Chavez et al v. Lumber Liquidators, Inc.

Filing 156

ORDER by Judge Samuel Conti denying 150 motion for preliminary approval of class action settlement. (sclc2, COURT STAFF) (Filed on 5/8/2015).

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IN THE UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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Northern District of California

United States District Court

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CRELENCIO CHAVEZ and JOSE
ZALDIVAR, on behalf of all others
similarly situated,

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Plaintiffs,
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v.
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LUMBER LIQUIDATORS, INC., and DOES )
1 through 20, inclusive,
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Defendants.
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Case No. CV-09-4812 SC
ORDER DENYING MOTION FOR
PRELIMINARY APPROVAL OF
CLASS SETTLEMENT

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I.

INTRODUCTION
Now before the Court is Plaintiff Jose Zaldivar's ("Zaldivar"

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or "Plaintiff") motion for preliminary approval of a class action

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settlement in this case brought under the Fair Labor Standards Act

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("FLSA"), the California Private Attorney General Act ("PAGA") and

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various other state employment laws.

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Defendants filed a notice of non-opposition, ECF No. 152, and the

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motion is ripe for disposition without oral argument under Civil

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Local Rule 7-1(b).

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approval is DENIED.

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ECF No. 150 ("Mot.").

For the reasons set forth below, preliminary

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II.

BACKGROUND
Lumber Liquidators is a retailer selling flooring products.

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During the relevant period, Lumber Liquidators had between six and

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twenty-four retail stores in California, each with a Store Manager

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and some combination of the following positions: Assistant

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Store Manager I, Assistant Store Manager II, Warehouse Associate,

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Delivery Driver, and/or Product Specialist.

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classified as "exempt" employees, meaning they are exempt from

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overtime pay requirements.

United States District Court

For the Northern District of California

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Store Managers are

Other employees are classified as "non-

exempt," meaning they are eligible for overtime pay.
Zaldivar worked for Lumber Liquidators in City of Industry,

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California as a non-exempt hourly Assistant Manager.1

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stated that he earned a commission in addition to his hourly pay,

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but never got a breakdown of the commissions and did not understand

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how Lumber Liquidators calculated his commission or bonus.

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July 2007 to June 2010, Lumber Liquidators paid Zaldivar $12,282.87

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as "sales bonuses."

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to include these bonuses into his regular rate of pay when

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calculating his overtime rate.

Zaldivar

From

Zaldivar claims that Lumber Liquidators failed

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As a result, Zaldivar filed suit alleging, among other things,

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failure to pay overtime wages in violation of California Labor Code

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("Labor Code") Section 1194 and 29 U.S.C. Section 207; failure to

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keep accurate payroll records in violation of Labor Code Section

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226; and violation of California's Unfair Competition Law ("UCL"),

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California Business & Professions Code Section 17200.
The Court subsequently denied class certification for several

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The other named plaintiffs, Crelencio Chavez and others, were
dismissed with prejudice by stipulation. See ECF No. 146.

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proposed classes, but granted certification for the "Unpaid

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Overtime Class," defined as:

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[A]ll past and current retail store employees
of [Lumber Liquidators] classified by [Lumber
Liquidators]
as
non-exempt
employees
(including, but not limited to, assistant store
managers,
sales
associates,
and
warehouse
associates), and employed in California from
September 3, 2005 through the present, who were
paid
overtime
wages
and
were
also
paid
commission wages and/or other non-discretionary
pay or bonuses.

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ECF No. 92 ("Class Cert. Order") at 12.

In essence, Plaintiffs'

United States District Court

For the Northern District of California

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theory is that Lumber Liquidators failed to account for non-

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discretionary pay or bonuses when calculating class members'

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overtime.

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to "no less than one and one-half times the regular rate of pay for

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an employee" for any work in excess of eight hours in one workday

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or forty hours in any one workweek.

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Plaintiffs contend that non-discretionary pay and bonuses were not

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factored into their "regular rate of pay" for the purposes of

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overtime calculations.

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Under California law, non-exempt employees are entitled

Cal. Lab. Code § 510(a).

Following class certification, notice was sent to all

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individuals who were employed by Lumber Liquidators in California

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as a non-exempt store employee "who during the same pay period both

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earned commission/bonus wages and was paid overtime wages from

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September 3, 2005 to the present."

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asked to be excluded from the class.

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Mot. at 4.

Only one individual

Subsequently, the parties engaged in discovery and reached a

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settlement with the help of a court-appointed mediator.

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seek approval of a class defined somewhat (but not materially)

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differently:

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Now they

All current and former retail store employees
of [Lumber Liquidators] classified as nonexempt and employed in California who were paid
overtime wages and commission/sales bonus wages
and/or
other
nondiscretionary
compensation
between September 3, 2005 through the present.
The Class includes, but is not limited to,
persons employed in the following position
categories
and/or
job
titles:
warehouse
associate, sales associate, Assistant Store
Manager 1, Assistant Store Manager 2, and other
non-exempt retail store employees.

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ECF No. 149 ("Settlement Agreement") § 2.6.

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of approximately 240 current and former employees of Lumber

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Liquidators.

United States District Court

Mot. at 1.

Under the settlement, class members who do not opt-out agree

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For the Northern District of California

This class is made up

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to receive a cash payment in exchange for a release of claims.

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The released claims include "any and all federal, state, and local

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law claims related to or pertaining to" an array of potential wage

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and hour claims accruing prior to the opt-out deadline.

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2.25.

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rather than out of the settlement class, "Settlement Class Members

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who do not timely opt out of the settlement shall be deemed to have

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fully released all Released Claims" except FLSA claims.

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also 29 U.S.C. § 216(b); Kakani v. Oracle Corp., No. C 06-06493

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WHA, 2007 WL 1793774, at *7 (N.D. Cal. June 19, 2007).

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

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$42,000 in requested attorneys' fees and costs (subject to
court approval);



$7,500 paid to the California Labor Workforce Development
Agency ("LWDA") under the PAGA;

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Id.; see

down as follows:

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Notably, because the FLSA requires individuals to opt in to

The settlement has a maximum value of $140,000 to be broken

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Id. §



an estimated $15,000 in claims administration costs to be paid
to CPT Group, a class action claims administrator;

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

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an incentive award totaling a maximum2 of $10,000 to lead

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plaintiff Jose Zaldivar for his work as class representative

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(in addition to whatever he is entitled as a member of the

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class); and


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$65,500 to be paid to the class based on (1) the number of

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overtime hours worked and amount of commission/sales bonus

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wages paid, and (2) (simplifying somewhat) a pro-rata

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distribution of any remaining funds according to the number of

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weeks worked.

United States District Court

For the Northern District of California

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This is a so-called "claims made" settlement, and as a result, any

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unclaimed funds will revert to Lumber Liquidators.
The parties calculate that the average class member will

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receive $269 from the settlement.

According to the parties, this

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is generous relative to the class members' actual damages, because

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the average amount each class member was underpaid is $21.13 and

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the total underpayment "likely does not exceed $21,000."

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8.

Mot. at

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III. LEGAL STANDARD
Judicial policy strongly favors settlement of class actions.

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Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1276 (9th Cir.

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1992).

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however, judges have the responsibility of ensuring fairness to all

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members of the class presented for certification."

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Boeing Co., 327 F.3d 938, 952 (9th Cir. 2003).

"To vindicate the settlement of such serious claims,

Staton v.

Where the "parties

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If the Court does not approve the incentive award or grants
Zaldivar less than the $10,000, the remaining money will be added
to the $65,500 to be paid to the class. See Settlement Agreement §
6.3.1.

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reach a settlement agreement prior to class certification, courts

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must peruse the proposed compromise to ratify both [1] the

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propriety of the certification and [2] the fairness of the

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settlement."

Id.

The approval of a class action settlement takes place in two

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stages.

First, the court preliminarily approves the settlement

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pending a fairness hearing, temporarily certifies a settlement

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class, and authorizes notice to the class.

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& Elec. Co., 266 F.R.D. 468, 473 (E.D. Cal. 2010).

See Murillo v. Pac. Gas
In this Order,

United States District Court

For the Northern District of California

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therefore, "the court will only determine whether the proposed

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class action settlement deserves preliminary approval and lay the

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ground work for a future fairness hearing."

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Rural Telecomms. Coop. v. DIRECTV, Inc., 221 F.R.D. 523, 525 (C.D.

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Cal. 2004) (alterations and internal quotation marks omitted).

Id. (citing Nat'l

"Once the judge is satisfied as to the certifiability of the

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class and the results of the initial inquiry into the fairness,

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reasonableness, and adequacy of the settlement, notice of a formal

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Rule 23(e) fairness hearing is given to the class members."

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for Complex Litigation, Fourth, § 21.633 (2004).

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the court will entertain class members' objections to (1) the

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treatment of this litigation as a class action and/or (2) the terms

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of the settlement.

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fairness hearing, the court will reach a final determination as to

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whether the parties should be allowed to settle the class action

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pursuant to the terms of the proposed settlement.

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F.R.D. at 525.

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At the hearing,

See Murillo, 266 F.R.D. at 473.

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Manual

Following the

See DIRECTV, 221

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IV.

DISCUSSION
"In the Ninth Circuit, 'named plaintiffs . . . are eligible

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for reasonable incentive payments.'"

Bayat v. Bank of the W., No.

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C-13-2376 EMC, 2015 WL 1744342, at *10 (N.D. Cal. Apr. 15, 2015)

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(quoting Staton v. Boeing Co., 327 F.3d 938, 977 (9th Cir. 2003)).

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While "[c]lass actions did much justice without [incentive awards]

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for many decades," Kakani v. Oracle Corp., No. C 06-06493 WHA, 2007

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WL 1793774, at *10 (N.D. Cal. June 19, 2007), for better or worse

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they are now "fairly typical in class action cases."

Rodriguez v.

United States District Court

For the Northern District of California

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W. Publ'g Corp., 563 F.3d 948, 958 (9th Cir. 2009); see also

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Theodore Eisenberg & Geoffrey P. Miller, Incentive Awards to Class

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Action Plaintiffs: An Empirical Study, 53 UCLA L. Rev. 1303, 1308

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(2006) (finding incentive awards were granted in about 28 percent

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of settled class actions from 1993 to 2002); but see In re Dry Max

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Pampers Litig., 724 F.3d 713, 722 ("[T]o the extent that incentive

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awards are common, they are like dandelions on an unmowed lawn --

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present more by inattention than by design.").

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Incentive awards are typically justified as compensating class

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representatives for their efforts in the case and are "often taken

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from the class's recovery."

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715 F.3d 1157, 1163 (9th Cir. 2013).

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class counsel is the true leader in the case, and the class

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representative's duties are usually modest.

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Acceptance, LLC, 736 F.3d 1076, 1080-81 (7th Cir. 2013) (Posner,

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J.) ("The class representative receives modest compensation . . .

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for what usually are minimal services in the class action

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suit, . . . which is in fact entirely managed by class counsel.")

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(internal citations omitted).

Radcliffe v. Experian Info. Solutions,
Realistically, however, the

See Phillips v. Asset

Despite the modest duties, such

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awards are more justifiable in employment cases like this one

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because an employee often experiences stigma or retaliation as a

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result of suing his employer.

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one factor relevant to the reasonability of an incentive award is

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whether the named plaintiff reasonably feared retaliation at work).

See Staton, 327 F.3d at 977 (noting

The Ninth Circuit requires district courts to be "vigilant in

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scrutinizing all incentive awards to determine whether they destroy

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the adequacy of the class representatives."

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1164.

Radcliffe, 715 F.3d at

Among other things, the concern about incentive awards and

United States District Court

For the Northern District of California

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the class representative's adequacy is that, when presented with a

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potential settlement, the class representative may "be more

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concerned with maximizing those incentives than with judging the

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adequacy of the settlement as it applies to class members at

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large."

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when the incentive award is disproportionate to the class's

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recovery, because the disproportionality may "eliminate[] a

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critical check on the fairness of the settlement for the class as a

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whole."

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may be "so large in relation to the judgment or settlement that if

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awarded it would significantly diminish the amount of damages

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received by the class."

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F.3d 872, 875-76 (7th Cir. 2012) (Posner, J.) (citations omitted).

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In such circumstances, a class representative "would then have a

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clear conflict of interest . . . ."

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Staton, 327 F.3d at 977.

Id.

This is particularly salient

In an extreme case, the conditional incentive award

See Espenscheid v. DirectSat USA, LLC, 688

Id.

Here, both the size of the incentive award relative to the

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settlement as a whole and the disparity between the incentive award

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and the average unnamed class members' recovery render Zaldivar

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inadequate.

The $10,000 currently earmarked for Zaldivar is more

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than 7 percent of the total settlement fund, more than 15 percent

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of the total amount of the common fund earmarked for the class, and

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more than 37 times the $269 average net recovery of the unnamed

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class members.

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incentive award to Zaldivar, the $10,000 provided for him in the

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settlement agreement would be paid out to unnamed class members,

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Settlement Agreement § 2.26, thus increasing the average net

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recovery of unnamed class members to (by the Court's math) over

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$310, an increase of 15 percent.

Furthermore, if the Court were to deny any

This is grossly disproportionate

United States District Court

For the Northern District of California

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when compared to both empirical research showing incentive awards

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constitute on average 0.16 percent of the class recovery, with a

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median of 0.02 percent,3 Eisenberg & Miller, Incentive Awards,

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supra, 53 UCLA L. Rev. at 1339, and similar cases approving

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incentive awards.

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213 F.3d 454, 463 (9th Cir. 2000) (approving an incentive award of

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$5,000 constituting only 0.56 percent of the settlement fund);

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Ontiveros v. Zamora, Civ. No. 2:08-567 WBS DAD, 2014 WL 3057506, at

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*9 (E.D. Cal. July 7, 2014) ("An incentive award consisting of one

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percent of the common fund is unusually high, and some courts have

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been reticent to approve incentive awards that constituted an even

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smaller portion of the common fund.") (collecting cases).

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incentive awards at or near just one percent of the common fund

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payable to the class "will receive intense scrutiny and require

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exceptional justification."

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(11th ed. 2014).

See, e.g., In re Mego Fin. Corp. Sec. Litig.,

In fact,

2 McLaughlin on Class Actions § 6:28

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Eisenberg and Miller also found that the mean and median for
employment cases (excluding employment discrimination) is 0.06
percent of the class recovery, although the study included only
three employment class actions. 53 UCLA L. Rev. at 1339.

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A recent case, Wallace v. Countrywide Home Loans, Inc., 2014

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WL 5819870 (C.D. Cal. Apr. 14, 2014), illustrates the Court's

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concerns with this settlement.

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Central District of California denied preliminary approval in a

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case asserting similar overtime claims, finding the disparity

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between the named plaintiffs' incentive awards and the classes

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recovery "seriously jeopardizes the adequacy of the Lead Plaintiffs

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to represent absent class members in settling their claims.

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2014 WL 5819870, at *5.

In Wallace, Judge Staton on the

See

The settlement in Wallace created a common

United States District Court

For the Northern District of California

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fund of $10.5 million, and provided for class members to receive

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the lesser of $1,500 or an equation taking into account the number

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of overtime hours worked on average in excess of five hours per

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week multiplied by the overtime pay rate.

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time, the three lead plaintiffs could apply to the Court for an

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incentive award of $50,000 each in addition to whatever they would

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be entitled under the settlement.

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the $50,000 figure was a maximum subject to court approval, Judge

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Staton concluded that by offering the possibility of an incentive

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award 33 times greater than the maximum recovery for each class

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member, "the Settlement Agreement threatens the capacity of the

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Lead Plaintiffs to adequately represent the class."

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Id. at *3.

Id. at *4.

At the same

Acknowledging that

Id. at *5.

Here, not only is Zaldivar's incentive award 37 times greater

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than the amount an average class member will receive, but it also

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makes up 7 percent of the entire settlement pool, attorneys' fees,

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administration costs, and class compensation included.

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result, the Court seriously questions whether Zaldivar "could be

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expected to fairly evaluate whether awards [averaging $269 are] a

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fair settlement value when [he may] receive [a $10,000] incentive

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As a

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award[]."

Radcliffe, 715 F.3d at 1165.

Admittedly, this award is subject to the Court's approval,

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however as the Wallace court pointed out, the Ninth Circuit's

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concerns in Radcliffe were not ameliorated by the possibility the

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court might deny or reduce the award.

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*5 (citing Radcliffe, 715 F.3d at 1162, 1165-66).

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cutting Zaldivar's incentive award prior to final approval would

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address the Court's concern that $10,000 overcompensates him for

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his duties, but would do nothing to address the Court's concern

Wallace, 2014 WL 5819870, at
On the contrary,

United States District Court

For the Northern District of California

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that the disproportionality of the incentive award has destroyed

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Zaldivar's adequacy.
To be clear, the Court is not suggesting that Zaldivar is

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irretrievably inadequate or that an incentive award is

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impermissible in this case.

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justify a reasonable incentive award, likely no more than $5,000

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(and perhaps significantly less depending on the size of an

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eventual settlement).

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relevant factors for an incentive award including the actions of

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the named plaintiff, degree of benefit to the class, time and

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effort expended, and fears of workplace retaliation).

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Court cannot approve the settlement as it stands now because the

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size and disproportionality of the proposed incentive award

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seriously jeopardizes Zaldivar's adequacy to represent the unnamed

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class members.

Indeed, the facts of this case likely

See Staton, 327 F.3d at 977 (stating

However, the

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V.

CONCLUSION
For the reasons set forth above, preliminary approval is

DENIED.

In closing, the Court notes that the parties have not

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provided enough information about the potential value of the class'

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claims if they are taken to verdict.

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because the damages the class may receive at trial are an important

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factor in assessing the amount offered in the settlement.

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Bayat, 2015 WL 1744342, at *4 (citing In re HP Inkjet Printer

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Litig., 716 F.3d 1173, 1178-79 (9th Cir. 2013); Laguna Coverall N.

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Am., Inc., 753 F.3d 918, 929 (9th Cir. 2014) (Chen, J.,

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dissenting), vacated on other grounds, 772 F.3d 608 (9th Cir.

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2014)).

United States District Court

For the Northern District of California

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This information is important

See

The parties shall provide this information along with any

future proposed settlement.

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IT IS SO ORDERED.

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Dated: May 8, 2015
UNITED STATES DISTRICT JUDGE

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