We have written a few posts about the challenges inherent in obtaining judicial approval of proposed class settlements here at the Missouri and Kansas Class Action Law Blog, and this latest order issued by Judge Kays denying a proposed hybrid wage-and-hour settlement outlines many of those concerns that counsel should be mindful of when negotiating and finalizing a proposed class settlement that will pass judicial scrutiny. (HT to our former colleague Eric Dirks who tipped us off about this order earlier this week – look for a guest post from him in the coming weeks).

In Stewart v. USA Tank Sales and Erection Co., No. 12-05136-CV-SW-DGK, 2014 WL 836212 (W.D. Mo. March 4, 2014), the plaintiffs brought a seemingly straight-forward wage-and-hour claim, alleging that their employer failed to pay them overtime; the wrinkle being that it was a “hybrid” class where plaintiffs bring a claim under both the federal Fair Labor Standards Act (FLSA) and under the state minimum wage law (here, the Missouri Minimum Wage and Maximum Hour Law, or MMWMHL).  As all of you savvy readers know, the class certification standards for these statutes are different, which ultimately became a problem down the road.

According to the order, the proposed settlement was negotiated with the assistance of a mediator within six months of the filing of the complain; informal discovery was exchanged, but there was no substantive motion practice.  While this sounds admirable and efficient, Judge Kays ultimately rejected the proposed agreement for a number of reasons:

  • Allowing Defendant to Serve as Claims Administrator with reversion provision “problematic” and “conflict of interest”

The  proposed settlement contained a reversion provision under which all settlement money not claimed by class members reverted back to an employer.  While these are not uncommon, they have been criticized because it could be evidence of potential collusion resulting in significant fees to plaintiffs’ counsel, especially if claim rates are low, resulting in limited benefits to the class. Id. at *6. While not objectionable in and of itself, the court found that the defendant’s role as claims administrator was a “patent conflict of interest” because the defendant “will have a financial incentive to deny class members’ claims.”  Id.  at *9.

  • Settlement Claim Form did not allow class members who wished to participate in FLSA settlement the opportunity to opt-out of Rule 23 state law settlement

This is where the hybrid Rule 23 / FLSA class became a potential landmine – the proposed claim form allowed class members to opt-out of both settlements, or “do nothing” to participate in the Rule 23 state law settlement, but not “opt-in” to the FLSA class.  The court found it problematic that the proposed settlement did not make any provision for a class member who wanted to participate in the FLSA settlement, but chose to opt-out of the state law settlement.  Id. at *7.  While the problem was likely academic, the court did not think it was fair that for a class member to receive a full share of the state law settlement, the class member also had to opt-in to the FLSA settlement as well.

  • Claim Provision for Rule 23 state law settlement unnecessary

Because all class members were current or former employees, and given relatively small class (~260) the court questioned whether “claims” needed to be made at all for the Rule 23 state law class, because the defendant could ensure “maximum participation” by mailing a settlement check directly to each class member.  Id.

  • Proposed class representative awards not supported by record

The parties proposed class representative incentive awards of $17,000 and $25,000, or approximately 4-6 times the average class member benefit.  The court found that a typical enhancment payment was between “$500 and $10,000″ depending on the work performed.  The court concluded that there was nothing in the record to support such an award.

  • Attorney’s Fee award problematic 

As a final matter, the court was concerned about the attorney fee award, where counsel was guaranteed its proposed fee “regardless of how many class claims are paid or how much the individual class members receive.”  Id. at *8.  The court was also concerned that plaintiff’s counsel proposed fee award had a “clear sailing” provision, which it called “prima facie evidence of simultaneous negotiations of merit relief and fees, which is a practice fraught with serious ethical concerns” justifying additional judicial scrutiny.  Id. (citation omitted).

While none of these factors individually would probably torpedo a proposed class settlement, the court noted that their “collective presence is a red-flag for potential collusion” which ultimately prevented judicial approval.