On January 24, the U.S. District Court for the Eastern District of California took the unusual step of declining to sign off — for the fourth time — on a proposed settlement, resulting from a putative class-action lawsuit against Five Guys Enterprises LLC and its parent Encore FGBF LLC. The lawsuit alleges the popular burger chain’s credit reporting and labor practices violate various federal and California laws. In Lusk v. Five Guys Enterprises LLC, et al., the court denied the class’s fourth motion for conditional certification and preliminary settlement approval, holding that the most recent settlement version represents a “disservice” to the class.

In May 2017, Jeremy Lusk filed a putative class action against Five Guys and its parent, alleging the burger chain’s credit reporting and labor practices violated the federal Fair Credit Reporting Act in addition to California’s Consumer Reporting Agencies Act and Labor Code Sections 201, 204, 226.7, 510, 512, 1198, 2698, and 2802. Specifically, the class alleges Five Guys commissioned credit and background checks for prospective employees to influence hiring decisions without the necessary disclosures, regularly required employees to work more than six hours per shift without meal and rest breaks, and refused to reimburse employees for driving their personal vehicles to pick up supplies.

Five Guys removed the action to federal court, and the parties exchanged discovery before reaching a class-wide settlement in mediation. Things went awry, however, in the Rule 23 approval process. Under Rule 23 of the Federal Rules of Civil Procedure, the reviewing court must ensure the settlement is fair, reasonable, and adequate in light of several factors, including the risk of adjudication on the merits and the reasonableness of attorney’s fees. Senior District Judge Anthony W. Ishii reviewed and rejected requests for conditional certification and preliminary settlement approval in December 2019, October 2020, and June 2021, taking issue with the class’s risk generalized assessment, insufficient discovery, excessive attorney’s fees, and overly broad releases of liability. Judge Ishii’s fourth and most recent review, handed down January 24, largely identified the same issues, focusing on the vague risk assessment and failure to distinguish between class members’ injuries of varying severity, such that certain class members would receive a “windfall” despite having minor injuries relative to other class members.

The court admitted it could not identify “clear signs of collusion” but characterized Five Guys’s willingness to pay $1 million to settle claims it had just discredited in its briefs as “a perverse set of circumstances.” Moreover, Judge Ishii accused the named plaintiff Lusk of “doing himself and the putative class he seeks to represent a disservice by trying to fit a square peg in a round hole.” He emphasized the court’s duty to “cautiously and rigorously scrutinize” attempts to settle class actions before certification and warned both parties to “carefully consider how they would like to proceed before another motion of this kind is immediately filed.” The court, he continued “will not further consider a new motion that merely tinkers with the same details.”

Judge Ishii’s repeated rejections of Five Guys settlements reflect a broader sensitivity toward class-action settlements across the Ninth Circuit, a downstream effect of recent congressional efforts to streamline the class-action process and prevent suspected collusion. In 2018, Congress made several changes to Rule 23, including heightening the standards for class-action settlement approval. The reform added the factors (risk, reasonable fees, etc.) that Judge Ishii relied on to reject the settlement agreement in his January 24 Five Guys opinion. The decision suggests that the changes to Rule 23 are having some effect on putative settlements. Both class counsel and defense counsel should take care to include detailed risk assessments and reasonable attorney’s fees in any class-action settlement eligible for review in the Ninth Circuit.