Court: District Court, N.D. California; June 23, 2016; Federal District Court
An order has been issued granting preliminary approval for a revised class action settlement agreement in a case involving current and former Lyft drivers in California. Initially, a proposed settlement of $12.25 million was rejected due to concerns regarding the undervaluation of drivers' reimbursement claims and an arbitrary allocation for claims under California’s Private Attorneys General Act (PAGA). The new agreement increases the total monetary relief to $27 million and offers slightly enhanced nonmonetary relief. The Court finds this new settlement fair, reasonable, and adequate pursuant to Rule 23(e)(2). The plaintiffs will not seek more in attorneys’ fees than initially proposed, limiting their share to 14 percent of the new settlement total. Additionally, $1 million is designated for PAGA claims, with 75 percent allocated to the State of California. The settlement does not reclassify drivers as employees but introduces limitations on driver termination and a process for challenging certain terminations. The plaintiffs also seek to certify the class for settlement purposes and permission to file an amended complaint to strengthen protections against future litigation.
In the lawsuit Zamora v. Lyft, Inc. (No. 16-cv-02558-VC), a group of drivers alleges that Lyft has wrongfully withheld gratuities and payments owed to them since August 2014. The core issue involves Lyft's "Prime Time" surcharge during peak hours, which Lyft claims is fully passed on to drivers, while in reality, it retains a 20 percent cut of this surcharge, similar to its deduction from regular fares. The lawsuit presents six claims, including a statutory claim under California Labor Code Section 351, which states that gratuities belong solely to employees. As there is no private cause of action under this section, the Zamora plaintiffs invoke the Private Attorneys General Act (PAGA) to seek penalties for Lyft’s alleged violations.
The plaintiffs contend that Lyft drivers have been misclassified as independent contractors rather than employees, which is essential for their Section 351 claim. The other five claims, under California’s Unfair Competition Law (UCL) and common law, focus on restitution, arguing for the return of commissions taken from drivers related to the Prime Time surcharges. While two of these claims suggest that Lyft’s actions are unlawful under the UCL due to violations of Section 351, they do not exclusively depend on the drivers’ employment status.
In a related case, Cotter v. Lyft, the plaintiffs had sought restitution for alleged gratuities from a different time period (2013) and did not consider the Prime Time claims now asserted by the Zamora plaintiffs during their settlement negotiations. The Cotter settlement seeks to release all gratuity claims tied to the classification of drivers as employees, which overlaps with the claims made in Zamora, particularly those asserting that drivers are entitled to gratuities under Section 351.
Drivers within the Cotter class will relinquish their PAGA gratuity claims as asserted in the Zamora case, as well as certain conversion and UCL claims that are contingent on allegations of Lyft's violations of section 351, since these claims are tied to misclassification claims released by the settlement agreement. The Zamora plaintiffs have sought to intervene in the Cotter case, arguing that their interests are inadequately represented due to the proposed settlement's partial waiver of new Prime Time gratuity claims for all drivers, without a thorough evaluation of those claims' strength or value. The court denied a request by the Zamora plaintiffs to expedite the hearing on their intervention but allowed their counsel to participate in the preliminary approval hearing of the Cotter settlement to ensure a comprehensive evaluation of the agreement's fairness. Subsequently, the court requested supplemental briefs to further examine the value of the new gratuity claims.
Class action settlements undergo a two-stage review by district courts. Initially, plaintiffs file a motion for preliminary approval and class certification. If granted, class members are notified and can object or opt out before a final approval motion is filed. The final approval standard, per Rule 23(e)(2), mandates that settlements must be "fair, reasonable, and adequate," with an emphasis on the settlement as a whole rather than its individual components. The court evaluates multiple factors, including the strength of the plaintiffs' case, litigation risks, settlement amounts, discovery status, counsel experience, government participation, and class member reactions. Additionally, settlements reached before formal class certification require stricter scrutiny due to potential collusion risks. While the Ninth Circuit has not defined a distinct review standard for preliminary approval, district courts often apply a more lenient threshold, assessing whether the agreement "falls within the range of possible approval."
District courts may grant preliminary approval of class settlements even when serious concerns about final approval exist, delaying the resolution of these concerns. The precedent from Harris v. Vector Marketing Corp. illustrates that preliminary approval can be granted despite doubts about adequacy, with final approval ultimately denied. The process suggests that courts should conduct only a superficial review at the preliminary stage, identifying “obvious deficiencies” as noted in In re Prudential Securities Inc. Ltd. Partnerships Litigation. However, this approach lacks a solid rationale, as the term "preliminary" does not imply a less thorough review according to Rule 23(e)(2). The document argues that such a lax inquiry is problematic, as it risks missing serious flaws in the settlement, leading to wasted resources and potentially disadvantaging class members who may misinterpret preliminary approval as an endorsement. Rigorous initial scrutiny is essential to identify flaws early, allowing parties to address them before proceeding with notifications and opt-out processes. Ultimately, district courts should apply the same level of scrutiny at the initial approval stage as at the final stage, assessing whether the settlement is “fair, reasonable, and adequate” based on available information.
The district court requires sufficient information from the parties to evaluate the claims’ strength, litigation risks, and the settlement's value for class members before granting preliminary approval. If inadequate information is provided, the court may deny the motion or request additional briefs. The new settlement agreement in the Cotter case addresses previous flaws by increasing the total settlement from $12.25 million to $27 million, primarily correcting a miscalculation in the reimbursement claim's value. Additionally, $1 million is allocated to PAGA claims, split between a $750,000 payment to California and $250,000 for the settlement fund. While this figure may seem low against potential maximum penalties, it is comparatively high for wage and hour settlements. Courts can reduce PAGA penalties if imposing the full amount is deemed unjust, which is likely given Lyft's ambiguous obligations regarding driver classification. The $1 million PAGA settlement is considered reasonable.
The Zamora plaintiffs object to the release of newly identified Prime Time gratuity claims under California Labor Code section 351 in the Cotter settlement. They request either an exclusion of these claims from the release or additional funds to reflect their value, suggesting rejection of the settlement if their demands are unmet. The Cotter plaintiffs and Lyft argue that the Zamora plaintiffs' objection is late, as it could have been raised earlier during the initial settlement motion. The timeliness of this objection may impact the court's ruling on the Zamora plaintiffs' intervention motion. Nevertheless, the court's primary duty in preliminary settlement approval is to ensure fair treatment of class members, and it should consider any fairness-related information, regardless of its timing.
District courts must evaluate class action settlements in their entirety for fairness under Rule 23(e)(2), rather than focusing on individual claims. The failure of the Cotter plaintiffs' counsel to consider the Zamora gratuity claims does not automatically invalidate the settlement, especially if those claims lack strength or value. A settlement can encompass claims not originally brought by plaintiffs, provided they arise from the same facts and the overall settlement is reasonable. If, however, the unconsidered claims are significant, their omission might render the settlement inadequate.
Currently, the Zamora plaintiffs' gratuity claims against Lyft appear weak. They allege that Lyft's "Prime Time" surcharge, which they argue should be classified as a gratuity, violates Labor Code section 351. Evidence suggests that, since August 2014, Lyft did not characterize the surcharge as a tip but rather as a price increase, making it unlikely that riders would perceive it as a gratuity. This weakens the Zamora claims compared to previous cases, such as O'Connor v. Uber Technologies. Additionally, the success of these new gratuity claims hinges on a jury determining that Lyft drivers are employees, a conclusion fraught with risks as previously outlined by the Court. In contrast, other related claims pursued by the Zamora plaintiffs remain unaffected by the settlement.
New gratuity claims related to the Zamora case are deemed weak and low in value compared to the reimbursement claim of $156 million that has been central to settlement discussions in the Cotter case. The Zamora claims amount to just over $10 million, leading to a settlement that anticipates a payout of approximately 17% of the reimbursement claim's value. The Cotter settlement does not prevent Zamora plaintiffs from pursuing other claims related to the same alleged misconduct, specifically regarding commissions from Prime Time premiums. Consequently, the lack of attention to the gratuity claims by Cotter plaintiffs’ counsel does not render the settlement unfair or inadequate under Rule 23(e)(2).
The new settlement agreement addresses previous monetary concerns and improves non-monetary benefits, considering the risks plaintiffs face if the case goes to trial. The court finds the settlement to be “fair, reasonable, and adequate,” granting preliminary approval and requiring a revised notification proposal for class members within seven days. This notification must outline the Zamora lawsuit and clarify that the settlement releases section 351 claims while preserving other claims based on similar facts.
Additionally, the waiver will not affect claims arising after the preliminary approval date, regardless of the drivers' classification as employees. The non-monetary benefits have been enhanced by extending the optional pre-arbitration process to all drivers and removing a provision from Lyft's contracts that allowed deactivation of drivers creating liability for Lyft. Although these enhancements are minor, they improve the overall value of the settlement. The Zamora plaintiffs allege that Lyft misrepresented the Prime Time surcharge as a tip, but Lyft has presented evidence that casts doubt on this claim, suggesting that the app accurately described the surcharge before and at the time of a change in its policy. Further evidence may still emerge that could impact this assessment.
