Cotter v. Lyft, Inc.
94 Fed. R. Serv. 3d 1450, 2016 U.S. Dist. LEXIS 184931, 193 F. Supp. 3d 1030 (2016)
Rule of Law:
When reviewing a proposed class action settlement for preliminary approval under Rule 23(e)(2) of the Federal Rules of Civil Procedure, a district court must apply the same rigorous 'fair, reasonable, and adequate' standard as for final approval, rather than a more lax 'quick look' approach.
Facts:
- Current or former Lyft drivers in California (the 'Cotter' plaintiffs) alleged that Lyft misclassified them as independent contractors rather than employees, thereby violating California law and depriving them of significant compensation and benefits.
- Lyft imposed a 'Prime Time' surcharge for rides given during peak hours, and from August 2014, its app displayed a message to riders stating 'It’s busy! 100% will be added to your total for the driver,' while Lyft in fact took a 20 percent cut of this surcharge.
- The 'Cotter' plaintiffs originally included claims for reimbursement of expenses, and PAGA/UCL claims related to gratuities Lyft allegedly took in 2013 when it accepted voluntary donations.
- Counsel for the 'Cotter' plaintiffs, during initial settlement negotiations, grossly underestimated the value of the drivers’ claim for reimbursement of expenses.
- Another group of drivers filed a separate lawsuit, Zamora v. Lyft, Inc., alleging that Lyft deprived drivers of Prime Time surcharges by taking a 20% cut, falsely representing that the entire surcharge went to the driver, and claiming this violated California Labor Code section 351.
- Counsel for the 'Cotter' plaintiffs admitted they never considered the Prime Time gratuity claims raised in the Zamora lawsuit when negotiating the settlement and analyzing its fairness for the proposed class.
Procedural Posture:
- Lyft drivers ('Cotter' plaintiffs) filed a proposed class action in a California federal district court, alleging misclassification as independent contractors.
- The 'Cotter' plaintiffs and Lyft reached a settlement agreement and filed a motion for preliminary approval of the settlement and a motion to certify the class for settlement purposes only in the District Court.
- The District Court denied preliminary approval of the first proposed class action settlement, citing an unreasonably low settlement amount due to underestimated claims value and an arbitrary PAGA allocation.
- The 'Cotter' plaintiffs and Lyft returned with a new, enhanced settlement agreement and again sought preliminary approval from the District Court.
- A separate group of drivers from the Zamora v. Lyft, Inc. lawsuit filed a motion to intervene in the Cotter case, contending their interests were not adequately protected.
- The District Court allowed counsel for the Zamora plaintiffs to appear at the hearing on the motion for preliminary approval of the Cotter settlement and requested supplemental briefs from the parties to further explore the strength and value of the new gratuity claims.
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Issue:
Does a district court apply a laxer 'quick look' standard when reviewing a proposed class action settlement for preliminary approval under Rule 23(e)(2) of the Federal Rules of Civil Procedure, or should it apply the same rigorous 'fair, reasonable, and adequate' standard as for final approval?
Opinions:
Majority - Vince Chhabria, United States District Judge
No, a district court should not apply a laxer 'quick look' standard when reviewing a proposed class action settlement for preliminary approval under Rule 23(e)(2); rather, it must apply the same rigorous 'fair, reasonable, and adequate' standard as for final approval. The court reasoned that nothing in Rule 23 suggests a more forgiving standard at the preliminary stage, and a lax review makes little practical sense. A cursory initial review risks wasting considerable time and money for the parties and the court if a serious flaw is missed and the settlement is ultimately rejected at the final approval stage. Moreover, preliminary approval by a federal judge can inadvertently mislead class members into believing the settlement is sound, even if it has only received a superficial review. Therefore, district courts must scrutinize settlement agreements carefully from the outset, based on all available information, and should deny preliminary approval or demand supplemental briefing if insufficient information is provided. Applying this rigorous standard, the court found that the new settlement agreement adequately addressed the flaws identified in its prior ruling by substantially increasing the monetary relief from $12.25 million to $27 million (primarily to account for the underestimated reimbursement claim) and enhancing non-monetary benefits. While the Cotter counsel failed to consider the Prime Time gratuity claims asserted in the Zamora lawsuit, the court found these claims to be neither particularly strong nor highly valuable. Evidence suggested that after August 2014, Lyft generally presented the Prime Time surcharge as a price increase, not a gratuity, making the section 351 claim questionable. Furthermore, these section 351 claims depend on proving employee status, which involves significant litigation risks, and other non-employee-dependent Prime Time claims are not released by the settlement. Considering the relative weakness and lower value of these omitted claims compared to the overall settlement and the litigation risks, the court concluded that the settlement as a whole was fair, reasonable, and adequate.
Analysis:
This ruling significantly clarifies the standard for preliminary approval of class action settlements, rejecting a prevailing trend toward a laxer 'quick look' approach. By mandating a rigorous 'fair, reasonable, and adequate' review at the initial stage, the court reinforces its role as a guardian of absent class members' interests, demanding comprehensive justification from parties from the outset. This decision will likely reduce the number of proposed settlements that advance to the costly notice and opt-out process only to be rejected later, thereby promoting greater efficiency and protecting class members from potentially misleading preliminary endorsements.
