Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) 175 Rather than address the problem of low claims rates through better notice or adjustment of the attorney’s fee, many courts have simply refused to approve reversionary settlements.874 That is, courts have been reluctant to approve a settlement by which attorney’s fees are calculated as a percentage of the gross value, but to the extent class members fail to claim their designated portion of the settlement fund, the money is returned to the def endant.875 Specifically, Code of Civil Procedure section 384(b) provides: [B]efore the entry of a judgment in a class action ... the court shall determine the total amount that will be payable to all class members if all class members are paid the amount to which they are entitled pursuant to the judgment. The court shall also set a date when the parties shall report to the court the total amount that was actually paid to the class members. After the report is received, the court shall amend the judgment to direct the defendant to pay the sum of the unpaid residue or unclaimed or abandoned class member funds, plus any interest that has accrued thereon, to nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent. Many trial courts interpreted this language as forbidding the return of any funds from a class settlement fund to the defendant. Instead, leftover funds either had to be distributed to other class members, donated to charity, or escheated to the state.876 This interpretation of Section 384 was rejected, however, in In re Microsoft I-V Cases.877 The court in that case faced a settlement where a portion of unclaimed funds from a consumer class action would be returned to Microsoft. The court, analyzing the statutory language and legislative history, determined that Section 384 applied only to funds an employer has paid as a result of a judgment entered in favor of the class on the merits, and did not apply to a stipulated settlement of class claims.878 Accordingly, In re Microsoft made clear that there was no absolute prohibition under California law on parties agreeing to reversions in class settlements. However, in 2017, the Legislature amended Code of Civil Procedure section 384(b) to apply not only to judgments but also to “any consent judgment, decree, or settlement agreement that has been approved by the court.” 874 See Managing Class Action Litigation: A Pocket Guide for Judges (2010), FEDERAL JUDICIAL CENTER, 19-20. 875 This can be contrasted with a true “claims made” settlement, where the employer simply agrees to pay a sum consisting of: (1) payments to class members who submit claims (pursuant to a formula), (2) payment to class counsel for fees and costs that is based on the value of the money paid out in claims rather than some fictional “gross settlement value,” and (3) payment of settlement administration costs. In this scenario, there is no money returned to the employer. 876 Cy pres settlements should ensure that the class is benefited and the purposes of the underlying statutes sued upon are best served. See, e.g., Dennis v. Kellogg Co., 697 F.3d 858, 865-67 (9th Cir. 2012) (reversing trial court’s approval of settlement where cy pres fund benefited the hungry indigent rather than a class of purported victims of statutory violations—those who relied upon false advertisements); Nachshin v. AOL, LLC, 663 F.3d 1034 (9th Cir. 2011) (trial court abused its discretion in approving cy pres settlement because the proposed distribution did not address the objectives of the underlying statutes sued upon, did not target the nationwide plaintiff class, and did not provide reasonable certainty that any member of the class would be benefited). 877 135 Cal. App. 4th 706 (2006). 878 Id. at 722.
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