Madrigal v. SMG Extol, LLC

Background

Cesar Madrigal asserted state wage-and-hour class claims and individual claims for retaliation and wrongful termination against SMG Extol, LLC, and Direct Line Global, LLC. The case was originally filed in Alameda Superior Court and was later removed to federal court. After mediation, the parties reached settlement terms. As part of that agreement, Madrigal amended the complaint to add class claims, which the parties said was necessary to match the settlement’s release of claims.

The proposed class settlement required Defendants to pay a non-reversionary gross amount of $550,000 to a settlement class consisting of current and former hourly-paid or non-exempt employees who worked in California between August 3, 2018, and July 18, 2023. The proposal allocated $183,333.33 for attorney fees, $20,000 for costs, $5,000 as a service award for Madrigal, and $6,450 for settlement administration. It also allocated $45,000 to claims under California’s Private Attorneys General Act, with 75% of that amount going to the California Labor and Workforce Development Agency. After the proposed deductions, $301,466.67 would be divided among 359 class members based on their workweeks. The parties separately agreed to settle Madrigal’s individual claims for $50,000.

Legal standard

Under Federal Rule of Civil Procedure 23(e), a court must determine whether a proposed class settlement appears fair, adequate, and reasonable. The court explained that this review includes comparing the settlement with the likely value of the class claims, examining the strength and risks of the claims, considering the discovery completed, and checking for conflicts or collusion. Because the settlement was negotiated before class certification, the court said it had a heightened duty to examine possible conflicts of interest and signs of collusion.

Reasons for denying preliminary approval

The court concluded that the motion did not provide enough information to evaluate whether the settlement met Rule 23(e). Madrigal originally estimated the maximum value of the class claims at $17,022,346.90, while the initial proposed gross settlement was $600,000. In the revised motion, Madrigal estimated the claims at $7,766,134.40. The court found it troubling that the revised estimates reduced the claimed value of the security-checkpoint claim by more than 80% and the missed-meal-and-rest-break claim by 50%, without supporting calculations or an explanation for those changes.

The court also found that the motion did not sufficiently explain the strengths and weaknesses of each class claim and defense. It specifically questioned the proposed settlement’s treatment of wage-statement claims, because the complaint alleged that none of the relevant paystubs complied with California Labor Code section 226. The court stated that the class might be entitled to at least $1,436,000 on that claim alone, making the $550,000 class settlement difficult to justify based on the information provided.

The court separately questioned the reduction of potential Private Attorneys General Act penalties from an estimated $1,776,000 to $45,000. The stated reason was Defendants’ position that Madrigal was not an appropriate representative because he worked only at Iowa client sites. But Madrigal also represented that he worked at client sites in both California and Iowa. The court said that, if he worked in California, the stated basis for sharply reducing the penalties appeared weak; if he worked only in Iowa, he might not be an appropriate representative of California wage-and-hour claims.

The court found that the limited discovery before settlement also weighed against approval. Counsel reviewed a sampling of class members’ time and pay data but did not appear to have interviewed any class member other than Madrigal. The court questioned how counsel could assess issues such as missed meal and rest breaks based only on time and pay data.

The court identified possible signs of collusion or conflicts. The settlement included a provision under which Defendants agreed not to object to the requested attorney fees, known as a clear-sailing provision. The proposed $183,333.33 fee award was about 33.3% of the settlement fund and approximately 60% of the amount to be distributed to class members. The court noted that the Ninth Circuit’s benchmark percentage for attorney fees is 25% and that more information would be needed to determine whether the requested multiplier was justified. The court also observed that class claims were added only after settlement negotiations had begun.

Adeacy of the class representative

Rule 23(a)(4) requires a class representative to fairly and adequately protect the class’s interests. The court found serious concerns about Madrigal’s adequacy because he would receive $50,000 for his individual claims plus a proposed $5,000 service award, for a total of $55,000. That amount was slightly more than 9.1% of the $600,000 Defendants were apparently willing to pay for both the individual and class claims. The court concluded that Madrigal had an incentive during negotiations to obtain as much of the total settlement as possible for his individual claims, creating a potential conflict with the class. The court stated that Madrigal did not address how this incentive affected his ability to represent the class and that he did not appear to be an adequate class representative.

Other issues and disposition

The court also noted that the parties had not created a website to inform class members about deadlines and provide important case documents. It further noted that the parties claimed notice under the Class Action Fairness Act was unnecessary but cited no authority supporting that position for this case.

Judge Seeborg denied Madrigal’s motion for preliminary approval of the class settlement without prejudice. The court deferred ruling on preliminary class certification until Madrigal submits a revised motion that merits preliminary approval. The opinion did not finally approve or reject the settlement, decide the underlying wage-and-hour claims, or make a final determination on class certification.