Cutting Class
June 4, 2009
Reprinted and/or posted with the permission of Daily Journal Corp. (2009).
Settling class actions is anything but typical. Rule 3.770 of the California Rules of Court conditions dismissal of class actions upon the plaintiff's submission of a declaration explaining the factual basis for the dismissal and any consideration received by the plaintiff. In Kullar v. Foot Locker Retail, Inc., 168 Cal.App.4th 116 (2008), the Court of Appeal reversed a class action settlement, despite acknowledging that it may very well have been reasonable and was reached in arm's-length negotiations by competent counsel with the assistance of an experienced mediator, on the ground that the trial court was not given sufficient evidence to approve the settlement. And now, in Watkins v. Wachovia Corp., 172 Cal.App.4th 1576 (2009), the Court of Appeal has given practitioners even more landmines to avoid in settling their class actions.
Watkins v. Wachovia Corp. was a putative class action where the plaintiff brought suit on behalf of all employees not paid overtime as a result of having been misclassified as exempt. After losing her class certification motion, the plaintiff and Wachovia entered into a settlement agreement in open court whereby Wachovia agreed not only to pay the plaintiff $51,000 (only $2,500 of which went toward her alleged lost wages), but also agreed to allow her to retain the right to assert class claims on behalf of the class should her appeal of the trial court's class certification ruling be granted. In exchange, Wachovia only required the plaintiff to release her individual claims, to waive any individual claim she might have if the class ultimately prevailed and to refrain from seeking or obtaining employment at Wachovia ever again.
That the plaintiff entered into such a deal is not surprising. She got paid, handsomely. And, if the class action was ever successful, her attorney would likely get paid too.
But, with the plaintiff no longer (legally) interested in the case, the appeal continued only at the insistence of her counsel.
For this reason, upon Wachovia's motion, the court dismissed the appeal as moot. The court explained: "When a plaintiff brings a class action, the plaintiff undertakes a fiduciary duty to the other members of the class, under which the plaintiff agrees not to settle the other class members' claims for the plaintiff's individual gain. But this duty should not be confused with an additional claim for relief. A representative plaintiff still only possesses a single claim for relief - the plaintiff's own. That the plaintiff has undertaken to also sue ‘for the benefit of all' does not mean that the plaintiff has somehow obtained a ‘class claim' for relief that can be asserted independent of the plaintiff's own claim."
By settling her individual claims, the plaintiff had no claim left on which to base her representation of a putative class.
In reaching this decision, however, Watkins diverged from another recent opinion of the 2nd District Court of Appeal, Larner v. Los Angeles Doctors Hospital Associates LP, 168 Cal.App.4th 1291 (2008).
In Larner, the plaintiff brought a class action lawsuit but ultimately lost her class certification motion. After the trial court's ruling, the parties settled and stipulated to an entry of judgment in favor of the defendant, with both the stipulation and judgment containing language specifically reserving the plaintiff's right to seek an appeal. Like Watkins, the Larner court dismissed the appeal as moot.
In contrast to Watkins, however, the Larner court did not find that the plaintiff's appeal was moot because she no longer had a claim with which to pursue a class action. Rather, the Larner court found that the plaintiff's appeal was moot because she had failed to reserve the right to shift attorney's fees to other class members.
To this end, the Larner court looked to prior federal decisions that applied a rationale that is used in what are commonly referred to as "pick off" cases. In these cases, defendants try to moot a class action by giving the named plaintiff - who has a small amount of damages - all of the relief claimed in the complaint, thereby "picking off" the named plaintiff and, theoretically, mooting the class action. In these types of cases, however, courts do not automatically grant a dismissal. Instead, courts will allow the class action to proceed if the named plaintiff still possesses an economic interest in class certification.
In Deposit Guaranty National Bank v. Roper, 445 U.S. 326 (1980), for example, the plaintiffs filed a class action against the defendant bank, alleging that finance charges made against their credit card accounts were usurious under Mississippi law. After the district court denied class certification, the bank tendered to each named plaintiff the maximum amount that each could have recovered. Although the named plaintiffs declined to accept the tender, the district court entered judgment in favor of the bank and dismissed the action involuntarily. The U.S. Supreme Court, however, found that the plaintiffs could still pursue their appeal because they desired to shift the costs of litigation - i.e., attorney fees - to the putative class members should the class be certified and ultimately prevail.
Despite the plethora of cases that hold that mootness depends on whether the named plaintiff possesses an economic interest in class certification, Watkins refused to apply the Roper rationale because the settlement at issue in Watkins was a voluntary one, and not a "pick off" settlement as in Roper.
"Often, a plaintiff brings an action as a class action ... because the attorney's fees involved in bringing the action individually would exceed the value of any judgment the plaintiff could obtain individually." As such, when a plaintiff is involuntarily "picked off," as in Roper, the relief provided by the defendant is inadequate; there are still attorney fees to contend with. It makes sense in that case to allow the plaintiff to continue to pursue the class action.
By comparison, a plaintiff who voluntarily settles his or her claims implicitly agrees that the offered amount fully satisfies his or her claims, thereby leaving no public policy reason for the class action to proceed in the plaintiff's absence. Whether the plaintiff has reserved the right to shift attorney fees is wholly irrelevant.
Practitioners should note, however, that in federal court, plaintiffs may still be able to voluntarily settle and dismiss their individual claims while proceeding with their class action. See, e.g., Richards v. Delta Air Lines, Inc., 453 F.3d 525 (D.C. Cir. 2006), in which the court applied the Roper economic interest test where the plaintiff voluntarily settled and found no difference between voluntary and involuntary extinguishment of claims; and Potter v. Norwest Mortgage, Inc., 329 F.3d 608 (8th Cir. 2003), in which the court applied the Roper economic interest test despite acknowledging that there is a distinction between voluntary settlement and involuntary termination.
Unlike in California, plaintiffs in federal court cannot immediately appeal an adverse class certification ruling. As such, and although not satisfied by settlement, federal plaintiffs may choose to settle their claims so that they can appeal the adverse class certification ruling without expending further time, energy and/or costs. In this situation, the settlement is made in pursuit of an appeal.
Although there is now a split of authority in California on the ability of a named plaintiff to pursue an appeal following a voluntary settlement, practitioners should nonetheless be aware of Watkins and its repercussions.
Specifically, practitioners should take care in crafting class settlements to observe at least the following three points:
First, in state court, plaintiffs who want class relief should not settle their individual claims, even where the defendant agrees to allow the class claims to move forward. Under Watkins, the parties will not be able to contract around the mootness of a plaintiff's individual claims that is created by the settlement. Mootness is a matter of justiciability.
Second, defendants cannot defeat class certification by "picking off" the named plaintiff's claims. As long as the named plaintiff maintains an economic interest in class certification - i.e., the desire to shift attorney fees to other class members - courts will allow the class action to move forward.
Third, although there is authority that named plaintiffs in federal courts who settle their individual claims may nonetheless pursue an appeal of an adverse class certification ruling, these plaintiffs should find a way to put on the record that they are settling - not because they are satisfied - but because they wish to seek their appeal without expending further time, energy and/or costs. On the other side, defendants seeking to moot a plaintiff's appeal should find a way to put on the record that, by settlement, the plaintiff is fully satisfied with the settlement, including the amount allocated toward attorney fees.
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