A Precertification Class Action Settlement Must Be Looked At With A Higher Level of Scrutiny

The Ninth Circuit Court of Appeal has held that when the parties to a putative class action negotiate a settlement before a class has been certified, the district court must apply a higher level of scrutiny for evidence of collusion or other conflicts of interest before approving the settlement as fair. (See, Roes v. SFBSC Management, LLC - filed Dec. 11, 2019 - 2019 S.O.S. 17-17079.)

In, Roes v. SFBSC Management, LLC, the Ninth Circuit Court of Appeal reversed the district court’s approval of a settlement notice process and a class action settlement, negotiated without a certified class, in a case in which exotic dancers working at various nightclubs in San Francisco alleged they were misclassified as independent contractors rather than being treated as employees. Specifically, the Ninth Circuit held that the settlement notice did not meet the “best notice that is practicable under the circumstances” due process standard of Fed. R. Civ. P. 23(c)(2)(B). The content of the notice was adequate, even though it did not include information about related litigation, but the process used was inadequate because notice was sent only once by mail. The Ninth Circuit held that, in granting approval of the settlement as “fair, reasonable, and adequate” under Rule 23(e), the district court failed to apply the correct legal standard and conduct the heightened inquiry required for review of class action settlements negotiated without a certified class. Accordingly, the Ninth Circuit determined district court abused its discretion in approving the settlement. The Ninth Circuit further held that, when the parties negotiate a settlement before a class has been certified, the district court must apply a higher level of scrutiny for evidence of collusion or other conflicts of interest before approving the settlement as fair. This more exacting review is warranted to ensure that class representatives and their counsel do not secure a disproportionate benefit at the expense of unnamed plaintiffs. The Ninth Circuit concluded that the district court failed to investigate or adequately address numerous problematic aspects of the settlement and subtle signs of implicit collusion, including a clear sailing agreement, a disproportionate cash distribution to attorneys’ fees justified in part by potentially inflated non-monetary relief, large incentive awards to two plaintiffs, and reversionary clauses.