Dale A. Drozd, UNITED STATES DISTRICT JUDGE.
This matter came before the court for hearing on plaintiffs' unopposed motion for approval of a settlement under the Fair Labor Standards Act ("FLSA") on March 6, 2018. (See Doc. No. 58.) Attorney Paul Bird appeared on behalf of plaintiffs and attorney Arthur Hartinger appeared on behalf of defendants. Following the hearing, the court ordered plaintiffs to submit supplemental briefing addressing a number
The complaint in this action was filed on July 28, 2016, alleging that defendants had violated the FLSA by under-paying municipal employees' overtime when the employees accepted cash in lieu of health care benefits, following the holding in Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016). (Doc. No. 2.) A scheduling order was entered on November 1, 2016, setting a deadline for non-expert discovery to be completed by June 9, 2017 and expert discovery to be completed by September 20, 2017. (Doc. No. 32.) Prior to the passing of the discovery deadline, the parties stipulated to conditional certification of the action on February 23, 2017. (Doc. No. 37.) No substantive motion practice took place. A magistrate judge of this court held two separate settlement conferences in this action, one on October 2, 2017 (Doc. No. 47) and one on October 23, 2017 (Doc. No. 48). A settlement was reached following the second such conference.
This proposed settlement essentially encompasses three theories of liability plaintiffs have alleged against defendant. The first follows Flores directly, and alleges that any cash payments made to plaintiffs in lieu of healthcare benefits must be included in the calculation of overtime wages (the "cash-in-lieu" theory). (Doc. No. 63 at 5-6.) The second theory is an expansion of the holding in Flores, and seeks to have the total payments for healthcare benefits made by defendant on behalf of plaintiffs included in the calculation of overtime, regardless of whether they were paid as cash directly to plaintiffs or were in the form of healthcare benefits secured for plaintiffs (the "total benefits plan" theory). (Id. at 6-7.) Finally, plaintiffs seek to settle what they denote as their "canine claim," which concerns alleged underpayment of the defendant's canine police officers. (Id. at 8.)
The settlement agreement proposes a total payment of $375,000. (Doc. No. 58-3 at 3.) This total amount is designated to the following categories: $195,000 in damages to plaintiffs for both Flores theories of liability; $25,000 in damages for the canine claim; $5,000 total as incentive payments, awarding $2,500 each to plaintiffs Kerzich and Wertz; and $150,000 in attorneys' fees and costs to plaintiffs' counsel. (Doc. No. 58 at 16; Doc. No. 58-3 at 3-4.) Plaintiffs also request that a further 20 percent of the damages amounts and incentive payments be paid to plaintiffs' counsel as additional attorneys' fees. (Doc. No. 58-3 at 3-4.) Thus, counsel seeks an ultimate award of $195,000 in attorneys' fees and costs. (See Doc. No. 63 at 9.) The total award to be paid to the members of the collective on behalf of whom this case was brought is therefore $180,000.
"The FLSA establishes federal minimum-wage, maximum-hour, and overtime guarantees that cannot be modified by contract." Genesis Healthcare Corp. v. Symczyk, 569 U.S. 66, 69, 133 S.Ct. 1523, 185 L.Ed.2d 636 (2013). Because an employee cannot waive claims under the FLSA, they may not be settled without supervision of either the Secretary of Labor or a district court. See Barrentine v. Ark.-Best Freight Sys., Inc., 450 U.S. 728, 740, 101 S.Ct. 1437, 67 L.Ed.2d 641 (1981); Beidleman v. City of Modesto, No. 1:16-cv-01100-DAD-SKO, 2018 WL 1305713, at *1 (E.D. Cal. Mar. 13, 2018); Yue Zhou v. Wang's Rest., No. 05-cv-0279 PVT, 2007 WL 2298046, at *1 n.1 (N.D. Cal. Aug. 8,
Employees may bring collective actions under the FLSA, representing all "similarly situated" employees, but "each employee [must] opt-in to the suit by filing a consent to sue with the district court." Does I thru XXIII v. Advanced Textile Corp., 214 F.3d 1058, 1064 (9th Cir. 2000); see also Jones v. Agilysys, Inc., No. C 12-03516 SBA, 2014 WL 108420, at *2 (N.D. Cal. Jan. 10, 2014).
The Ninth Circuit has not established criteria for district courts to consider in determining whether an FLSA settlement should be approved. Dunn v. Teachers Ins. & Annuity Ass'n of Am., No. 13-CV-05456-HSG, 2016 WL 153266, at *3 (N.D. Cal. Jan. 13, 2016). However, district courts in this circuit have frequently applied a widely-used standard adopted by the Eleventh Circuit, which looks to whether the settlement is a fair and reasonable resolution of a bona fide dispute. Id.; see also Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350, 1352-53 (11th Cir. 1982); Selk v. Pioneers Mem'l Healthcare Dist., 159 F.Supp.3d 1164, 1172 (S.D. Cal. 2016); Nen Thio v. Genji, LLC, 14 F.Supp.3d 1324, 1333 (N.D. Cal. 2014); Yue Zhou, 2007 WL 2298046, at *1. "A bona fide dispute exists when there are legitimate questions about the existence and extent of Defendant's FLSA liability." Selk, 159 F.Supp.3d at 1172 (internal quotation marks and citation omitted). A court will not approve a settlement of an action in which there is certainty that the FLSA entitles plaintiffs to the compensation they seek, because it would shield employers from the full cost of complying with the statute. Id.
Additionally, because FLSA settlements require court approval, payment of attorneys' fees from settlement proceeds is also subject to review by the court. See Avila v. Los Angeles Police Dep't, 758 F.3d 1096, 1104-05 (9th Cir. 2014) (reviewing an award of attorneys' fees under the FLSA); Dunn, 2016 WL 153266, at *9 (N.D. Cal. Jan. 13, 2016) ("The Court retains the authority to determine what fees are reasonable [in an FLSA settlement]."); Selk, 159 F.Supp.3d at 1180 ("Where a proposed settlement of FLSA claims includes the payment of attorney's fees, the court must also assess the reasonableness of the fee award.") (quoting Wolinsky v. Scholastic Inc., 900 F.Supp.2d 332, 336 (S.D.N.Y. 2012)).
Once it is established that there is a bona fide dispute, courts often apply the Rule 23 factors for assessing proposed class action settlements when evaluating the fairness of an FLSA settlement, while recognizing that some of those factors do not apply because of the inherent differences between class actions and FLSA actions. Khanna v. Inter-Con Sec. Sys., Inc., No. CIV S-09-2214 KJM, 2013 WL 1193485, at *2 (E.D. Cal. Mar. 22, 2013). To determine whether the proposed FLSA settlement is fair, adequate, and reasonable, courts in this circuit have balanced factors such as:
Khanna v. Intercon Sec. Sys., Inc., No. 2:09-CV-2214 KJM EFB, 2014 WL
This case concerns a failure to accurately calculate the overtime compensation rate for employees who accepted cash payments in lieu of healthcare benefits, following the Ninth Circuit's 2016 decision in Flores. As indicated above, plaintiffs also allege a related, but distinct theory that, under Flores, an employer must include all healthcare benefits in calculating overtime rates. (See Doc. No. 58-2 at ¶ 17(b)). Finally, the settlement concerns a failure by the county to adequately compensate certain deputy sheriffs for canine-related duties, though this "canine claim" is not alleged in the complaint. (See Doc. No. 58 at 7.) This settlement cannot be approved as requested because, in the court's view, the attorneys' fee award provided for in the settlement is excessive.
Plaintiffs' counsel seeks more than 50 percent of the total settlement to be awarded as attorneys' fees, and the settlement agreement is specifically contingent on this fee arrangement. The settlement agreement first designates $150,000 of the settlement as payment for attorneys' fees, to be paid directly by the defendant. (Doc. No. 58-3 at 4.) Designating a portion of a settlement as attorneys' fees is appropriate and commonplace in the context of the FLSA, which has a fee-shifting provision such that the prevailing party would be entitled to receive attorneys' fees from the opposing party. 29 U.S.C. § 216(b); Dunn, 2016 WL 153266, at *4 ("Because settlement of a FLSA claim results in a stipulated judgment (at least when in district court), this provision [§ 216(b)] applies even where parties settle an individual action.") (internal citations omitted); Goodwin v. Citywide Home Loans, Inc., No. SACV 14-866-JLS (JCGx), 2015 WL 12868143, at *2 (C.D. Cal. Nov. 2, 2015) (observing the FLSA "requires that a settlement agreement include an award of reasonable attorneys' fees").
Typically, attorneys' fees under the FLSA are determined using the lodestar method. See, e.g., Pehle v. Dufour, No. 2:06-cv-1889-EFB, 2014 WL 546115, at *1-2 (E.D. Cal. Feb. 11, 2014); Nolan v.
However, as noted, plaintiffs' counsel also seek an additional percentage of the damages award as attorneys' fees. In particular, the settlement agreement calls for plaintiffs' attorneys to receive an additional 20 percent of the damages portion of the judgment, divided on a per-share basis among all the class members. (Doc. No. 58-3 at ¶ 4.) Thus, under the proposed settlement agreement plaintiffs' counsel would receive an additional 20 percent of the $225,000 awarded to the class — comprised of $195,000 for the Flores claims, $25,000 for the canine claim, and $2,500 in incentive payments to each of the named plaintiffs — or another $45,000 in attorneys' fees. In short, plaintiffs seek approval of a settlement that will award $195,000 of the $375,000 settlement, or 52 percent of the total settlement, to plaintiffs' counsel. The court simply cannot condone a fee award
According to plaintiffs' counsel, "[n]either the FLSA nor any case law prohibits an FLSA-plaintiff from signing a private fee agreement with her counsel to pay contingency fees from any damages she receives, as Plaintiffs have done here." (Doc. No. 63 at 9.) This may be the case. As a general matter, courts are rarely called upon to determine whether the private fee agreements attorneys strike with their clients are reasonable. Nonetheless, plaintiffs may not settle this case without court approval and the amount of attorneys' fees to be awarded is clearly one of the issues the court must consider when it is called upon to approve the fairness and reasonableness of a settlement. See, e.g., Trout v. Meggitt-USA Servs., Inc., No. 2:16-cv-07520-ODW(AJW), 2018 WL 1870388, at *5 (C.D. Cal. Apr. 17, 2018) ("While attorneys' fees may be awarded in a certified collective action where so authorized by law or the parties' agreement, courts have an independent obligation to ensure that the award is reasonable, even if the parties have already agreed to an amount."); Seguin v. County of Tulare, No. 1:16-cv-01262-DAD-SAB, 2018 WL 1919823, at *5-6 (E.D. Cal. Apr. 24, 2018). Indeed, numerous courts have declined to approve FLSA settlements due, at least in part, to the attorneys' fee requests associated with them. See, e.g., Trout, 2018 WL 1870388 at *5 (commenting "the Court previously took issue" with an agreed award of 33 percent of the settlement, finding it to be a sign of collusion); Alder v. County of Yolo, No. 16-cv-01682-VC, 2018 WL 770394 at *1 (E.D. Cal. Jan. 22, 2018) ("Plaintiffs' attorneys have not shown that it is appropriate for them to receive both statutory and contingent fee awards in this case, particularly as the latter reduces the amount each plaintiff receives as compensation for the alleged FLSA violations."); Mar v. Genuine Parts Co., No. 2:15-cv-01405-MCE-AC, 2017 WL 68287, at *2-3 (E.D. Cal. Jan. 6, 2017); Dunn, 2016 WL 153266, at *8 (expressing skepticism with a FLSA settlement containing a contingency fee agreement which would allow counsel "to recover nearly double the percentage of their clients' settlements"); Gamble v. Boyd Gaming Corp., Nos. 2:13-cv-01043-JCM-PAL, 2:13-cv-01801-JCM-PAL, 2015 WL 4874276, at *10 (D. Nev. Aug. 13, 2015) (denying approval of an FLSA settlement in part because the court could not evaluate whether the attorneys' fees were reasonable).
Here, counsel suggests that a hybrid approach, awarding both statutory damages plus a contingency fee enhancement, is the most logical or fair from counsel's point of view, because a common fund approach would award too little in fees if only a few employees joined, while a statutory approach would award too little in fees if many employees joined. (See Doc. No. 63 at 9-10.) Counsel misunderstands the court's concern. It is precisely the self-interest of counsel against which the court must guard, whether the harm caused to the collective and the FLSA is purposeful or not. See In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 946-47 (9th Cir. 2011) (cautioning courts to look for "more subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations"); Staton v. Boeing Co., 327 F.3d 938, 970 (9th Cir. 2003) (noting that, in setting attorneys' fees, the relationship
Of significant concern to the court is counsel's assertion in its supplemental briefing that their contingency fee arrangement "made it economically feasible to litigate this action," because it "facilitated settlement by effectively reducing the statutory fee paid by the County." (Doc. No. 63 at 10.) This logic reinforces, rather than dispels, the court's concerns. The point of a fee-shifting provision in a statute like the FLSA is to ensure that the burden of enforcing federal labor law does not fall on the employees, and to put the burden on employers to ensure they promptly pay what is legally owed without plaintiffs being saddled with attorneys' fees. See Barrentine, 450 U.S. at 739, 101 S.Ct. 1437 (noting the purpose of the FLSA was "to protect all covered workers from substandard wages and oppressive working hours"); Fegley v. Higgins, 19 F.3d 1126, 1134 (6th Cir. 1994) ("The purpose of the FLSA attorney fees provision is to insure effective access to the judicial process by providing attorney fees for prevailing plaintiffs with wage and hour grievances.") (internal quotation omitted); Peak v. Forever Living Prods. Int'l, Inc., No. CV 11-903-PHX-SRB, 2011 WL 13174334, at *8 (D. Ariz. Sept. 30, 2011) ("Because the FLSA was intended to provide workers with the full compensation due under the law, requiring a claimant to pay attorney's fees incurred to enforce his FLSA rights would frustrate the statute's underlying purpose.") (quoting McBurnie v. City of Prescott, No. CV-09-8139-PCT-FJM, 2010 WL 5344927, at *2 (D. Ariz. Dec. 22, 2010)). The suggestion that the defendant County is able to pay a reduced attorneys' fee because that cost will instead be borne by the plaintiffs here is truly antithetical to the purposes of the FLSA's fee-shifting provision. Indeed, the fee-shifting provisions of the FLSA are intended to allow plaintiffs to find competent counsel if legal action is required to compel the employer to pay what is owed, because if the plaintiffs' claims are meritorious, counsel will be able to obtain its fees from defendants regardless of the size of the claims, freeing them from a reliance on contingency fees to make pursuit of the litigation worthwhile. See Alvarez v. 894 Pizza Corp., No. 14-CV-6011 (JBW), 2016 WL 4536574, at *5 (E.D.N.Y. Aug. 2, 2016) (finding the FLSA's fee-shifting provision "guarantees that employees are not prevented from asserting their rights by an inability to retain competent counsel or the small size of their claims"); Dominguez v. Quigley's Irish Pub, Inc., 897 F.Supp.2d 674, 687 (N.D. Ill. 2012) (noting the purpose of the FLSA's fee shifting statute "is to enable smaller claims to be litigated"); Williams v. R.W. Cannon, Inc., 657 F.Supp.2d 1302, 1314 (S.D. Fla. 2009) ("[T]he intent of the fee-shifting provision of the FLSA [is to] ensur[e] that individuals with relatively small claims may effectively enforc[e] their
Next, plaintiffs' counsel invokes the Supreme Court's holding in Venegas v. Mitchell, 495 U.S. 82, 110 S.Ct. 1679, 109 L.Ed.2d 74 (1990), as authority for the proposition that contingency fees may be agreed to in cases involving fee-shifting statutes. (Doc. No. 63 at 11-13.) However, consideration of the purposes of the FLSA demonstrates why the decision in Venegas does not support a finding that this settlement is fair. In Venegas, the Supreme Court held that 42 U.S.C. § 1988, the fee-shifting statute pertaining to civil rights actions, did not prevent a plaintiff from entering into a contingency fee arrangement with his attorney. Id. at 86-87, 110 S.Ct. 1679. In so holding, the court noted that, since "§ 1983 plaintiffs may waive their causes of action entirely, there is little reason to believe that they may not assign part of their recovery to an attorney if they believe that the contingency arrangement will increase their likelihood of recovery." Id. at 88, 110 S.Ct. 1679. This highlights a key difference between 42 U.S.C. § 1983 and the FLSA. While a plaintiff is generally free to waive any and all claims under § 1983, employees may not typically waive their rights under the FLSA. See Barrentine, 450 U.S. at 740, 101 S.Ct. 1437 ("FLSA rights cannot be abridged by contract or otherwise waived because this would nullify the purposes of the statute and thwart the legislative policies it was designed to effectuate.") (internal quotations omitted); Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697, 706, 65 S.Ct. 895, 89 S.Ct. 1296 (1945) (holding that "Congress did not intend that an employee should be allowed to waive his right to liquidated damages" under the FLSA); Gordon v. City of Oakland, 627 F.3d 1092, 1095 (9th Cir. 2010) ("[E]mployees cannot waive the protections of the FLSA.").
Further, the contingency fee agreement at issue in Venegas was not similar to the contingency fee agreement here. In Venegas, the plaintiff had agreed to a 40 percent contingency fee following trial, offset dollar for dollar by any award of attorneys' fees. 495 U.S. at 83, 110 S.Ct. 1679. Here, it appears that plaintiffs were obligated under their fee agreement to give their counsel both the statutory fees and a 25 percent contingency fee. A dollar-for-dollar offset arrangement, like the one in Venegas, ensures that counsel will receive up to, but not more than, the total contingency amount to which the parties have agreed. In contrast, the payment structure contemplated here is essentially a contingency bonus. This arrangement virtually assures that counsel will be over-compensated for their work. See Zhao Hui Chen v. Jin Holding Grp., No. 10 Civ. 0414(PAC), 2012 WL 279719, at *4 (S.D.N.Y. Jan. 31, 2012) ("The [FLSA] was not designed to create a windfall for attorneys."). The settlement counsel negotiated here assures a total award of attorneys' fees in excess of the lodestar amount they claim and amounts to more than half of the total value of the settlement. In short, Venegas does not support the attorneys' fees requested in this case.
This settlement agreement differs from many the court has reviewed because it provides for a specific contingency fee to be paid to plaintiffs' counsel, rather than indicating counsel will apply for a further percentage award up to a certain amount. (Doc. No. 58-3 at ¶ 4.) Because the settlement agreement specifies a certain percent of attorneys' fees to be awarded, the court cannot simply reduce the award. Instead, the court must reject this settlement agreement as structured, because the award of attorneys' fees contemplated is excessive and renders the settlement unfair. The motion to approve the settlement
Having concluded that the proposed settlement must be rejected as drafted, the court need not definitively reach any further conclusions about the substantive fairness of the settlement at this point. However, because it seems likely the parties will seek to renegotiate the settlement agreement, the court provides the following further guidance.
Plaintiffs' cash-in-lieu claim is premised on the Ninth Circuit's 2016 decision in Flores. Neither party disputes that cash payments made in lieu of healthcare benefits must be included in the overtime rate paid to the members of this collective action, and that pursuant to the decision in Flores, defendants are liable for this amount of damages. (See Doc. No. 58 at 9.) Nevertheless, despite the lack of a dispute on this point, plaintiffs' counsel still agreed to discount the value of the cash-in-lieu claims by 25 percent as part of the settlement of this action. (See Doc. No. 58 at 17; Doc. No. 58-4.) No satisfactory explanation has been provided to the court regarding why these claims — for which both liability and damages are certain and undisputed — has nevertheless been substantially discounted. See Selk, 159 F.Supp.3d at 1172 ("If there is no question that the FLSA entitles plaintiffs to the compensation they seek, then a court will not approve a settlement because to do so would allow the employer to avoid the full cost of complying with the statute.").
Plaintiffs' counsel also failed to include liquidated damages in their estimation of the value of the cash-in-lieu claim in this case. (See Doc. No. 63 at 5-6.) The FLSA typically allows plaintiffs to recover double damages, awarding both the actual damages and an equivalent amount in liquidated damages. See 29 U.S.C. § 216(b); Haro v. City of Los Angeles, 745 F.3d 1249, 1259 (9th Cir. 2014) ("Double damages are the norm; single damages the exception."); Local 246 Util. Workers Union of Am. v. S. Cal. Edison Co., 83 F.3d 292, 297 (9th Cir. 1996) (same); see also Alvarez v. IBP, Inc., 339 F.3d 894, 910 (9th Cir. 2003). Employers may seek to establish a good faith defense to the liquidated damages component under the FLSA, but bear the burden of showing they acted with both objective and subjective good faith in their violation of the FLSA. See 29 U.S.C. § 260; Local 246, 83 F.3d at 298.
Plaintiffs assert that, prior to the Ninth Circuit's decision in Flores, it was not settled law that cash payments in lieu of health benefits should be considered part of the wages paid under the FLSA. (Doc. No. 58 at 9.) However, the court observes that, in Flores itself, the Ninth Circuit imposed liquidated damages, finding the defendant had not acted in good faith. 824 F.3d at 897, 905-06. In doing so, the Ninth Circuit held that neither evidence that the city complied with other obligations under the FLSA nor evidence that it generally paid overtime at a rate more generous than required by law was sufficient to show the defendant had acted in good faith. Id. at 905-06. The Ninth Circuit also found that, in order to meet the "heavy burden" of establishing a good faith defense, the employer must present evidence that it took "the steps necessary to ensure [its] [] practices complied with [FLSA]," and "show that it actively endeavored to ensure such compliance." Id. at 905 (quoting Alvarez v. IBP, Inc., 339 F.3d 894, 910 (9th Cir. 2003)). This strongly suggests that, while some discounting of liquidated damages might be warranted in light of the settlement, completely excluding liquidated damages from the calculation
Here, the total amount of damages suffered by the collective action members with respect to the Flores claim is represented to be $103,107.17,
Additionally, it appears that plaintiffs' counsel accepted a 75 percent discounting of damages recoverable on the total benefits plan theory. A greater discounting is certainly more reasonable on this claim since it is more novel. Similarly, a more significant discounting of liquidated damages is also appropriate here, since the more novel the claim is, the more likely a good faith defense is to succeed. Nevertheless, plaintiffs' counsel once again has omitted liquidated damages in their entirety from the calculation of the value of the claim. No representation has been made that liquidated damages were definitely not recoverable on this claim. Instead, plaintiffs' counsel explained that this claim was discounted by 75 percent, given that success on it was less likely. (Doc. No. 58 at 17; Doc. No. 58-4; Doc. No. 63 at 6-7.) Excluding liquidated damages entirely had the effect of halving the plaintiffs' recovery prior to counsel's discounting. No explanation has been provided to the court as to why the decision to discount plaintiffs' claim to this extent was reasonable or how it is consistent with the representations made to this court about the value of the claims presented. Considering that double damages are the norm under the FLSA (see Haro, 745 F.3d at 1259; Alvarez, 339 F.3d at 910; Local 246 Util. Workers Union of Am., 83 F.3d at 297), if counsel believed this claim was worth 25 percent of its maximum value, it seems that it should have been valued at $114,554.73, rather than the $57,277.47 attributed to it. Counsel has provided no reason why liquidated damages were entirely excluded from these calculations.
Taking the full value of the Flores claims in this case as calculated by plaintiffs' counsel and adding to it liquidated damages, the total potential recovery appears to be $664,433.26. (See Doc. No. 58-4.) According to the discounting plaintiffs' counsel represents was appropriate — a 25 percent discount of the cash-in-lieu claim and a 75 percent discount of the total benefits theory claim — the value of the Flores claims in this case would therefore appear to be $320,769.07. However, the proposed settlement provides only for the payment of $195,000 in damages for these
For the reasons given above, plaintiffs' motion for approval of this FLSA settlement (Doc. No. 58) is denied without prejudice to the parties attempting to settle this action in a manner that remedies the deficiencies identified above. The case is referred back to the assigned magistrate judge for further scheduling.
IT IS SO ORDERED.
