This past week, the U.S. District Court for the Northern District of California declined to preliminarily approve a class action settlement of a Fair Credit Reporting Act (FCRA) claim because the payment to class members was unreasonably low.  In the Court’s view, the class members deserved more in light of the strengths of the plaintiff’s case, recent Ninth Circuit precedent, and unfavorable rulings for the defendant earlier in the case.  Even in a settlement posture, the Court found that the plaintiff’s FCRA claims were “not so weak as to warrant so deep a discount.” 

In Lagos v. Leland Stanford Junior University   , the plaintiff filed a class action lawsuit alleging that the defendant violated the background check disclosure provisions of the FCRA.  Specifically, the plaintiff alleged that the form the defendant used to inform job applicants that it would obtain a background check ran afoul of the FCRA’s requirement that the form consist “solely of the disclosure” that a background check would be obtained.   After litigating the case for months, the parties settled the lawsuit on a class action basis, in a settlement that would pay each class member a net amount of $13.82.  Perhaps unexpectedly, the Court declined to preliminarily approve the settlement because the recovery to class members was insufficient.

According to the Court, in approving a class action settlement, it must compare the plaintiff’s expected recovery in a litigation posture to the amount of the settlement.  In Lagos, the Court found that an 86% discount between the settlement amount and the minimum statutory damages ($100) if the plaintiff fully prevailed on his claim was not warranted.  In the Court’s view, the defendant faced significant risk if it continued to litigate the issue of whether its background check disclosure complied with the FCRA.  This risk came from many sources, according to the Court.

For example, the Court found that the defendant’s previous motion to dismiss significantly weakened its case because the motion was denied in an opinion that cast serious doubt on the defendant’s theory.  The Court also found that the Ninth Circuit’s recent Syed decision had paved the way for a finding of willfulness under the FCRA in similar disclosure cases.  In light of these factors, the Court concluded that “the risks to Plaintiff’s case are not so great as to warrant an 86% discount, which is a significant decrease that must be justified only by substantial risks and weaknesses in a plaintiff’s case.”

Although class action settlements are often approved in the FCRA context, this decision serves as a reminder that settlement approvals are not simply “rubber stamped.”  It also highlights the fact that litigation developments earlier in the lawsuit can have a fundamental impact on potential settlement approvals down the road.