Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-55479/USCOURTS-ca9-12-55479-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SABRINA LAGUNA, an individual;

CARLOS ACEVEDO, an individual;

TERESA SALAS, an individual; ROES

3–50, on behalf of themselves and in

a representative capacity for all

others similarly situated,

Plaintiffs-Appellees,

AMRIT SINGH,

Objector-Appellant,

v.

COVERALL NORTH AMERICA, INC., a

Delaware corporation; ALLIED

CAPITAL CORPORATION, a Maryland

corporation; ARES CAPITAL

CORPORATION, a Maryland

corporation; CNA HOLDING

CORPORATION, a Delaware

corporation; TED ELLIOTT, an

individual; DOES 5–50, inclusive,

Defendants-Appellees.

No. 12-55479

D.C. No.

3:09-cv-02131-

JM-BGS

OPINION

Appeal from the United States District Court

for the Southern District of California

Jeffrey T. Miller, Senior District Judge, Presiding

Argued and Submitted

November 8, 2013—Pasadena, California

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2 LAGUNA V. COVERALL NORTH AMERICA

Filed June 3, 2014

Before: Ronald M. Gould and Jay S. Bybee, Circuit Judges,

and Edward M. Chen, District Judge.*

Opinion by Judge Gould;

Dissent by Judge Chen

SUMMARY**

Settlement Agreement

The panel affirmed the district court’s approval of a

proposed class action settlement agreement pursuant to

Federal Rule of Civil Procedure 23(e), and the award of

attorneys’ fees to the attorneys for the proposed class. 

The panel held that the district court correctly used the

lodestar method in gauging the fairness of the attorneys’ fee

award, correctly calculated the lodestar amount, and

reasonablyconcluded the agreed upon award was appropriate. 

The panel also held that the district court did not abuse its

discretion in applying the factors of Churchill Vill., L.L.C. v.

Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004), when

examining the fairness of the proposed settlement. The panel

held that the district court had no obligation to make explicit

* The Honorable Edward M. Chen, District Judge for the U.S. District

Court for the Northern District of California, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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LAGUNA V. COVERALL NORTH AMERICA 3

monetary valuations of injunctive remedies. The panel

further held that the district court did not abuse its discretion

in approving the settlement term that objectors be available

for depositions. Finally, the panel held that the district court

did not abuse its discretion when it approved the settlement

agreement consistent with the Class Action Fairness Act’s

notice requirement described in 28 U.S.C. § 1715(b) and (d).

District Judge Chen dissented because he believed that the

record below is bereft of crucial information without which

the district court could not fully review either the adequacy of

the settlement or the reasonableness of the fee award. He

would remand the case for fuller development of the record.

COUNSEL

Shannon Liss-Riordan (argued), Licthen & Liss-Riordan,

P.C., Boston, Massachusetts; Monique Olivier, Duckworth

Peters Lebowitz Olivier, LLP, San Francisco, California, for

Objector-Appellant.

Raul Cadena & Nicole R. Roysdon, Cadena Churchill, LLP,

San Diego, California; L. Tracee Lorens & Wayne Alan

Hughes, Lorens & Associates, APLC, San Diego California,

for Plaintiffs-Appellees.

Norman M. Leon (argued), DLA Piper LLP, Chicago,

Illinois; Mazda K. Antia, Cooley LLP (argued), San Diego,

California; Jeffrey A. Rosenfeld & Nancy Nguyen Sims,

DLA Piper LLP, Los Angeles, California, for DefendantsAppellees.

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4 LAGUNA V. COVERALL NORTH AMERICA

OPINION

GOULD, Circuit Judge:

This case asks us to decide whether a settlement

agreement reached before class certification between

Plaintiffs and Defendants is fair, reasonable, and adequate. 

We agree with the district court that the settlement merits

approval, and we affirm.

I

Coverall North America, Inc. (“Coverall”) is a janitorial

franchising company operating in California. Plaintiffs

brought a class action suit against Coverall in 2009 alleging

that (1) Coverall misclassified its California franchisees as

independent contractors, thereby avoiding the protections

afforded by California’s labor laws to franchisees; and

(2) Coverall breached its franchise agreements, and

committed fraudulent and unfair practices, by removing

customer accounts from franchisees without cause so that it

could resell those accounts to other franchisees. In August

2011, after about two years of significant litigation, the

parties agreed on a settlement. The sole objector, Amrit

Singh, filed an objection to the proposed settlement on

November 14, 2011, and although the objection was not

timely, the district court accepted the filing “in the interest of

determining the issues on the merits.” After a fairness

hearing on November 21, 2011, the district court approved

the settlement agreement on February 23, 2012 pursuant to

Federal Rule of Civil Procedure 23(e).

The settlement agreement is expansive, but the most

contested provisions include the following: (1) Coverall

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LAGUNA V. COVERALL NORTH AMERICA 5

pledges to assign customer accounts to current franchisees,

with the assignments remaining conditional until franchisees

have paid their franchise fees in full; (2) former franchise

owners will receive $475 each and will receive a $750

purchase credit toward a new Coverall franchise; and (3) new

franchisees will have a 30-day right to rescind their franchise

agreements, and upon rescission will receive all the of money

they have paid during that period under the franchise

agreement except for the $75 background investigation fee. 

The settlement agreement also outlines other changes to the

franchise agreements and Coverall’s operating procedures. 

Beyond the agreement generally, Singh contests the award of

$994,800 in attorneys’ fees to Plaintiffs’ attorneys. As of the

fairness hearing on November 21, 2011, two class members

had opted out of the agreement and Singh is the only objector.

II

We review the district court’s approval of a proposed

class action settlement agreement for abuse of discretion. 

Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 963 (9th Cir.

2009); see also United States v. Hinkson, 585 F.3d 1247,

1250 (9th Cir. 2009) (en banc) (giving general abuse of

discretion standard in contexts beyond class actions). Our

review of a class action settlement is “extremely limited,” In

re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 458 (9th Cir.

2000), and we will only reverse upon “a strong showing that

the district court’s decision was a clear abuse of discretion,”

Staton v. Boeing Co., 327 F.3d 938, 960 (9th Cir. 2003)

(quotation marks and citations omitted). We also review for

abuse of discretion the calculation and award of attorneys’

fees. In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d

935, 940 (9th Cir. 2011).

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6 LAGUNA V. COVERALL NORTH AMERICA

III

When a class action settlement agreement is submitted for

approval, “[t]he initial decision to approve or reject a

settlement proposal is committed to the sound discretion of

the trial judge.” Officers for Justice v. Civil Serv. Comm’n,

688 F.2d 615, 625 (9th Cir. 1982). The district court judge

must determine whether the settlement is “fundamentallyfair,

adequate and reasonable.” Id.

We start with fees. Although the parties have agreed on

the award of attorneys’ fees, the district court has an

“independent obligation to ensure that the award, like the

settlement itself, is reasonable.” Bluetooth, 654 F.3d at 941. 

However, we recognize that in the settlement context fees are

a subject of compromise. Staton, 327 F.3d at 966. We have

made clear that “since the proper amount of fees is often open

to dispute and the parties are compromising preciselyto avoid

litigation, the [district] court need not inquire into the

reasonableness of the fees at even the high end with precisely

the same level of scrutiny as when the fee amount is

litigated.” Id.

We note at the outset that two different methods may be

used “for calculating a reasonable attorneys’ fee depending

on the circumstances.” Bluetooth, 654 F.3d at 941. The

lodestar method is most appropriate where the relief sought

is “primarily injunctive in nature,” and a fee-shifting statute

authorizes “the award of fees to ensure compensation for

counsel undertaking socially beneficial litigation.” Id.; see

also Hanlon v. Chrysler Corp., 150 F.3d 1011, 1029 (9th Cir.

1998). That is precisely the situation we face here, because

the settlement provisions that Plaintiffs have sought and

agreed upon are mostly injunctive in nature and a fee shifting

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LAGUNA V. COVERALL NORTH AMERICA 7

statute exists, California Business and Professions Code

§ 17082. We conclude that the district court correctly used

the lodestar method in gauging the fairness of the attorneys’

fee award.

The district court also correctly calculated the lodestar

amount and reasonably concluded that the agreed upon

award, $994,800, was appropriate. In its analysis, the district

court noted that the case had been contentiously litigated for

over two years, and that the report submitted by Plaintiffs’

counsel showing that over 4,500 hours had been billed by six

attorneys, a paralegal, and a law clerk was fair and accurate. 

Using that number, the district court calculated that the

lodestar amount reached almost $3 million. At a third of the

lodestar amount, the district court soundly concluded that the

attorneys’ fee award of $994,800 was reasonable.

Moreover, the district court prudently cross-checked the

award amount against the alternative percentage-of-recovery

method. We have “encouraged courts to guard against an

unreasonable result by cross-checking their calculations

against a second method.” Bluetooth, 654 F.3d at 944–45. 

Generally, courts use a benchmark figure of 25% to gauge the

reasonableness of an award under the percentage-of-recovery

method, which is most appropriate in common fund

settlement cases. Id. at 942; In re Mercury Interactive Corp.

Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010); Six (6)

Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301,

1311 (9th Cir. 1990). Here, the district court correctly noted

that the value of the settlement, and particularly its injunctive

terms, was disputed. While Singh’s figure of $56,525 is

clearly incorrect because it gives no value to the injunctive

terms of the settlement, Plaintiffs may certainly be

overstating the value of the settlement at $20 million. The

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8 LAGUNA V. COVERALL NORTH AMERICA

district court reasonably surmised that even if the value of the

settlement was $4 million—only a part of the amount claimed

by Plaintiffs—the attorneys’ fee award would still be within

the normal bounds of reasonableness. The district court was

within its discretion to find the attorneys’ fee award to be fair,

reasonable, and adequate because it was both significantly

below the lodestar amount and represented an

unobjectionable percentage of recovery once the value of

injunctive relief was considered.

Singh’s main argument against the reasonableness of the

attorneys’ fee award is that the actual value of the settlement,

which he characterizes as primarily the amount of the cash

payments, is so low that the award is unreasonable. Singh

correctly notes that “the benefit obtained for the class” is

important in determining whether to adjust the lodestar

amount and by how much, Hanlon, 150 F.3d at 1029, but any

such adjustment is equitable and squarely at the discretion of

the district court, Hensley v. Eckerhart, 461 U.S. 424, 437

(1983), and Singh presents no evidence that the district court

abused its discretion in declining further adjustment from the

lodestar amount. Moreover, the district court acted within its

proper discretion when it found that the settlement contains

significant benefits for Plaintiffs beyond the cash recovery,

and thus that the award, at about a third of the lodestar

amount, was reasonable.

IV

Turning to the settlement as a whole, Federal Rule of

Civil Procedure 23(e) “requires the district court to determine

whether a proposed settlement is fundamentally fair.” 

Hanlon, 150 F.3d at 1026. As a general rule, a district court

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LAGUNA V. COVERALL NORTH AMERICA 9

must consider the following factors when examining the

fairness of a proposed settlement:

(1) the strength of the plaintiffs’ case; (2) the

risk, expense, complexity, and likely duration

of further litigation; (3) the risk of

maintaining class action status throughout the

trial; (4) the amount offered in settlement;

(5) the extent of discovery completed and the

stage of the proceedings; (6) the experience

and views of counsel; (7) the presence of a

governmental participant; and (8) the reaction

of the class members to the proposed

settlement.Churchill Vill., L.L.C. v. Gen.

Elec., 361 F.3d 566, 575 (9th Cir. 2004);

Torrisi v. Tucson Elec. Power Co., 8 F.3d

1370, 1375 (9th Cir. 1993). In its analysis

under the Churchill factors, the district court

noted that the risks of moving forward with

litigation were significant, both in terms of the

likelihood of success and cost. Plaintiffs

expressed justified concern that the class

members could be forced into individual

arbitration after the Supreme Court’s decision

in AT&T Mobility LLC v. Concepcion, 131 S.

Ct. 1740 (2011), and conflicting case law

supports those concerns.

The district court also agreed with Plaintiffs that

California employment law would likely make obtaining

class certification particularly difficult. Following the

Supreme Court’s decision in Wal-mart Stores, Inc. v. Dukes,

131 S. Ct. 2541 (2011), there was a real prospect that

California’s multi-factor test for employee classification

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10 LAGUNA V. COVERALL NORTH AMERICA

would have proven fatal to any eventual class certification in

this case. As an additional risk, the district court found that

the poor financial health of Coverall seriously increased the

chance that Plaintiffs would be left with nothing if they

continued to litigate their claims. Rounding out its analysis,

the district court noted that no governmental entity had

weighed in on the matter, that Plaintiffs’ attorneys had

significant experience and had demonstrated skill and

diligence throughout the litigation, and that only two class

members had opted out of the agreement.

Further, the district court reasonably found that the

settlement would yield significant benefits for Plaintiffs given

the risks and costs of continuing litigation. The district court

found that, beyond the cash for former franchisees,

“assignment of customer accounts and pledges for

programmatic changes are significant victories.” The district

court elaborated that “once franchises are assigned,

franchisees will own a valuable business they can choose to

sell or continue to operate.” Viewed together, the district

court determined that the Churchill factors supported the

conclusion that the settlement was fair, reasonable, and

adequate.

Singh claims that the district court was “under a special

obligation to make clear, fact-based findings regarding the

value of the non-monetary terms of the settlement,” by which

he seems to contend that the district court should have

assigned a monetary value to the non-monetary terms of the

settlement. But we have never required a district court to

assign a monetary value to purely injunctive relief. To the

contrary, we have stated that courts cannot “judge with

confidence the value of the terms of a settlement agreement,

especially one in which, as here, the settlement provides for

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LAGUNA V. COVERALL NORTH AMERICA 11

injunctive relief.” Staton, 327 F.3d at 959. Monetary

valuation of injunctive relief is difficult and imprecise.1 As

such, we “put a good deal of stock in the product of an armslength, non-collusive, negotiated resolution, and have never

prescribed a particular formula by which that outcome must

be tested.” Rodriguez, 563 F.3d at 965 (internal citations

omitted). The district court has no obligation to make explicit

monetary valuations of injunctive remedies, and it did not

abuse its discretion in applying the Churchill factors to this

case.

Singh also argues that the district court abused its

discretion in not exercising heightened review given the

alleged presence of “warning signs” indicating collusion. 

1 The dissent contends that our precedents contradict this statement. The

dissent relies on Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012), and

Staton, 327 F.3d at 973, referring to Hanlon, 150 F.3d at 1029. See

Dissent 26–27. Neither of those cases is controlling. In Dennis, we held

that a district court must give a valuation where the bulk of the settlement

was a charity cy pres award of “$5.5 million worth of food” without

reference to whether the food was to be valued at cost, wholesale, or retail

value. 679 F.3d at 867 (internal quotation marks omitted). In that case,

the settlement term was not injunctive, could not be determined without

a valuation, and the information would readily be available to the

defendant. Similarly, in Staton, we noted that valuation for injunctive

relief may be considered when there is a “clearly measurable benefit,” and

referred to the cost of a replacement latch for minivans at issue in Hanlon. 

327 F.3d at 973. But in Hanlon, “the district court used its valuation of

the fund only as a cross-check of the lodestar amount” because the

valuation of the injunctive relief was still too uncertain. Staton, 327 F.3d

at 973. We have not required a district court to assign a monetary value

to injunctive relief as amorphous as the right to own a franchise with its

attendant rights and responsibilities. See Dennis, 697 F.3d at 864

(requiring that the district court “explore[] comprehensively all factors”

and “give a reasoned response to all non-frivolous objections” (internal

quotation marks and citation omitted)).

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12 LAGUNA V. COVERALL NORTH AMERICA

Although we must be particularly vigilant in the pre-class

certification context, when there are typically more

opportunities for attorney collusion, Hanlon, 150 F.3d at

1026, we will rarely overturn an approval of a compromised

settlement “unless the terms of the agreement contain

convincing indications that the incentives favoring pursuit of

self-interest rather than the class’s interests in fact influenced

the outcome of the negotiations and that the district court was

wrong in concluding otherwise,” Staton, 327 F.3d at 960.

In Bluetooth, we outlined three settlement arrangements

that could indicate collusion because they may improperly

favor counsel at the expense of the plaintiffs. 654 F.3d at

946–47. These are:

(1) when counsel receive a disproportionate

distribution of the settlement, or when the

class receives no monetary distribution but

class counsel are amply rewarded; (2) when

the parties negotiate a “clear sailing”

arrangement providing for the payment of

attorneys’ fees separate and apart from class

funds . . . ; and (3) when the parties arrange

for fees not awarded to revert to defendants

rather than be added to the class fund.

Id. at 947 (internal quotation marks and citations omitted). 

Although the district court did not explicitly outline these

“warning signs,” contrary to Singh’s assertion, it did

specifically address two of the three. The district court found

the third sign, the presence of a reversion clause, to “not [be]

a preferable result,” but balanced it with the overall benefits

of the settlement to Plaintiffs and the fact that the cash

payment represented a small amount of those benefits.

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LAGUNA V. COVERALL NORTH AMERICA 13

The district court’s analysis, balancing the reversion

clause against the overall strength of the settlement, was

adequate. The first warning sign was not present because the

district court correctly concluded that the attorneys’ fee

award was entirely reasonable. This conclusion has broad

implications for the district court’s obligation to ensure “that

the settlement is not the product of collusion among the

negotiating parties.” Id. (internal quotation marks, citation,

and alteration omitted). Because collusion is the product of

attorneys pursuing their self-interest to the detriment of the

class’s interests, one would expect primarily to find collusion

where attorneys disproportionately benefitted from the

settlement. Id. at 947–48; see Staton, 327 F.3d at 964 (“If

fees are unreasonably high, the likelihood is that the

defendant obtained an economically beneficial concession

with regard to the merits provisions [of the settlement].”). A

settlement may still be the product of collusion when

attorneys’ fees are reasonable. But when, as in this case, the

fee award is clearly reasonable as viewed through the

appropriate application of either the lodestar or percentageof-recovery methods, the chance of collusion narrows to a

slim possibility. In these cases, it is sufficient that a district

court recognizes and balances potentially collusive

provisions, such as the reversion to defendants of unclaimed

funds, against the other terms of the settlement agreement. 

See Bluetooth, 654 F.3d at 948 (“But these factors did not

obviate the need to examine the fee provision in light of the

rest of the agreement.”); Staton, 327 F.3d at 961 (“[I]t will be

rare that we will reverse a district court’s approval . . . unless

the fees and relief provisions clearly suggest the possibility

that class interests gave way to self-interest.”); Hanlon,

150 F.3d at 1026 (“[I]t is the settlement taken as a whole,

rather than the individual component parts, that must be

examined for overall fairness.”).

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14 LAGUNA V. COVERALL NORTH AMERICA

Plaintiffs faced real dangers in proceeding on their case

in light of menacing precedents from the United States

Supreme Court. At the same time, the class gained

significant benefits from the settlement, and Plaintiffs’

lawyers received fees that are overall reasonable. The district

court correctly examined the settlement agreement and did

not abuse its discretion in finding the agreement to be fair,

reasonable, and adequate.

V

The district court’s decision to grant discovery is

reviewed for abuse of discretion. Hallett v. Morgan, 296 F.3d

732, 751 (9th Cir. 2002). As a threshold matter, Singh has

standing to appeal the settlement’s deposition requirement

because the district court ordered that objectors comply with

the relevant settlement provision, and he was later required to

sit for a deposition as the sole objector.

The district court also did not abuse its discretion in

approving the settlement term that objectors be available for

depositions. Federal Rule of Civil Procedure 30(a)(1) allows

a party to conduct depositions, and courts commonly require

objectors to make themselves available for deposition given

the power held by objectors. See, e.g., In re Netflix Privacy

Litig., 289 F.R.D. 548, 554 (N.D. Cal. 2013) (finding that

objectors “have voluntarily inserted themselves into this

action, and as such, depositions . . . are relevant and proper”);

In re TFT-LCD (Flat Panel) Antitrust Litig., No. M 07-

1827SI, 2013 WL 621791 (N.D. Cal. Feb. 19, 2013) (holding

objectors in contempt for refusing to be deposed); In re

Cathode Ray Tube (CRT) Antitrust Litig., 281 F.R.D. 531,

533 (N.D. Cal. 2012). The district court considered the

totality of the circumstances when it concluded that a

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LAGUNA V. COVERALL NORTH AMERICA 15

deposition of Singh was appropriate, including the

deposition’s utility to the court and the scant possibility that

Singh would be harassed or intimidated by giving a

deposition, and the district court was well within its

discretion in so concluding.

VI

Finally, the district court did not abuse its discretion when

it approved the settlement agreement consistent with the

Class Action Fairness Act (“CAFA”) notice requirement

described in 28 U.S.C. § 1715(b) and (d). CAFA requires

that defendants in a class action suit send notice to all

relevant state and federal authorities where class members

reside. 28 U.S.C. § 1715(b). A court may not issue an order

giving final approval of a proposed settlement until 90 days

have passed since the relevant authorities were served with

notice. 28 U.S.C. § 1715(d). When violations of the

28 U.S.C. § 1715(b) notice requirement occur, “[a] class

member may refuse to comply with and may choose not to be

bound by a settlement agreement or consent decree.” 

28 U.S.C. § 1715(e)(1). Rather than asking to be exempt

from the settlement agreement, Singh demands relief beyond

the scope of 28 U.S.C. § 1715—the rejection of the entire

settlement agreement. Because Singh requests no relief tied

to § 1715, he cannot show that a “favorable decision will

provide redress,” and thus he lacks standing on this claim. 

See Knisley v. Network Assocs., Inc., 312 F.3d 1123, 1126

(9th Cir. 2002). And even if Singh had standing to pursue

this claim, it is without merit because the class was clearly

limited to “individuals in the State of California,” and

Coverall properlynotified the AttorneyGeneral of California.

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VII

The district court did not abuse its discretion in finding

the settlement agreement and its attorneys’ fee award to be

fair, reasonable, and adequate. The district court also

appropriately exercised its discretion in ordering that Singh

be available for a deposition.2

AFFIRMED.

2 Although we do not agree with the thoughtful comments of our

dissenting colleague, class action settlement approval is important, and

bench and bar benefit from the expression of more than one view. We

diverge from the dissent on the level of deference to be given to the

district court overseeing the adversarial process, and our disagreements

largely follow from that. Neither our precedent nor that of the Supreme

Court requires the approach taken in dissent. The dissent urges positions

that our precedent to date has not required, such as the assignment of a

particular monetary value to injunctive relief. This case was hard fought

by skilled lawyers for years, the injunctive terms of the settlement are in

our view not illusory because they have practical value, and Plaintiffs’

class action theory was under serious threat by developing Supreme Court

precedents. The district court was well positioned to follow the case’s

progress. The development of the parties’ settlement was aided by a

retired federal judge acting as mediator. We review the district court’s

approval of the settlement for abuse of discretion, and here the district

court did not proceed illogically, improbably or without support from

inferences drawn from facts in the record. Hinkson, 585 F.3d at 1251. All

things considered, we view the settlement as reasonable and within the

range that we should approve.

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LAGUNA V. COVERALL NORTH AMERICA 17

CHEN, District Judge, dissenting:

With reluctance, I dissent from the majority decision

affirming the district court’s approval of the proposed class

action settlement. The record below is bereft of crucial

information – information without which the district court

could not fully review either the adequacy of the settlement

or the reasonableness of the fee award. In particular, the

record is silent as to two essential matters: (1) the portion of

the class eligible to receive the chief non-monetary benefit of

the settlement (i.e., the assignment of customer accounts to

current franchisees) and (2) the value of the monetary relief

to the class (and whether there is a justification for imposing

a claims process with a reverter of unclaimed funds back to

the defendant). The case should be remanded for fuller

development of the record. I also believe this case affords

this Court an opportunity to provide additional guidance to

the district courts in their assessment of proposed class action

settlements.

I am well aware that there are good reasons for a district

judge to afford deference to a settlement reached by

agreement between the parties. See Lane v. Facebook, Inc.,

696 F.3d 811, 819 (9th Cir. 2012) (noting that one factor for

a court to consider in determining the fairness of a class

action settlement is the experience and views of counsel). 

The parties know more about the case and the factors that

lead to settlement than the trial judge does; often there are

facts beyond the record (such as the finances or future

business plans of the defendant or infirmities with the

plaintiff’s ability to prosecute the case) which can have a

substantial and legitimate influence on settlement

negotiations. I also recognize that there are good reasons for

an appellate court to defer to the trial judge’s approval of a

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settlement. See Hanlon v. Chrysler Corp., 150 F.3d 1011,

1026 (9th Cir. 1998) (stating that “[o]ur review of the district

court’s decision to approve a class action settlement is

extremely limited”). The trial judge generally is in a better

position to ferret out the relevant factors and to discern the

subtle dynamics of the litigation warranting approval of a

negotiated settlement. See id. (stating that “the decision to

approve or reject a settlement is committed to the sound

discretion of the trial judge because he is ‘exposed to the

litigants, and their strategies, positions and proof’”).

Nevertheless, the district court has an important and

meaningful role to play in the settlement of a putative class

action. In particular, the district judge has a fiduciary duty to

safeguard the interests of the absent and putative class

members. See, e.g., Sullivan v. DB Invs., Inc., 667 F.3d 273,

319 (3d Cir. 2011) (stating that “‘trial judges bear the

important responsibility of protecting absent class members,’

and must be ‘assur[ed] that the settlement represents adequate

compensation for the release of the class claims’”); Maywalt

v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1078 (2d

Cir. 1995) (noting that “the district court has a fiduciary

responsibility to ensure that the settlement is fair and not a

product of collusion, and that the class members’ interests

were represented adequately”) (internal quotation marks

omitted). That duty is especially important when the interests

of the class and its counsel negotiating on its behalf are not

aligned. See Reynolds v. Benefit Nat’l Bank, 288 F.3d 277,

279–80 (7th Cir. 2002) (stating that the problem that class

counsel “may, in derogation of their professional and

fiduciaryobligations, place their pecuniaryself-interest ahead

of that of the class . . . requires district judges to exercise the

highest degree of vigilance in scrutinizing proposed

settlements of class actions”). Moreover, where the

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settlement agreement is negotiated prior to final class

certification, “There is an even greater potential for a breach

of fiduciary duty owed the class during settlement.” In re

Bluetooth Headset Products Liability Litigation, 654 F.3d

935, 946 (9th Cir. 2011). Thus, in this case, an “even higher

level of scrutiny than that ordinarily required under Rule

23(e)” is warranted. Id.

The terms and structure of the proposed settlement herein

warrant meaningful scrutiny. Its approval must be supported

by the record. Unfortunately, though the district judge

plainly took this duty seriously, I believe the requisite

scrutiny was not possible given the deficiencies in the record. 

The district court’s task was compounded by the lack of

clarity in this Circuit’s law on particular issues discussed

below.

I.

Although the majorityaddresses the reasonableness of the

fee award before addressing the reasonableness of the

settlement’s substantive terms, review ordinarily begins with

the adequacy of the settlement itself. See Bluetooth, 654 F.3d

at 941. Therefore, I address the adequacy of the settlement

first.

Under Federal Rule of Civil Procedure 23(e), a class

action may be settled only with the approval of the district

court, and “[a] district court’s approval . . . must be

accompanied by a finding that the settlement is ‘fair,

reasonable, and adequate.’” Lane, 696 F.3d at 818. Here, a

higher standard of fairness is required because the settlement

took place before formal class certification. See id. at 819.

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A district court must consider a number of factors in

determining whether a proposed settlement is fair and

adequate; these include:

the strength of the plaintiffs’ case; the risk,

expense, complexity, and likely duration of

further litigation; the risk of maintaining class

action status throughout the trial; the amount

offered in settlement; the extent of discovery

completed and the stage of the proceedings;

the experience and views of counsel; the

presence of a governmental participant; and

the reaction of the class members to the

proposed settlement.

Id. See Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566,

575 (9th Cir. 2004).

In the case at bar, the district court adequately considered

many of the Lane/Churchill factors, including the risk of

further litigation. It properly found, for example, that there

was a risk class claims could have been forced into individual

arbitration pursuant to AT&T Mobility v. Concepcion, 131 S.

Ct. 1740 (2011). There was also a risk in obtaining class

certification in light of Wal-Mart Stores, Inc. v. Dukes, 131 S.

Ct. 2541 (2011). Many of the other factors supported

approval.

However, in my view, the district court’s order – although

thorough in most respects – did not adequately assess a

critical factor: the amount offered in settlement. Although

Lane does not expressly order the importance of the

assessment factors, inescapably, the core of any settlement is

“the amount offered in settlement.” In this regard, the district

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court’s order did not determine whether the most significant

terms of the settlement were real or largely illusory. See In

re Dry Max Pampers Litig., 724 F.3d 713, 721 (6th Cir. 2013)

(stating that “[t]he relief that this settlement provides to

unnamed class members is illusory” and therefore finding the

settlement unfair); cf. Dennis v. Kellogg Co., 697 F.3d 858,

868 (9th Cir. 2012) (stating that dollar value of the cy pres

fund should not be fictitious).

Under the settlement, there were two classes that would

receive benefits: (1) current franchisees and (2) former

franchisees. Current franchisees obtained certain equitable

relief – most notably, the assignment of customer accounts

which would confer upon the franchisees economic value that

could not summarily be taken away. As for former

franchisees, each was entitled to $475 in cash and a credit of

$750 (in effect, a coupon) which could be used to purchase a

new Coverall franchise. For the reasons discussed below,

both aspects of the settlement are problematic, and a fuller

record is required in order to properly assess the fairness,

reasonableness, and adequacy of the settlement.

A.

Current Franchisees: Assignment of Customer Accounts

For current franchisees, the primary benefit of the

settlement was the assignment of customer accounts. The

centrality of this benefit is clear: a major claim asserted by

Plaintiffs in this action was a breach of contract based on

Coverall’s “churning” of customers accounts. Churning

involves taking a customer account away from a franchise

owner for a pretextual reason in order to resell the customer

account to a different franchise owner. If accounts were

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assigned to franchise owners, that would prevent the practice

of churning.

The importance of the assignment provision is

underscored by the district court’s order as well as the

parties’ briefs presented to this Court. The district court

stated in its order that “[t]he [Settlement] Agreement provides

separate benefits for current and former franchisees. 

Principally, Coverall pledges to assign customer accounts to

current franchisees.” ER 23 (emphasis added); see also ER

25 (stating that “assignment of customer accounts and

pledges for programmatic changes are significant victories”1). 

Similarly, in Plaintiffs’ appellate brief, the first benefit

highlighted is the assignment of accounts, with Plaintiffs

touting that “[t]he value of the assignment . . . is estimated to

be worth $18 to $20 million per year in California alone.”2

Pls.’ Resp. Br. at 6. Defendants did the same in their own

appellate brief. See Defs.’ Resp. Br. at 36–40.

Because the assignment was the primary benefit of the

settlement for current franchisees, the district court had a duty

to ensure that this benefit had real value. Notably, the burden

of proving that the assignment had real value lay with the

settling parties; it was not Mr. Singh’s burden to disprove it. 

See In re Dry Max Pampers Litig., 724 F.3d at 719 (“[T]o the

extent the parties here argue that the settlement was fair

1 As noted below, the district court “lumped” the programmatic changes

together and did not call out any of the changes as being particularly

meaningful. See note 5, infra.

2 Plaintiffs also argue that it is fair for current franchisees not to get a

monetary award because they “would receive a significant benefit by way

of the assignment of customer accounts.” Pls.’ Resp. Br. at 9.

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because the refund program has actual value for consumers,

it was the parties’ burden to prove the fact, rather than [the

objector’s] burden to disprove it.”).

As to whether the assignment provision of the settlement

would actually benefit current franchisees, that posed a

troubling question because, under the proposed settlement,

the assignment is conditional. See ER 73. That is, until a

current or new franchise owner pays for a customer account

in full (i.e., the full franchise fee, including any financed

portion), there is no actual assignment, and customer accounts

can continue to be taken away pursuant to the old just or good

cause standard.3 But the record contains no information as to

how many or what percentage of franchise owners have paid

their fees in full. In particular, there is no information about

how many franchise owners still owe money on their

franchise fees (and if so, how much); how long it takes an

average franchise owner to pay off a franchise fee; and

whether franchise owners typically leave before they are able

to pay off their franchise fees in full.4 This is significant

because Mr. Singh, the objector, asserted in argument before

this Court that a substantial number of franchisees finance

their franchise fees. See also Pls.’ Op. Br. at 10 n.3 (claiming

that, “[t]ypically, Coverall workers make a down payment

toward [the franchise] fee [which ranges from approximately

 

3

See ER 76 (providing that “[n]othing in this Agreement shall modify,

amend, or otherwise alter . . . the rights and obligations of Coverall and

Current and Former Franchise Owners under their respective Janitorial

Franchise Agreements, which, except as expressly set forth herein, remain

in full force and effect”).

4 The fact that the named Plaintiffs might have been entitled to an actual

assignment does not speak to whether this was true of the remaining class

members (approximately 750 current franchise owners).

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$10,000 to $32,000] and then finance the remaining portion

of the fee by borrowing it from Coverall for a two or threeyear period (at 12% interest)”; adding that, “[w]hen workers

lose accounts and want to obtain more work, they may do so

by then paying fees for ‘additional business,’” and these fees

must also be paid off before any assignment). On the current

record, we do not know whether 5%, 50%, or 95% of the

class will or will likely receive the benefit of the assignment

of accounts.

Moreover, even if a significant portion of current

franchisees were actually able to pay off their franchise fees

and thus get an assignment, the parties’ claim that the value

of the assignment was $18–20 million is still problematic. 

The parties asserted this value because the gross billing of

customer contracts in California in the year 2010 was $18–20

million. See Pls.’ Resp. Br. at 6. But under the settlement

agreement, certain customer accounts are deemed not

assignable. See ER 73 (providing that “certain accounts,

including National Accounts, customer prepared contracts

that preclude assignment, and local multiple location

customer contracts are not assignable”). There does not

appear to be any information in the record as to how many

customer contracts fall within this category, or their worth. 

Thus, the claimed $18–20 million value of the assignment

may well be inflated. The district court’s order did not

address this issue.

Furthermore, although the district court acknowledged

that the assignment of accounts may not have the full $18–20

million value claimed by the parties because of the

conditional nature of the assignment, see ER 30 (“Indeed, it

is unclear whether the assignment of all accounts to

franchisees will reach the $ 18-20 million Plaintiffs claim,

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LAGUNA V. COVERALL NORTH AMERICA 25

especially because assignments are only conditional until

franchises are paid for in full.”), it did not estimate – indeed,

had no basis in the record to estimate – what portion of the

class would actually benefit from the assignment. The

district court could only state that, “once franchisees are

assigned, franchisees will own a value business they can

choose to sell or continue to operate.” ER 30.5

5 The majority points out that, under the settlement, there were also

programmatic changes made for the benefit of current franchisees. 

However, several of the benefits seem relatively modest; others appear to

depend on an account actually being assigned to a current franchisee. 

Benefits in the latter category have no value if there is not an assignment

in the first place. The programmatic changes include the following:

(1) “Commencing sixty (60) days after the Effective Date, New

Franchise Owners shall be granted a thirty (30) day option to rescind

their [Janitorial Franchise Agreements],” and “all monies they paid

to Coverall, less the then-current cost of Coverall’s background

investigation, which is currently $75.00,” shall be returned to them. 

ER 74. Notably, this benefit accrues to new franchisees only – i.e.,

those persons or entities who enter into a JFA after the effective date

of the settlement. See ER 71. Furthermore, the new franchisees

would simply be getting their money back in return for giving back

the franchises, and the amount of money would likely be limited

given that only a 30-day period is covered and it is not unusual for

franchises to be financed. See ER 138.

(2) “Coverall will agree to re-purchase from Current and New Franchise

Owners all accounts that are in good standing, both financially and

operationally . . . .” ER 74. It is not clear whether Coverall can repurchase customer accounts unless the franchisees actually have been

assigned the accounts in the first place. Although Defendants’ brief

suggests that repurchase without assignment is possible, that is not

evident from the face of the settlement agreement, and the record

does not clarify this point.

(3) “Current and New Franchise Owners may cease servicing a customer

for non-payment at any time they see fit . . . .” ER 75. Plaintiffs’

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The majority correctly states that the district court

ordinarily need not necessarily place a specific monetary

brief indicates that this right applies only where there has been an

assignment of an account in the first place. See Pls.’ Resp. Br. at 6

(“As part of Coverall’s assignment of customer accounts to current

franchisees, franchisees shall have the right to cease servicing a

customer for non-payment at any time they see fit . . . .”); see also AR

171 (declaration of class counsel, noting the same).

(4) “[T]he term of the post-termination and post-expiration

noncompetition clause set forth in the FJAs shall be reduced from

eighteen (18) months to twelve (12) months.” ER 75.

(5) “Coverall will offer to replace any customer account that is lost with

one or more customer accounts of equal or greater monthly dollar

volume within a reasonable period of time of the account loss, as long

as the customer account is lost through no fault of the Franchise

Owner . . . ; and (ii) the customer account is lost within the applicable

guarantee period as set forth in the JFA.” AR 75. Similar to above,

it is not clear from the face of the settlement agreement or the record

below whether this benefit applies only if the franchisee actually

owns (i.e., has been assigned) the account.

(6) “Coverall . . . represents that it shall continue to attempt to offer

Franchise Owners accounts that are located within a reasonable

proximity of each other.” AR 75.

(7) “Coverall shall provide, and all new Franchise Owners shall be

required to attend, Initial Training on the operation of a franchise

business, record keeping, and the bidding of customer accounts. 

Current Franchise Owners will be permitted, but are not required, to

attend such training. . . . Coverall’s training materials shall be

available in both English and Spanish.” AR 75.

(8) “Coverall will include in the disclosure document it gives to

prospective franchisees the terms and conditions of coverage under

the commercial general liability policy that it is then making available

to Franchise Owners.” AR 76.

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value on injunctive relief. See, e.g., Staton v. Boeing Co.,

327 F.3d 938, 959 (9th Cir. 2003) (stating that courts cannot

“judge with confidence the value of the terms of a settlement

agreement [in which] the settlement provides for injunctive

relief”). Still, given the importance of the “amount offered in

settlement” in assessing the fairness and adequacy of a class

settlement, valuation of benefits should be “examined with

great care.” Dennis, 697 F.3d at 868 (finding the settlement

valuation “unacceptably vague and possibly misleading” and

noting that “[t]he issue of the valuation . . . must be examined

with great care to eliminate the possibility that it serves only

the ‘self-interests’ of the attorneys and the parties, and not the

class, by assigning a dollar number to the fund that is

fictitious”). In any event, while it is true that equitable relief

sometimes is not capable of quantitative valuation (for

example, where equitable relief is directed to dignitary

interests such as privacy rights), where that relief has some

calculable monetary value and is central to the relief

obtained, some meaningful effort should be made to

determine the “amount offered in settlement.” Cf. Fed. R.

Civ. P. 23(h), 2003 advisory committee notes (stating that

“[s]ettlements involving nonmonetary provisions for class

members also deserve careful scrutiny to ensure that these

provisions have actual value to the class”).

In the case at bar, the assignment of accounts is capable

of quantitative valuation, even if that value cannot be

precisely determined. See, e.g., Staton, 327 F.3d at 978

(noting that value of benefits from injunctive relief may be

included in common fund calculation where value can be

accurately ascertained – e.g., in a prior case, there was clearly

a measurable benefit of one replacement latch for each

minivan owned, and thus the court could, “with some degree

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28 LAGUNA V. COVERALL NORTH AMERICA

of accuracy, value the benefits conferred”).6Indeed, as noted

above, the parties themselves valued the assignment at

approximately $18–20 million.7See Pls.’ Resp. Br. at 6; see

also ER 74 (providing that “Coverall represents that, in 2010,

the gross billing of the customer contracts in the State of

California was approximately $20 million”). The factor that

is missing from the calculus (and missing from the record) is

the number or percentage of current franchisees who actually

will or, at least, will likely receive the benefit.

Absent anything in the record which would shed light on

this crucial variable, the district court was not in a position to

6 The majority correctly notes that Staton discussed the value of

injunctive relief in the context of analyzing fees. However, Ninth Circuit

law requires a district court to consider the “amount offered in settlement”

as a factor in deciding whether to approve a class action settlement, and

district courts have naturally considered the value of injunctive relief

under this factor (which is reasonable as there is no other factor that

accommodates consideration of the value of injunctive relief). See, e.g.,

Ko v. Natura Pet Prods., No. C 09-02619 SBA, 2012 U.S. Dist. LEXIS

128615, at *12–13 (N.D. Cal. Sept. 10, 2012). It makes little sense to say

that the value of injunctive relief should be considered for purposes of

evaluating fees but not for purposes of evaluating the value of the

settlement. Cf. Reynolds v. Beneficial Nat. Bank, 288 F.3d 277, 283 (7th

Cir. 2002) (reversing district court approval of class action settlement

based on various grounds, including the fact that there was “injunctive

relief the value of which no one has attempted to monetize and which is

barely discussed in the briefs or by the judge”).

7 The majority suggests that “the right to own a franchise with its

attendant rights and responsibilities” has an “amorphous” value. Maj. Op.

at 11 n.1. However, the value of the accounts that accompany the

ownership has real dollar value. Accordingly, the parties gave the

injunctive relief a quantitative value. Moreover, the district court did not

find that the right to own a franchise had less value because of “attendant

rights and responsibilities.”

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conclude that the settlement was fair, reasonable, and

adequate. Although “[w]e review the district court’s approval

of a class-action settlement for abuse of discretion,” Radcliffe

v. Experian Info. Solns., 715 F.3d 1157, 1162 (9th Cir. 2013),

and, under such review, “[w]e are not permitted to ‘substitute

our notions of fairness for those of the district court and the

parties to the agreement,’” Class Plaintiffs v. Seattle,

955 F.2d 1268, 1276 (9th Cir. 1992), a district court’s

approval cannot be affirmed where its “findings of fact were

. . . without support in the record.”8 Radcliffe, 715 F.3d at

1162. Here, the record was not sufficiently developed on

what should be a central factor in assessing the fairness,

reasonableness, and adequacy of the class settlement – “the

amount offered in settlement.” Lane, 696 F.3d at 819.

B.

Former Franchisees: Monetary Relief

With respect to the monetary portion of the settlement,

former franchisees are each entitled to $475 in cash and a

credit of $750 towards a purchase of a new Coverall

franchise. There were approximately 750 former franchisees

in the class. Therefore, Defendants would, in theory, pay a

maximum of $918,750 to former franchises.

The monetary terms of the settlement, however, are

suspect. Although the $918,750 class fund was identified as

a potential pay-out, neither side expected Defendants would

8 The majority concedes in its opinion that, even under abuse-ofdiscretion review, a settlement cannot be approved if the district court did

not proceed without support from inferences drawn from facts in the

record. See Maj. Op. at 16 n.2.

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actually pay anywhere close to this sum under the structure of

the proposed settlement. This is because, under the

settlement, (1) pay-outs would be made only to those class

members who submitted claims, and (2) any unclaimed funds

would revert back to Defendants rather than being

redistributed to claiming class members or distributed to a cy

pres beneficiary.

As district courts have pointed out, “in a reversionary

common fund or a claims-made settlement, the defendant is

likely to bear only a fraction of the liability to which it

agrees.” In re TJX Cos. Retail Sec. Breach Litig., 584 F.

Supp. 2d 395, 405 (D. Mass. 2008) (emphasis added); see

also Sylvester v. Cigna Corp., 369 F. Supp. 2d 34, 52 (D. Me.

2005) (stating that parties’ evidence indicated that “‘claims

made’ settlements regularly yield response rates of 10 percent

or less”; adding that “the parties’ expectations of a low

response rate gives the reverter clause real value for

Defendants”). Researchers and commentators have also

confirmed that, while results vary from case to case

depending on a number of factors, it is common that only a

fraction of the class in class action settlements actually

submit claims. See, e.g., Max Helveston, Promoting Justice

Through Public Interest Advocacy in Class Actions, 60 Buff.

L. Rev. 749, 782–83 (2012) (noting that there are “a variety

of different explanations” for low claims rates – e.g., “the

difficulty of notifying class members, the overly complex and

technical notifications that class members receive, the effort

required to pursue a claim, the lack of interest of class

members in the types of relief available, and the failure of

fund designers to design claim procedures in ways that take

into account cognitive biases” – but adding that, at the end of

the day, “class members in large class action suits typically

file claims at rates that are much lower than one would

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expect”); Mayer Brown LLP, Do Class Actions Benefit Class

Members?, available at http://www.mayerbrown.com/files/

uploads/Documents/PDFs/2013/December/DoClassActions

BenefitClassMembers.pdf (last visited Apr. 30, 2014)

(stating that “extremely small claim-filing rates [in several

cases] are consistent with the few other reports of claim rates

in class action settlements that have come to light”).

That is precisely, and predictably, what happened here. 

With respect to the $475 cash payment, only 119 out of 750

former franchisees actually submitted claims. This amounts

to a response rate of about 16%, for a total of $56,525 out of

$356,250. As for the $750 coupon, of the 750 former

franchisees, only 34 made a claim for the coupon – a response

rate of about 4.5%. Thus, instead of a true pay-out of

$562,500 (with respect to coupons), Defendants would be

obligated to pay (or credit) at most $25,500, and this assumes

that all 34 former franchisees will actually use the coupon

once received.

At the end of the day, the purported settlement value of

$918,750 for former franchisees (covering both the $475 payout and the $750 coupon) amounted to, at most, a true value

of only $82,025 (or a response rate of approximately 9%) –

and likely even less because some of the coupons claimed

probably will not be used. The unclaimed funds did not

benefit the class as they would revert back to Defendants.

This result was entirely predictable once the parties

stipulated to a claims process. This then begs the question

why the parties chose to require a claims process in the first

place. While there are situations in which a claims process is

unavoidable (such as a consumer class action where there is

no readily accessible record of purchases to identify class

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members and their contact information), in this case, it is not

obvious why a claims process was necessary. Compare In re

Wells Fargo Loan Processor Overtime Pay Litig., No. C-07-

1841 EMC, 2011 U.S. Dist. LEXIS 84541, at *22–23 (N.D.

Cal. Aug. 2, 2011) (explaining why “there is a valid and

substantial justification for the claims process”). As noted in

a Federal Judicial Center publication, a claims process is not

necessary in all cases:

“In too many cases, the parties may negotiate

a claims process which serves as a choke on

the total amount paid to class members. 

When the defendant alreadyholds information

that would allow at least some claims to be

paid automatically, those claims should be

paid directly without requiring claim forms.”

De Leon v. Bank of Am., N.A., No. 6:09-cv-1251-Orl-28KRS,

2012 U.S. Dist. LEXIS 91124, at *61 (M.D. Fla. Apr. 20,

2012) (quoting the 2010 version of the “Judges’ Class Action

Notice and Claims Process Checklist and Plain Language

Guide” produced by the Federal Judicial Center).

Here, the necessity of a claims process is not apparent

from the record. There was a set sum to be paid to each

former franchisee, so a claims process was not needed in

order for the parties to determine the appropriate amount of

damages for each former franchisee. No proof of claim was

needed to identify class members because Defendants already

had within their possession information identifying the

former franchisees. And presumably Defendants had the last

best address for each former franchisee: how else could they

send the claim forms to the franchisees? The record fails to

indicate why it was not feasible to send checks and coupons

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directly to class members rather than requiring a claims

process. See De Leon, 2012 U.S. Dist. LEXIS 91124, at *61

(finding a claim form procedure unreasonable because, inter

alia, defendant had databases that “enabled it to identify

approximately 500,000 cardholders who were assessed late

fees on timely payments made”); see also Mayer Brown LLP,

Do Class Actions Benefit Class Members? (noting that

automatic distribution settlements are possible where “class

members whose eligibility and alleged damages could be

ascertained and calculated – such as retirement-plan

participants in ERISA class actions”).

The decision to use coupons (or credit) as a benefit for

former franchisees towards the price of a new franchise also

raises questions about the adequacy of the settlement. As

noted in the Manual for Complex Litigation, coupons are

often illusory monetary benefits. See Manual for Complex

Litig., 4th § 21.61, at 310 (noting that a judge “should be

wary” of a proposed settlement that “grant[s] class members

illusory nonmonetary benefits, such as discount coupons for

more of defendants’ products, while granting substantial

monetary attorney fee awards”). The illusory value of the

coupon is particularly acute here: each former franchisee was

entitled to a $750 coupon to be used towards purchase for a

new Coverall franchise, but a franchise costs at least $10,000

and can be as high as $32,000. See ER 138. It was unlikely

that many of the $750 coupons would ever be claimed or

used. It is not surprising that only 4.5% of former franchisees

filed a claim for the coupon.

Finally, even if the claims process were justified, that

does nothing to justify the reverter of any unclaimed funds to

Defendants. The parties could have agreed (as many

settlements have) to a second distribution of residual funds to

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34 LAGUNA V. COVERALL NORTH AMERICA

those former franchisees who did submit claims and/or a

distribution to a cy pres beneficiary. See, e.g., Garner v.

State Farm Mut. Auto. Ins. Co., No. CV 08 1365 CW (EMC),

2010 U.S. Dist. LEXIS 49477, at *49 (N.D. Cal. Apr. 22,

2010) (noting that, under the settlement, uncashed settlement

checks and unspent portions of the administrative cost reserve

will be redistributed to the class or given to a cy pres

beneficiary). At least this would have guaranteed a

meaningful and substantial payment to the class.

In sum, the monetary benefits to the former franchisees

was vastly overstated and largely illusory, thus raising

significant questions that deserve a meaningful degree of

scrutiny by the district court. Cf. In re Classmates.com

Consolidated Litig., No. C 09-45 RAJ, 2011 U.S. Dist.

LEXIS 17761, at *24 (W.D. Wash. Feb. 23, 2011) (stating

that, “where class counsel points to an illusory $9.5 million

benefit as justification for its own fee award, without

acknowledging that counsel expected the benefit to be

dramatically smaller, it illustrates the danger of deferring to

counsel’s view of a settlement that misaligns the interests of

class members and class counsel”). This is particularly

troubling given that Plaintiffs’ counsel was guaranteed

(subject only to court approval where Defendants agreed not

to oppose the motion) nearly $1 million regardless of the

amount of money actually claimed by the class.

The requirement of a claims process (without a substantial

justification) combined with a reversion of unclaimed class

funds back to the defendant was not a factor presented or

expressly discussed in Bluetooth. This Court in Bluetooth

identified three “subtle signs that class counsel have allowed

pursuit of their own self-interests and that of certain class

members to infect the negotiations” – including an

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arrangement for attorney fees not awarded to revert to the

defendant rather than to the class fund. Bluetooth, 654 F.3d

at 947. But for the same reason why a reverter of unawarded

attorney fees is a risk factor indicative of potential collusion,

the use of a claims process coupled by a reversion of

unclaimed class funds likewise presents such a risk. Indeed,

where the magnitude of the reverter of class funds is great, it

should raise even more serious questions than reverter of

unawarded fees.

II.

Because the reasonableness of the settlement’s

substantive terms could not be adequately determined based

on the record before the district court, the reasonableness of

the fee award also could not be appropriately assessed.

As noted above, where a case is settled prior to formal

class certification, a higher standard of fairness is required. 

This higher standard is necessary precisely because, before

formal class certification, “there is an even greater potential

for breach of fiduciary duty owed the class” – i.e., there is an

even greater chance of collusion or conflicts of interest on the

part of the named plaintiffs and their attorneys. Bluetooth,

654 F.3d at 946. Moreover, it is important to take into

account that,

[i]n class-action settlements, the adversarial

process . . . extends only to the amount the

defendant will pay, not the manner in which

that amount is allocated between the class

representatives, class counsel, and unnamed

class members. For “the economic reality [is]

that a settling defendant is concerned only

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with its total liability[,]” and thus a

settlement’s “allocation between the class

payment and the attorneys’ fees is of little or

no interest to the defense.”

In re Dry Max Pampers Litig., 724 F.3d at 717 (citations

omitted).

In Bluetooth, this Court underscored that “[c]ollusionmay

not always be evident on the face of a settlement, and courts

therefore must be particularly vigilant not only for explicit

collusion, but also for more subtle signs that class counsel

have allowed pursuit of their own self-interests and that of

certain class members to infect the negotiations.” Bluetooth,

654 F.3d at 947. As indicated above, Bluetooth identified

three such subtle signs:

(1) “when counsel receive a disproportionate

distribution of the settlement, or when the

class receives no monetary distribution but

class counsel are amply rewarded”;

(2) when the parties negotiate a “clear sailing”

arrangement providing for the payment of

attorneys’ fees separate and apart from class

funds, which carries “the potential of enabling

a defendant to pay class counsel excessive

fees and costs in exchange for counsel

accepting an unfair settlement on behalf of the

class”; and

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(3) when the parties arrange for fees not

awarded to revert to defendants rather than be

added to the class fund.

Bluetooth, 654 F.3d at 947.

In the case at bar, the second and third factors above are

clearly applicable, as the majority recognizes. This puts a

premium on the district court’s evaluation of the first

Bluetooth factor. However, the district court could not

evaluate whether the $1 million fee award constituted a

“disproportionate” distribution of the settlement without first

having a fair sense of the value of the overall settlement,

particularly the settlement’s key terms discussed above.

Furthermore, although not necessarily a subtle sign of

collusion in and of itself, the fact that the fee award here was

not tied to the magnitude of relief actually obtained by the

class amplifies the need for scrutiny. Here, class counsel had

no particular incentive to negotiate a settlement that would

ensure substantial benefits would actually accrue to the class. 

Counsel’s fee was a stipulated sum unaffected by the actual

pay-out to the class. To the extent the parties based the fee

award in part upon a claimed settlement fund of over

$900,000 and the promised assignment of accounts, that basis

is misleading given that the class fund was largely illusory

and it was uncertain whether a substantial portion of the class

will benefit from the assignment. Although this Circuit has

sanctioned using the full class fund theoretically available as

a basis for evaluating the reasonableness of a negotiated fee

award, see Williams v. MGM-Pathe Communs. Co., 129 F.3d

1026, 1027 (9th Cir. 1997) (holding that the lower court had

“abused its discretion by basing the fee on the class members’

claims against the fund rather than on a percentage of the

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entire fund or on the lodestar”), such a practice tends to

divorce the class counsel’s incentives from the best interests

of the class. It is perhaps for this reason the Fifth Circuit

takes a different approach. See Strong v. Bellsouth

Telecomms., Inc., 137 F.3d 84, 852–53 (5th Cir. 1998)

(indicating that fee awards may be based on actual pay-out to

class rather than reversionary fund). Where fees are tied to

actual pay-out to the class, counsel has a strong incentive to

negotiate a real, rather than illusory, class fund. Under this

Circuit’s decision in Williams, however, that incentive may

be absent, and thus there is a need for meaningful scrutiny of

the settlement and fee award.

That scrutiny is particularly warranted here where, as

noted above, two of the three Bluetooth factors were clearly

met (i.e., the clear sailing and reverter arrangements). 

Without a full record as to the value of the settlement, the

district court could not ensure that the fee award was not

disproportionate compared to the benefits to the class as

required by the third Bluetooth factor.

For example, the district court’s lodestar analysis was

problematic without a more fully developed record. In the

settlement, the parties had agreed to a fee award of

approximately $1 million. According to the district court,

this was a reasonable award because class counsel had

incurred approximately $3 million in fees in the course of

litigating the action. But even accepting that counsel had

legitimately incurred $3 million in fees (based on hours spent

and rates charged), that does not reflect a full lodestar

analysis. “[T]he fairness of the lodestar amount should be

gauged against the overall class recovery, adjusting the

lodestar fees upward or downward as necessary to ensure

their reasonableness. In doing so, the district court must

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weigh the requested lodestar figure against a variety of

factors, foremost among them the results obtained for the

class, monetary and non-monetary alike.” In re HP Inkjet

Printer Litig., 716 F.3d 1173, 1190 (9th Cir. 2013). Here,

even if we assume that the district court did an adjustment

based on results obtained (i.e., a downward adjustment from

$3 million to $1 million), the district court did not have a

complete basis for making the adjustment without a fuller

understanding of the value of the assignment of accounts –

the central benefit of the settlement.

The district court also performed a percentage method

analysis as a cross-check on the fee award. According to the

district court, “even if the cash settlement [for former

franchisees], the assignment of accounts [for current

franchisees], and the pledged programmatic changes [for

current franchisees] . . . were worth only about $4 million, the

requested fee award [of $1 million] would fit with[in] normal

bounds of class action recovery.” ER 31. Presumably, the

district court’s statement was informed by case law from this

Court using 25% of the common fund as a benchmark under

the percentage method. See Bluetooth, 654 F.3d at 942

(stating that, under the percentage method, “courts typically

calculate 25% of the fund as the ‘benchmark’ for a reasonable

fee award”); cf. Staton, 327 F.3d at 945–46 (noting that

injunctive “relief should generallybe excluded from the value

of a common fund when calculating the appropriate

attorneys’ fee award, as the benefit of that relief to the class

members is most often not sufficiently measurable,” but

“[t]he fact that counsel obtained injunctive relief in addition

to monetary relief for their clients is . . . a relevant

circumstance to consider in determining what percentage of

the fund is reasonable as fees”). However, there is nothing in

the record upon which the district court could have based an

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40 LAGUNA V. COVERALL NORTH AMERICA

assumption that the benefits of the settlement could be worth

$4 million. The value of the assignment to the class was on

this record entirely unknown since there is no information as

to the number or percentage of franchise owners who are

actually able or likely to receive the assignments of accounts. 

While the district court is entitled to make estimates in

evaluating the reasonableness of the fee award, its

assumptions must have some basis in the record. Cf.

Radcliffe, 715 F.3d at 1162 (stating that a district court’s

approval of a class action settlement cannot be affirmed

where its “findings of fact were . . . without support in the

record”). In this case, that basis is absent. Cf. Bluetooth,

654 F.3d at 947 (district court must guard against risk that a

high fee award was traded for “lower monetary payments to

class members or less injunctive relief for the class than could

otherwise have been obtained”).

III.

On the record before this Court, I cannot conclude that the

proposed settlement was fair, reasonable, and adequate and

the fee award reasonable. Crucial information about the

value of the benefits obtained for the class (i.e., how many

franchisees will benefit from the assignment of accounts) is

missing. Also lacking is the justification for requiring former

franchisees to submit claims and providing for a reverter of

undistributed funds back to Coverall – while guaranteeing a

$1 million fee award to counsel.9

9 The majority cites the abuse of discretion standard of review

articulated in United States v. Hinkson, 585 F.3d 1247, 1250 (9th Cir.

2009) (en banc). Maj. Op. at p. 16 n.2. Although as a general matter, that

standard applies, Bluetooth provides a more specific application of that

standard to the situation at bar – review of a class action settlement prior

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The district court’s task in cases such as this could be

made more manageable were this Court to provide more

specific guidance on: (1) the centrality of the Lane/Churchill

factor “the amount offered in settlement” in assessing the

adequacy of class action settlements, and (2) the explicit

inclusion as a factor in Bluetooth the unjustified use of a

claims process and/or reverter of unclaimed class funds back

to the defendant – particularly if Williams continues to allow

fees to be based on size of the potential class fund rather than

actual pay-out to the class. This case affords the Court an

opportunity to provide that clarity.

I do not express any opinion whether ultimately the

substantive terms of the settlement or the fee award may in

fact be fair, reasonable and adequate, as the majority

concludes. Rather, I diverge from the majority because I

believe there are substantial questions about the fairness,

reasonableness, and adequacy of the proposed settlement that

cannot be answered without a fuller record and more

complete analysis.

For the foregoing reasons, I respectfully dissent.

to class certification where there are “subtle signs that class counsel have

allowed pursuit of their own self-interests . . . to infect the negotiations.” 

Bluetooth, 654 F.3d at 947. Hence, even abuse of discretion review in this

context is not toothless. In any event, under Hinkson, for the reasons

stated above regarding the deficient record, the district court’s conclusion

as to the adequacy and fairness of the settlement and reasonableness of the

fee award was “without support in inferences that may be drawn from

facts in the record.” Hinkson, 585 F.3d at 1251.

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