Staton v. Boeing Co.

The panel majority opinion filed November 26, 2002, is withdrawn and the attached opinion is ORDERED filed.

With the filing of the attached opinion, a majority of the panel has voted to deny defendants/appellees' petition for rehearing. Judge Berzon has voted to deny the plaintiffs/appellees' and defendants/appellees' petitions for rehearing en banc and Judge Lay has so recommended. Judge Trott has voted to grant the petition for rehearing and to grant the petitions for rehearing en banc.

The full court was advised of the petitions for rehearing en banc. A judge of the court requested a vote on whether to rehear the matter en banc. The en banc request failed to receive a majority of the votes of the nonrecused active judges in favor of en banc consideration. Fed. R.App.P. 35.

The petition for rehearing and the petitions for rehearing en banc are DENIED.

This case involves a consent decree in an employment discrimination class lawsuit. The action was brought in 1998 by a class of approximately 15,000 African-American employees of the Boeing Company ("Boeing" or "the Company") against the Company. The decree requires Boeing to pay $7.3 million in monetary relief to the class, less reversions and an opt-out credit,1 and releases Boeing from race discrimination-related and other claims. It further provides for certain injunctive relief, although much of this relief appears to be largely precatory in nature. Finally, the decree awards to the lawyers for the class ("class counsel") $4.05 million in attorneys' fees.2

A group of class members objected to the proposed consent decree, arguing that the class fails to meet the certification requirements of Fed.R.Civ.P. 23(a) ("Rule 23(a)") for class actions and that the settlement contained in the decree is unfair, inadequate and unreasonable under Fed. R.Civ.P. 23(e) ("Rule 23(e)"). The district court approved the decree despite the objections, and the objectors appealed to this court. After oral argument, we requested supplemental briefs from the parties concerning the attorneys' fees issues.

We hold that the district court acted within its discretion in certifying the case as a class action pursuant to Rule 23(a). We agree with the objectors, however, that the district court should not have approved the settlement agreement under Rule 23(e), because of several considerations relating to the award of attorneys' fees and because of the structure of the damages payments established by the decree.

The parties negotiated the amount of attorneys' fees as part of the settlement between the class and the Company. They included as a term of the proposed decree the amount of attorneys' fees that class counsel would receive. The action falls under the terms of two fee-shifting statutes. By negotiating fees as an integral part of the settlement rather than applying to the district court to award fees from the fund created, Boeing and class counsel employed a procedure permissible if fees can be justified as statutory fees payable by the defendant.

Boeing and class counsel did not, however, seek to justify the attorneys' fees on this basis but instead made a hybrid argument: They maintained that the award is an appropriate percentage of a putative "common fund" created by the decree even though common funds, as opposed to statutory fee-shifting agreements, usually do not isolate attorneys' fees from the class award before an application is made to the court. The district court approved the fees on that common fund basis.

The incorporation of an amount of fees calculated as if there were a common fund as an integral part of the settlement agreement allows too much leeway for lawyers representing a class to spurn a fair, adequate and reasonable settlement for their clients in favor of inflated attorneys' fees. We hold, therefore, that the parties to a class action may not include in a settlement agreement an amount of attorneys' fees measured as a percentage of an actual or putative common fund created for the benefit of the class. Instead, in order to obtain fees justified on a common fund basis, the class's lawyers must ordinarily petition the court for an award of fees, separate from and subsequent to settlement.

To assess the reasonableness of the attorneys' fees awarded by the decree, the district court compared the amount of the fees to the amount of the putative common fund and determined what percentage of this fund the fee amount constituted. This comparison is a permissible procedure when a court is determining the reasonableness of fees taken from a genuine common fund. In conducting the comparison, however, the district court included in the value of the putative fund the parties' inexact, and quite probably inflated, estimate of the value of the proposed injunctive relief. Such relief should generally be excluded from the value of a common fund when calculating the appropriate attorneys' fees award, as the benefit of that relief to the class members is most often not sufficiently measurable. The fact that counsel obtained injunctive relief in addition to monetary relief for their clients is, however, a relevant circumstance to consider in determining what percentage of the fund is reasonable as fees. We hold further, therefore, that parties ordinarily may not include an estimated value of undifferentiated injunctive relief in the amount of an actual or putative common fund for purposes of determining an award of attorneys' fees.

Finally, the decree sets up a two-tiered structure for the distribution of monetary damages, awarding each class representative and certain other identified class members an amount of damages on average sixteen times greater than the amount each unnamed class member would receive. At least one person not a member of the class was provided a damages award. The record before us does not reveal sufficient justification either for the large differential in the amounts of damage awards or for the payment of damages to a nonmember of the class. On this ground as well, the district court abused its discretion in approving the settlement.

In September 1997, a group of African-American employees of the Company who believed that they were victims of race discrimination by Boeing consulted class counsel. Prior to the filing of this lawsuit, forty-three African-American Boeing employees filed a lawsuit in March 1998 in federal court in Seattle, Washington, alleging individual claims of race discrimination in violation of 42 U.S.C. § 1981 and the state anti-discrimination law, Wash. Rev. Code § 49.60 et seq. (the "Seattle individual action"). Several months later, in June 1998, sixteen Boeing employees, including twelve plaintiffs from the Seattle individual action, filed this class action in the same court. The employees again alleged violations of § 1981 and the state anti-discrimination law but sought to represent both themselves and other similarly-situated African-American Boeing employees. The action alleged that Boeing's promotion, compensation, and career development decisions were systematically discriminatory and that Boeing created and permitted a racially hostile work environment.

The plaintiffs amended their complaint on November 4, 1998. In the amended complaint thirty-two named plaintiffs seek to represent all African-American Boeing employees. The amended complaint alleges violations of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., as well as violations of § 1981; it omits the state anti-discrimination claim but includes other state tort and contract causes of action. The named plaintiffs and over two hundred other Boeing employees each signed retainer agreements with class counsel. They agreed to pay class counsel an initial fee of $300 and to follow that payment with monthly payments of $200 each; the record contains several letters from class counsel to these individuals urging that the payments be brought up to date. Approximately $150,000 was raised in this manner.

Meanwhile, in July 1998, seven named plaintiffs filed a similar class action against Boeing in Philadelphia (the "Philadelphia class action"). The plaintiffs in this case moved in October 1998 to consolidate the two actions.

Soon thereafter, in early November, Boeing filed a motion to dismiss plaintiffs' class claims. Also in November, class counsel and Boeing began settlement negotiations. Class counsel had met with numerous African-American Boeing employees before filing suit but almost no formal discovery had taken place by November. At the beginning of December, class counsel indicated frustration to their clients about the Company's lack of responsiveness, characterizing "much of what Boeing has provided thus far as `junk,'" and adding that "Boeing has been unwilling to provide us with numerous documents we believe are pertinent to proving Boeing's unlawful treatment of African-Americans." The negotiations nonetheless proceeded rapidly for such a large class action at this early stage of litigation, with the result that, in January 1999, Boeing and class counsel announced that they had agreed to settle the lawsuit. The parties filed motions in district court for class certification and for preliminary approval of a consent decree.

On January 25, 1999, the district court provisionally certified the class and preliminarily approved the consent decree. The preliminary approval order required the Company to provide approved notice of the proposed decree to class members through newspaper publication, distribution using the Company's payroll system for present employees, and first-class mailings to former employees. Two distributions of the notices were ultimately required because the first notices published and mailed were improper and had to be corrected. The notices explained that Boeing would pay the attorneys' fees and costs and reported the total sum of money Boeing would pay under the decree, the amount to be paid for monetary awards to members of the class, and the amount ascribed to injunctive relief. Neither version expressly identified the amount of attorneys' fees provided in the proposed decree.

The proposed consent decree purports to resolve this case, the Seattle individual action, and the Philadelphia class action. The decree releases Boeing from liability for claims brought by any of the Company's African-American employees in exchange for certain monetary and injunctive relief. In particular, Boeing is released by all class members from all existing claims for race discrimination (under any of the various discrimination laws) and for "negligent misrepresentation, fraud, detrimental reliance, promissory estoppel, or breach of contract," without regard to whether such claims are in any way related to the alleged race discrimination. The period covered by the release is set according to the statute of limitations period of the state in which a class member resides and extends until the preliminary approval date of the decree. As a result, any claims arising before January 25, 1999 (the preliminary approval date) of the types covered by the decree and timely under the relevant state statute of limitations are barred.

The decree goes on to certify a settlement class pursuant to Fed.R.Civ.P. 23(b)(2) for purposes of equitable relief. That class consists of all African-Americans employed by Boeing from the beginning of the applicable limitations periods until the expiration of the decree (including new employees hired after the preliminary approval date of the decree). No opt-outs are allowed from the equitable relief class. The effect of this provision may be that no African-American employed by Boeing during the pertinent period, including new hires, can obtain any injunctive relief — reinstatement, promotion, or change in working conditions, for example — even if he or she opts out of the class for purposes of monetary relief and proves race discrimination in a separate action.3

For purposes of monetary relief, the decree approves a Settlement Class pursuant to Fed.R.Civ.P. 23(b)(3), consisting of African-American Boeing employees employed from the beginning of the applicable limitations periods until the preliminary approval date of the decree, and allows members of that class to opt out of the monetary relief provisions. By the cut-off date of April 30, 1999, about 500 class members had opted out, including six named plaintiffs.

The class receives a total monetary award of $7.3 million. Out of the approximately 15,000-member class, a group of 264 individuals4 — less than two percent of the class — made up of the named plaintiffs and other class members identified by class counsel as having actively participated in the litigation (together, the "individually identified recipients" or "IIRs") is to receive $3.77 million, more than half the monetary award. The $3.77 million will be distributed among the IIRs in amounts established by class counsel, who credit the assistance of an independent claims adjuster for consultation on many, but not all, of the claims. There is ample evidence in the record that before retaining this claims adjuster class counsel extensively discussed specific award amounts with some IIRs. Moreover, the record indicates that class counsel made the final decisions concerning many of these designated payments.

The individual awards for the IIRs range from $5,000 to $50,000, with most of the class representatives receiving higher awards than the other IIRs, and average approximately $16,500. Based on our examination of records relating to the Wichita-based IIRs, the individuals singled out for IIR settlement payments are for the most part the same people who signed individual retainers with class counsel that obligated them to pay monthly fees.

The remaining $3.53 million of monetary relief is to be distributed to the rest of the class (the "unnamed class members"). To receive an award, unnamed class members must submit a claim form to an independent claims arbitrator (hired by class counsel and approved by the district court), who will verify the validity of the claims against Boeing's records and designate awards according to a detailed point system laid out in the decree and applicable only to the unnamed class members. Some 3,400 class members filed claims, so the average payment each unnamed class member would receive is approximately $1,000.

Boeing also agreed to pay $3.75 million to $3.85 million to class counsel for fees and expenses, as follow:

— $3 million for attorneys' fees and costs (the parties agreed that class counsel had incurred approximately $126,000 in costs as of the preliminary approval date);

— up to $100,000 for explaining the decree to class members;5 and

— $750,000 for monitoring, administering, implementing, and defending the decree.

The decree also grants $200,000 to objectors' counsel for their role in representing the putative class in the Philadelphia class action.

Finally, within three years of receiving final judicial approval of the decree, Boeing must spend an additional $3.65 million on expenses related to the approval and implementation of the decree. This $3.65 million would go toward the cost of providing notice to class members of the proposed settlement and toward the injunctive relief provided for in the decree, discussed below. The decree further provides that:

Such credited expenditures shall also include money spent by Boeing on diversity training and other programs designed to improve the cooperation between members of Boeing's diverse workforce, to facilitate the advancement of African-Americans into first-level and higher-level management positions at Boeing, to prevent and/or resolve racial harassment concerns among the workforce, and/or to otherwise advance equal employment opportunity for African-American employees of Boeing.

Nothing in the decree requires that the credited amount be in addition to any amount of money Boeing was already planning to spend on such matters. The timing of such expenditures is within Boeing's discretion, although the parties expressed the expectation that half the funds would be spent between the preliminary approval date and the first anniversary of the final approval.

The decree's injunctive provisions are to be in effect for the three years following final judicial approval of the decree. The injunctive relief provided for in the decree is as follows:

(1) Boeing will not discriminate based on race or retaliate against employees for opposing race discrimination or participating in efforts to eradicate it. These general provisions mirror statutory prohibitions. However, "Court enforcement of this Decree shall not be utilized as a method for class members to litigate entitlement to individual relief for claims of alleged Race Discrimination," and individual complaints of race discrimination "shall not be considered to raise an issue of compliance or non-compliance with this decree."

(2) Boeing will meet annually with a three-person advisory committee chosen from among the class members to discuss "Settlement Class members' viewpoints and concerns." The members of the committee will bear their own expenses for attending the meetings.

(3) Boeing will hire one or more consultants "to assist it in developing and assessing the success of alternative and/or supplemental human resources systems designed to accomplish the objectives in this Section [describing the injunctive relief] of the Decree." The consultant is to be chosen by Boeing and class counsel.6 The consultant is to investigate the degree to which the decree successfully addresses various of the class members' concerns and to report back to Boeing and class counsel. Nothing in the decree requires Boeing to take any action in response to these reports or otherwise to take any action suggested by the consultant.

(4) Boeing — unilaterally — will develop and implement systems for providing information to hourly employees about the Company's promotion systems and will develop and "pilot" a program designed to enable hourly employees to learn who received a particular promotion. Boeing is required to meet and confer with class counsel about the effectiveness of these programs once implemented but is not required to adopt any suggestions class counsel make or, with regard to the "pilot" promotion information program, to do anything more than "determine the feasibility of implementing that program, or comparable programs" throughout the Company.7

(5) Similarly, Boeing will develop a system whereby qualified but unsuccessful candidates for discretionary promotions will receive feedback and be directed to training or other steps that would make the candidates more competitive. Class counsel are to "monitor" this process, with no provision for any dispute resolution mechanism should class counsel conclude that the system is inadequate or ineffective.

(6) With regard to filling opportunities for temporary promotions (useful in providing experience relevant to desirable positions), Boeing "shall identify informal systems" to permit candidates to know about and be considered for such opportunities, and shall "meet and confer" with class counsel regarding such informal systems and related complaints. There is no requirement that Boeing change its behavior in response to any suggestions or objections by class counsel or any class member.

(7) Boeing "presently plans" to expand its First Level Management Selection Process (FLMSP) to all its operations over the first two years of the decree. The FLMSP, thus far a pilot program at Heritage Boeing8 locations, attempts to create a standardized, fair process for selecting first-level managers. If "Boeing decides not to implement FLMSP in certain portions of the Company's operations, Boeing will advise Class Counsel of the alternative selection methods which will be utilized in such operations, and Class Counsel will provide feedback to Boeing regarding any systemic concerns about such alternative methods which they believe may impact upon the Settlement Class members." Boeing can modify the FLMSP or eliminate it altogether; if it does so, Boeing must advise class counsel "and consider feedback provided by Class Counsel regarding such changes."

(8) In 1998, in part in response to this litigation, Boeing developed new "Company-wide EEO Investigation Guidelines," which, among other things, improve the time period for addressing internal discrimination complaints. Boeing will accept "feedback" from class counsel on the guidelines generally and on any modifications the company makes and "may" use the consultant's services to refine these procedures.

(9) Boeing will continue the provisions of its existing harassment policy concerning race, or implement amended policies "reasonably designed to achieve the same effect" as the existing policy. Class counsel will have the opportunity to provide "feedback" on any modifications to that policy. However, "[i]ndividual [harassment] complaints shall not be considered to raise an issue of compliance or noncompliance with this Decree."

In April 1999, some members of the class filed objections to the proposed consent decree. The district court allowed limited discovery by the objectors, reviewed motions by all parties, and held two fairness hearings (but did not take any evidence at those hearings).

Among other matters, the objectors complained that class counsel could not have meaningfully assessed the value of class claims because of insufficient discovery; that the monetary relief was inadequate and unfairly distributed; that the injunctive relief would not result in concrete benefits to the class; that the court should not approve a single broad class, since the members of the putative class have divergent interests; that plaintiffs' counsel are not fairly representing the plaintiffs because, inter alia, individual class members were promised monetary relief in order to secure their support of the decree; that the notice provided to class members was deficient; and that the fees awarded to class counsel are too high.

In partial response, most of the named plaintiffs and Boeing submitted summaries of allegedly comparable average monetary awards in other employment class actions; declarations of several experts, including the Reverend Jesse Jackson, praising the proposed decree (largely on the understanding that the decree would provide individual class members with free legal representation with regard to their employment issues at Boeing);9 and evidence that Boeing had vigorously contested race discrimination cases brought to trial against the Company, with victorious results that led class counsel, as stated in a declaration to the district court, to be "hard pressed to find anything that would support a nationwide victory over Boeing."

In September 1999, the district court certified a settlement class and approved the decree. In its order approving the decree, the district court concluded that "there are important advantages to class-wide resolution in this type of dispute." The court cited Boeing's past success in defending against individual claims of race discrimination; the court's assessment of the effectiveness of the injunctive relief; and the cooperative nature of the settlement. It found no merit to the objectors' qualms over the class's certification. Plaintiffs' "allegations clearly raise class-wide legal and factual issues sufficient to satisfy the [commonality] requirement." Moreover, typicality was assured by the "broadly selected cross-section ... of Boeing employees" serving as named plaintiffs. The court proceeded to certify the class.

Concerning the fairness of the decree, the district court emphasized "a strong judicial policy favoring settlement of class actions," noting the conservation of resources for all concerned that leaves "more to devote to the problems raised by the claim." The court approved the notice procedure followed by the parties and then conducted an analysis of the fairness, adequacy and reasonableness of the decree.

The "heart of the matter" according to the district court was the amount of the settlement; it reviewed the decree's components and found that the objectors "have not presented any evidence to suggest that the amount of payments appear [sic] inadequate or unfair when compared with the other cases [cited by Boeing]." Further, the court decided that "the awards to the named parties are not excessive." Without reviewing the proposed decree in any detail in its order, the district court concluded that the injunctive provisions are not "toothless," but "present a novel and potentially effective response to the problem of race discrimination." After rejecting categorically allegations of collusion between class counsel and Boeing, the court concluded, citing this court's precedent, that "the mere possibility of a better settlement is not sufficient grounds for finding the agreement unfair." As a final matter, the district court found the award of attorneys' fees "to be reasonable given the nature of the case, the risks to the plaintiffs' counsel's firm, and the amount of pre-filing and post-settlement work performed."

This case presents difficult questions regarding the appropriate role of the courts in approving class action settlement decrees. The governing principles are clear, but their application is painstakingly fact-specific and hampered by the much greater knowledge of the parties as to the give-and-take of the bargaining process. Judicial review also takes place in the shadow of the reality that rejection of a settlement creates not only delay but also a state of uncertainty on all sides, with whatever gains were potentially achieved for the putative class put at risk. We are mindful of the value dialogue and cooperation have played in attempting to resolve this litigation and in aspiring to foster a spirit of future goodwill in the wake of an alleged systemic pattern of race discrimination.

To vindicate the settlement of such serious claims, however, judges have the responsibility of ensuring fairness to all members of the class presented for certification. Especially in the context of a case in which the parties reach a settlement agreement prior to class certification, courts must peruse the proposed compromise to ratify both the propriety of the certification and the fairness of the settlement. First, the district court must assess whether a class exists; "[s]uch attention is of vital importance, for a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold." Amchem Prods. Inc. v. Windsor, 521 U.S. 591, 620, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). Second, the district court must carefully consider "whether a proposed settlement is fundamentally fair, adequate, and reasonable," recognizing that "[i]t is the settlement taken as a whole, rather than the individual component parts, that must be examined for overall fairness...." Hanlon v. Chrysler Corp. 150 F.3d 1011, 1026 (9th Cir.1998) (citations omitted). When, as here, the parties have entered into a settlement agreement before the district court certifies the class, reviewing courts "must pay `undiluted, even heightened, attention' to class certification requirements...." Id. at 1019 (quoting Amchem, 521 U.S. at 620, 117 S.Ct. 2231). Moreover, concerns about the fairness of settlement agreements "warrant special attention when the record suggests that settlement is driven by fees; that is, when counsel receive a disproportionate distribution of the settlement...." Id. at 1021.

In this case, the objectors contend that the lawsuit does not qualify for class action status under Rule 23(a). We review under the abuse of discretion standard a district court's decision to certify a case as a class action. Armstrong v. Davis, 275 F.3d 849, 867 (9th Cir.2001). Although we have some concerns, largely relating to litigation management, as to whether the case could be maintained as a class action if the litigation continues, the district court did not abuse its discretion in certifying the case for settlement purposes pursuant to Rule 23.

The objectors argue in the alternative that the district court should not have approved the settlement agreement under Rule 23(e). "We have repeatedly stated that the decision to approve or reject a settlement is committed to the sound discretion of the trial judge because he is exposed to the litigants, and their strategies, positions and proof." Hanlon, 150 F.3d at 1026 (citation and internal quotation marks omitted). Nonetheless, the district court did in this case abuse that discretion. To repeat what this court had reason recently to state: "Although we are always cautious to reverse the ... approval of a settlement agreement because of the time and effort dedicated by the parties and the district court, we are compelled to do so in this case because of the unjust terms of the decree." Molski v. Gleich, 318 F.3d 937, 956 (9th Cir.2003).

We address first the propriety of the class certification and then examine the district court's decision to approve the settlement agreement.

Rule 23(a) establishes four prerequisites for class action litigation, which are: (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy of representation. We examine each of these requirements in turn.

Rule 23(a)(1) requires that "the class is so numerous that joinder of all members is impracticable." There is no dispute that the numerosity requirement is met in this case. The plaintiff class before us is approximately 15,000 in number.

Rule 23(a)(2) requires that "there are questions of law or fact common to the class." We stated in Hanlon that

Rule 23(a)(2) has been construed permissively. All questions of fact and law need not be common to satisfy the rule. The existence of shared legal issues with divergent factual predicates is sufficient, as is a common core of salient facts coupled with disparate legal remedies within the class.

150 F.3d at 1019.

The class in this case is broad and diverse. It encompasses some 15,000 employees, from a wide range of positions both salaried and hourly, who are employed at Boeing facilities located in 27 different states. Class counsel argue, and the district court found, that the large class is united by a complex of company-wide discriminatory practices against African-Americans.

Gen. Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 157, 159, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982), emphasizes that the fact "that racial discrimination is by definition class discrimination," cannot automatically convert a single allegation of race discrimination into "an across-the-board attack." Though the commonality claim in this case is ambitious and therefore especially worthy of scrutiny, it is far from the theoretical extrapolation sought in Falcon. That case concerned only one named plaintiff who did not identify any other plaintiffs subjected to the treatment he claimed to have experienced.

By contrast, the record indicates that class counsel interviewed more than 1,300 Boeing employees from facilities across the country. Counsel have produced detailed documentation of discrimination experienced by more than 200 of these employees. Those named employees include salaried managers and hourly line-workers, union members and non-union members, employees from all of Boeing's major locations, and employees from two firms that Boeing recently acquired. Appellees also point to the results of an internal "survey of Boeing's affirmative action issues," distributed in an e-mail to Boeing senior management. The e-mail identified "racial bias" in the categories of hiring practices and promotion practices and "race issues" in the category of peer working environment as issues of concern at the Company.

In fact, the named plaintiffs and objectors share the contention that discriminatory practices at Boeing are widespread and entrenched. According to the district court, "both the supporters of the consent decree and the objectors spoke forcefully of institutional problems with race discrimination." The court may not go so far, of course, as to judge the validity of these claims. "Although some inquiry into the substance of a case may be necessary to ascertain satisfaction of the commonality and typicality requirements of Rule 23(a), it is improper to advance a decision on the merits to the class certification stage." Moore v. Hughes Helicopters, Inc., 708 F.2d 475, 480 (9th Cir.1983), citing Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974). But the breadth and consiste