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Ninth Circuit:

Class Settlement Upheld Despite Errors, Collusion Concerns

Majority Affirms Approval of Agreement to Pay Out About $950,000 on CPK Data Breach Claims Even With ‘Sparse’ Reasoning, ‘Glaring’ Calculation Error, Drawing Dissent; Panel Reverses Attorney Fee Award of $800,000

By a MetNews Staff Writer

The Ninth U.S. Circuit Court of Appeals yesterday affirmed, in a 2-1 decision, the approval of a class settlement of litigation arising out of a cyberattack that compromised the personal information of California Pizza Kitchen Inc. employees even though indicia of collusion between the plaintiffs’ counsel and the restaurant chain were present and the judge’s order was “sparse” on reasoning and based in part on a “glaring” error in the valuation of the claims.

Finding that the rationale for approval could reasonably be inferred from the “unusually extensive record,” the panel concluded that the settlement was “fair, reasonable, and adequate,” as required by Federal Rule of Civil Procedure 23(e), although it appeared that the restaurant would likely be paying out approximately $1.16 million on the claims-made settlement, when in fact the maximum monetary value of the claims was $950,000.

In the opinion authored by Circuit Judge Kenneth K. Lee, the court also reversed an award of $800,000 in attorney fees, saying that “[w]e REMAND for the district court to determine the settlement’s actual value to class members and award reasonable and proportionate attorneys’ fees.”

Senior Circuit Judge Richard R. Clifton joined in the opinion. Circuit Judge Daniel P. Collins concurred in the fee reversal but dissented as to approval of the settlement.

Hacking Scheme

The litigation arose after California Pizza Kitchen (“CPK”), in September 2021, fell prey to a cyberattack by the ransomware group Conti, which engages in a scheme of hacking into a company’s systems, encrypting the files, and leaving a note demanding payment in exchange for a decryption key and promises not to leak the stolen data.

CPK paid the ransom but the breach compromised the personal data, including social security numbers, of 103,767 of the company’s current and former employees. Five class actions were filed in a matter of weeks; four were eventually consolidated into a single action—the In re California Pizza Kitchen Data Breach Litigation.

Plaintiff Aviva Kirsten was the last to file a class action complaint. Attempts by the plaintiffs in the consolidated matter (the “consolidated plaintiffs”) to bring the new plaintiffs (the “Kirsten plaintiffs”) into the fold failed.

A proposed settlement agreement between CPK and the consolidated plaintiffs was reached under which the class of all employees affected by the data breach agreed to release all claims in exchange for the following relief:

“(1) up to $1,000 in reimbursement for ordinary expenses and lost time incurred because of the data breach; (2) up to $5,000 in compensation for monetary loss from actual identity theft; and (3) 24-months’ worth of credit monitoring services, which included $1 million in identity theft insurance.”

Members of a California subclass would also be entitled to claim another $100 in statutory damages under Civil Code §1798.100. Class members would only recover if they submitted a timely claim form with supporting documentation and the settlement agreement permitted class counsel to request—without CPK’s objection—up to $800,000 in attorneys’ fees and costs, which would be paid separately from any money disbursed to class members.

Initial Valuation

The consolidated plaintiffs initially estimated that the settlement had “a conservative value of over $3.7 million,” providing numbers based on guesses as to what percentage of the class would file for each type of claim. Counsel for the Kirsten plaintiffs objected to the proposed settlement as collusive and to the fee request as excessive.”

After multiple hearings, District Court Judge David O. Carter of the Central District of California issued final approval of the settlement. The consolidated plaintiffs said that 1.8% of the class, or 1,828 employees, had filed claims and calculated the face value of the submissions as $1.16 million.

The claims administrator had not yet determined whether such claims were properly documented.

Carter also granted, in full, the plaintiffs request for $773,632.95 in attorneys’ fees and $26,367.05 in expenses, noting that the award would constitute “36.3% of the total class benefit, which is $2,133,719,” based on the plaintiffs’ recovery plus the fee award and certain administration costs.

Carter’s order did not explain the rationale for approving the settlement and the fees. The Kirsten plaintiffs timely appealed.

Lee noted that the court’s approval was made before the claims were validated and said:

“Even without validation, one glaring error is apparent on its face: because of the $1,000 cap on ordinary expense claims, the 176 ordinary expense claims are capped at $176,000, despite the class members asking for $384,134.77. That means the maximum monetary value of the claims is, at most, around $950,000, not $1.16 million.”

He turned to Rule 23(e), which provides that a court may only approve a settlement if it is “fair, reasonable, and adequate” and sets forth factors to be used in the determination, such as whether the proposal was negotiated at arm’s length and the adequacy of the proposed relief, taking into account the terms of any proposed attorney fee awards.

The jurist noted that “[a]nother concern lurks in the background of every class action settlement: ‘class counsel may collude with the defendants, tacitly reducing the overall settlement in return for a higher attorney’s fee.’ ”

He cited the 2011 case of In re: Bluetooth Headset Products Liability Litigation, in which the Ninth Circuit identified three red flags indicating collusion—when counsel receives a disproportionate distribution of the settlement, when the parties negotiate a “clear-sailing arrangement” under which the defendant agrees not to challenge a request for an agreed upon fee, and when the agreement contains a “reverter” clause that returns unawarded fees to the defendant.

If these indicia of implicit collusion are present, the settlement must withstand a higher level of scrutiny.

Unique Wrinkle

In this case, Lee acknowledged:

“[B]efore we can review the district court’s settlement approval order, we first must address a unique wrinkle here: the district court’s preliminary and final approval orders were sparse—almost boilerplate—and memorialized little of the district court’s rationale. Usually…we [would] remand the case for the court to explain its rationale. But here, we can reasonably infer the district court’s rationale from the record, which was unusually extensive…”

He opined that “[t]he Kirsten plaintiffs correctly point out that the settlement raises all three red flags of potential collusion under Bluetooth” but remarked that “the presence of all three…factors does not trigger a domino effect that makes a settlement per se collusive.” The judge reasoned:

“Here, the district court gave the settlement provisions a hard look….It probed the parties’ disputes over whether CPK’s decision to negotiate with the consolidated plaintiffs amounted to a ‘reverse auction,’ whether the Kirsten plaintiffs’ counsel’s ‘effort to become class counsel’ was improper, and whether a ‘claims-made settlement’ was ‘inherently collusive.’….In its preliminary approval order, it made an explicit finding that the settlement was ‘non-collusive.’ ”

He continued:

“The most problematic part of the class settlement is its claims-made nature….[R]edemption rates are typically very low because most class members do not bother jumping through the hoops to submit a claim….But we have never held that claims-made settlements are per se inadequate under Rule 23(e). And here, the settlement does offer real benefits—not worthless coupons or imaginary injunctive relief—to the people who submitted claims. We cannot say that the district court abused its discretion in finding the settlement fair, reasonable, and adequate.”

Attorney Fees

As to the fee award, Lee said:

“Unlike the district court’s settlement approval, we cannot infer the district court’s rationale for its fee award from the record. At the November 2022 hearing, the district court raised ‘tremendous concern[s]’ about the reasonableness of the consolidated plaintiffs’ $800,000 fee request….

“….In a short, two-paragraph order, the district court signed off on a positive multiplier to counsel’s lodestar, even though the fees were significantly over the 25% percentage-of-recovery benchmark. The court failed to ‘provide an adequate explanation” for the fees, so we must reverse and remand.”

He added that “[e]ven apart from its failure to provide an explanation, the district court erred by approving fees that appear excessive of settlement value.”

Collins’ View

Collins objected to Carter having provided “little explanation” as to why he approved this settlement and instead issuing “a series of perfunctory orders” despite the fact that the settlement “triggers every Bluetooth factor” and the “final value ended up being nearly a fourth of the estimated…value presented at the preliminary approval hearing.”

He argued:

“There is…no evidence in the record that the district court gave a proper hard look at any of the Bluetooth factors….The majority is simply wrong in concluding that the record here provides a sufficient basis for affirming the district court.”

The judge concluded: “At bottom, the majority’s error stems from its unfounded belief that merely ‘prob[ing]’ and ‘question[ing],’…the parties and a mediator at a hearing is a substitute for judicial reasoning and the careful exercise of judgment. But we have said otherwise. We have held that Rule 23(e), our precedent, and due process demand an ‘inquiry, findings, and evaluation of whether the settlement is fair, reasonable, and adequate.’ ”

The case is In re: Kirsten v. California Pizza Kitchen Inc., 23-55288.