Murphy v. SFBSC Management, No. 17-17079 (9th Cir. 2019)
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The Ninth Circuit reversed the district court's approval of a settlement notice process and a class action settlement, negotiated without a certified class, in a case arising out of a dispute under federal and California labor law regarding whether exotic dancers working at various nightclubs in San Francisco were misclassified as independent contractors rather than being treated as employees.
The panel held that the settlement notice did not meet Federal Rule of Civil Procedure 23's "best notice that is practicable under the circumstances" standard. The panel also held that the district court abused its discretion in approving the settlement, because the district court applied an incorrect legal standard and failed to employ the heightened scrutiny required to meet the strict procedural burden the panel imposed for assessing class settlements negotiated prior to class certification. The panel also reversed the district court's award of attorneys' fees, and remanded for further proceedings.
Court Description: Labor Law / Class Action Settlement. The panel reversed the district court’s approval of a settlement notice process and a class action settlement, negotiated without a certified class, in a case in which exotic dancers working at various nightclubs in San Francisco alleged they were misclassified as independent contractors rather than being treated as employees. * The Honorable Lawrence L. Piersol, United States District Judge for the District of South Dakota, sitting by designation. MURPHY V. SFBSC MANAGEMENT 3 The panel held that the settlement notice did not meet the “best notice that is practicable under the circumstances” due process standard of Fed. R. Civ. P. 23(c)(2)(B). The content of the notice was adequate, even though it did not include information about related litigation, but the process used was inadequate because notice was sent only once by mail. The panel held that, in granting approval of the settlement as “fair, reasonable, and adequate” under Rule 23(e), the district court failed to apply the correct legal standard and conduct the heightened inquiry required for review of class action settlements negotiated without a certified class. Accordingly, the district court abused its discretion in approving the settlement. The panel held that, when the parties negotiate a settlement before a class has been certified, the district court must apply a higher level of scrutiny for evidence of collusion or other conflicts of interest before approving the settlement as fair. This more exacting review is warranted to ensure that class representatives and their counsel do not secure a disproportionate benefit at the expense of unnamed plaintiffs. The panel concluded that the district court failed to investigate or adequately address numerous problematic aspects of the settlement and subtle signs of implicit collusion, including a clear sailing agreement, a disproportionate cash distribution to attorneys’ fees justified in part by potentially inflated non-monetary relief, large incentive awards to two plaintiffs, and reversionary clauses. The panel reversed and remanded for further proceedings. 4 MURPHY V. SFBSC MANAGEMENT
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