attorney fees, and 50% of the $100,000 fund. Put another way, out of a $400,000 pool, up to $150,000 (or 37.5%) could go to the attorneys. The agreement further provided, as is true in many cases, that the defendant would not oppose the plaintiffs’ attorney fee application. Significantly, as the court found, even if the court did reject or reduce the attorney fee award, the difference would revert to the employer and not the class.

The court rejected the settlement. It noted that in common fund settlements, the normal range for attorney fees was between 20-30%. The court did NOT hold that the settlement could not be approved with the attorney fee provisions as is, but questioned how these provisions worked as a whole and noted no support in the record for such a fee award. In particular, the court found significant shortcomings in basic factual information such as the number of class members, the amounts they had claimed, the amounts they were to receive, and the value of injunctive relief. Put another way, the parties needed to show why the settlement was fair and reasonable to the class.

As to the $100,000 fund, the court noted that the total attorney fees and costs were $80,000, the state of California was to receive only $3,750 under PAGA, and the named plaintiff received a $15,000 incentive. Although the court left open the question of the parties being able to demonstrate the propriety of that aspect of the settlement, its opinion reflects skepticism, ending with the understated observation that “[t]hese proportions seem askew.”

The Plaisted decision is a reminder that some courts will scrutinize the attorney fee provisions of class action settlements for fairness and that larger percentage fee awards require additional support. It also highlights one of the difficulties with PAGA litigation from the plaintiffs’ perspective. Under PAGA, 75% of the amounts recovered must go to the state. Thus, even if the attorney fees are only 25%, if a case is settled under PAGA, the proposed class members will only receive at most 18.25% (25% of 75%) of the amount claimed. Put another way, for cases settled solely under PAGA, unless the attorney fees are less than about 20% of the amount paid, the attorneys will get more than the putative class members. We expect to see more courts questioning PAGA settlements as more plaintiffs rely upon that statute to avoid the higher hurdles they now face in traditional Rule 23 class litigation.

The Bottom Line: Attorneys seeking disproportionately large attorney fee awards as part of class action settlements need to show their work.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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