High Costs of PAGA Litigation

A California Superior Court order denied approval of a proposed settlement in Lime Scooter Co.’s ongoing PAGA litigation. In its order, the court offered important considerations for employers at risk of high-stakes wage and hour litigation.

PAGA Settlements are Closely Scrutinized

The court began its discussion by noting that proposed PAGA settlements inherently invoke a heightened level of concern for judges. As a form of representative action, PAGA settlements may preclude future claims from individuals who were not involved in the settlement process. This preclusive effect gives rise to a concern that a proposed settlement may be the result of a “reverse auction”—a tactic where the defendant negotiates with the most ineffectual class lawyers to receive a weak settlement that precludes future claims. The court noted that wariness of reverse auctions is especially warranted in the PAGA context, given that “resolution of specifically-identified PAGA claims has preclusive impact on the State.”

Focusing on the circumstances surrounding Lime’s proposed settlement, the court determined a reverse auction had likely taken place. When settlement negotiations first began, all plaintiffs—including the plaintiff seeking settlement—stated they were working cooperatively and participating in joint mediation sessions. But Lime soon indicated it had reached a settlement with a singular plaintiff. Both Lime and the individual plaintiff represented that the settlement had been reached when the plaintiff accepted a “take-it-or-leave-it” offer made pursuant to Cal. Civ. Pro. Code § 998—an offer rejected by three other plaintiffs. But after more inquiry, the court discovered that the settlement had actually resulted from a previously undisclosed individual mediation session between Lime and the individual plaintiff. Given the court’s heightened wariness of PAGA settlements generally, this behavior had “an odor of mendacity” and likely indicated a reverse auction.

Adequate Settlements Reflect the Theoretical Maximum Recovery

The court further noted the proposed settlement did not adequately reflect the maximum potential damages faced by Lime. As a PAGA settlement, both Lime employees at large and the State of California had an interest in the settlement’s value, so the court rejected what it deemed to be an inadequate calculation of damages. Several considerations influenced the court’s determination.

First, Lime and the individual plaintiff had calculated the maximum potential damages on an “assumed rate of violations.” Dismissing this method, the court explained that a calculation not based on a 100% violation rate resulted in “double discounting”—i.e., discounting the maximum theoretical damages by the assumed rate of violations, and then applying further discounts when justifying the proposed settlement results. The court opined that the maximum theoretical damages would need to be based on a 100% violation rate, and that any assumed violation rate could thereafter be applied when determining a reasonable settlement amount.

Second, the parties improperly chose a “middle ground” in determining the maximum theoretical minimum wage penalties. Reasoning that California Labor Code §§ 558 and 1197.1 put forth differing penalties for minimum wage violations, the parties adopted a figure falling between the two. The court rejected this approach and stated the maximum theoretical value of the claims must use the higher penalties found in § 1197.1—$100 per aggrieved employee per pay period for the initial violation, and $250 per aggrieved employee per pay period for each subsequent violation.

Third, the parties failed to account for unpaid overtime and premium payments for meal break violations. Arguing that plaintiffs were unlikely to prevail on overtime and meal break claims at trial, Lime and the individual plaintiff did not assign any value to those potential claims when calculating the maximum theoretical damages. The court again rejected the argument and stated unlikelihood of success was a reason to give a discount on a claim when settling but was not a reason to omit the value of the claim entirely.

Fourth, the court believed the proposed settlement reflected far too many discounts overall. The individual plaintiff determined the theoretical maximum recovery to be between approximately $392 million and $750 million. The proposed settlement of $4.98 million therefore represented approximately .66–1.27% of the theoretical maximum. Even accounting for the difficulties plaintiffs would face in proving their claims, the court was not swayed that such a heavy discount was justified.

Lessons for California Employers

The court’s decision highlights the difficult road California employers must navigate. With the potential for enormous amounts of damages, PAGA actions are a serious threat for any company—a threat that is only compounded by a court’s increased scrutiny of settlements in these cases. Given these considerations, compliance with California wage and hour laws should be a top priority for any employer in the state.

Read more issues of the National Employment Perspective >>