Settlements Reached in Mediation Not Reasonable Per Se

Wednesday, November 12, 2008

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Settlements Reached in Mediation Not Reasonable Per Se—C.A.

Panel Orders Judge to Reconsider Approval of Foot Locker Employees’ Class Action Agreement

By SHERRI M. OKAMOTO, Staff Writer

The First District Court of Appeal has vacated a $2 million class action settlement reached during mediation between athletic shoe retailer Foot Locker Retail Inc. and approximately 16,900 of its current and former employees, holding that the trial court had failed to meaningfully appraise the reasonableness of the agreed recovery.

The fact that the settlement was reached during mediation did not eliminate the trial court’s obligation to evaluate its terms, Div. Three ruled in an opinion published Friday, holding that San Francisco Superior Court Judge Richard A. Kramer had abused his discretion in finding the terms of the settlement to be fair without any basis to assess the adequacy of the proposed agreement.

Jatinder Kullar filed a class action on behalf of himself and all persons employed at any of Foot Locker’s California retail locations subsequent to November 23, 2001, who were required to purchase and wear shoes of a distinctive design or color as a term and condition of their employment.

Employee Claims

He later amended his complaint to to include claims on behalf of employees who were subject to security searches for which they were not compensated, causing them to be denied compensation for all hours worked, the legally-mandated minimum wage, and statutorily mandated meal and rest periods.

Foot Locker denied all of the allegations and the dispute proceeded to arbitration. Subsequently, the parties produced a “stipulation of settlement” which they submitted to the trial court, seeking preliminary approval of the settlement agreement.

Among many other standard provisions, the final stipulation of settlement stated that class counsel had engaged in adequate discovery, investigation and research before determining that settlement was in the best interests of the class.

Under the terms of the settlement, Foot Locker agreed to pay up to $2 million inclusive of all costs, attorney fees and settlement expenses, in settlement of all claims.

Objection to Compensation

Crystal Echeverria filed a written objection to the proposed settlement, alleging that it did not provide compensation reasonably related to the actual loss sustained by class members, and that class counsel had not conducted sufficient discovery or investigation to determine the extent of the class loss.

Echeverria sought the production of Foot Locker records and discovery responses produced in this action of “all documents referring or relating to the final stipulation of settlement,” the briefs that the parties had submitted to the mediator, and an analysis of class-wide damage studies.

Kramer ordered the parties to produce all materials that had been exchanged in discovery, but denied Echeverria’s remaining discovery requests, finding that the materials were protected from discovery by Evidence Code Sec. 1119, which prohibits the compelled disclosure of any admission made during mediation.

At the hearing on final approval of the settlement, Kramer acknowledged that “it would perhaps be easier to do this if I saw the actual numbers, “ but concluded he had to take the lawyers assertions that the consideration being received for the release of the class members’ claims was reasonable in light of the strengths and weaknesses of the claims and the risks of the particular litigation at “face value.”

Trial Court Decision

Noting that the settlement had been reached at arm’s length by capable attorneys before an experienced mediator, that the attorneys represented that meaningful data had been exchanged during the mediation, and that few members of the large class had objected, Kraemer found sufficient circumstantial evidence to establish the fairness, adequacy and reasonableness of the settlement and approved the agreement.

Writing for the appellate court, however Justice Stuart R. Pollak said an informed evaluation of a proposed settlement could not be made without an understanding of the amount in controversy and the realistic range of outcomes of the litigation.

Although the court should give weight to the competency and integrity of counsel and the involvement of a neutral mediator in assuring itself that a settlement agreement represents an arm’s length transaction entered without self-dealing or other potential misconduct and that an agreement reached under these circumstances would presumably be fair, Pollak said, the court still has a fiduciary responsibility to ensure that the recovery represents a reasonable compromise.

“If some relevant information is subject to a privilege that the court must respect, other data must be provided that will enable the court to make an independent assessment of the adequacy of the settlement terms,” Pollak wrote. Even though communications made during mediation and writings prepared for use in mediation would be inadmissible under Sec. 1119, Pollak reasoned the underlying data, not otherwise privileged, was not immune from production.

Because “there was nothing before the court to establish the sufficiency of class counsel’s investigation other than their assurance that they had seen what they needed to see,” Pollak concluded, the record failed to establish what investigation counsel conducted or what information they reviewed on which they based their assessment of the strength of the class members’ claims and did not provide sufficient information for the court to intelligently evaluate the adequacy of the settlement.

Pollack, joined by Presiding Justice William R. McGuiness and Justice Martin J. Jenkins, vacated the order approving the settlement and remanded the matter to permit the trial court to reconsider the fairness and adequacy of the settlement in light of such additional information as the parties may present concerning the value of the class members’ claims should they prevail in the litigation and the likelihood of prevailing.

The case is Kullar v. Foot Locker Retail, Inc., 08 S.O.S. 6106.