The Court’s authority to supervise class proceedings is uniquely and often forcefully exercised when deciding whether to approve or reject proposed settlements. Settlements are by nature consensual, so the normal adversarial atmosphere does not normally apply.  As a result, courts are highly attuned to their role of ensuring that class members receive substantive fairness. Fairness and reasonableness are the Court’s paramount considerations in Canadian class action settlements, just as they are south of the border.

Last week, the California Northern District Court (the “Court”) in anti-“employee poaching” litigationadded to the growing line of cases on both sides of the border that have scrutinized and rejected proposed class settlements, questioning the proposal’s fairness to class members.

The Decision

In the California litigation, a group of representative plaintiffs commenced a class action against seven of the world’s largest technology companies, alleging that they had conspired to suppress employee salaries by agreeing not to recruit one another’s employees. The litigation followed on the heels of a 2012 Department of Justice investigation. Last year, in the wake of a failed certification motion that was denied with leave to amend, the plaintiffs settled with three of the seven companies (the “Settling Defendants”) leaving Apple, Google, Adobe and Intel (the “Remaining Defendants”) to defend the action. The Court eventually certified the action after it had approved the settlement with the Settling Defendants, arguably giving the plaintiffs greater leverage in subsequent negotiations with the Remaining Defendants.

Here, three of the four representative plaintiffs sought to end the litigation against the Remaining Defendants and presented their proposed $324.5 million settlement with the Remaining Defendants for court approval. The fourth representative plaintiff objected to the proposed settlement arguing that, given the strength of the plaintiffs’ evidence and the Remaining Defendants’ deep pockets, the value of the proposed settlement lacked the necessary punch to deter future anti-poaching practices.

The Court denied approval of the settlement, holding that the proposed settlement fell “below the range of reasonableness” since the class stood to recover proportionally less from the Remaining Defendants than it did from the Settling Defendants. The Court reasoned that since the plaintiffs alleged that the Remaining Defendants were the cause of 95% of the harm, they should have to pay 95% of settlement amount. To that end, the Court held that the Remaining Defendants should pay no less than $380 million.

The three representative plaintiffs argued that the reduced figure reflected evidentiary weaknesses in the plaintiffs’ case against the Remaining Defendants which gave rise to a substantial risk of non-recovery. The Court rejected this argument, holding that the risk of non-recovery was even greater when the plaintiffs settled with the Settling Defendants a year ago, just after certification had been denied.

The Court held that, since then, “procedural posture of the case swung dramatically in the Plaintiff’s favour” because the Court:

  • Granted certification, albeit in respect of a narrower group of employees;
  • Was impressed with the plaintiffs’ evidence on certification; and
  • Dismissed five motions for summary judgment and a motion to exclude the plaintiffs’ principal damages expert.

The parties retain a right to appeal from this decision, and they may yet hope that, as was the case with the Citigroup settlement with the SEC, they find a more receptive audience with an appellate court.

Risk Management Considerations

This case raises some interesting illustrations of why decision makers need to be cognizant that positions taken in one context may have impacts beyond the limited matter at issue. On the substantive matters that led to the litigation, one can imagine how a single set of decisions, motivated by business considerations, can lead to multiple fronts of legal attack and potential liability for the company and its directors.

In the context of litigation, itself, the Court’s reasoning emphasizes that tactical decisions made in multi-party class proceedings may unintentionally impact other aspects of the litigation. Specifically, if a settlement with one party or set of parties is going to establish a “baseline” against which other proposed settlements are to be measured, the complex calculus of if, when and how to settle may become even more challenging.

As a side note, Apple’s board of directors now faces a fresh lawsuit in connection with the anti-employee poaching class action. On Monday, a group of Apple shareholders launched a derivative action against the directors, in which they claimed for the harm they allege the directors caused to the company by engaging in the allegedly anti-competitive behaviour and by allegedly misleading shareholders about the settlement with the DOJ and the related class action litigation.