The Franchise Memorandum

The United States Court of Appeals for the Ninth Circuit has affirmed a ruling from a federal California court, approving a proposed class action settlement agreement that included nearly a million dollars in fees to the plaintiffs' attorneys. Laguna v. Coverall N. Am., Inc., 2014 U.S. App. LEXIS 10259 (9th Cir. June 3, 2014). In 2009, the plaintiffs brought a class action suit against Coverall, a janitorial franchising company, alleging that Coverall misclassified California franchisees as independent contractors allowing them to avoid certain protections afforded to franchisees, and that Coverall breached its franchise agreements by taking existing accounts from franchisees and reselling the same customer accounts to other franchisees. After the named plaintiffs agreed to a settlement, an objector contested the agreement which gave former franchisees a credit of $750 and a payment of $475, gave new franchisees the right to rescind their franchise agreements, and provided injunctive relief requiring certain changes to the franchise agreements and Coverall's operating procedures. The objector also challenged the award of $994,800 in attorneys' fees to the class counsel.

The Ninth Circuit concluded that the settlement was fair, reasonable, and adequate. A majority of the appellate panel members held the district court had correctly considered the elements of the settlement agreement and had properly applied the lodestar method in gauging the fairness of the attorneys' fees. (Recommending that the case be remanded, a dissenting judge felt there was a lack of information to support the validity of both the settlement agreement and the attorneys' fees.) Despite the objections, the majority held that Ninth Circuit Rule 23(e) has "never required a district court to assign a monetary value to purely injunctive relief," and the court "put[s] a good deal of stock in the product of an arms-length, non-collusive, negotiated resolution."