Desaulles v. Community Hospital: Plaintiff Who Receives Monetary Settlement Is "Prevailing Party" and May Recover Costs as a Matter of Right

In DeSaulles v. Community Hospital of the Monterey Peninsula (2014) 225 Cal.App.4th 1427, the plaintiff sued for failure to accommodate disability and other causes of action. After the defendant won several motions, the parties settled the case, with the defendant paying the plaintiff $23,500. The trial court found that the defendant had obtained a dismissal, was the prevailing party, and was entitled to recover its costs.

The Court of Appeal reversed, holding that when an employer pays an employee in settlement, the employee obtains a "net monetary recovery" and is the prevailing party under Code of Civil Procedure section 1032(a)(4). As such, where the settlement agreement is silent as to the recovery of costs, the employee is entitled to recover his or her costs as a matter of right. The employer is not entitled to recover its costs, even though it obtained a judgment denying the plaintiff any relief, which ordinarily would make the defendant the prevailing party.

The Supreme Court has affirmed that decision in full:

When a defendant pays money to a plaintiff in order to settle a case, the plaintiff obtains a "net monetary recovery," and a dismissal pursuant to such a settlement is not a dismissal "in [the defendant‘s] favor." (§ 1032(a)(4).) [T]his holding sets forth a default rule; settling parties are free to make their own arrangements regarding costs.

The opinion is available here.

Allen v. Bedolla: Ninth Circuit Addresses Class Settlement Standards

In Allen v. Bedolla, ___ F.3d ___ (9th Cir. 6/2/15), the parties settled a wage and hour class and collective action on the following terms: (1) gross settlement fund of $4.5 million, with distributions on a claims made basis and all unclaimed funds (other than fees and administrative costs) reverting to the employer; (2) stipulated injunctive relief; and (3) attorney fees of up to 25% of the gross settlement fund. The district court granted preliminary approval, notices went out, and approximately 15,000 settlement class members filed claim forms, equating to a maximum of $375,000 in payment to settlement class members.

The plaintiffs in a separate class action then sought to intervene and objected to the settlement, but the court denied their intervention motion and overruled their objections. The court granted final settlement approval, and the intervenors/objectors appealed.

The Ninth Circuit affirmed in part and reversed and remanded in part, holding as follows:

The court properly denied the motion to intervene. Although the court did not give its reasons for denying the motion, the Ninth Circuit affirmed on grounds that the intervention motion was not timely, as the Allen case had been pending for four years at the time of settlement, and the intervenors knew of the case and had regularly asked the defendant about the status of settlement talks there.

The court did not engage in the "searching inquiry" required for settlement of uncertified class actions. The Ninth Circuit found three signs that the settlement may have been improper:

(1) all of the money that does not go toward claims actually made, the attorneys’ fees and costs and the administration costs reverts to Labor Ready; (2) Labor Ready agreed not to dispute the award of fees to class counsel, as long as that award did not exceed 25% of the common fund; and (3) when the attorneys’ fee award is examined in terms of “economic reality,” the award exceeds the maximum possible amount of class monetary relief by a factor of three.

The court should have examined these factors, built a record to support its final approval decision, and fulfilled its "special obligat[ion] to assure itself that the fees awarded in the agreement were not unreasonably high." The court also should have made express findings regarding the value of the stipulated injunctive relief and plaintiff's counsel's reasonable attorney fee lodestar.

The court also erred in that the deadline for filing class member objections was before counsel submitted its final fee request. The court should have allowed settlement class members to object to the fee award.

The Ninth Circuit expressed no opinion on the settlement's substantive fairness, leaving that issue for the district court on remand.

The opinion is available here. 

McCall v. Facebook: Court Affirms Settlement Despite Objections As To Cy Pres Beneficiary

In McCall v. Facebook, Inc. (9th Cir. 9/20/12), the Ninth Circuit held that the district court did not abuse its discretion in approving a somewhat unusual $9.5 million settlement in a case involving more than 3.5 million putative class members.

The case arose out of allegations that Facebook's "Beacon" program violated users' privacy. The settlement allocated about $3 million to attorney fees, costs, and class rep enhancements and the remaining $6.5 million to establish and fund a new entity, the Digital Trust Foundation (“DTF”), which would “fund and sponsor programs designed to educate users, regulators[,] and enterprises" regarding online privacy issues. One of DTF's three directors would be a Facebook employee. DTF would have a Board of Legal Advisors, which would consist of counsel for both the plaintiff class and Facebook. Four class members objected, the district court granted final approval, the objectors appealed, and the Ninth Circuit affirmed.

Of greatest interest was the Court's rejection of the objectors' argument that Facebook’s employee serving on DTF’s board of directors created an unacceptable conflict of interest that would prevent DTF from acting in the interests of the class. Slip op. at 11545-11548. Given that direct distribution to the more than 3.5 million class members would be infeasible, the Court held that DTF was an acceptable alternative, even if the objectors did not find it "ideal." Slip op. at 11545. "The cy pres remedy the settling parties here have devised bears a direct and substantial nexus to the interests of absent class members and thus properly provides for the 'next best distribution' to the class." Slip op. at 11546. 

The Court also rejected the objectors' argument that the district court did not sufficiently evaluate the plaintiffs’ claims and compare the value of those claims with the class’s $9.5 million recovery (slip op. at 11548-11554), that the notice of settlement was insufficient because it did not describe the value of the plaintiffs’ claims and “did not accurately describe what the class members would receive in exchange for the release” of those claims (slip op. at 11554-11555).  The Court concluded: 

Ultimately, we find little in Objectors’ opposition to the settlement agreement beyond general dissatisfaction with the outcome. That dissatisfaction may very well be legitimate insofar as Objectors would have acted differently had they assumed the role of class representatives. But while Objectors may vigorously disagree with the class representatives’ decision not to hold out for more than $9.5 million or insist on a particular recipient of  cy pres funds, that disagreement does not require a reviewing court to undo the settling parties’ private agreement. The district court properly limited its substantive review of that agreement as necessary to determine that it was “fair, adequate, and free from collusion.” 

Judge Kleinfield wrote a very strongly worded dissent, which begins as follows:  

This settlement perverts the class action into a device for depriving victims of remedies for wrongs, while enriching both the wrongdoers and the lawyers purporting to represent the class.

Slip op. at 11555.  The opinion is available here.  

Wohlgemuth v. Caterpillar: Where Plaintiff Accepts 998 Offer That Is Silent as to Attorney Fees and Costs, Plaintiff Is Prevailing Party and May Recover Fees and Costs

Wohlgemuth v. Caterpillar Inc. (7/23/12) --- Cal.App.4th --- is not an employment case, but it demonstrates an important point for counsel in employment matters, particularly defense counsel: when dealing with a CCP section 998 offer to compromise, be sure that the offer states clearly whether prevailing party costs and fees are included in the amount of the offer.  Failure to do so can lead to a very uncomfortable situation for the defendant and its counsel.  

"Where a [Code of Civil Procedure] section 998 offer is silent on costs and fees, the prevailing party is entitled to costs and, if authorized by statute or contract, [attorney] fees." (Engle v. Copenbarger & Copenbarger, LLP (2007) 157 Cal.App.4th 165, 168.)  This is a "brightline rule," meaning that "a [Code of Civil Procedure] section 998 offer to compromise excludes [attorney] fees only if it says so expressly." (Id. at p. 169, italics added.)

Slip op. at 6.   

Plaintiffs filed suit for violation of the Song-Beverly Consumer Warranty Act. Before trial, defendant made a CCP 998 offer to pay plaintiffs $50,000 in exchange for a dismissal with prejudice and release of all claims. The offer was silent as to attorney fees and costs.  

The plaintiffs accepted the offer and moved to recover their attorney fees and costs.  The trial court (Fresno County Superior, Judge Jeffrey Y. Hamilton) found that plaintiffs prevailed and awarded them their fees and costs.  Defendant appealed, and the Court of Appeal affirmed.  

First, the Court rejected defendant's argument that the trial court could not award attorney fees and costs because the case was dismissed, and no judgment was entered.  A "compromise agreement contemplating payment by defendant and dismissal of the action by plaintiff is the legal equivalent of a judgment in plaintiff's favor." Slip op. at 8.  

Second, the Court held that the trial court did not abuse its discretion in finding that the plaintiffs were the prevailing parties.  While defendant could be the prevailing party because a dismissal was entered, plaintiffs also could be the prevailing parties because they obtained a net monetary recovery.  In this case, the trial court did not abuse its discretion by finding that plaintiffs were the prevailing parties.  

The moral of the story is clear. Be very careful with CCP 998 offers.  Read the statute and the offer carefully to avoid nasty surprises.  

The opinion is available here.