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Even seasoned class action practitioners might be surprised to learn that the percentage-of-the-fund method for awarding attorneys’ fees is not settled law in California. After all, California trial courts routinely award attorneys’ fees based on a percentage of the overall recovery, and numerous California courts have endorsed this approach. [1] This common practice has been called into question by David Brennan, an objector to the $19 million wage-and-hour class action settlement in the long-running Laffitte v. Robert Half Int’l, No. S222996, rev. granted, 342 P.3d 1232 (Feb. 25, 2015). [2] Laffitte, which was initially filed in 2004, involved independent contractor misclassification claims against the staffing agency Robert Half; in 2013, the trial court approved a $19 million settlement, including an attorneys’ fee award of one-third of the gross settlement.

In Laffitte, the California Supreme Court will decide whether use of the percentage method is valid under California law. In his petition for review and opening brief (available here and here, respectively), Objector Brennan seized on a footnote from Serrano v. Priest, 20 Cal.3d 25, 48 n. 23 (1977), where the California Supreme Court stated that “the starting point of every fee award . . . must be a calculation of the attorney’s services in terms of the time he has expended on the case,” to argue that California law requires use of the lodestar method for assessing fees. The lodestar method multiplies the number of hours reasonably expended by a reasonable hourly rate, and the resulting number can be adjusted at the court’s discretion. While Brennan correctly identified a source of potential confusion, his radical position, if adopted, would unsettle the landscape, upending not just the settlement in Laffitte, where the trial court awarded attorneys’ fees representing 33 1/3% of the settlement fund, but numerous other already-approved settlements. Further, the vast majority of California class action settlements currently pending final approval would have to be renegotiated.

However, there is little doubt that the California Supreme Court will enshrine the use of the percentage method for cases where an ascertainable fund is created. As Respondent Mark Laffitte discussed in his Answering Brief (available here), every Federal Circuit has authorized use of percentage method, with two Circuits, the Eleventh Circuit and the District of Columbia Circuit, requiring use of the percentage method for common fund cases. This is because the percentage method has several significant advantages over the lodestar method: (1) it is less demanding of judicial resources; (2) it connects the fee recovery more closely to the results obtained; (3) it aligns the interests of class members and class counsel; (4) it rewards efficient prosecution; (5) it better approximates the workings of the marketplace; and (6) it leads to greater predictability in fee awards. Lafitte Answering Brief at 35-39 (internal citations omitted).

California also has a venerable tradition of utilizing the percentage method for common fund cases, as detailed in Serrano itself. See Serrano, 20 Cal.3d at 34-38 (observing that the percentage method was first approved in California in 1895 and “has since been applied by the courts of this state in numerous cases”). Serrano declined to apply the percentage method principally because the settlement there did not create an ascertainable fund. Id. at 35-38. Contrary to Brennan’s position, there is nothing in Serrano that would preclude courts from applying the percentage method in awarding attorneys’ fees.

Although Laffitte presents only one question for review—whether the percentage method is permitted under Serrano—several open questions remain even if the Court cements the use of the percentage method. Among other issues, the Court may also decide whether a benchmark percentage is appropriate, and whether to require a “lodestar cross-check” if a court applies the percentage method in awarding fees. In sum: do not expect a sea change, but class action practitioners should nonetheless keep a close watch on Laffitte to see if the Court will provide further guidance to courts on when and how to apply the percentage method.

Authored By:
Ryan Wu, Senior Counsel
CAPSTONE LAW APC

[1] See, e.g., In re Consumer Privacy Cases, 175 Cal. App. 4th 545, 558 (2009), Chavez v. Netflix, Inc., 162 Cal. App. 4th 43, 63 (2008), and Apple Computer v. Superior Ct., 126 Cal. App. 4th 1253, 1271 (2005).
[2] Capstone Law APC, on behalf of its clients, submitted a letter requesting publication that contributed to the publication of the intermediate court decision, Laffitte v. Robert Half Int’l Inc., 231 Cal. App. 4th 860 (2014), and intends to submit an amicus brief supporting Respondent Laffitte.

Recently, the National Labor Relations Board (“NLRB”) drastically expanded joint employer liability under the National Labor Relations Act (“NLRA”). In a 3-2 decision involving a Local 350 union, which had filed a representative petition that sought to represent sorters, housekeepers, and screen cleaners employed by a subcontractor Leadpoint, the NLRB modified its standard for determining joint-employer status. Browning-Ferris Industries of California, 362 NLRB No. 186 (August 27, 2015) (slip op. available here). Initially, Local 350’s petition alleged that that Browning-Ferris, a waste and recycling services company, jointly employed the workers with Leadpoint because Leadpoint had contracted with Browning-Ferris to provide temporary labor to manually sort materials, clean the screens on the sorting equipment and clear jams, and clean the recyclery. After a hearing, a decision was issued, holding that Leadpoint was the sole employer because it had sole control over recruiting, hiring, counseling, disciplining, and terminating its employees. Then, Local 350 filed a request for review of the decision that Browning-Ferris and Leadpoint were not joint employers. The Board granted the petition for review in April of 2014, and issued the present decision.

Under the new standard, two separate entities will be found to be joint employers under the NLRA if “they ‘share or codetermine those matters governing the essential terms and conditions of employment.’ . . . [T]he initial inquiry is whether there is a common-law employment relationship with the employees in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.” Slip op. at 2, citing NLRB v. Browning-Ferris Industries of Pennsylvania, Inc., 691 F.2d 1117, 1123 (3d Cir. 1982). In short, the NLRB may find the entities to be joint employers where (1) they are both employers within the meaning of the common law; and (2) they share or co-determine matters governing the essential terms and conditions of employment indirectly or whether they both have the authority to do so. For example, if Company A, that obtained workers from Company B, has a mere right to control elements of employment such as salary and working conditions, then both companies may qualify as employers.

This decision is likely to have profound implications for companies that rely on third-party labor providers because previously, those companies had to exercise “direct and immediate” control over workers. Slip op. at 7. The majority stated that it chose to “restate the Board’s legal standard for joint-employer determinations and make clear how that standard is to be applied going forward,” returning to the “traditional test” used by the Board. Id. at 15. Under the new regime, the courts and regulators will take a case-by-case approach in determining whether companies have the potential to affect pay and working conditions of the contracted employees. “The right to control, in the common-law sense, is probative of joint-employer status, as is the actual exercise of control, whether direct or indirect.” Id. at 16. Notably, the Board stated it would “no longer require that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but must also exercise that authority, and do so directly, immediately, and not in a ‘limited and routine’ manner,” thus overruling prior Board decisions to the extent they are inconsistent with this decision. Id. at 15-16. 

Indeed, under the new approach, many companies, including franchisors or users of staffing agencies, may become wary of relying on labor services provided by third parties, because such an arrangement may substantially expand these companies’ potential liability. On the other hand, the NLRB’s approach is likely, in its own words, to avoid requirements that are “increasingly out of step with changing economic circumstances,” and “significantly and unjustifiably narrow the circumstances where a joint-employment relationship can be found.” Slip op. at 31. Labor providers frequently have little control over their employees, whose daily working conditions are determined by policies and practices of the companies that hire those employees. The new rule, therefore, ensures that companies that rely on contract or temporary employees may not shield themselves from liability merely by citing their third-party status.

Authored By:
Stan Karas, Senior Counsel
CAPSTONE LAW APC

Earlier this month, the U.S. Court of Appeal for the Ninth Circuit affirmed the district court’s approval of a proposed class action settlement and an award of attorneys’ fees. Laguna v. Coverall North America, Inc., No. 12-55479 (9th Cir. June 3, 2014) (slip op. available here). The suit alleged that Coverall, a janitorial franchising company, misclassified its California franchisees as independent contractors and improperly removed customer accounts from franchisees to re-sell them to other franchisees.

The decision came after one franchisee objected to the settlement, which included cash payouts, credits toward a new franchise, and a promise from Coverall to assign customer accounts to current franchisees once full franchise fees were paid, among other relief. As to the settlement as a whole, the panel found that the district court had not erred by considering the Churchill factors in granting approval, such as the difficulty of obtaining class certification in the wake of Dukes, the defendant’s poor financial health, the fact that no governmental entity had participated in the matter, the experience of class counsel, and the fact that only two class members had opted out of participating in the settlement. Slip op. at 8-10 (citing Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004) (internal citations omitted). The objector argued that the district court had not properly assessed the value of the non-monetary injunctive relief, the assignment of customer accounts. The panel found, however, that the district court was not obligated to conduct such a monetary valuation to determine whether the proposed settlement was fair, stating, “[w]e have never required a district court to assign a monetary value to purely injunctive relief.” Id. at 10.

The Ninth Circuit also held that the lower court had not abused its discretion in awarding fees based on the lodestar method “because 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.’” Slip op. at 6. Furthermore, the panel found the award of approximately $995,000 in attorneys’ fees to be fair where the value of the cash settlement and injunctive relief provided (the assignment of accounts and the promise of programmatic changes) was likely more than $4 million. Id. at 7-8. Also, the district court had not abused its discretion in finding that the fee award, which was approximately a third of the lodestar amount, was reasonable. Id. at 8.

Dissenting Judge Edward M. Chen from the Northern District of California, sitting by designation, wrote that he would have remanded the case for fuller development of the record, due to the lack of “crucial information,” such as the proportion of the class eligible to receive the non-monetary benefit of the settlement, the value of the monetary relief to the class, and the justification (if any) for imposing a claims process with a reverter of unclaimed funds back to Coverall, without which the district court could not fully evaluate the adequacy of the settlement or the reasonableness of the attorneys’ fee award. Slip op. at 17.

The California Court of Appeal, Fourth Appellate District revived a class action lawsuit over Rite Aid’s failure to provide seating to its clerks and cashiers on May 16, 2014. Hall v. Rite Aid Corp., No. D062909 (4th Dist. Div. 1 May 16, 2014) (slip op. available here). In Hall, the Court of Appeal reversed a 2012 trial court order decertifying a class action of nearly 16,000 Rite Aid cashiers and clerks who alleged they were denied seating in violation of California’s Industrial Welfare Commission Wage Order 7-2001, section 14.

The panel found that the San Diego Superior Court trial judge prematurely considered the merits of the case when she decertified the class, deciding that the plaintiff’s claims could not be decided on a classwide basis. The panel held that the trial court had failed to follow the approach laid out in the California Supreme Court’s decision in Brinker Rest. Corp. v. Superior Court (273 P.3d 513 (2012)), because the trial court had assessed the merits of the plaintiff’s legal theory of liability, rather than whether that theory was amenable to class treatment. Finding that the plaintiff’s theory of recovery, i.e. “what is Rite Aid’s policy” and “whether the nature of the work involved in performing check-out functions would reasonably permit the use of seats,” were amenable to common proof, the court stated, “[w]e read Brinker to hold that, at the class certification stage, as long as the plaintiff’s posited theory of liability is amenable to resolution on a class-wide basis, the court should certify the action for class treatment even if the plaintiff’s theory is ultimately incorrect at its substantive level.” Slip op. at 19-20.

The case was remanded back to the lower court for further proceedings. The Rite Aid decision suggests that a plaintiff alleging that a common employer policy violates the law may be enough for a court to grant certification. In line with Brinker, Rite Aid states that reviewing the merits of a case at the class certification stage should be “closely circumscribed” and only should occur in limited circumstances. Slip op. at 21 (quoting Brinker, 273 P.3d 513 at 526 (2012)).