That statement marked the beginning of the end of a federal district court judge’s opinion, as well as the class-action settlement to which the opinion referred. U.S. District Court for the Northern District of California Judge William Alsup’s May 29 opinion in Daniels v. Aéropostale West, Inc. provides a tutorial on how not to win judicial approval of a class-action settlement.
Ms. Daniels alleged that she and other employees of the trendy apparel retailer Aéropostale were denied non-discretionary bonus pay (i.e., overtime) in violation of the federal Fair Labor Standards Act (FLSA). Judge Alsup conditionally certified the class in April 2013. Daniels provided notice to all employees in the class, and 594 opted into the suit. The parties filed a motion on April 24, 2014 seeking preliminary approval of a proposed settlement.
For reasons we will elaborate, Judge Alsup refused to grant approval. On June 12, the court entered an order decertifying Daniels, dismissing the claims, and extending the statute of limitations for 30 days so dismissed plaintiffs could pursue individual suits if they wish. The order noted that the parties agreed to the decertification, and that Aéropostale would make payment to any class member “who did not receive full payment for the overtime adjustment on any non-discretionary bonus earned during the collective action period.” The plaintiff’s lawyers agreed to provide notice of the action’s decertification at their own expense.
Lessons. In just 12 pages, Daniels offers litigants and their lawyers at least five lessons on how to undo your own class-action settlement.
Lesson #1: Be unresponsive to the court’s requests
In just the second paragraph of the opinion, Judge Alsup took the unusual step of noting the name and affiliation of all counsel of record in the case. This was not done to recognize their brilliant advocacy. As the rest of the opinion reveals, the lawyers, among other things, failed to provide the court with expert damage reports as required by federal procedural rules. After the parties filed their proposed settlement, the court had to ask twice for more information or corrections to the document. When pressed by Judge Alsup, Daniels’s lawyer could not state how much the plaintiff would ask the jury to reward. In addition, “Plaintiff’s counsel also failed to provide any specific information about overtime hours worked and non-discretionary bonuses paid.”
Lesson #2: Offer claimants $0 (or barely more) and demand they sign a release
The parties informed Judge Alsup that the settlement amount—the overtime pay the 594 employees did not receive—was $8,645.61. How did they arrive at this amount? We’ll never know since, as the judge wrote, “The record is barren of evidentiary or expert support showing how this proposed settlement could possibly be fair.”
But what really set off Judge Alsup was that 60% of the 594 opted-in employees would receive nothing. And of the 38% that would receive $1-$200, 78% would get $1-$25. That meant 90% of the class members would receive nothing or next to nothing and they would have to sign a release featuring a covenant not to sue Aéropostale. As the judge himself put it, “the opt ins would be better off walking away from this lawsuit with their rights to sue intact.”
Lesson #3: Draft an overbroad release that also insulates the lawyers from liability
The release that class members would have to sign waived their right to sue Aéropostale not only under the FLSA, but also under other laws, including state laws. Judge Alsup found that overbroad, and he was particularly troubled by a provision which insulated all parties and their lawyers from claims related to the settlement. He wrote: “This takes the cake. Not only would most opt ins receive nothing at all, or in some cases virtually nothing at all, but absent opt ins could not go after their counsel for malpractice in foisting this deal upon them.”
Lesson #4: Submit a proposed notice “chock-full of legalese” that is “oppressive to the average person”
The fourteen-page proposed notice failed to disclose up front how much each class member would receive. “Nowhere would the notice say that ninety percent of all opt ins would receive nothing or virtually nothing,” the judge wrote. Also, the release “would be buried on page 8 of the proposed notice.” For the lucky few who would receive money, the judge added, “the [claims] procedure is onerous.”
Lesson #5: Ask for a disproportionately large “incentive award” if most of the other plaintiffs are getting nothing
The named plaintiff “brazenly seeks $5,000 as an incentive award to be paid separately by the defendants.” Recall that the entire proposed settlement amount was only $8,645.61 and 60% of the other plaintiffs would get nothing. In denying the award, Judge Alsup declared, “This is an excessive request for someone who has done nothing in this action except to foist a terrible settlement on the people she claims to represent.”
Plaintiffs’ lawyers and consumer activists tout class actions as the most effective and efficient legal tool available for compensating consumers where individual suits are unlikely to ever be filed. Defendants targeted with such suits certainly welcome the finality of class-wide settlement. But the lawyer-driven nature of class actions today, where most consumers have no idea a suit exists, invites abuses that benefit no one but the lawyers and the named parties. The shenanigans in Daniels may represent an extreme example of such abuses, but the case points up the need for the type of aggressive judicial oversight Judge Alsup utilized to protect absent class members.
Also published at WLF’s Forbes.com contributor site