Roes v. SFBSC Mgmt., LLC

944 F.3d 1035

Jane ROES, 1–2, on behalf of themselves and all others similarly situated, Plaintiff-Appellee,

v.SFBSC MANAGEMENT, LLC; Chowder House, Inc.; Deja Vu-San Francisco, LLC ; Roaring 20's, LLC ; Garden of Eden, LCC; S.A.W. Entertainment Limited; Deja Vu Showgirls of San Francisco, LLC; Gold Club-S.F., LLC ; Bijou-Century, LLC ; BT California, LCC, Defendants-appellees,

v.Sarah Murphy ; Poohrawn Mehraban; Devon Locke, Objectors-Appellants.

No. 17-17079

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 16, 2018 San Francisco, California

Filed December 11, 2019

Shannon Liss-Riordan (argued), Lichten & Liss-Riordan P.C., Boston, Massachusetts, for Objectors-Appellants.

F. Paul Bland Jr. (argued) and Karla Gilbride, Public Justice P.C., Washington, D.C.; Steven G. Tidrick and Joel B. Young, The Tidrick Law Firm, Oakland, California; for Plaintiffs-Appellees.

Douglas J. Melton (argued) and Shane M. Cahill, Long & Levit LLP, San Francisco, California, for Defendants-Appellees.

Eli Naduris-Weissman, Rothner Segall & Greenstone, Pasadena, California; Charles P. Yezbak III, Yezbak Law Offices PLLC, Nashville, Tennessee; for Amicus Curiae International Entertainment Adult Union.

Before: A. Wallace Tashima and Milan D. Smith, Jr., Circuit Judges, and Lawrence L. Piersol,^* District Judge.

TASHIMA, Circuit Judge:

This case arises out of a dispute under federal and California labor law whether exotic dancers working at various nightclubs in San Francisco were misclassified as independent contractors rather than being treated as employees. The district court approved a class action settlement that was negotiated in the absence of a certified class. Objectors-Appellants challenge that settlement approval under Federal Rule of Civil Procedure 23 (" Rule 23"). They contend that the settlement was inadequate because it recovered only a fraction of the class claims' value, accorded too much weight to worthless "coupons" and injunctive relief, and that the district court disregarded indicia of collusion that warranted additional scrutiny. Objectors-Appellants also challenge the adequacy of the notice process because it involved only a single notice sent by U.S. mail and hanging posters in the defendant nightclubs, and lacked any electronic outreach.

Because the notice did not meet Rule 23's "best notice that is practicable under the circumstances" standard, and because, in granting approval of the settlement, the district court failed to apply the correct legal standard and conduct the heightened inquiry we require for review of class action settlements negotiated without a certified class, we reverse approval of the notice and of the settlement, and remand for further proceedings.

BACKGROUND

In 2014, Plaintiffs Jane Roes Nos. 1–2 filed this putative class and collective action alleging violations of the Fair Labor Standards Act ("FLSA"), 29 U.S.C. §§ 201 – 219, and various provisions of the California Labor Code and San Francisco municipal ordinance. The named Plaintiffs, as well as the nearly 4,700 members of the putative Rule 23 class, worked as exotic dancers at eleven adult entertainment clubs in San Francisco. Plaintiffs brought suit against Defendant SFBSC Management, LLC ("SFBSC"), which, "broadly speaking," managed the eleven nightclubs where class members worked.

Plaintiffs alleged that they were misclassified as independent contractors and should have been classified as employees of SFBSC. Plaintiffs sought to recover the following categories of damages on a classwide basis: unpaid minimum wages under federal, state, and San Francisco law for all hours worked on the clubs' premises; reimbursement of stage fees paid to the clubs for each night that a dancer worked; unpaid overtime wages; liquidated damages; PAGA penalties¹ ; and attorneys' fees and costs.

A. Litigation History

Shortly after the case was filed, SFBSC brought a motion to compel arbitration. The district court denied that motion on March 2, 2015, holding that the relevant arbitration provision was unconscionable and therefore unenforceable. SFBSC appealed the district court's decision, but we affirmed, albeit on the alternative ground that SFBSC lacked standing to enforce the arbitration provisions at issue because SFBSC was not a party to the relevant contracts between the nightclubs and class members, which contained the arbitration provision. See Roes v. SFBSC Mgmt., LLC , 656 F. App'x 828, 829 (9th Cir. 2016).

During the appeal concerning the arbitration issue, "the parties conducted three in-person mediations and multiple telephone conferences with the Ninth Circuit Mediator, exchanging information about working conditions, hours worked, compensation, and the parties' relative control over their work, among other matters." Ultimately, the parties executed a settlement agreement and, per the parties' stipulation, we then dismissed the appeal without prejudice to its reinstatement if the district court did not approve the parties' settlement. As part of the settlement, and for settlement purposes only, the parties agreed to add the eleven individual nightclubs as defendants; they submitted a proposed second amended complaint to that effect.

Meanwhile, during the appeal and negotiation process, counsel who now represents Objectors Sarah Murphy, Poohrawn Mehraban, and Devon Locke (collectively, "Objectors") brought two separate misclassification suits directly against three of those nightclubs—Larry Flynt's Hustler Club, the Gold Club, and Condor Gentlemen's Club. The suits, Hughes v. S.A.W. Entm't, Ltd. , 16-cv-03371-LB (N.D. Cal.), and Pera v. S.A.W. Entm't, Ltd. , 17-cv-00138-LB (N.D. Cal.), involve the same kind of substantive claims for wage-and-hour violations as are involved here. When the plaintiffs in those cases discovered that they were part of the putative class in this case, and learned the proposed terms of the settlement in this case, they objected to preliminary approval of the settlement.

B. The Settlement and its Approval

Following dismissal of the appeal, the Roe parties moved for preliminary approval of their proposed class action settlement pursuant to Rule 23(e). The Settlement Agreement proposed to release wage claims against SFBSC, as well as against the individuals and entities—which had not been named in the original complaint—that directly owned and operated the eleven nightclubs in San Francisco. In return, the settlement included several different types of consideration.

First, the proposed settlement provided for two tiers of cash: a first tier of $2 million ("First Tier Cash Pool") and a possible second tier of up to $1 million ("Second Tier Cash Pool"). The First Tier Cash Pool would be used for: (1) cash compensation to Settlement Class Members who timely elected to receive a Cash Payment, (2) attorneys' fees and expenses, (3) enhancement payments of up to $71,000 total, (4) a $100,000 PAGA payment,² and (5) administrative costs of up to $50,000. Only if the sum of those five items exceeded $2 million, would the defendants be required to fund the Second Tier Cash Pool in the amount, up to $1 million, sufficient to fully cover the sum of the valid claims for cash payment, the attorneys' fees and expenses, the enhancement payments, the PAGA payment, and administrative costs. Under the proposed settlement, the Cash Payments were calculated based on the number of months in which a class member had worked for the nightclubs during the class period, and ranged from $350 to $800, although the amount could be increased or reduced on a pro rata basis based on the number of claims submitted. To receive a Cash Payment, class members had to submit an FLSA claim form by the deadline.

Second, the proposed settlement also provided for up to $1 million in "dance fee payments." A "dance fee" is the published amount that a customer at the defendant nightclubs must pay to a dancer for each dance that she performs.³ The clubs normally retain a significant portion of those fees pursuant to their "Dancer Contracts." As part of the settlement, a class member who continues to work at one of the defendants' clubs could claim as much as $8,000 in "dance fee payments" in lieu of a cash settlement share. Such "dance fee payments" would allow a class member to, on specified nights, keep the "dance fees" that she would normally remit to the clubs. Specifically, a dancer could receive up to $5,000 in "dance fee payments" to be used at a "Primary Nightclub" she designates on her claim form, and up to $3,000 to be used at her "Secondary Nightclub."⁴ . The settlement required a class member to schedule, at least three business days in advance, a Date of Performance at her Primary or Secondary Nightclub during the two-year Dance Fee Redemption Period. On that Date of Performance, she would then be permitted to retain 100% of the dance fees she earned, capped at her total dance fee payment allocation for that nightclub.

If the total amount of Dance Fee Payments claimed was less than $100,000 for any of the defendant nightclubs, that nightclub would create a "Residual Dance Fee Payment Pool" for the residual amounts. Class members who did not submit an FLSA claim form during the original claims period could claim dance fee payments from the Residual Pool by submitting a Residual Dance Fee Claim Form, which would be available from management at the clubs and would contain an acknowledgment that the claimant did not submit an FLSA claim. The dance fee payment vouchers were set to expire in two years, at which time the "value" of any unredeemed claims (i.e., of dance fee payments that class members had claimed, but had not yet cashed in by working on a scheduled Date of Performance) would revert to the defendant nightclubs.

Third, the settlement also included an injunction memorializing the clubs' offer of employee status to prospective dancers, under which any dancer interested in working at the clubs would be given the "option" of working as...