JOSEPHINE L. STATON UNITED STATES DISTRICT JUDGE

ORDER ON PLAINTIFFS' MOTION FOR PRELIMINARY APPROVAL OF CLASS ACTION SETTLEMENT
(Doc. 432)

Before the Court is a Motion for Preliminary Approval of Class Action Settlement filed by Lead Plaintiffs Reggie Wallace, Travin Lu'I, and Erik Frates. (Mot., Doc. 432.) The Motion asks the Court to preliminarily approve the proposed settlement and approve the form and method of class notice. The Court ordered supplemental briefing regarding the definition of the settlement class (Doc. 438), which Plaintiffs provided. (Class Def'n Brief, Doc. 440.) Having reviewed the papers and considered the arguments of counsel at the hearings, the Court concludes that it cannot grant preliminary approval of the proposed settlement in its current form.

I. BACKGROUND

This action has a long and contentious history, and the parties reached a settlement less than a week before trial was set to begin. As discussed in this Court's previous Orders, "[t]his case challenges an employer's program of distributing back pay to employees allegedly mis-classified as exempt from overtime pay requirements." (5/17/10 Order at 1, Doc. 145.) Plaintiffs were all employed by Defendant Full Spectrum Lending, Inc. ("Full Spectrum"), a former subsidiary and now division of Defendant Countrywide Home Loans, Inc. ("Countrywide"), as Branch Account Executives for various periods between 2002 and 2005. (Id. at 2.) From 2002 to 2004, Full Spectrum classified its Branch Account Executives as "exempt" from overtime pay requirements under the Fair Labor Standards Act ("FLSA") and California law. (Id.) In 2005, Full Spectrum opted to reclassify all of its Branch Account Executives as "non-exempt" from overtime pay requirements and to pay both current and former Branch Account Executives back overtime. (Id.)

To implement the voluntary back pay program, Defendants sent each qualifying employee an "Acknowledgment Letter" explaining the details of the back pay program. In each letter, Full Spectrum stated its belief that Branch Account Executives worked an average of five hours of overtime per week. (Id. at 2-3.) For each employee, Full Spectrum then calculated five hours of overtime pay per week of employment during the covered period and offered to pay the employee that amount. (Id.)

In June 2005, before this lawsuit, Reggie Wallace and Erick Sosa filed a FLSA collective action where they sought to collect overtime in excess of what the Branch Account Executives received under the back pay program ("Wallace I"). (Id. at 3.) In Wallace I, Judge Stotler denied class certification as to employees who received money through the back pay program because they were not similarly situated, but granted certification as to the employees who did not receive back pay and ordered that notice be sent to that class. (Id.) Of the 500 or so employees who were sent notice, 39 opted in to the Wallace I action. (Id.) Those employees and the named plaintiffs either accepted Rule 68 Offers of Judgment or entered into individual settlements with Full Spectrum. (Id.)

On September 8, 2005, Plaintiffs brought this lawsuit in state court, alleging state law claims ("Wallace II"). (Id.) On January 20, 2006, Plaintiffs filed a First Amended National Class Action Complaint seeking the same recovery. Defendants removed the action to federal court. (Id.) The court ordered remand on October 27, 2006. (Id.)

Plaintiffs filed their Second Amended National Class Action Complaint ("SAC") in state court. (Notice of Removal, Ex. O, Doc. 1.) Defendants removed the action to federal court on December 29, 2008. (Notice of Removal.) In the SAC, Plaintiffs brought four claims against Defendants: (1) violation of California's Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq. ("UCL"); (2) fraud and deceit; (3) violation of California Labor Code §§ 201, 202, 203, 510, 1194, and 1199; and (4) violation of the FLSA, 29 U.S.C. §§ 207, 216(b). (SAC at 15-63.)

On May 11, 2009, the Court certified Plaintiffs' first three claims in the SAC as a nationwide class ("Class") consisting of the following members:

All employees who are or have been employed by Defendant FULL SPECTRUM LENDING, INC. at its branch offices who, within the last two (2) years preceding the filing of this Complaint, received acknowledgement letters from COUNTRYWIDE requesting each FULL SPECTRUM LENDING, INC. employee to acknowledge before any payment would be received that COUNTRYWIDE'S method of calculating overtime compensation was reasonable and that the total amount to be paid to each employee equals or exceeds the total overtime compensation that was due.

On May 17, 2010, the Court granted summary judgment in favor of Defendants on Plaintiffs' opt-in FLSA claim. (5/17/10 Order at 11.) As a result, this action has since proceeded only as a Rule 23 class action, and not as an FLSA collective action. (See 5/13/11 Order at 2, Doc. 287 ("The FLSA class is now moot, so only the Rule 23 class remains.").) On December 14, 2011, the Court granted summary judgment in favor of Defendants on the FLSA-derivative UCL claims of non-California Class members. (Doc. 332 at 9.) On February 12, 2013, the Court decertified the Class as to damages. (Doc. 363 at 10.) The Class remains certified as to liability. (Id.)

Trial was set to begin on October 22, 2013. (Doc. 367.) On October 16, 2013, the parties participated in a mediation conference before a neutral mediator. (Doc. 429.) The parties reached a resolution at the conference (id.), and on November 12, 2013, the parties signed a fully executed Stipulation of Class Settlement and Release ("Settlement Agreement"). (Fiola Decl. Ex. 3, Doc. 432-2.) Plaintiffs filed the present motion on November 18, 2013, seeking preliminary approval of the Settlement Agreement and approval of the form and method of class notice. The Settlement Agreement defines the Settlement Class as follows:

All individuals who received compensation from Full Spectrum Lending, Inc. in the position of Branch Account Executive between January 1, 2002 and December 31, 2004 who were sent Acknowledgement Letters in connection with Full Spectrum's back pay program, excluding those Branch Account Executives who released their claims through settlement in the cases of Reggie Wallace et. al. v. Full Spectrum Lending, Inc., U.S. District Court, Central District of California Case No. 05 CV 00560 (AHS), Butler v. Countrywide Home Loans, Inc., et al. Los Angeles Superior Court Case No. BC 268250, or Walker v. Countrywide Credit Industries, Inc., et. al., U.S. District Court, Northern District of Texas Case No. 3:03-CV-00684-N.

Under the terms of the Settlement Agreement, the Settlement Class releases "all claims asserted in the Second Amended Complaint and any other claims that arise out of the same underlying factual allegations of the Second Amended Complaint." (Id. ¶ 11.) In return, each member of the Settlement Class who timely submits a claim is entitled to receive the lesser of (1) $1,500 or (2) the number of overtime hours the class member contends he or she worked, on average, in excess of five hours per week multiplied by 1.5 times the regular rate for each pay period during the class period the class member worked. (Id. ¶ 4.) The parties estimate that there are 4,150 members of the Settlement Class. (Id. ¶ 3(a).)

The Settlement Agreement also provides that each of the three "named Plaintiffs are entitled to and may apply for an enhancement award not to exceed . . . $50,000 . . . per class representative, and Defendants will not oppose that request." (Id. ¶ 3(c).) Each Lead Plaintiffs' incentive award is in addition to any other amounts he will receive under the settlement. (Id.) The Settlement Agreement further provides that Plaintiffs' counsel may apply for an award of costs not to exceed $150,000, and attorney's fees of up to $3,150,000. (Id. ¶ 3(b).) Defendants have also agreed to pay administration costs not to exceed $100,000. (Id.) In all, the parties estimate that the maximum total settlement payout is $10.5 million. (Id. ¶ 2.)

II. LEGAL STANDARD

To preliminarily approve a proposed class-action settlement, Rule 23(e)(2) requires the Court to determine whether the proposed settlement is fair, reasonable, and adequate. Fed. R. Civ. P. 23(e)(2). "To determine whether a settlement agreement meets these standards, a district court must consider a number of factors, including: the strength of 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." Staton v. Boeing Co., 327 F.3d 938, 959 (9th Cir. 2003) (internal citation and quotation marks omitted). "The relative degree of importance to be attached to any particular factor will depend upon and be dictated by the nature of the claim(s) advanced, the type(s) of relief sought, and the unique facts and circumstances presented by each individual case." Officers for Justice v. Civil Serv. Comm'n, 688 F.2d 615, 625 (9th Cir. 1982). "It is the settlement taken as a whole, rather than the individual component parts, that must be examined for overall fairness, and the settlement must stand or fall in its entirety." Staton, 327 F.3d at 960 (quoting Hanlon, 150 F.3d at 1026) (alterations omitted).

III. DISCUSSION

The Settlement Agreement offers genuine relief in the form of overtime payments capped at $1,500 per member of the Settlement Class. (Settlement Agreement ¶ 4.) The parties, moreover, reached agreement just before trial after years of litigation, thereby assuring the Settlement Agreement was entered into by parties with a substantial grasp of the strengths and weaknesses of the case. The risks and complexities involved with proceeding to trial in this case, particularly now that the Class is no longer certified as to damages, also weigh in favor of approving the settlement. Nevertheless, the Court is compelled to conclude that the overall fairness of the Settlement Agreement has been undermined by (1) Lead Plaintiffs' incentive awards and (2) the definition of the Settlement Class.

A. The Incentive Awards

"[D]istrict courts must be vigilant in scrutinizing all incentive awards to determine whether they destroy the adequacy of the class representatives." See Radcliffe v. Experian Info. Solutions Inc., 715 F.3d 1157, 1164 (9th Cir. 2013). The Ninth Circuit has on several occasions found that an incentive award undermined the fairness of a settlement. Id. In Staton, the court reversed a district court's approval of a class-action settlement where "the very large differential in the amount of damage awards between the named and unnamed class members [wa]s not justified." 327 F.3d at 975-78. The settlement in Staton awarded 29 class representatives up to $50,000 each, but only $1,000 on average to unnamed class members. Id. at 948.

In Radcliffe, the court examined a settlement that "explicitly condition[ed] the incentive awards on the class representatives' support for the settlement." 715 F.3d at 1164. Though the conditional nature of the incentive awards was itself sufficient to invalidate the settlement, the court also found that the "significant disparity between the incentive awards and the payments to the rest of the class members further exacerbated the conflict of interest." Id. at 1165. There was, the court reasoned, "a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 [wa]s a fair settlement value when they would receive $5,000 incentive awards." Id. As Staton and Radcliffe make clear, incentive awards that are disproportionate to the recovery of individual class members may "corrupt the settlement by undermining the adequacy of the class representatives." Id. at 1164.

Here, individual class members are entitled to receive no more than $1,500 under the settlement. (Settlement Agreement ¶ 4.) The parties have not provided an estimate of the amounts individual class members are expected to receive, but it is certainly possible that many class members will not receive that maximum award. The three Lead Plaintiffs, on the other hand, may apply for an incentive award of $50,000 each, in addition to whatever other amounts they are entitled to receive. (Id. ¶ 3(c).) An incentive award 33 times greater than the maximum possible recovery of other individual class members creates a "significant disparity." Plaintiffs, moreover, have provided little justification for the incentive awards. Lead Plaintiffs' declarations do not identify any particular risks or hardships caused by their participation in this litigation. Instead, the Lead Plaintiffs describe only those activities expected of any lead plaintiff—e.g., communicating with counsel, reviewing certain documents, and attending mediation conferences and their own depositions. (See Wallace Decl., Doc. 432-4; Lu'I Decl., Doc. 432-5; Frates Decl., Doc. 432-6.) These activities may justify incentive awards, but not awards entirely disproportionate to the settlement amounts other class members will receive.

The Court acknowledges that the $50,000 figure is only a maximum, and the amount properly awarded will ultimately be determined by the Court. This does not, however, lessen the Court's concern with the amount of the incentive awards the Settlement Agreement authorizes. The settlement in Radcliffe similarly provided that the named plaintiffs would receive awards to be determined by the court "'not to exceed 5,000.00.'" 715 F.3d at 1162 (quoting settlement agreement). That did not ameliorate the court's concern with the disparity between the incentive awards and other class members' recoveries. See id. at 1165. See also id. at 1166 (rejecting argument that the conditional incentive award provision was irrelevant because a district court ultimately determines "who receives the incentive awards and in what amount"). By offering the possibility of incentive awards so substantially in excess of the amounts other class members are to receive, the Settlement Agreement threatens the capacity of the Lead Plaintiffs to adequately represent the class.

This concern is heightened with respect to Lead Plaintiff Reggie Wallace. In Staton, the Ninth Circuit's "concerns about incentive or risk payments to certain class members [were] exacerbated . . . by the allegation, and in one case . . . the apparent reality, that [incentive] awards went to individuals who were not proper members of the class." 327 F. 3d at 977. Here, as described below, while Wallace is a member of the Class, he is not a member of the Settlement Class. As a result, Wallace's only interest in the settlement is the possibility of a substantial incentive fee, an interest not shared by the class members he represents. The Settlement Agreement thus undermines Wallace's adequacy as a Lead Plaintiff.

The Court cannot approve a Settlement Agreement that so seriously jeopardizes the adequacy of the Lead Plaintiffs to represent absent class members in settling their claims.

B. Settlement Class Definition

The Settlement Class definition differs from the Class definition in a number of ways. (Compare Settlement Agreement ¶ 1 with Cert. Order at 4-5, 13.) Many of these differences do not affect who is a member of the class, and are therefore immaterial changes that would not preclude the Court from approving the Settlement Agreement. However, the Settlement Class definition, unlike the Class definition, excludes "those Branch Account Executives who released their claims through settlement in the cases of Reggie Wallace et. al. v. Full Spectrum Lending, Inc., U.S. District Court, Central District of California Case No. 05 CV 00560 (AHS), Butler v. Countrywide Home Loans, Inc., et al. Los Angeles Superior Court Case No. BC 268250, or Walker v. Countrywide Credit Industries, Inc., et. al., U.S. District Court, Northern District of Texas Case No. 3:03-CV-00684-N." (Settlement Agreement ¶ 1.)

Plaintiffs ask the Court to approve this modification to the Class definition under Federal Rule of Civil Procedure 23(c)(1)(C). (Class Defn Brief at 10-11.) Rule 23(c)(1)(C) provides that "[a]n order that grants or denies class certification may be altered or amended before final judgment." Fed. R. Civ. P. 23(c)(1)(C). Any amendment, however, must satisfy the requirements of Rule 23. See Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 160 (1982). "The court should exercise its power to alter or amend its class-action determination with great care, taking into account the due-process rights of the absent class members." 7AA Fed. Prac. & Proc. Civ. § 1785.4 (3d ed.).

Plaintiffs identify 171 Class members who would be excluded from the Settlement Class under the Settlement Class definition. (Class Defn Brief at 6.) Plaintiffs argue that modification of the Class definition to exclude these 171 individuals is appropriate because "[s]ettlements in [the] three prior lawsuits settled the overtime claims of [these individuals] in the present action." (Class Defn Brief at 6, 11.)

1. Wallace I — Rule 68 Offers of Judgment

Full Spectrum made Rule 68 Offers of Judgment to those employees who opted in to the Wallace I action and to the named plaintiffs. (5/17/10 Order at 3.) Fifteen employees accepted the offers. (Fiola Decl. ¶ 7, Ex. A, Doc. 440-1.) Plaintiffs assert that these employees are "bar[red]" from "further participation in [this] class action." (Class Defn Brief at 11.)

Federal Rule of Civil Procedure 68 is a settlement mechanism that allows a defendant to "serve on an opposing party an offer to allow judgment on specified terms." Fed. R. Civ. P. 68(a). If the offer is accepted, "[t]he clerk must then enter judgment." Id. A Rule 68 judgment is a consent judgment, and as a result, its "'preclusive effects should be measured by the intent of the parties.'" Garcia v. Scoppetta, 289 F. Supp. 2d 343, 350 (E.D.N.Y. 2003) (quoting 18A Fed. Prac. & Proc. Juris. § 4443 (2d ed.)). See also Hivner v. Active Elec., Inc., 878 F. Supp. 2d 897, 903 (S.D. Ohio 2012) (preclusive effect of Rule 68 judgment depends on intent of the parties); Arizona v. California, 530 U.S. 392, 414 (2000), supplemented, 531 U.S. 1 (2000) (preclusive effect of consent judgment depends on intent of the parties); Monahan v. Emerald Performance Materials, LLC, 705 F. Supp. 2d 1206, 1213 (W.D. Wash. 2010) ("[A] consent judgment . . . may be preclusive . . . if the parties intend[ed] their agreement to have such effect." (citation and quotation marks omitted)). The Court therefore looks to the "four corners of the Rule 68 [O]ffer[s] of [J]udgment" in determining their preclusive effect. Garcia, 289 F. Supp. 2d at 352-53.

The Wallace I Offers of Judgment state that "Full Spectrum offers to allow judgment to be taken against it in this action by [Plaintiff]" and that "[t]his offer is made solely to avoid the time and expense that continued litigation of this matter will otherwise require. Nothing in this offer should be deemed an admission of wrongdoing by Full Spectrum." (Fiola Decl. ¶ 7, Ex. A (emphasis added).) The original Wallace I complaint asserted claims for violations of the FLSA, UCL, and California Labor Code § 206.5, as well as claims for quantum meruit and injunctive relief. (Notice of Removal, Ex. A.) Full Spectrum moved to dismiss the quantum meruit, § 206.5, and injunctive relief claims, and moved to strike the class action allegations for violation of the UCL. (Notice of Removal, Exs. B, C.) The parties then stipulated to the filing of an amended complaint omitting the state law claims, but allowing Plaintiffs to proceed with their purely state law claims in state court. (Id. ¶ 5, Ex. D.) As a result of the stipulation, Plaintiffs filed the present action in parallel with the federal action on September 8, 2005. (Id. ¶ 7, Ex. F.) Accordingly, by the time Full Spectrum made the Offers of Judgment in 2006 (see Fiola Decl. Ex. A), Wallace I was solely an FLSA action proceeding in parallel with a state court action asserting related state law claims. The reference in the Offers of Judgment to "this action" and "this matter" therefore evidence an intent to preclude federal wage claims, but not state law claims such as those that were proceeding in parallel with the federal claims at the time the Offers of Judgment were made. Accordingly, Class members who accepted Rule 68 Offers of Judgment in Wallace I are not precluded from prosecuting the claims in this action.

2. Wallace I — Settlement

The remaining employees who did not accept Rule 68 offers of judgment in Wallace I, including Reggie Wallace, settled their claims. (Fiola Decl. ¶ 8, Ex. B ("Wallace I Settlement").) Plaintiffs assert that these employees are also barred from participation in this action. (Class Def'n Brief at 11.)

The Wallace I Settlement provides that the settling plaintiffs "release[] and discharge[]" Full Spectrum and its parents, successors, and affiliated entities from all "claims, demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys' fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise . . . contained in or arising out of [Wallace I]." (Wallace I Settlement ¶ 6.) The release then goes on to specify as follows:

It is expressly understood and agreed by and between the parties that Wallace is not releasing any claims other than those contained in or arising out of [Wallace I]. Full Spectrum acknowledges that Wallace is currently a party to . . . [Wallace II] . . . and further acknowledges that Wallace does not hereby make any release in connection with [Wallace II].

3. Butler v. Countrywide Home Loans , Inc.

Plaintiffs seek to exclude five individuals who participated in the settlement in Butler. (Class Defn Brief at 10; see also Moser Decl. ¶ 4, Doc. 440-6 (identifying individuals).) Members of the settlement class in Butler released

[Countrywide Home Loans, Inc. and Countrywide Financial Corp.] . . . and [their] respective successors and predecessors in interest, subsidiaries, affiliates, parents and attorneys . . . from any and all claims for violation of any California wage and hour law and Business and Professions Code § 17200 et seq., for wages, penalties, interest, damages, including liquidated damages, attorneys' fees and costs, and injunctive and other equitable relief that were asserted or could have been asserted in this action, related to the allegations contained in Plaintiffs' Complaint and three Amended Complaints arising from Settlement Class Members' employment in Class Positions during the [period of February 14, 1998 to December 31, 2004].

4. Walker v. Countrywide Credit Industries , Inc.

Plaintiffs seek to exclude 125 individuals who participated in the settlement in Walker. (Class Defn Brief at 9; see also Nutten Decl. ¶ 4, Ex. A, Doc. 440-7 (identifying individuals).) All settlement class members in Walker who participated in the settlement released Countrywide Home Loans, Inc., Countrywide Financial Corp., and Full Spectrum from the following claims:

all claims . . . whether in tort, contract, or for violation of any state or federal constitution, statute, rule or regulation . . . arising out of, relating to, or in connection with: any and all facts, transactions, events, policies, occurrences, acts, disclosures, statements, omissions or failures to act, which are or could be the basis of claims that Countrywide did not comply with all wage and hour laws in compensating Plaintiffs at any time during the Class Period, . . . .

Additionally, participants in the Walker settlement who were employed in California released Countrywide Home Loans, Inc., Countrywide Financial Corp., and Full Spectrum from the following claims:

all claims . . . whether in tort, contract, or for violation of any state or federal constitution, statute, rule [or] regulation . . . arising out of, relating to, or in

connection with: any and all facts, transactions, events, policies, occurrences, acts, disclosures, statements, omissions or failures to act, which are or could be the basis of claims that Countrywide did not comply with all wage and hour laws in compensating Plaintiffs during the California Class Period, . . . .

The Court concludes that the 125 settling employees in Walker have released their claims in this action. The 46 settling employees in Wallace I and Butler, however, have not released their claims, and the Court cannot exclude them from the Class on that basis. The Court therefore cannot approve the Settlement Agreement's definition of the Settlement Class.

IV. CONCLUSION

For the reasons set forth above, the Court cannot grant preliminary approval of the Settlement Agreement in its current form. The parties may amend the Settlement Agreement and class notice and renew their request for preliminary approval by filing a supplement to the Motion no later than 30 days from the date of this Order. If the Court does not receive a supplement by that time, it will reset the trial and remaining pretrial dates in this matter and proceed with the litigation. DATED: April 14, 2014

JOSEPHINE L. STATON

JOSEPHINE L. STATON

UNITED STATES DISTRICT JUDGE