United States: Utilizing California Civil Code Section 1542 Waivers In Class Action Settlement Agreements: Helpful Or Harmful?

A significant concern for any lawyer negotiating the settlement of a class action in California state court is crafting a settlement agreement that the court will ultimately approve. Under California law, a judge must approve of any proposed settlement agreement disposing of a class action.ⁱ A judge will only approve a class action settlement that he/she determines is fair, adequate, and reasonable.ⁱⁱ Courts have broad discretion in evaluating the fairness, adequacy, and reasonableness of class settlement agreements. ⁱⁱⁱ

In deciding whether to approve a proposed class action settlement, judges pay close attention to the extent to which the settlement agreement requires class members to waive other claims they may have against the defendant. Of growing concern to judges is whether the settlement includes a California Civil Code section 1542 waiver.

What Is a California Civil Code Section 1542 Waiver?

California Civil Code section 1542 is a statutory protection for parties who sign a settlement agreement containing a general release of claims. It provides that a general release of claims does not extend to claims that the releasing party does not "know or suspect to exist" at the time of executing the release, and which if known "must have materially affected" the settlement. Thus, a California settlement agreement containing a general release of claims does not prevent a plaintiff from bringing a subsequent action against a settling defendant arising out of claims he/she did not know of, or suspect, at the time of the settlement.

To ensure that settling plaintiffs release all known and unknown claims against defendants and other releasees at the time of settlement, defense counsel routinely include section 1542 waivers in their settlement agreements. However, some judges evaluating class action settlements are skeptical of this practice given the wide scope of a section 1542 waiver and the potential for class members to be surprised when their later claims are barred. See Salehi v. Surfside III Condo. Owners' Assn., 200 Cal. App. 4th 1146, 1160 (2011) (barring subsequent claim of condo owner because it was covered by a prior release that included a section 1542 waiver); Israel-Curley v. California Fair Plan, 126 Cal. App. 4th 123, 129 (2005) (barring subsequent claim of insured because it was covered by a general release insured signed in a prior class action settlement).

Section 1542 Waivers in Class Action Settlements in Los Angeles County Superior Court

In the Los Angeles County Superior Court, all class actions are handled by the Complex Litigation Program. (Note: In Los Angeles, San Bernardino, Riverside, and Fresno counties, class actions are automatically assigned to the complex litigation departments. In San Francisco, Orange, San Diego, and Alameda counties, class actions may be assigned to the complex department, but the assignment is not automatic.) The Los Angeles Superior Court provides checklists for attorneys to consult to ensure they have properly considered the various factors affecting the fairness, adequacy, and reasonableness of their proposed class settlement agreements.^iv The checklist specifically lists "[t]he necessity of including a §1542 release as to the putative class members" as a topic for judges to order further briefing on after reviewing a party's motion for preliminary approval of the class action settlement. Id.

In practice, judges in the Los Angeles County Superior Court's Complex Litigation Program will evaluate whether a section 1542 waiver is necessary under the circumstances of the particular class action settlement, and they will expect the parties to have briefed the issue. In one action, a judge approved a section 1542 waiver in a 243 class member employee wage violation settlement of $650,000. However, two different judges found section 1542 waivers inappropriate in wage violation class action settlements of $3.5 million dollars each, with class sizes of 7,600 and 26,000 employees. A section 1542 waiver was also rejected by a judge in a $3.2 million class settlement of consumer wiretapping claims by a 15,000 consumer class. Even if the judge ultimately determines that inclusion of a section 1542 waiver is inappropriate, he/she may still be willing to approve a settlement containing a general release of both known and unknown claims, if tailored to address the judge's concerns.

What Does This Mean for Me?

When negotiating settlement agreements in California class actions, carefully consider whether a judge may view a section 1542 waiver as unfair or unreasonable to the class members. If a section 1542 waiver is included, fully and persuasively brief the issue in your motion for preliminary approval of the class action settlement. Last, be prepared to revise the settlement agreement's release of claims to be as broad as possible without explicitly waiving section 1542 if the judge expresses concerns.

Footnotes

i. See Cal. Civ. Code §§ 581(k), 1781(f); Cal. Rules of Court 3.769(a), (g); see also Malibu Outrigger Bd. of Governors v. Superior Court, 103 Cal. App. 3d 573, 579 (1980) (holding that purpose of trial court review of dismissal motion is to protect the class).

ii. Cal. Rule of Court 3.769(g); Roos v. Honeywell Int'l, Inc., 241 Cal. App. 4th 1472, 1482 (2015) ("A trial court may approve only a settlement of a class action that is fair, adequate, and reasonable.") (citations omitted).

iii. Roos, 241 Cal. App. 4th at 1482.

iv. Preliminary Approval of Class Action Settlement 1–2, available at http://www.lacourt.org/division/civil/pdf/PreliminaryApprovalofClassActionSettlement.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.