Marchelos et al v. Reputation.Com

Filing 41

ORDER RE: TENTATIVE RULING ON MOTION FOR PRELIMINARY SETTLEMENT APPROVAL; CONTINUING HEARING ON MOTIONS; AND DIRECTING PLAINTIFFS TO FILE WRITTEN RESPONSE, Set/Reset Deadlines as to 37 MOTION for Settlement Preliminary Approval. Motion Hearing set for 4/16/2013 is CONTINUED to 4/30/2013 02:00 PM in Courtroom 5, 2nd Floor, Oakland before Hon. Yvonne Gonzalez Rogers. Signed by Judge Yvonne Gonzalez Rogers on 4/12/13. (fs, COURT STAFF) (Filed on 4/12/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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GEORGE MARCHELOS, AMY
KASSENBROCK et al.,

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Plaintiff(s),

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v.

Case No.: 12-CV-01899 YGR
TENTATIVE RULING ON MOTION FOR
PRELIMINARY SETTLEMENT APPROVAL;
CONTINUING HEARING ON MOTION; AND
DIRECTING PLAINTIFFS TO FILE WRITTEN
RESPONSE

REPUTATION.COM,

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Defendant(s).

Northern District of California

United States District Court

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TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD, PLEASE TAKE NOTICE OF THE FOLLOWING

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TENTATIVE RULING FOR THE HEARING SCHEDULED ON TUESDAY, APRIL 16, 2013 AT 2:00 P.M.
The Court has reviewed the Motion for Preliminary Approval of Class Settlement and the

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Stipulation and Settlement of Class & Collective Action Claims and is inclined to DENY the Motion

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because the proposed settlement has an obvious deficiency in that it will release claims brought under

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the Fair Labor Standards Act (“FLSA”) irrespective of whether Class Members affirmatively choose

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to join the action.
This is a tentative ruling and Plaintiffs are DIRECTED to file a written response addressing the

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issues raised in this Order. To allow Plaintiffs sufficient time to file their response, the Court

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CONTINUES the hearing to April 30, 2013. However, if the Plaintiffs stipulate in writing to entry of

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the tentative ruling, the hearing shall be taken off calendar, and the tentative ruling shall become the

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Order of the Court.
The Court TENTATIVELY DENIES the Motion WITH LEAVE TO REFILE as follows:

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I.

INTRODUCTION
Plaintiffs allege that their former employer, Defendant Reputation.com, misclassified its

employees as “exempt” employees not entitled to the protection of state and federal overtime laws,

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and that it failed to maintain wage and hour records required by state and federal laws. Plaintiffs

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filed this action as a “hybrid” wage-and-hour collective action and class action―a collective action

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under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201 et seq. (Claim 1); and a putative

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class action under various provisions of the California Labor Code and Wage Orders, and California

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Business and Professions Code §§ 17200 et seq. (Claims 2 through 7). The FLSA claim is the basis

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for this Court’s jurisdiction.
Plaintiffs have filed a Motion for Preliminary Approval of Class Settlement and the

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Stipulation and Settlement of Class & Collective Action Claims requesting: Certification of a

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Settlement Class (with named Plaintiffs as Class Representatives and their attorneys as Class

Notice to the members of the class; and a Fairness Hearing be scheduled in this matter. Plaintiffs’

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Northern District of California

Counsel); Preliminary Approval of the Class Settlement; Approval of the form and content of the

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United States District Court

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motion for preliminary approval seeks only to certify a Rule 23 opt-out class; the motion does not

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seek to certify a collective action under the FLSA, though the settlement will release these claims.
Having reviewed the Motion for Preliminary Approval of Class Settlement and the Stipulation

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and Settlement of Class & Collective Action Claims, the Court hereby DENIES the Motion. The

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proposed settlement has an obvious deficiency in that it will violate the FLSA by releasing claims

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under the FLSA irrespective of whether putative Class Members affirmatively choose to join the

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action.

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II.

BACKGROUND

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Reputation.com provides a service to businesses and individuals concerned about negative or

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unflattering internet content. Reputation.com attempts to improve its customers’ image with respect

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to internet content, in part by creating “positive” internet content to counteract and/or gain internet

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search engine “priority” over negative content when the customer’s name is the object of an internet

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search.

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Reputation.com has two categories of employees: “Reputation Associates” and “Advanced

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Client Services.” The principal job duty of both categories of employee is to sell Reputation.com’s

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services through telephone conversations with potential customers, often after potential customers

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have called Reputation.com to inquire about its services. Defendant paid all of its employees through

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a combination of base salary and commissions earned from the sales employees generated. Plaintiffs

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contend they worked substantial overtime hours but that Reputation.com did not pay them overtime

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premiums because Reputation.com misclassified them as “exempt.”
On April 17, 2012, Plaintiffs George Marchelos and Amy Kassenbrock filed this putative

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class and collective action in federal court against Reputation.com, Inc., alleging that Defendant

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failed to compensate them for overtime as required by federal and state law. The parties engaged in

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informal discovery. On October 24, 2012, the parties met for a formal mediation with Mark S. Rudy.

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After a lengthy mediation, Mr. Rudy formulated a mediator’s proposal that he reduced to writing.

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The parties accepted the proposal subject to minor modifications. Plaintiffs now seek preliminary

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approval of the parties’ Settlement Agreement and certification of a settlement class.1

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III.

Preliminary approval of a settlement and notice to the proposed class is appropriate if “the

Northern District of California

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United States District Court

LEGAL STANDARD

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proposed settlement appears to be the product of serious, informed, noncollusive negotiations”; “has

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no obvious deficiencies”; “does not improperly grant preferential treatment to class representatives or

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segments of the class”; and “falls with the range of possible approval.” In re Tableware Antitrust

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Litig., 484 F. Supp. 2d 1078, 1079 (N.D. Cal. 2007) (citing Manual for Complex Litigation, § 30.44

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(2d ed. 1985)). Here, the settlement was reached in a procedurally fair manner, after conducting

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some discovery, and is the result of arms-length negotiations between the parties with the assistance

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of an experienced mediator. However, the proposed settlement has an obvious deficiency in that it

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will violate the FLSA.

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IV.

DISCUSSION

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Plaintiffs brought this as a “hybrid” wage-and-hour class action, yet seek to certify only a

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Rule 23 opt-out class; they do not seek to certify a collective action under the FLSA. The opt-out

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procedures of Rule 23 do not apply to claims for violations of the FLSA. See Kinney Shoe Corp. v.

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Vorhes, 564 F.2d 859, 862 (9th Cir. 1977), overruled on other grounds by Hoffmann-La Roche Inc. v.

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Plaintiffs seek to certify the following class under Rule 23: “Any and all persons employed for more than
one day by Reputation.com as a Reputation Advisor (‘RA’) or an Advanced Client Solutions provider
(‘ACS’), at any level or seniority (including managers), at any time from April 1, 2010 through and including
February 26, 2013.”

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Sperling, 493 U.S. 165, 167 n. 1 (1989) (“The clear weight of authority holds that Rule 23 procedures

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are inappropriate for the prosecution of class actions under § 216(b)”) (quoted in Wang v. Chinese

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Daily News, Inc., 623 F.3d 743, 761 (9th Cir. 2010) cert. granted, judgment vacated, 132 S. Ct. 74

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(2011)). Collective actions under the FLSA are governed by the opt-in provision of Section 216(b).2

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When Congress enacted this opt-in requirement, it “was for the purpose of limiting private FLSA

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plaintiffs to employees who asserted claims in their own right.” Hoffman-La Roche, Inc. v. Sperling,

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493 U.S. 165, 173 (1989). While the opt-in provision of Section 216(b) of the FLSA does not

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preclude certification of Plaintiffs’ state law wage-and-hour claims under Rule 23, it does preclude

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certification of Plaintiffs’ FLSA claim.
Unlike a class action under Rule 23 of the Federal Rules of Civil Procedure, where a member

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Northern District of California

of the class must expressly request exclusion from the class, a representative action under the FLSA

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United States District Court

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requires affirmative consent to be included in the class. McElmurry v. U.S. Bank Nat’l Assoc., 495

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F.3d 1136, 1139 (9th Cir. 2007). Thus, the res judicata effect of the FLSA representative action

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extends only to those individuals that consent to inclusion in the class, as distinguished from a Rule

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23 opt-out class action in which the res judicata effect of a judgment extends to the entire class. The

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proposed settlement will release claims under the FLSA irrespective of whether Class Members

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affirmatively choose to join the action.3 This violates the FLSA’s requirement that an employee

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consent to be bound by the judgment.
For the reasons set forth above, the Court cannot certify Plaintiffs’ FLSA claim under Rule 23

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and the Court cannot approve a settlement that extinguishes the FLSA claims of individuals who do

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not consent to join this lawsuit.

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V.

CONCLUSION

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When a court undertakes a fairness inquiry, “the settlement must be ‘taken as a whole, rather

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than the individual component parts.’” Tijero v. Aaron Brothers, Inc., 10-CV-1089 SBA, 2013 WL

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“No employee shall be a party plaintiff to any such action unless he gives his consent in writing to become
such a party and such consent is filed in the court in which such action is brought.” 29 U.S.C. § 216(b).

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The proposed claim form contemplates that the class members must “consent to join this lawsuit under the
Fair Labor Standards Act, 29 U.S.C. § 216(b),” but the settlement agreement does not exclude those
employees who do not so consent. (See Dkt. No. 39-1 at 52.)

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60464, at *6 (N.D. Cal. Jan. 2, 2013) (quoting Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th

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Cir. 1998)). The treatment of the class members’ FLSA claims relates to the provisions of the

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Settlement itself. “The Court has no power to ‘delete, modify or substitute certain provisions’―and

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the settlement ‘must stand and fall in its entirety.’” Id.

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Therefore, the Court tentatively ORDERS that the Motion for Preliminary Approval of Class

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Settlement and the Stipulation and Settlement of Class & Collective Action Claims is DENIED WITH

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LEAVE TO REFILE.

By no later than 5:00 p.m. on Thursday, April 18, 2013, Plaintiffs shall file a written

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response to this Order in which they: (1) explain why they seek to certify an FLSA class under Rule

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23 instead of 29 U.S.C. § 216(b); (2) identify the binding legal authority for this Court to certify an

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Northern District of California

The April 16, 2013 hearing is CONTINUED to April 30, 2013 at 2:00 p.m.

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United States District Court

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FLSA class under Rule 23; (3) explain why they believe it is fair to release the FLSA claims of

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absent class members who do not consent to join this lawsuit; and (4) identify the statute, rule, and/or

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binding court decision that authorizes the release of FLSA claims of parties who do not consent to

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join a lawsuit.

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Alternatively, Plaintiffs may stipulate in writing to entry of this tentative ruling. If Plaintiffs

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stipulate to entry of this tentative ruling, then the hearing shall be taken off calendar, and the tentative

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ruling shall become the order of the Court. If Plaintiffs do not so stipulate, the hearing shall be held

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on April 30, 2013.

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IT IS SO ORDERED.
Dated: April 12, 2013
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YVONNE GONZALEZ ROGERS
UNITED STATES DISTRICT COURT JUDGE

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