Sarah Murphy v. Sfbsc Management, LLC

                    FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


JANE ROES, 1–2, on behalf of       No. 17-17079
themselves and all others
similarly situated,                  D.C. No.
             Plaintiff-Appellee,   CV 14-3616 LB

               v.
                                      OPINION
SFBSC MANAGEMENT, LLC;
CHOWDER HOUSE, INC.; DEJA
VU-SAN FRANCISCO, LLC;
ROARING 20’S, LLC; GARDEN
OF EDEN, LCC; S.A.W.
ENTERTAINMENT LIMITED;
DEJA VU SHOWGIRLS OF SAN
FRANCISCO, LLC; GOLD
CLUB-S.F., LLC; BIJOU-
CENTURY, LLC; BT
CALIFORNIA, LCC,
      Defendants-Appellees,

               v.

SARAH MURPHY; POOHRAWN
MEHRABAN; DEVON LOCKE,
      Objectors-Appellants.
2              MURPHY V. SFBSC MANAGEMENT

         Appeal from the United States District Court
            for the Northern District of California
         Laurel D. Beeler, Magistrate Judge, Presiding

          Argued and Submitted November 16, 2018
                  San Francisco, California

                     Filed December 11, 2019

     Before: A. Wallace Tashima and Milan D. Smith, Jr.,
    Circuit Judges, and Lawrence L. Piersol,* District Judge.

                    Opinion by Judge Tashima


                            SUMMARY**


            Labor Law / Class Action Settlement

    The panel reversed the district court’s approval of a
settlement notice process and a class action settlement,
negotiated without a certified class, in a case in which exotic
dancers working at various nightclubs in San Francisco
alleged they were misclassified as independent contractors
rather than being treated as employees.




     *
     The Honorable Lawrence L. Piersol, United States District Judge for
the District of South Dakota, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
             MURPHY V. SFBSC MANAGEMENT                        3

    The panel held that the settlement notice did not meet the
“best notice that is practicable under the circumstances” due
process standard of Fed. R. Civ. P. 23(c)(2)(B). The content
of the notice was adequate, even though it did not include
information about related litigation, but the process used was
inadequate because notice was sent only once by mail.

    The panel held that, in granting approval of the settlement
as “fair, reasonable, and adequate” under Rule 23(e), the
district court failed to apply the correct legal standard and
conduct the heightened inquiry required for review of class
action settlements negotiated without a certified class.
Accordingly, the district court abused its discretion in
approving the settlement. The panel held that, when the
parties negotiate a settlement before a class has been
certified, the district court must apply a higher level of
scrutiny for evidence of collusion or other conflicts of interest
before approving the settlement as fair. This more exacting
review is warranted to ensure that class representatives and
their counsel do not secure a disproportionate benefit at the
expense of unnamed plaintiffs. The panel concluded that the
district court failed to investigate or adequately address
numerous problematic aspects of the settlement and subtle
signs of implicit collusion, including a clear sailing
agreement, a disproportionate cash distribution to attorneys’
fees justified in part by potentially inflated non-monetary
relief, large incentive awards to two plaintiffs, and
reversionary clauses. The panel reversed and remanded for
further proceedings.
4            MURPHY V. SFBSC MANAGEMENT

                         COUNSEL

Shannon Liss-Riordan (argued), Lichten & Liss-Riordan P.C.,
Boston, Massachusetts, for Objectors-Appellants.

F. Paul Bland Jr. (argued) and Karla Gilbride, Public Justice
P.C., Washington, D.C.; Steven G. Tidrick and Joel B.
Young, The Tidrick Law Firm, Oakland, California; for
Plaintiffs-Appellees.

Douglas J. Melton (argued) and Shane M. Cahill, Long &
Levit LLP, San Francisco, California, for Defendants-
Appellees.

Eli Naduris-Weissman, Rothner Segall & Greenstone,
Pasadena, California; Charles P. Yezbak III, Yezbak Law
Offices PLLC, Nashville, Tennessee; for Amicus Curiae
International Entertainment Adult Union.


                          OPINION

TASHIMA, Circuit Judge:

    This case arises out of a dispute under federal and
California labor law whether exotic dancers working at
various nightclubs in San Francisco were misclassified as
independent contractors rather than being treated as
employees. The district court approved a class action
settlement that was negotiated in the absence of a certified
class.   Objectors-Appellants challenge that settlement
approval under Federal Rule of Civil Procedure 23 (“Rule
23”). They contend that the settlement was inadequate
because it recovered only a fraction of the class claims’ value,
             MURPHY V. SFBSC MANAGEMENT                         5

accorded too much weight to worthless “coupons” and
injunctive relief, and that the district court disregarded indicia
of collusion that warranted additional scrutiny. Objectors-
Appellants also challenge the adequacy of the notice process
because it involved only a single notice sent by U.S. mail and
hanging posters in the defendant nightclubs, and lacked any
electronic outreach.

    Because the notice did not meet Rule 23’s “best notice
that is practicable under the circumstances” standard, and
because, in granting approval of the settlement, the district
court failed to apply the correct legal standard and conduct
the heightened inquiry we require for review of class action
settlements negotiated without a certified class, we reverse
approval of the notice and of the settlement, and remand for
further proceedings.

                      BACKGROUND

    In 2014, Plaintiffs Jane Roes Nos. 1–2 filed this putative
class and collective action alleging violations of the Fair
Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201–219, and
various provisions of the California Labor Code and San
Francisco municipal ordinance. The named Plaintiffs, as well
as the nearly 4,700 members of the putative Rule 23 class,
worked as exotic dancers at eleven adult entertainment clubs
in San Francisco. Plaintiffs brought suit against Defendant
SFBSC Management, LLC (“SFBSC”), which, “broadly
speaking,” managed the eleven nightclubs where class
members worked.

    Plaintiffs alleged that they were misclassified as
independent contractors and should have been classified as
employees of SFBSC. Plaintiffs sought to recover the
6             MURPHY V. SFBSC MANAGEMENT

following categories of damages on a classwide basis: unpaid
minimum wages under federal, state, and San Francisco law
for all hours worked on the clubs’ premises; reimbursement
of stage fees paid to the clubs for each night that a dancer
worked; unpaid overtime wages; liquidated damages; PAGA
penalties1; and attorneys’ fees and costs.

    A. Litigation History

    Shortly after the case was filed, SFBSC brought a motion
to compel arbitration. The district court denied that motion
on March 2, 2015, holding that the relevant arbitration
provision was unconscionable and therefore unenforceable.
SFBSC appealed the district court’s decision, but we
affirmed, albeit on the alternative ground that SFBSC lacked
standing to enforce the arbitration provisions at issue because
SFBSC was not a party to the relevant contracts between the
nightclubs and class members, which contained the
arbitration provision. See Roes v. SFBSC Mgmt., LLC, 

 (9th Cir. 2016).

    During the appeal concerning the arbitration issue, “the
parties conducted three in-person mediations and multiple
telephone conferences with the Ninth Circuit Mediator,
exchanging information about working conditions, hours
worked, compensation, and the parties’ relative control over
their work, among other matters.” Ultimately, the parties
executed a settlement agreement and, per the parties’
stipulation, we then dismissed the appeal without prejudice to


    1
       PAGA refers to the California Private Attorneys General Act, Cal.
Labor Code §§ 2698–2699.5, which authorizes aggrieved employees to
file lawsuits to recover civil penalties on behalf of themselves, other
employees, and the State of California for Labor Code violations.
             MURPHY V. SFBSC MANAGEMENT                      7

its reinstatement if the district court did not approve the
parties’ settlement. As part of the settlement, and for
settlement purposes only, the parties agreed to add the eleven
individual nightclubs as defendants; they submitted a
proposed second amended complaint to that effect.

    Meanwhile, during the appeal and negotiation process,
counsel who now represents Objectors Sarah Murphy,
Poohrawn Mehraban, and Devon Locke (collectively,
“Objectors”) brought two separate misclassification suits
directly against three of those nightclubs—Larry Flynt’s
Hustler Club, the Gold Club, and Condor Gentlemen’s Club.
The suits, Hughes v. S.A.W. Entm’t, Ltd., 16-cv-03371-LB
(N.D. Cal.), and Pera v. S.A.W. Entm’t, Ltd., 17-cv-00138-LB
(N.D. Cal.), involve the same kind of substantive claims for
wage-and-hour violations as are involved here. When the
plaintiffs in those cases discovered that they were part of the
putative class in this case, and learned the proposed terms of
the settlement in this case, they objected to preliminary
approval of the settlement.

   B. The Settlement and its Approval

    Following dismissal of the appeal, the Roe parties moved
for preliminary approval of their proposed class action
settlement pursuant to Rule 23(e). The Settlement Agreement
proposed to release wage claims against SFBSC, as well as
against the individuals and entities—which had not been
named in the original complaint—that directly owned and
operated the eleven nightclubs in San Francisco. In return,
the settlement included several different types of
consideration.
8             MURPHY V. SFBSC MANAGEMENT

    First, the proposed settlement provided for two tiers of
cash: a first tier of $2 million (“First Tier Cash Pool”) and a
possible second tier of up to $1 million (“Second Tier Cash
Pool”). The First Tier Cash Pool would be used for: (1) cash
compensation to Settlement Class Members who timely
elected to receive a Cash Payment, (2) attorneys’ fees and
expenses, (3) enhancement payments of up to $71,000 total,
(4) a $100,000 PAGA payment,2 and (5) administrative costs
of up to $50,000. Only if the sum of those five items
exceeded $2 million, would the defendants be required to
fund the Second Tier Cash Pool in the amount, up to
$1 million, sufficient to fully cover the sum of the valid
claims for cash payment, the attorneys’ fees and expenses, the
enhancement payments, the PAGA payment, and
administrative costs. Under the proposed settlement, the
Cash Payments were calculated based on the number of
months in which a class member had worked for the
nightclubs during the class period, and ranged from $350 to
$800, although the amount could be increased or reduced on
a pro rata basis based on the number of claims submitted. To
receive a Cash Payment, class members had to submit an
FLSA claim form by the deadline.

   Second, the proposed settlement also provided for up to
$1 million in “dance fee payments.” A “dance fee” is the
published amount that a customer at the defendant nightclubs




    2
      Seventy-five percent of the PAGA payment must be distributed to
the California Labor and Workforce Development Agency for
enforcement of labor laws and for education of employers and employees
about their rights and responsibilities. See 

(i).
               MURPHY V. SFBSC MANAGEMENT                                9

must pay to a dancer for each dance that she performs.3 The
clubs normally retain a significant portion of those fees
pursuant to their “Dancer Contracts.” As part of the
settlement, a class member who continues to work at one of
the defendants’ clubs could claim as much as $8,000 in
“dance fee payments” in lieu of a cash settlement share. Such
“dance fee payments” would allow a class member to, on
specified nights, keep the “dance fees” that she would
normally remit to the clubs. Specifically, a dancer could
receive up to $5,000 in “dance fee payments” to be used at a
“Primary Nightclub” she designates on her claim form, and
up to $3,000 to be used at her “Secondary Nightclub.”4. The
settlement required a class member to schedule, at least three
business days in advance, a Date of Performance at her
Primary or Secondary Nightclub during the two-year Dance
Fee Redemption Period. On that Date of Performance, she
would then be permitted to retain 100% of the dance fees she
earned, capped at her total dance fee payment allocation for
that nightclub.

     If the total amount of Dance Fee Payments claimed was
less than $100,000 for any of the defendant nightclubs, that
nightclub would create a “Residual Dance Fee Payment Pool”
for the residual amounts. Class members who did not submit
an FLSA claim form during the original claims period could


    3
      We recognize that not all exotic dancers are female and our use of
feminine pronouns should not be interpreted to imply as much. It appears
that most, if not all, class members are female, but our discussion applies
equally to all class members, regardless of gender.
    4
      However, if the total dance fee payment claims exceeded $100,000
for any single nightclub, all of the claims for that nightclub would be
reduced on a pro rata basis such that the total in dance fee payment claims
for that nightclub did not exceed $100,000.
10          MURPHY V. SFBSC MANAGEMENT

claim dance fee payments from the Residual Pool by
submitting a Residual Dance Fee Claim Form, which would
be available from management at the clubs and would contain
an acknowledgment that the claimant did not submit an FLSA
claim. The dance fee payment vouchers were set to expire in
two years, at which time the “value” of any unredeemed
claims (i.e., of dance fee payments that class members had
claimed, but had not yet cashed in by working on a scheduled
Date of Performance) would revert to the defendant
nightclubs.

    Third, the settlement also included an injunction
memorializing the clubs’ offer of employee status to
prospective dancers, under which any dancer interested in
working at the clubs would be given the “option” of working
as an employee or independent contractor. The employee
option would provide dancers with an hourly rate of $15, plus
a 20% commission for total sales of private dances over $150
on any given night. Other changes made to the nightclubs’
business practices under the settlement involved reviewing
employment choices (independent contractor versus
employee status) with dancers, the context in which those
choices are permitted to be made (not while intoxicated or
nude), provisions allowing dancers to change their status to
an employee, control over clothing choices for independent
contractors, a prohibition against tip-sharing for independent
contractors, training videos, and guaranteed average earnings
for independent contractors.

    The settlement would release all state law wage claims of
approximately 4,700 members of the class spanning nearly
seven years, from August 8, 2010, to April 14, 2017 (the date
of preliminary approval). If a class member did not exclude
herself from the settlement, she released all wage claims
            MURPHY V. SFBSC MANAGEMENT                     11

except claims under the FLSA. If a class member submitted
a claim form, she released all claims, including her FLSA
claims.

    Despite objections, the district court preliminarily
approved the settlement and the class notice plan on April 14,
2017. The claims administrator subsequently mailed, by U.S.
mail, the court-approved notice to class members at their last
known address from their most recent contract with
defendants, or at any more current address reflected in the
National Change of Address database. When 1,546 notices
of the 4,681 notices mailed were returned as undeliverable,
the administrator performed address traces and resent notices,
but ultimately a total of 560 notices remained undeliverable.
No reminder, follow up, or electronic notice was sent to any
class member. However, Plaintiffs did set up a settlement
website, and “the nightclubs displayed posters in the dancers’
dressing rooms to ensure that they were seen, were confident
that they were seen by all entertainers at the clubs, and
responded to questions by encouraging entertainers to review
the settlement notice, website, and poster.”

     Following the distribution of notice and the close of the
period during which class members could opt out, object, or
file a claim, the parties moved for final settlement approval.
They reported that only 865 out of 4,681 class members
(18.5% of the class) submitted claim forms to receive
payments from the settlement; of those, 790 opted for a cash
payment and 75 opted for a Dance Fee Payment. Fourteen
class members requested exclusion from the settlement, and
several class members filed objections, challenging both the
fairness of the settlement and the adequacy of the notice.
12                MURPHY V. SFBSC MANAGEMENT

     As a result of the low claims rate, defendants were not
required to fund the Second Tier Cash Pool of $1 million (i.e.,
that money reverted to defendants). In addition, although the
parties initially expected that the class members would
receive approximately $350–$800 each if they submitted
claims for cash payments, the individual shares ultimately
ranged from $650–$1500 as a result of the low claims rate.5
At the time of final approval, 75 class members had claimed
a face value of $370,000 of the Dance Fee Payment Pool.
Class members could continue to claim these dance fee
payment vouchers for two years after final approval;
however, the vouchers would be distributed on a first come,
first served basis.

    Despite vigorous objections, the district court granted
final approval, deemed the notice adequate, and awarded the
requested attorneys’ fees and service awards. Overall, the
settlement provided $2 million in cash, of which
$950,000—more than the class would receive in total cash
distribution—was allocated to attorneys’ fees. Specifically,
beside the $950,000 in attorneys’ fees, $864,115 went to
payments to class members, $4,884.21 to expenses, $71,000

     5
         In particular, the cash distribution shares were allotted as follows:

     •      $1,500.77 for Cash Payment Claimants who accrued 24 or more
            Performance Months during the Class Period;

     •      $1,313.17 for Cash Payment Claimants who accrued between
            12 and 23 Performance Months during the Class Period;

     •      $937.98 for Cash Payment Claimants who accrued between
            6 and 11 Performance Months during the Class Period; and

     •      $650.59 for Cash Payment Claimants who accrued fewer than
            6 Performance Months during the Class Period.
               MURPHY V. SFBSC MANAGEMENT                            13

to incentive payments,6 $35,000 to the costs of settlement
administration, and $75,000 to the State of California (for the
PAGA allocation). Objectors appealed, challenging both the
adequacy of the notice to class members and the district
court’s approval of the settlement.

                  STANDARD OF REVIEW

    We have jurisdiction under 

, and “[w]e
review a district court’s rulings regarding notice de novo.”
Molski v. Gleich, 

 (9th Cir. 2003) (citing
Silber v. Mabon, 

 (9th Cir. 1994)),
overruled on other grounds by Dukes v. Wal-Mart Stores,
Inc., 

 (9th Cir. 2010), rev’d, 

(2011); see also Lane v. Facebook, Inc., 

(9th Cir. 2012) (Kleinfeld, J., dissenting) (explaining that we
review adequacy of notice de novo, rather than deferentially,
“because notice is a matter of due process of law,” and “[i]f
a person owns a claim, it is property, and the owner of the
claim is constitutionally entitled not to have it taken from him
except with reasonable notice and an opportunity to be
heard”).

    We “review a district court’s decision to approve a class
action settlement ‘for clear abuse of discretion.’” In re
Online DVD-Rental Antitrust Litig., 

 (9th
Cir. 2015) (quoting In re Bluetooth Headset Prods. Liab.


    6
      The district court approved the requested incentive service awards
of $5000 each to Jane Roes 1 and 2, and $3500 each to Jane Roe 3, Jane
Roes 10 through 13, and Jane Roe 22, for a total of $31,000. In addition,
the court approved requested enhancement payments of $20,000 each to
Jane Roes 1 and 2 for their execution of general release forms, bringing
the total of all incentive payments to $71,000.
14           MURPHY V. SFBSC MANAGEMENT

Litig., 

, 940 (9th Cir. 2011)). “A court abuses its
discretion when it fails to apply the correct legal standard or
bases its decision on unreasonable findings of fact.”
Nachshin v. AOL, LLC, 

 (9th Cir. 2011).
Although our own substantive review of class settlement
fairness is “extremely limited,” we hold district courts to a
“higher procedural standard when making that determination
of substantive fairness.” Allen v. Bedolla, 

 (9th Cir. 2015). “That procedural burden is more strict
when a settlement is negotiated absent class certification.” 

. In such cases, the district court abuses its discretion
if it fails to apply “an even higher level of scrutiny for
evidence of collusion or other conflicts of interest than is
ordinarily required under Rule 23(e).” In re Bluetooth,
654 F.3d at 946. We review a pre-certification settlement
approval not only for whether the district court has “explored
comprehensively all factors, . . . given a reasoned response to
all non-frivolous objections,” and “adequately . . .
develop[ed] the record to support its final approval decision,”
but also for whether the district court has looked for and
scrutinized any “subtle signs that class counsel have allowed
pursuit of their own self-interests . . . to infect the
negotiations.” Allen, 787 F.3d at 1223–24 (third alteration in
original) (first quoting Dennis v. Kellogg Co., 

 (9th Cir. 2012); then quoting In re Bluetooth, 654 F.3d
at 947).

                       DISCUSSION

    The main thrust of Objectors’ argument on appeal is that
the district court abused its discretion in approving a class
action settlement that does not provide enough benefit to
class members and contains indicia of collusion. As part of
this challenge to settlement approval, Objectors also argue
             MURPHY V. SFBSC MANAGEMENT                      15

that the notice process that was used to inform class members
about the proposed settlement was inadequate. Because the
adequacy of notice can not only play a role in the overall
fairness of the settlement, but is also a discrete issue subject
to a de novo standard of review, we address Objectors’
challenge to the adequacy of notice first and then turn to the
district court’s approval of the settlement as a whole.

I. Adequacy of Class-Wide Settlement Notice

    On appeal, Objectors argue that the settlement notice
provided in this case was inadequate for two reasons:
(1) content-wise, the notice was inadequate because it did not
notify class members about the related Hughes and Pera
lawsuits; and (2) the process used to provide notice was
inadequate because notice was sent only once by mail—no
reminder notice or electronic notice was given. As explained
below, we reject Objectors’ first argument because the notice
met the requirements to provide various information about
the settlement in this case, but we agree with Objectors’
second argument that the notice process was insufficient in
that it did not provide the “best notice practicable.”

   A. Notice Contents: Information About Related
      Litigation

    Objectors argue that the district court erred under Rule 23
by approving the proposed class settlement notice as written
and refusing to require that the notice include information
about the related Hughes and Pera lawsuits. Objectors
contend that the notice should have, at minimum, informed
class members of the existence of the other lawsuits and
provided contact information for plaintiffs’ counsel in those
cases. According to Objectors, by failing to notify class
16           MURPHY V. SFBSC MANAGEMENT

members “that another group of plaintiffs had filed cases
directly against the clubs that could provide [class members]
an avenue to continue to pursue their wage claims, should
they not be satisfied with the result of this settlement,” the
notice did not provide sufficient information to allow class
members to “make an intelligent, informed decision about
what to do.”

    However, as the district court explained in its preliminary
approval order, none of the cases cited by Objectors in
support of this argument compels the inclusion in a settlement
notice of such information about parallel litigation. In fact,
although Rule 23 lists seven items that must be included in
the required notice, information about related lawsuits is not
one of them. See Fed. R. Civ. P. 23(c)(2)(B) (requiring that
the notice “clearly and concisely” state “the nature of the
action,” the “definition of the class certified,” the “class
claims, issues, or defenses,” information about appearing and
opting out, and “the binding effect of a class judgment on
members”). As we have consistently maintained, Rule 23(e)
simply “requires notice that describes ‘the terms of the
settlement in sufficient detail to alert those with adverse
viewpoints to investigate and to come forward and be
heard.’” In re Online DVD-Rental, 

 (quoting
Lane, 

); see also Lane, 

(holding that Rule 23(e) “does not require detailed analysis of
the statutes or causes of action forming the basis for the
plaintiff class’ claims, and it does not require an estimate of
the potential value of those claims”).

    Our Circuit has previously explained, in a case in which
objectors similarly challenged the adequacy of the settlement
notice, the rationale for not requiring additional information
beyond that specified in Rule 23:
             MURPHY V. SFBSC MANAGEMENT                     17

       Objectors contend that the Settlement Notice
       also failed to provide a meaningful
       description of the terms of the settlement,
       including the content of objections and the
       expected value of fully litigating the case. In
       our view, the Notice contains adequate
       information, presented in a neutral manner, to
       apprise class members of the essential terms
       and conditions of the settlement. The Notice
       advises class members that a majority (hence,
       not all) of the class representatives approve
       the settlement. It describes the aggregate
       amount of the settlement fund and the plan for
       allocation, thereby complying with what we
       require. While the Notice does not detail the
       content of objections, or analyze the expected
       value, we do not see why it should.
       Settlement notices are supposed to present
       information about a proposed settlement
       neutrally, simply, and understandably—
       objectives not likely served by including the
       adversarial positions of objectors.         We
       therefore conclude that the Notice
       communicated the essentials of the proposed
       settlement in a sufficiently balanced, accurate,
       and informative way to satisfy due process
       concerns.

Rodriguez v. W. Publ’g Corp., 

, 962–63 (9th Cir.
2009) (footnote omitted) (citations omitted).

   Under Rodriguez, the district court did not err in rejecting
Objectors’ proposed additional information about the Hughes
and Pera lawsuits. While it may be true that such
18           MURPHY V. SFBSC MANAGEMENT

information could have allowed class members to make a
more “informed” decision about their options, declining to
include the information did not contravene the due process
requirement to provide sufficient information about the
settlement in this case. See In re Hyundai & Kia Fuel Econ.
Litig., 

 (9th Cir. 2019) (en banc) (“Notice
is satisfactory if it ‘generally describes the terms of the
settlement in sufficient detail to alert those with adverse
viewpoints to investigate and to come forward and be
heard.’” (quoting Rodriguez, 

).

     B. Notice Process:     Sufficiency of Single Mailed
        Notice

    Next, we turn to the sufficiency of the procedures that the
parties used to effect notice. In cases like this one, in which
a class is certified under Rule 23(b)(3) for purposes of
settlement, the Federal Rules require that the district court
“direct to class members the best notice that is practicable
under the circumstances, including individual notice to all
members who can be identified through reasonable effort.”
Fed. R. Civ. P. 23(c)(2)(B). Because Rule 23’s notice
requirement is designed to ensure that class notice procedures
comply with the demands of due process, the Supreme
Court’s due process case law further illuminates the Rule 23
standard. See Eisen v. Carlisle & Jacquelin, 

 (1974); Fed. R. Civ. P. 23 advisory committee’s note to
1966 amendment (“This mandatory notice pursuant to
subdivision (c)(2) . . . is designed to fulfill requirements of
due process to which the class action procedure is of course
subject.”). To meet the constitutional guarantee of procedural
due process, “notice must be ‘reasonably calculated, under all
the circumstances, to apprise interested parties of the
pendency of the action and afford them an opportunity to
             MURPHY V. SFBSC MANAGEMENT                      19

present their objections.’” Eisen, 

 (quoting
Mullane v. Cent. Hanover Bank & Trust Co., 

 (1950)). That is, “[t]he means employed [to provide
notice] must be such as [a person] desirous of actually
informing the absentee might reasonably adopt to accomplish
it.” Mullane, 

.

    Objectors argue that the notice process used in this case
did not meet Rule 23’s mandate for “the best notice
practicable,” in part because “the parties did not provide for
any e-mail distribution of the settlement notice” or for “any
reminder notice, both of which are now routine in class action
administration.” Instead, even though the parties appeared
to believe that it might be difficult to reach the class
members because of their “transient” nature, the claims
administrator sent class members the court-approved notice
by mail. When 1,546 notices of the 4,681 notices mailed
were returned as undeliverable, the administrator performed
address traces and resent notices, but ultimately a total of 560
notices remained undeliverable. Nor did the administrator
send any follow-up notice even to those class members to
whom mailed notice was deliverable. Objectors characterize
this notice procedure as “halfhearted,” and fault it for the
“low claims rate” of 18.5%. Amicus Curiae International
Entertainment Adult Union (“Union”) similarly asserts that
the notice process used in this case “does not appear to be the
best notice practicable in this digital age.” The district court
nevertheless concluded that the notice “met all legal
requisites,” in part because, in addition to the mailing,
defendants set up a settlement website, and the nightclubs
displayed posters in the dancers’ dressing rooms.

   Reviewing the notice process de novo, see Molski,

, we agree with Objectors that it fell short of
20              MURPHY V. SFBSC MANAGEMENT

“the best notice that is practicable under the circumstances.”
Fed. R. Civ. P. 23(c)(2)(B). We find it particularly
problematic that, despite concerns that former employees in
particular might be difficult to reach by mail, the settlement
provided no other means of reaching former employees. And
when at least 12% of the mailed notices were ultimately
determined to be undeliverable—meaning those class
members had not received notice—still no additional means
of notice reasonably calculated to reach those class members
was attempted.7 See Eisen, 

; see also In re
Hyundai & Kia, 

 (“[I]t is ‘critical’ that class
members receive adequate notice.” (quoting Hanlon v.
Chrysler Corp., 

 (9th Cir. 1998)
overruled on other grounds by Wal-Mart Stores, Inc.,

)).          Although the mailed notice was
supplemented with posters that were hung in the defendant
night clubs, those posters were likely to be seen only by class
members who were still working at the nightclubs, and those
class members are also the precise group of people for whom
the defendants likely had a current address such that mail
notice could successfully be effected. That is to say, the
former employees for whom the defendants did not have a

     7
       Although we have held that neither due process nor Rule 23’s
standard necessarily require actual notice, Silber, 

, the
response rate of only 18.5%—which seems low for a scenario in which
class members stood to receive hundreds of dollars if they made a
claim—provides further indication that class members may not have
received adequate notice of the settlement. The district court justified this
claims rate by asserting that the “exotic dancers are transient workers; that
affects the hit rate for claimants.” Regardless of whether this assertion of
transience is correct—the Union argues that it is unsupported by any
evidence and is instead based on stereotypes—if the district court believed
that class members might be more difficult to reach because they were
“transient,” it should have taken that factor into consideration when
determining what notice process would be adequate.
               MURPHY V. SFBSC MANAGEMENT                               21

current address, and thus were the class members who may
not have received a mailed notice, also would not have seen
the posters.8 As to those former employees for whom the
claims administrator was able to identify a valid address, the
lack of reminder notices is particularly relevant, given that
the posters would serve no function. In sum, the notice
process was not “reasonably calculated, under all the
circumstances,” to apprise all class members of the proposed
settlement, because the “circumstances” included the district
court’s and parties’ belief that class members were
“transient” and thus might be difficult to reach by mail, and
the posters also were not reasonably calculated to reach all of
the absent class members who could not be notified by mail
or to serve as a reminder to those who did receive the single
mailed notice. Mullane, 

.

    Moreover, because there were numerous other reasonable
options that could have been pursued to improve the notice
process, it is not the case that, despite the shortcomings
discussed above, the notice used was “the best notice that
[was] practicable under the circumstances.” Fed. R. Civ. P.
23(c)(2)(B) (emphasis added). For example, even if, as
defendants suggest, e-mail notice was infeasible,9 information
about the settlement could have been electronically
disseminated through social media or postings on any


    8
      The district court does not appear to have considered this issue, nor,
as far as we can tell, did it inquire as to how many class members still
worked at the nightclubs, which would have been relevant to
understanding the extent of the posters’ efficacy in providing notice to
absent class members.
    9
      Defendants point out that they did not have e-mail addresses for the
class members, so sending email notice would in no way have been
“practicable under the circumstances.” Fed. R. Civ. P. 23(c)(2)(B).
22             MURPHY V. SFBSC MANAGEMENT

relevant online message boards. To illustrate this possibility,
the Union points out that, in another settlement involving
sister entities of some of the defendants in this case, the
parties disseminated notice not only via U.S. Mail and email,
but also through ads targeting class members on social media,
and by posting on StripperWeb.com, a website that has
117,000 members and has forums dedicated to the exotic
dancer community. Particularly here, where the parties knew
the names and other identifying information of the class
members—even if not all of their current addresses—these
types of supplemental notice methods appear practicable.
Publication notice has long been used as a supplement to
other forms of notice, and technological developments are
making it ever easier to target communications to specific
persons or groups and to contact individuals electronically at
little cost.10

    That is not to say that due process would require the
parties to implement all of these potential options for
improving the notice process. But the parties must provide
notice “reasonably calculated” to apprise all class members
of the settlement, which here required the parties to at least
make some reasonable attempt to reach former employees
who could not be notified by mail. Mullane, 

(“[W]hen notice is a person’s due, process which is a mere
gesture is not due process.”). This is particularly important
where, as here, the proposed settlement has reversionary


     10
        For example, Facebook makes it possible to target ads to a custom
audience of people based on identifying information such as first name,
last name, phone number, city, state, date of birth, year of birth, age, zip
code, and gender. See About Targeting New Audiences, FACEBOOK
BUSINESS, https://www.facebook.com/business/help/717368264947302
(last visited Aug. 1, 2019).
             MURPHY V. SFBSC MANAGEMENT                     23

aspects, and those who did not receive notice and make a
claim by the deadline can only possibly obtain dance fee
payments—which are likely worthless to former employees.

    For the foregoing reasons, something more was required
here to meet the standard of the “best notice practicable” and
to ensure that the valuable claims of absent class members
were not wiped out without affording them an opportunity to
opt out, object, or claim a cash payment. See Fed. R. Civ. P.
23(c)(2)(B). Because the notice plan utilized in this case did
not adequately heed the constitutional due process guarantees
embodied by Rule 23’s notice requirements, we reverse the
district court’s approval of the notice process.

II. District Court’s Approval of Settlement Under
    Rule 23

    Next, Objectors argue that the district court also erred in
approving the class settlement as “fair, reasonable, and
adequate” under Rule 23(e). They contend that the district
court was required to, but did not, apply heightened scrutiny
of the settlement after being faced with several indicia of
collusion, and that the district court abused its discretion by
accepting as sufficient “a class settlement that would release
valuable wage claims of 4,700 exotic dancers at eleven
nightclubs, spanning a nearly seven-year class period, for
only $2 million in cash,”—which, according to Objectors, is
only 1.7% to at most 4.3% of the value of the primary
claims—“nearly half of which would be paid for attorney’s
fees.” As explained below, because the district court applied
an incorrect legal standard and failed to employ the
heightened scrutiny required to meet the strict procedural
burden we impose for assessing class settlements negotiated
prior to class certification, we hold that the district court
24             MURPHY V. SFBSC MANAGEMENT

abused its discretion in approving the settlement. See
Nachshin, 

 (“A court abuses its discretion
when it fails to apply the correct legal standard . . . .”).

    Because of the unique due process concerns relating to
absent class members and the inherent risk of collusion
between class counsel and defense counsel, Federal Rule of
Civil Procedure 23(e) requires district courts to review
proposed class action settlements for fairness, reasonableness,
and adequacy. Prior to Congress’ 2018 codification of a new
multifactor test for this review,11 we held that a district court
“may consider some or all of the following factors” when
assessing whether a proposed settlement meets this standard:

          [1] the strength of plaintiffs’ case; [2] the risk,
          expense, complexity, and likely duration of
          further litigation; [3] the risk of maintaining
          class action status throughout the trial; [4] the
          amount offered in settlement; [5] the extent of
          discovery completed, and the stage of the
          proceedings; [6] the experience and views of
          counsel; [7] the presence of a governmental
          participant; and [8] the reaction of the class
          members to the proposed settlement.

Rodriguez, 

 (citations omitted).

     11
       Subsequent to the district court’s approval of the proposed class
settlement in this case, Congress codified its own multifactor test
comprising “the primary procedural considerations and substantive
qualities that should always matter to the decision whether to approve the
proposal.” Fed. R. Civ. P. 23(e)(2) advisory committee’s note to 2018
amendment. Because it does not affect our analysis here, we decline to
address whether the new Rule 23(e)(2) test should be applied
retroactively.
             MURPHY V. SFBSC MANAGEMENT                     25

    Where, however, the parties negotiate a settlement
agreement before the class has been certified, “settlement
approval ‘requires a higher standard of fairness’ and ‘a more
probing inquiry than may normally be required under Rule
23(e).’” Dennis, 

 (quoting Hanlon, 

). Specifically, “such [settlement] agreements must
withstand an even higher level of scrutiny for evidence of
collusion or other conflicts of interest than is ordinarily
required under Rule 23(e) before securing the court’s
approval as fair.” In re Bluetooth, 654 F.3d at 946. This
more “exacting review” is warranted “to ensure that class
representatives and their counsel do not secure a
disproportionate benefit ‘at the expense of the unnamed
plaintiffs who class counsel had a duty to represent.’” Lane,

 (quoting Hanlon, 

). The
“subtle signs” of collusion for which we require district
courts to look include, for example:

       (1) “when counsel receive a disproportionate
       distribution of the settlement;” (2) “when the
       parties negotiate a ‘clear sailing’
       arrangement” (i.e., an arrangement where
       defendant will not object to a certain fee
       request by class counsel); and (3) when the
       parties create a reverter that returns unclaimed
       [funds] to the defendant.

Allen, 

 (quoting In re Bluetooth, 654 F.3d
at 947).

    In determining whether to approve the settlement here,
the district court appropriately referred to the Rule 23 “fair,
reasonable, and adequate” standard and the factors that our
Circuit has identified as relevant to assessing whether a class
26             MURPHY V. SFBSC MANAGEMENT

settlement meets that standard. Nowhere in the final approval
order, however, did the district court cite or otherwise
acknowledge our longstanding precedent requiring a
heightened fairness inquiry prior to class certification. To the
contrary, the district court declared that, “[w]here a
settlement is the product of arms-length negotiations
conducted by capable and experienced counsel, the court
begins its analysis with a presumption that the settlement is
fair and reasonable.” (Emphasis added.) But such a
presumption of fairness is not supported by our precedent,
and the district court cites no Ninth Circuit case which
adopted this standard.12 Particularly in light of the fact that
we not only have never endorsed applying a broad
presumption of fairness, but have actually required that courts
do the opposite—by employing extra caution and more
rigorous scrutiny—when it comes to settlements negotiated
prior to class certification, the district court’s declaration that
a presumption of fairness applied was erroneous, a
misstatement of the applicable legal standard which governs
analysis of the fairness of the settlement.

    Not only did the district court misstate the legal standard,
but the record makes clear that, in fact, the district court


     12
       A presumption of fairness was commonly applied by district courts
in our circuit prior to Congress’ 2018 codification of standards for
evaluating whether a proposed class settlement is “fair, reasonable, and
adequate.” Fed. R. Civ. P. 23(e)(2); 4 William B. Rubenstein, Newberg
on Class Actions § 13:50 n.9 (5th ed. 2019) (collecting Ninth Circuit
district court cases). Even assuming this was proper then, it is very likely
inappropriate under the standards now codified in Rule 23(e)(2). Rule
23(e)(2) now identifies “whether . . . the proposal was negotiated at arm’s
length” as one of four factors that courts must consider and does not
suggest that an affirmative answer to that one question creates a favorable
presumption on review of the other three. Fed. R. Civ. P. 23(e)(2)(B).
                MURPHY V. SFBSC MANAGEMENT                               27

failed to apply the correct legal standard and to conduct the
searching inquiry required, thereby abusing its discretion.
See Nachshin, 

. In particular, as discussed
further below, there were numerous problematic aspects of
the settlement and subtle signs of implicit collusion that the
district court was obligated to—but did not—investigate or
adequately address, including a clear sailing agreement, the
disproportionate cash distribution to attorneys’ fees, large
incentive payments seemingly untethered from service to the
class, and reversionary clauses that would return unclaimed
funds to the defendants.13 The district court’s failure to fulfill


    13
        The court’s conclusory statement, without any further analysis, that
“the settlement is the product of serious, non-collusive, arm’s length
negotiations and was reached after mediation with an experienced
mediator at the Ninth Circuit” is insufficient. As we have many times
explained, “[t]he incentives for the negotiators to pursue their own self-
interest and that of certain class members are implicit in the circumstances
and can influence the result of the negotiations without any explicit
expression or secret cabals.” Staton v. Boeing Co., 

 (9th
Cir. 2003). Thus, “the mere presence of a neutral mediator . . . is not on
its own dispositive of whether the end product is a fair, adequate, and
reasonable settlement agreement.” In re Bluetooth, 654 F.3d at 948.
Instead, the “real dangers in the negotiation of class action settlements of
compromising the interests of class members for reasons other than a
realistic assessment of usual settlement considerations” are “why district
court review of class action settlements includes not only consideration of
whether there was actual fraud, overreaching or collusion but, as well,
substantive consideration of whether the terms of the decree are ‘fair,
reasonable and adequate to all concerned.’” Staton, 327 F.3d at 959–60
(quoting Officers for Justice v. Civil Serv. Comm’n of S.F., 

 (9th Cir. 1982)); see also In re Bluetooth, 654 F.3d at 948 (“While the
Rule 23(a) adequacy of representation inquiry is designed to foreclose
class certification in the face of ‘actual fraud, overreaching or collusion,’
the Rule 23(e) reasonableness inquiry is designed precisely to capture
instances of unfairness not apparent on the face of the negotiations.”
(quoting Staton, 

)).
28             MURPHY V. SFBSC MANAGEMENT

its obligation to scrutinize these areas of concern requires that
we vacate the settlement approval and remand for further
proceedings. See Allen, 

 (vacating final
settlement approval and remanding for “a more searching
inquiry” where the district court failed to scrutinize three
subtle warning signs—a reversionary clause, a clear sailing
agreement, and a disproportionately large attorneys’ fees
award—that appeared in the settlement).

    Although we leave the final fairness determination to the
district court after an opportunity to apply the appropriate
heightened review and further develop the record, we identify
several aspects of the settlement that in our view cast serious
doubt on whether the settlement meets the applicable fairness
standard. See Allen, 

 (noting that we may
“overturn an approval of a compromised settlement” on
substantive grounds if “the terms of the agreement contain
convincing indications that . . . self-interest rather than the
class’s interests in fact influenced the outcome of the
negotiations” (alteration in original) (quoting Staton,

)). To explain our concerns and to illustrate
the type of scrutiny to which the district court should have
subjected these aspects of the settlement, we discuss each of
them in turn.




     Moreover, because the proceedings before the Ninth Circuit Mediator
are not part of the record, nor do we have a statement from the Mediator
setting forth the extent to which the Mediator took into account and
considered the Hanlon and Bluetooth factors, as well as the issues raised
by Rodriguez, even assuming that it would be proper to rely on a
mediator’s assessment of the Rule 23 factors in brokering a pre-class-
certification settlement, the record here does not permit us to do so.
                MURPHY V. SFBSC MANAGEMENT                               29

    A. Clear Sailing Agreement and Attorneys’ Fees

    First, the settlement agreement included a clear sailing
agreement, whereby the defendants agreed that they would
not object to an attorneys’ fees-and-expense award of up to
$1 million. “Although clear sailing provisions are not
prohibited, they ‘by [their] nature deprive[] the court of the
advantages of the adversary process’ in resolving fee
determinations and are therefore disfavored.” In re
Bluetooth, 654 F.3d at 949 (alterations in original) (quoting
Weinberger v. Great N. Nekoosa Corp., 

(1st Cir. 1991)). More importantly, we have repeatedly
explained that “‘clear sailing’ agreements on attorneys’ fees
are important warning signs of collusion,” Lane, 

, because “[t]he very existence of a clear sailing
provision increases the likelihood that class counsel will have
bargained away something of value to the class,”14 In re

    14
        As we have repeatedly explained, one of the “unique due process
concerns for absent class members” is an “inherent risk . . . that class
counsel may collude with the defendants, ‘tacitly reducing the overall
settlement in return for a higher attorney’s fee.’” In re Bluetooth,
654 F.3d at 946 (first quoting Hanlon, 

; then quoting
Knisley v. Network Assoc., 

, 1125 (9th Cir. 2002)); see also
Evans v. Jeff D., 

 (1986) (recognizing that “the
possibility of a tradeoff between merits relief and attorneys’ fees” is often
implicit in class action settlement negotiations); In re HP Inkjet Printer
Litig., 

 (9th Cir. 2013) (“[B]ecause the interests of
class members and class counsel nearly always diverge, courts must
remain alert to the possibility that some class counsel may ‘urge a class
settlement at a low figure or on a less-than-optimal basis in exchange for
red-carpet treatment on fees.’” (quoting Weinberger, 

));
Staton, 

 (“If fees are unreasonably high, the likelihood is
that the defendant obtained an economically beneficial concession with
regard to the merits provisions, in the form of lower monetary payments
to class members or less injunctive relief for the class than could
otherwise have obtained.”).
30           MURPHY V. SFBSC MANAGEMENT

Bluetooth, 654 F.3d at 948 (quoting Weinberger, 

).

    As a result, “when confronted with a clear sailing
provision, the district court has a heightened duty to . . .
scrutinize closely the relationship between attorneys’ fees and
benefit to the class, being careful to avoid awarding
‘unreasonably high’ fees simply because they are
uncontested.” 

 (quoting Staton, 

). Here,
however, the district court did not scrutinize the clear sailing
provision. And although the district court did examine the
basis for the fee request and perform a lodestar cross-check,
it did not—as was particularly important given the clear
sailing provision—substantively grapple with some of the
potentially problematic aspects of the “relationship between
attorneys’ fees and the benefit to the class.” See 

    Here, more of the available $2 million in settlement cash
ultimately went to attorneys’ fees ($950,000) than would be
distributed to class members ($864,115). While this is not
per se problematic, such a disproportionate cash allocation
makes it all the more important for the district court closely
to examine the claimed value of the non-cash portions of the
settlement that were used to justify the requested attorneys’
fees. See Staton, 

 (“[C]oncerns 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.’” (quoting Hanlon, 

)).

    In this case, the district court accepted the parties’
valuation of $1 million for the injunctive relief component of
the settlement and $1 million for the Dance Fee Payment
Pool. Adding the $2 million First Tier Cash Pool, the district
              MURPHY V. SFBSC MANAGEMENT                             31

court used a total settlement value of $4 million for the
lodestar cross-check, and concluded that the $950,000 in
attorneys’ fees was reasonable because it was only 23.75% of
the total settlement value. Objectors, however, raised
concerns regarding the district court’s valuation of both the
dance fee payments and the injunctive relief, and renew those
challenges once more on appeal.

     First, Objectors argue that the dance fee payments are
coupons and that the Dance Fee Payment Pool from which
those coupons are drawn cannot be accorded its full face
value of $1 million because: (1) the coupons expire in two
years; (2) any unredeemed coupons or unclaimed portion of
the Dance Fee Payment Pool will revert to defendants after
that two year period; (3) many class members likely no longer
work at the defendant nightclubs, but redeeming the dance fee
payments requires just that, so it is unlikely that the full value
of the Dance Fee Payment Pool will be claimed and
redeemed; (4) the dance fee payment coupons fail to disgorge
ill-gotten gains from the defendants, because in order to “cash
in” and redeem dance fee payment coupons, a class member
must first pay a stage fee in order to be able to perform at the
club, and her work will also generate additional revenue for
defendants through sales of food and beverages; and (5) the
terms of the settlement show that the parties themselves
considered the coupons to be worth approximately 10% of
their face value, because a dancer who worked more than two
years during the class period could claim either $800 in cash
or $8,000 in dance fee payment coupons.15


    15
      Objectors further point out that, if the dance fee payment coupons
are valued at face value, then the settlement unfairly favors current
dancers (who could claim up to $8,000 in dance fee payments) over
former dancers (who could only claim a significantly smaller cash
32              MURPHY V. SFBSC MANAGEMENT

    The district court dismissed the Objectors’ “quarrel with
the dance fee payments” by noting that the payments provide
“a tangible benefit,” and by claiming that a dance fee
payment “is not the ordinary illusory coupon payment with a
more arguable lack of value.” However, the district court did
not substantively investigate or address all of the concerns
raised by Objectors, nor did it explain why the Dance Fee
Payment Pool should nevertheless be valued at its $1 million
maximum.16 Regardless of whether the dance fee payment
vouchers are officially “coupons” within the meaning of the
Class Action Fairness Act (“CAFA”), the district court should
have recognized that some of the same concerns applicable to
coupon settlements also apply here and warranted closer
scrutiny of the Dance Fee Payments Pool.17


payment), which would present its own problems for fairness.
     16
       We offer the analysis that follows under the assumption that the
dance fee payments were at least legal, notwithstanding the fact that class
members seeking to redeem the dance fee payments would need to
continue working as independent contractors. We express no opinion on
the underlying merits of that issue, whether before or after the California
Supreme Court’s decision in Dynamex Operations West Inc. v. Superior
Court, 

 (Cal. 2018).
     17
        The Class Action Fairness Act sets forth several requirements and
protections applicable specifically to “coupon settlements,” see 

, with the goal of “preventing settlements that award excessive
[attorneys’] fees while leaving class members with ‘nothing more than
promotional coupons to purchase more products from the defendants.’”
In re Easysaver Rewards Litig., 

 (9th Cir. 2018)
(quoting In re Online DVD-Rental, 

). Because the statute
“provides no definition of ‘coupon,’ . . . courts have been left to define
that term on their own, informed by § 1712’s animating purpose.” Id. We
have “outlined three factors to guide this inquiry: (1) whether class
members have ‘to hand over more of their own money before they can
take advantage of’ a credit, (2) whether the credit is valid only ‘for select
               MURPHY V. SFBSC MANAGEMENT                               33

    In particular, as with coupon settlements, it was possible
here that the parties overstated the value of the Dance Fee
Payment Pool, thereby inflating attorneys’ fees and as a result
reducing the amount of cash available to class members who
were not interested in the dance fee payment vouchers. See
In re Easysaver, 

 (“Congress targeted
[coupon] settlements for heightened scrutiny out of a concern
that the full value of coupons was being used to support large
awards of attorney’s fees regardless of whether class
members had any interest in using the coupons.”). As we
have explained:

             Typically, courts try to ensure faithful
         representation by tying together the interests
         of class members and class counsel. That is,
         courts aim to tether the value of an attorneys’
         fees award to the value of the class recovery.
         Where both the class and its attorneys are paid
         in cash, this task is fairly effortless. The
         district court can assess the relative value of
         the attorneys’ fees and the class relief simply


products or services,’ and (3) how much flexibility the credit provides,
including whether it expires or is freely transferrable.” 

 (quoting In re
Online DVD-Rental, 

).

     Here, the dance fee payments vouchers are not the regular type of
“coupons” that are awarded to consumer classes for use toward a purchase
of a product or service from defendant corporations. However, the dance
fee payments do resemble what one might imagine the equivalent of a
coupon to be in the context of an employer-employee relationship, in that
the settling employer is providing the employee with effectively a piece
of paper that can be redeemed for value by taking additional steps that
involve the defendant. As a result, some of the same types of concerns
relevant to “coupon” settlements also apply to the dance fee payment
vouchers.
34        MURPHY V. SFBSC MANAGEMENT

     by comparing the amount of cash paid to the
     attorneys with the amount of cash paid to the
     class. The more valuable the class recovery,
     the greater the fees award. And vice versa.

         But where class counsel is paid in cash,
     and the class is paid in some other way, for
     example, with coupons, comparing the value
     of the fees with the value of the recovery is
     substantially more difficult. Unlike a cash
     settlement, coupon settlements involve
     variables that make their value difficult to
     appraise, such as redemption rates and
     restrictions. For instance, a coupon settlement
     is likely to provide less value to class
     members if . . . the coupons are non-
     transferable, expire soon after their issuance,
     and cannot be aggregated. Of course,
     consideration of these variables necessarily
     increases the complexity of the district court’s
     task—comparing the ultimate “value” of the
     coupon relief with the value of a proposed
     fees award. And perhaps more importantly,
     the additional complexity also provides class
     counsel with the opportunity to puff the
     perceived value of the settlement so as to
     enhance their own compensation. As one
     commentator succinctly put it, “[p]aying the
     class members in coupons masks the relative
     payment of the class counsel as compared to
     the amount of money actually received by the
     class members.”
             MURPHY V. SFBSC MANAGEMENT                      35

In re HP Inkjet, 716 F.3d at 1178–79 (second alteration in
original) (emphases added) (footnotes omitted) (citations
omitted) (quoting Christopher R. Leslie, A. Market-Based
Approach to Coupon Settlement in Antitrust and Consumer
Class Action Litigation, 

, 1049 (2002)).
Here, too, the dance fee payment vouchers had an expiration
date, were not transferable, and required class members to do
business with defendants again in order to redeem the dance
fee payments. See In re Easysaver, 

 (noting
that “potential for abuse is greatest when the coupons have
value only if a class member is willing to do business again
with the defendant who has injured her in some way,” and
“when the coupons expire soon” and “are not transferable”
(quoting In re Sw. Airlines Voucher Litig., 

(7th Cir. 2015))).

     Furthermore, the danger of unjustifiably inflating the
settlement value of coupons is even more grave when the
value of unused coupons will revert back to defendants. See

 (“[W]hen coupons that class members would not use were
factored into the value of a settlement, they inflated the
nominal size of a settlement fund without a concomitant
increase in the actual value of relief for the class. And when
a court relied on the size of such a settlement fund to
calculate attorney’s fees, this inflation dramatically increased
the size of the fee award—allowing class counsel to reap the
lion’s share of the benefits.” (citation omitted)). Unchecked,
such reversions would allow defendants to create a larger
coupon pool than they know will be claimed or used, just to
inflate the value of the settlement and the resulting attorneys’
fees, because they know that they will not be on the hook for
the full coupon pool since the value of all unredeemed
coupons will revert to them.
36             MURPHY V. SFBSC MANAGEMENT

     To guard against this danger and to align the interests of
class counsel with the class, CAFA requires that “the portion
of any attorney’s fee award to class counsel that is
attributable to the award of . . . coupons shall be based on the
value to class members of the coupons that are redeemed.”

(a) (emphasis added); see also In re
Easysaver, 

 (“[R]equir[ing] district courts to
consider the value of only those coupons ‘that were actually
redeemed’ when calculating the relief awarded to a class . . .
ensures that class counsel benefit only from coupons that
provide actual relief to the class, lessening the incentive to
seek an award of coupons that class members have little
interest in using . . . .” (quoting In re Online DVD-Rental,

)). In addition, to address the potential for
large reversions—which allow defendants to keep more of
their ill-gotten gains while still extinguishing class members’
claims—CAFA also allows district courts to “require that a
proposed settlement agreement provide for the distribution of
a portion of the value of unclaimed coupons to 1 or more
charitable or governmental organizations, as agreed to by the
parties.” 

(e).

    Here, however, the district court not only accepted the
parties’ $1 million valuation of the Dance Fee Payment Pool,
but it also used that full valuation when performing the
lodestar cross-check for attorneys’ fees, despite the fact that
all unclaimed and unredeemed dance fee payment vouchers
would revert back to the defendants at the end of the two-year
Dance Fee Redemption Period.18 While we do not hold that
the district court was bound by CAFA’s requirements for


     18
      The district court did not suggest to the parties that the unclaimed
vouchers, or their cash equivalent, instead be distributed to a charitable
organization.
             MURPHY V. SFBSC MANAGEMENT                      37

coupon settlements, the district court was required to
“scrutinize closely the relationship between attorneys’ fees
and benefit to the class” in order to “avoid awarding
‘unreasonably high’ fees simply because they are
uncontested,” In re Bluetooth, 654 F.3d at 948 (quoting
Staton, 

), and “ensure that . . . counsel do not
secure a disproportionate benefit ‘at the expense of the
unnamed plaintiffs who class counsel had a duty to
represent,’” Lane, 

 (quoting Hanlon, 

). Particularly in light of the fact that only 75 out of
865 class member claimants had requested dance fee
payments totaling only $370,000 out of the $1 million Dance
Fee Payment Pool, the district court should have done more
to investigate whether the Dance Fee Payment Pool was
really worth $1 million and was not unfairly inflating
attorneys’ fees.

    For example, to ensure that the $1 million valuation of the
Dance Fee Payment Pool’s benefit to class members was not
wildly inflated given that only $370,000 of that pool had been
claimed (although not yet even redeemed), the district court
could have asked the parties to provide information about
how many class members who had not responded to the
settlement were current dancers who might still claim part of
the Residual Dance Fee Payment Pool. In addition, to better
understand how the dance fee payment vouchers’ expiration
date potentially limited the vouchers’ value, the district court
might have inquired roughly how many scheduled Dates of
Performance might be required to redeem the full $8,000
worth of vouchers that a class member could claim, and
whether completing that many Dates of Performance within
the two-year Dance Fee Redemption Period was realistic for
the average class member. In other words, in response to
concerns that the value of the Dance Fee Payment Pool had
38           MURPHY V. SFBSC MANAGEMENT

been overestimated and was unfairly inflating the attorneys’
fees award at the expense of the class, the district court had
an obligation to scrutinize whether the purported value of the
non-monetary relief would ever come to fruition, and to
develop the record to support its $1 million valuation and
address concerns that the dance fee payment vouchers were
a “subtle sign[] that class counsel . . . allowed pursuit of their
own self-interests and that of certain class members to infect
the negotiations.” In re Bluetooth, 654 F.3d at 947; see also
Dennis, 

 (“The issue of the valuation of this
aspect of a settlement must be examined with great care to
eliminate the possibility that it serves only the ‘self-interests’
of the attorneys and the parties, and not the class, by
assigning a dollar number to the fund that is fictitious.”).

    Next, Objectors also challenge the district court’s
acceptance of the parties’ $1 million valuation of the
injunctive relief that the settlement provides, arguing that the
injunctive relief is essentially worthless because the
supposedly changed business practices had already been
adopted years prior to the settlement. The district court
rejected this challenge, finding that the injunctive relief
required “substantial” changes and provided “real benefits.”
However, the district court did not make any findings
specifically justifying the $1 million dollar valuation, noting
only that “there is an economic value that attaches to this
portion of the settlement.” Despite the district court’s failure
or inability to articulate any calculations to support the
$1 million valuation of the injunctive relief portion of the
settlement, the district court included that $1 million value in
the total settlement value for purposes of its lodestar cross-
check.
              MURPHY V. SFBSC MANAGEMENT                         39

     Our caselaw, however, demands that, because of the
danger that parties will overestimate the value of injunctive
relief in order to inflate fees, courts must be particularly
careful when ascribing value to injunctive relief for purposes
of determining attorneys’ fees, and avoid doing so altogether
if the value of the injunctive relief is not easily measurable.
See Staton, 

 (“Precisely because the value of
injunctive relief is difficult to quantify, its value is also easily
manipulable by overreaching lawyers seeking to increase the
value assigned to a common fund.”). In Staton, we addressed
a scenario where, like here, for purposes of comparing the
putative common fund to the requested attorneys’ fees, “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.” 

. We held
that, because of the difficulties of valuing injunctive relief
and the concomitant dangers of inflated fees, “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.” 

. Instead, “[t]he fact that
counsel obtained injunctive relief in addition to monetary
relief for their clients is . . . a relevant circumstance to
consider in determining what percentage of the fund is
reasonable as fees.” 

 (emphasis added). “Only in
the unusual instance where the value to individual class
members of benefits deriving from injunctive relief can be
accurately ascertained may courts include such relief as part
of the value of a common fund for purposes of applying the
percentage method of determining fees.” 

.

    Under this precedent, the district court here should have,
for purposes of performing the lodestar cross-check using a
percentage of the total class recovery, either: (1) explained
40           MURPHY V. SFBSC MANAGEMENT

why the value of the injunctive relief’s benefits to individual
class members was readily quantifiable and worth $1 million,
or (2) excluded the injunctive relief from the valuation of the
settlement and explained why attorneys’ fees of 31.6%
($950,000 out of $3 million, assuming for the sake of
argument that the Dance Fee Payment Pool is worth
$1 million, which may not be true) or more were justified.
See In re Bluetooth, 654 F.3d at 945 (“If the lodestar amount
overcompensates the attorneys according to the 25%
benchmark standard, then a second look to evaluate the
reasonableness of the hours worked and rates claimed is
appropriate.” (quoting In re Coordinated Pretrial
Proceedings, 

 (9th Cir. 1997)).

     In sum, to meet its procedural burden and to ensure that
the settlement satisfied the heightened standard of fairness,
the district court was required to scrutinize the clear sailing
provision and the possibly pernicious reasons for its inclusion
in the settlement. See id. at 948 (“By disregarding the
contents of the clear sailing fee provision here, including both
the disproportionate amounts negotiated and the reversionary
kicker arrangement, the district court effectively ‘delete[d]’
it from the settlement—an approach that is beyond the scope
of the court’s discretion.” (alteration in original) (quoting
Officers for Justice, 

)). And particularly in
light of the specter of implicit collusion raised by that
provision, the district court had an obligation to question the
disproportionate cash distribution to attorneys’ fees,
substantively address concerns that the settlement value was
inflated, and clearly explain why the total benefits to the class
justified the fees awarded. See id. at 949 (“Given the
questionable features of the fee provision here, the court was
required to examine the negotiation process with even greater
scrutiny than is ordinarily demanded, and approval of the
               MURPHY V. SFBSC MANAGEMENT                            41

settlement had to be supported by a clear explanation of why
the disproportionate fee is justified and does not betray the
class’s interests.”).

    B. Incentive Payments

    Another concerning aspect of the settlement that should
have been subjected to heightened scrutiny are the $20,000
“General Release Enhancement Payments” awarded from the
common fund to both Jane Roe 1 and Jane Roe 2 for their
execution of a general release. In contrast to the $5,000
service awards that Jane Roes 1 and 2 also received in
recognition of their efforts to represent the class and secure a
settlement, the $20,000 General Release Enhancement
Payments appear to be completely divorced from any benefit
or service to the class. In fact, the Settlement Agreement
explicitly states that these incentive payments are
“consideration for [Jane Roes’ 1 and 2] execution of a
General Release Form.”19

    Yet neither the parties nor the district court cite any
caselaw suggesting it is appropriate to draw such large
amounts from the common fund to pay the named plaintiffs
for what is essentially a side settlement between themselves
and the defendants covering additional claims not covered in
the class settlement. To the contrary, we have noted that
“special rewards for counsel’s individual clients are not


    19
       Through this General Release Form, Jane Roes 1 and 2 would
individually—not on behalf of the class—release not only the claims
released by all the other class members, but also “any other Claims under
any provision of the FLSA, the California Labor Code . . . or any
applicable California Industrial Welfare Commission Wage Orders, and
Claims under all state or federal discrimination statutes . . . .”
42           MURPHY V. SFBSC MANAGEMENT

permissible when the case is pursued as a class action.
Generally, when a person ‘join[s] in bringing [an] action as
a class action . . . he has disclaimed any right to a preferred
position in the settlement.’” Staton, 

(alterations in original) (quoting Officers for Justice, 

); see also 

 (“[W]hen representative plaintiffs make
what amounts to a separate peace with defendants, grave
problems of collusion are raised.” (alteration in original)
(quoting Women’s Comm. for Equal Employment Opportunity
v. Nat’l Broad. Co., 

 (S.D.N.Y. 1977))).

    Thus, while reasonable incentive awards are permitted,
our cases have described such awards as being intended “to
compensate class representatives for work done on behalf of
the class, to make up for financial or reputational risk
undertaken in bringing the action, and, sometimes, to
recognize their willingness to act as a private attorney
general.” Rodriguez, 563 F.3d at 958–59; see also In re
Online DVD-Rental, 

 (“[I]ncentive awards
that are intended to compensate class representatives for work
undertaken on behalf of a class ‘are fairly typical in class
action cases.’” (quoting Rodriguez, 

)). We
have therefore directed district courts to evaluate the
propriety of requested incentive payments “using ‘relevant
factors includ[ing] the actions the plaintiff has taken to
protect the interests of the class, the degree to which the class
has benefitted from those actions, . . . the amount of time and
effort the plaintiff expended in pursuing the litigation . . . and
reasonabl[e] fear[s of] workplace retaliation.’” Staton,

 (alterations in original) (quoting Cook v.
Niedert, 

 (7th Cir. 1998))). None of
those factors, nor any other benefit to the class, was used as
a basis to justify the General Release Enhancement Payments
here.
             MURPHY V. SFBSC MANAGEMENT                     43

    Moreover, the handsome amounts of those incentive
payments, relative to the size of the cash payments that can be
claimed by class members, raise serious red flags that the
defendants may have tacitly bargained for the named
plaintiffs’ support for the settlement by offering them
significant additional cash awards. Cf. Staton, 

 (finding that payments to certain identified class
members that were “on average, sixteen times greater” than
the damages that other unnamed class members would
receive, and together made up roughly 6% of the total
settlement, “raise[d] serious concerns as to [the settlement’s]
fairness, adequacy and reasonableness,” particularly because
there was “no sufficient justification in the record for this
differential in the amount of damage awards and the process
for awarding them”). We have repeatedly warned that

       excessive payments to named class members
       can be an indication that the agreement was
       reached through fraud or collusion. Indeed,
       “[i]f class representatives expect routinely to
       receive special awards in addition to their
       share of the recovery, they may be tempted to
       accept suboptimal settlements at the expense
       of the class members whose interests they are
       appointed to guard.”

 (alteration in original). Significantly, “[t]he danger is
exacerbated if the named plaintiffs have an advance guarantee
that a request for a relatively large incentive award will be
made that is untethered to any service or value they will
provide to the class.” Rodriguez, 

 (emphasis
added). That is exactly what appears to have happened here.
Even though there is no indication that named plaintiffs’
general release of their individual claims provides any value
44           MURPHY V. SFBSC MANAGEMENT

to the class as a whole, the settlement agreement explicitly
specified that the parties would request, and defendants
would pay from the common fund, the $20,000 General
Release Enhancement Payments.

     In sum, not only do the $20,000 General Release
Incentive Payments to Jane Roes 1 and 2 appear to be
contrary to our caselaw on incentive payments, but they also
raise concerns about a potential conflict of interest between
the class representatives and unnamed class members. That
conflict arises because, “[i]f . . . members of the class are
provided with special ‘incentives’ in the settlement
agreement, they may be more concerned with maximizing
those incentives than with judging the adequacy of the
settlement as it applies to class members at large.” Staton,

; see also Rodriguez, 563 F.3d at 959–60
(“[T]he incentive agreements disjoined the contingency
financial interests of the contracting representatives from the
class . . . [and] created a disincentive to go to trial; going to
trial would put their [large incentive payments] at risk in
return for only a marginal individual gain even if the verdict
were significantly greater than the settlement.”). As a result,
the district court should have closely scrutinized these
General Release Enhancement Payments to ensure that they
were justified under our precedent, did not create an
impermissible conflict of interest, and were not the result of
implicit collusion. Cf. Rodriguez, 

 (“An
absence of material conflicts of interest between the named
plaintiffs and their counsel with other class members is
central to adequacy and, in turn, to due process for absent
members of the class.”).
               MURPHY V. SFBSC MANAGEMENT                            45

    C. Reversionary Aspects

    The concerns raised by the above-described aspects of the
settlement are further compounded by the settlement’s
inclusion of reversionary funds, namely, the Second Tier
Cash Pool and the Dance Fee Payment Pool.20 While we
have not disallowed reversionary clauses outright, we
generally disfavor them because they create perverse
incentives. See In re Volkswagen, 895 F.3d at 611–12. For
example, allowing unclaimed funds to revert to defendants
even where class members who do not respond or submit a
claim are bound by the class release creates an incentive for
defendants to ensure as low a claims rate as possible so as to
maximize the funds that will revert.21 This perverse incentive
might lead defendants to negotiate for a subpar notice
process, a more tedious claims process, or restrictive claim

    20
       “A ‘kicker’ or reversion clause directs unclaimed portions of a
settlement fund . . . to be paid back to the defendant.” In re Volkswagen
“Clean Diesel” Mktg., Sales Practices, & Prods. Liab. Litig., 

 (9th Cir. 2018). Here, the defendants were not required to fund
the Second Tier Cash Pool of up to $1 million, unless enough class
members submitted claims to push the total of all claims and fees above
the $2 million amount provided by the First Tier Cash Pool. In other
words, the promised Second Tier Cash Pool money would revert back to
the defendants if the claims rate was sufficiently low, even though the
non-FLSA claims of all class members who did not make a claim or opt
out would nonetheless be extinguished. Similarly, as discussed above, any
amount of the Dance Fee Payment Pool or Residual Dance Fee Payment
Pool that was not redeemed within the two-year Dance Fee Redemption
Period would also revert to the defendants.
    21
       By contrast, in an opt-in settlement the defendants retain an
incentive to ensure a high claims rate, because any class member who
does not opt in and make a claim is also not subject to the release,
meaning that a low claims rate leaves defendants with the specter of
unresolved liability to all class members who did not opt in.
46           MURPHY V. SFBSC MANAGEMENT

eligibility conditions. See 

. Moreover, “[a]
reversion can benefit both defendants and class counsel, and
thus raise the specter of their collusion, by (1) reducing the
actual amount defendants are on the hook for, especially if
the individual claims are relatively low-value, or the cost of
claiming benefits relatively high; and (2) giving counsel an
inflated common-fund value against which to base a fee
motion.” 

 As a result, we have identified reversionary
clauses as a “subtle sign[] that class counsel have allowed
pursuit of their own self-interests . . . to infect the
negotiations.” Allen, 

. (alteration in original)
(quoting In re Bluetooth, 654 F.3d at 947).

    That is not to say that a reversionary clause can never
reasonably be included in a settlement; in some cases, the
reversionary clause may provide articulable benefits to the
class, and any concerns about perverse incentives or collusion
may be ameliorated by other aspects of the settlement. See,
e.g., In re Volkswagen, 

 (“The incentives for
class members to participate in the settlement, the
complementary inducement for Volkswagen to encourage
them to participate, the value of the claims, and the actual
trend in class member participation all indicate that the
reversion clause did not, in design or in effect, allow VW to
recoup a large fraction of the funding pool.”). But that is not
the case here. Instead, the lackluster notice process, the
relatively low claims rate, the restrictive conditions on
redeeming dance fee payments, and a fee award that
constituted a disproportionate share of the cash distribution
and was based in part on funds subject to reversion, made
concerns regarding perverse incentives and implicit collusion
raised by the reversionary clause all the more salient.
               MURPHY V. SFBSC MANAGEMENT                             47

    As a result, the district court had an obligation to
scrutinize these reversionary clauses closely and seek
adequate justification for their inclusion; it was required to
“explain why the reversionary component of a settlement
negotiated before certification is consistent with proper
dealing by class counsel and defendants.”22             In re
Volkswagen, 

; see also In re Bluetooth,
654 F.3d at 949 (explaining that when a district court was
faced with a “questionable” provision, it “was required to
examine the negotiation process with even greater scrutiny
than is ordinarily demanded, and approval of the settlement
had to be supported by a clear explanation of why the
[provision] is justified and does not betray the class’s
interests”). The district court failed to do so here. In its
approval order, the district court appeared to justify the
reversionary aspects of the Second Tier Cash Pool simply by
stating that “the Tier One funds are not reversionary.” But
just because some of the settlement funds are not reversionary
does not explain why a third of the potential cash settlement
funds should be, see In re Bluetooth, 654 F.3d at 949 (“If the
defendant is willing to pay a certain sum . . . , there is no
apparent reason the class should not benefit from the excess
allotted . . . .”), nor does it do anything to address the


    22
       This cautionary approach to reversionary clauses is also reflected
in the Northern District of California’s own guidance for class action
settlements. See Procedural Guidance for Class Action Settlements, N.D.
CAL., https://cand.uscourts.gov/ClassActionSettlementGuidance (last
updated Dec. 5, 2018) (instructing that, “[i]n light of Ninth Circuit case
law disfavoring reversions,” parties should state in their motion for
preliminary approval “whether and under what circumstances money
originally designated for class recovery will revert to any defendant, the
potential amount or range of amounts of any such reversion, and an
explanation as to why a reversion is appropriate in the instant case”
(emphasis added)).
48           MURPHY V. SFBSC MANAGEMENT

substantive concerns regarding perverse incentives and
potential collusion discussed above. The district court
therefore failed to satisfy its procedural obligation to probe
more closely the reversionary clauses, by investigating
whether those clauses are justified by unique benefits to the
class and supported by provisions that ameliorate concerns
about perverse incentives, in order to dispel any concerns that
the clauses are the result of implicit collusion or self-serving
dealings.

     D. Overall Fairness Determination

    The foregoing questionable aspects of the settlement—the
clear sailing agreement, the disproportionate cash distribution
to attorneys’ fees justified in part by potentially inflated non-
monetary relief, the large incentive awards to Jane Roes 1 and
2, and the reversionary clauses—squarely illustrate our
concerns why settlements negotiated prior to class
certification are subject to a heightened risk that self-interest,
even if not purposeful collusion, will seep its way into the
settlement terms. See Staton, 

. These
identified “subtle signs that class counsel have allowed
pursuit of their own self-interests and that of certain class
members to infect the negotiations,” In re Bluetooth, 654 F.3d
at 947, should have caused the district court to think twice,
investigate further, and justify the terms’ inclusion before
approving the settlement as “fair, reasonable, and adequate.”
See Allen, 

 (“While the existence of [subtle
warning] signs [including a reversionary clause, clear sailing
agreement, and disproportionate attorneys’ fee] does not
mean the settlement cannot still be fair, reasonable, or
adequate, they required the district court to examine them,
and adequately to develop the record to support its final
approval decision.”). Such a heightened inquiry was all the
                MURPHY V. SFBSC MANAGEMENT                                49

more imperative here, where concerns raised by the
potentially problematic aspects of the settlement were not
offset by an exceptional recovery to the class.23

    Ultimately, because the district court applied the incorrect
legal standard in determining whether to approve the
settlement—it failed to conduct the required heightened
inquiry and instead suggested that a presumption of fairness
applied—we hold that the district court abused its discretion
in granting approval of the settlement. See Allen, 

.

                           CONCLUSION

     For the foregoing reasons, we reverse the district court’s
approval of the settlement notice process and the settlement
itself, including the attorneys’ fees award, and remand for
further proceedings consistent with this opinion. We leave it
to the district court to determine how to proceed, whether that
be negotiating a new settlement, seeking re-approval of the
current settlement with a new notice plan under the applicable



    23
        While appellate courts are not well suited to estimate the value of
the settlement compared to the full potential value of the class claims, see
Staton, 

, here the district court itself suggested in its final
approval order that the gross settlement value (including the Dance Fee
Payment Pool and the injunctive relief valued by the court at $2 million)
amounts to 4.3% of possible class damages. While “[i]t is well-settled law
that a cash settlement amounting to only a fraction of the potential
recovery does not per se render the settlement inadequate or unfair,”
Officers for Justice, 

, this recovery is not so large as to
extinguish the fairness concerns raised by the clear sailing agreement, the
disproportionate cash distribution to attorneys’ fees, the large incentive
awards to Jane Roes 1 and 2, and the reversionary clauses.
50         MURPHY V. SFBSC MANAGEMENT

heightened standard, reinstating the prior Ninth Circuit
appeal, or proceeding toward trial.

     REVERSED and REMANDED.