California Supreme Court Again Weighs in on Class Certification

The California Supreme Court decided Duran v. U.S. Bank Nat. Assn., 59 Cal.4th 1, just a few weeks ago.  We  discussed that here.  That was a major decision on class actions.  The Court there explained how courts are to consider whether to certify a class action. The Court suggested that trial courts must consider not only whether there are "common questions" but whether a class action is "manageable" in that the individual issues won't drown the trial court. From the opinion in Duran:

In the misclassification context, as in other types of cases, trial courts deciding whether to certify a class must consider not just whether common questions exist, but also whether it will be feasible to try the case as a class action. Depending on the nature of the claimed exemption and the facts of a particular case, a misclassification claim has the potential to raise numerous individual questions that may be difficult, or even impossible, to litigate on a classwide basis. Class certification is appropriate only if these individual questions can be managed with an appropriate trial plan.

Now, the Court has issued another class-action-related opinion in Ayala v. Antelope Valley Newspapers, Inc., opinion here.  Here, the court considered another "misclassification case," one involving the issue of independent contractors.  The Court's focus again was whether common issues "predominate" and how trial courts make that determination.

Curiously, other than a quick cite to the opinion for an unremarkable proposition of law, there is no discussion of Duran in this latest case.  Perhaps that is because this case is a roadmap to certification of independent contractor v. employee class actions.

In Ayala, the plaintiff's case involves the test for employee v. independent contractor status.  The Court made clear that to determine whether common issues predominate, one must look at the nature of the legal claims.  Said the Court:

We begin by identifying the principal legal issues and examining the substantive law that will govern. In doing so, we do not seek to resolve those issues. Rather, the question at this stage is whether the operative legal principles, as applied to the facts of the case, render the claims susceptible to resolution on a common basis. (Brinker, supra, 53 Cal.4th at pp. 1023–1025; Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 327 [the focus ―is on what type of questions—common or individual—are likely to arise in the action, rather than on the merits of the case‖].) 

* * *

A court evaluating predominance ―must determine whether the elements necessary to establish liability [here, employee status] are susceptible to common proof or, if not, whether there are ways to manage effectively proof of any elements that may require individualized evidence.‖ (Brinker, supra, 53 Cal.4th at p. 1024.)

So, it's more than just the plaintiff's "theory" that drives whether issues are common. That "theory" has to be valid within the context of the substantive law.

Here, the theory was that Antelope Valley's "right to control" its newspaper carriers rendered them employees, rather than independent contractors.  That indeed is the central issue in employee v. independent contractor cases.  So, the Court evaluated whether that right to control was susceptible to resolution via common proof.

at the certification stage, the relevant inquiry is not what degree of control Antelope Valley retained over the manner and means of its papers‘ delivery. It is, instead, a question one step further removed: Is Antelope Valley‘s right of control over its carriers, whether great or small, sufficiently uniform to permit classwide assessment? That is, is there a common way to show Antelope Valley possessed essentially the same legal right of control with respect to each of its carriers? Alternatively, did its rights vary substantially, such that it might subject some carriers to extensive control as to how they delivered, subject to firing at will, while as to others it had few rights and could not have directed their manner of delivery even had it wanted, with no common proof able to capture these differences?

The Court then assessed whether the trial court properly decided that Antelope Valley's "right to control" the carriers was susceptible to common proof.  The Court decided the trial court applied the wrong analysis, because it focused on the degree to which Antelope Valley actually exercised control. The trial court believed that because it did not uniformly exercise control, the case would splinter into mini-trials of whether each carrier was a contractor or employee.

The Supreme Court instead focused on Antelope's contract with the carriers, which was uniform in that it applied to all of the carriers.  The contract specified the "right to control," thereby providing a sufficient "common issue":

At the certification stage, the importance of a form contract is not in what it says, but that the degree of control it spells out is uniform across the class. Here, for example, the two form contracts address, similarly for all carriers, the extent of Antelope Valley‘s control over what is to be delivered, when, and how, as well as Antelope Valley‘s right to terminate the contract without cause on 30 days‘ notice.

* * *

Evidence of variations in how work is done may indicate a hirer has not exercised control over those aspects of a task, but they cannot alone differentiate between cases where the omission arisesbecause the hirer concludes control is unnecessary and those where the omission is due to the hirer‘s lack of the retained right. That a hirer chooses not to wield power does not prove it lacks power. (Malloy, at p. 370 [―It is not essential that the right of control be exercised or that there be actual supervision of the work of the agent.

The Court summarized:

For class certification under the common law test, the key question is whether there is evidence a hirer possessed different rights to control with regard to its various hirees, such that individual mini-trials would be required. Did Antelope Valley, notwithstanding the form contract it entered with all carriers, actually have different rights with respect to each that would necessitate mini-trials?

Then the Court explained how to address whether there is variation in the right to control, such that there is no "common" question.  For example, the Court explained that, despite the written contract, there could be evidence of the parties' course of dealing that showed individual rights to control depending on the carrier involved.  The Court explained that when there is a dispute in the evidence over the central issue, a trial court must consider it if certification "depends on" resolution of that dispute:

The extent of Antelope Valley‘s legal right of control is a point of considerable dispute; indeed, it is likely the crux of the case‘s merits. To address such an issue on a motion for class certification is not necessarily erroneous. We recently reaffirmed that a court deciding a certification motion can resolve legal or factual disputes: ―To the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them.‖ (Brinker, supra, 53 Cal.4th at p. 1025; see Dailey v. Sears, Roebuck & Co. (2013) 214 Cal.App.4th 974, 990–991.) But we cautioned that such an inquiry generally should occur only when ―necessary.‖ (Brinker, at p. 1025.) The key to deciding whether a merits resolution is permitted, then, is whether certification ―depends upon‖ the disputed issue. (Ibid.)

Finally, the Court addressed the "secondary factors" that apply in independent contractor cases.  These include who specifies the location of the work, whether the contractor uses his or her own tools, how the relationship is terminated, the form of compensation, etc.  The Court wrote that trial courts must weigh individual v. common issues, but give special weight to whether the "more important" factors are susceptible to common proof. 

Accordingly, the impact of individual variations on certification will depend on the significance of the factor they affect. Some may be of no consequence if they involve minor parts of the overall calculus and common proof is available of key factors such as control, the skill involved, and the right to terminate at will; conversely, other variations, if they undermine the ability to prove on a common basis the most significant factor or factors in a case, may render trial unmanageable even where other factors are common. The proper course, if there are individual variations in parts of the common law test, is to consider whether they are likely to prove material.

All 7 justices agreed the trial court erred. But the majority opinion, by Justice Werdegar, is joined by  (Liu, Kennard, Corrigan, and CJ. Cantil-Sakauye).  Justice Baxter wrote a concurring opinion, joined by Justice Corrigan, in which he argued that most of the majority's opinion was unnecessary to the decision.  It is a bit strange that Justice Corrigan joined Justice Baxter's concurrence, but also joined the majority opinion.  And Justice Chin concurred in the result only, authoring a long opinion explaining his view of the record and the flaws in the majority's analysis. 

So, bottom line:

- The California Supreme Court's recent decisions in Duran and Ayala have clarified class certification practice. However, on the whole, class certification will be easier to obtain.

- Class action defense must change strategies to defeat certification.  The proffered "differences' among the putative class members have to concern the common issues advanced by the plaintiff.  

- Larger employers facing class actions in a variety of contexts may wish to consider arbitration agreements containing class action waivers.

- Companies relying on large groups of independent contractors to perform aspects of their work should review their independent contractor agreements and consider (1) whether the classification is defensible and (2) whether the "right to control" is common enough to allow for class certification, or whether the agreement can build in variations in the right to control.

California Supreme Court Confirms: "Refusing to Sign" Is Insubordination. But it's not "Misconduct."

Somewhere along the line, employees got the idea that they can "refuse to sign" personnel documents.  Our advice is always to clearly indicate on a form that "signing" simply means acknowledgement of receipt.  Yet, employees still refuse to sign, even with that disclaimer.  Some then claim they did not receive them, usually during depositions.

Can the employer fire a worker for refusing to sign?  One of this blog's most popular posts addressed the court of appeal's decision in Paratransit v. Unemployment Insurance Appeals Board.  (Here)  The court there held that an employee's "refusing to sign" a disciplinary notice was insubordination, warranting discharge. But the court also held that the employee's refusing to sign was also "misconduct" within the meaning of  unemployment insurance law, disqualifying the fired worker from benefits.

The California Supreme Court has now weighed in on the case. As stated by the Court:

Craig Medeiros (Claimant) worked for Paratransit, Inc. (Employer) as a vehicle operator for approximately six years. As a condition of his employment, Claimant was required to join a union. The union and Employer were parties to a collective bargaining agreement (CBA) containing the following provision: “The Employer shall provide a Vehicle Operator with copies of complimentary letters received regarding his or her job performance and with copies of disciplinary notices, including verbal warnings that have been put in writing. All disciplinary notices must be signed by a Vehicle Operator when presented to him or her provided that the notice states that by signing, the Vehicle Operator is only acknowledging receipt of said notice and is not admitting to any fault or to the truth of any statement in the notice.”

Yet, when Paratransit attempted to discipline Medeiros, he refused to sign the document.  Later, he claimed he was tired and confused, and believed he did not have to sign because of advice he had received from his union.  

Paratransit contested Medeiros's claim for unemployment benefits.  Ultimately, the Court of Appeal decided, 2-1, that Medeiros was disqualified, because his refusal to sign amounted to "misconduct" within the meaing of California's Unemploymet Insurance Code section 1256.

The Supreme Court previously ruled in Amador v. Unemployment Ins. Appeals Bd. (1984) 35 Cal.3d 671, that misconduct means the following:

“conduct evincing such wilful or wanton disregard of an employer‟s interests as is found in deliberate violations or disregard of standards of behavior which the employer has the right to expect of his employee, or in carelessness or negligence of such degree or recurrence as to manifest equal culpability, wrongful intent or evil design, or to show an intentional and substantial disregard of the employer‟s interests or of the employee‟s duties and obligations to his employer. On the other hand mere inefficiency, unsatisfactory conduct, failure in good performance as the result of inability or incapacity, inadvertencies or ordinary negligence in isolated instances, or good faith errors in judgment or discretion are not to be deemed "misconduct" within the meaning of the statute.” 

With respect to insubordination, the Court noted prior rulings established that

“an employee‟s unequivocal refusal to comply with the employer‟s rule, without more, is not misconduct within the meaning of section 1256.” (Robles v. Employment Development Dept. (2012) 207 Cal.App.4th 1029, 1035 (Robles).) As in all cases of misconduct, the employee‟s insubordination must be marked by fault. (See Amador, supra, 35 Cal.3d at p. 678; Robles, at p. 1035.) Hence, violating an employer‟s reasonable order because of a good faith error in judgment does not disqualify an employee from receiving benefits. (See Amador, at p. 680; Moore v. Unemployment Ins. Appeals Bd. (1985) 169 Cal.App.3d 235, 243 (Moore).)

The Supreme Court acknowledged that refusing to sign the paper was insubordinate and justified discharge.  But the Court also unanimously held that Medeiros's refusing to sign one disciplinary notice was insufficient evidence of "misconduct" under the above definitions.

So, the Court found the disciplinary notice's disclaimer ambiguous, because it did not say that signing was "only" for acknowledging receipt of the document.  So, it pays to include a clear statement on documents requiring an employee's signature.  Additionally, the Court was concerned that Medeiros merely made a "good faith error in judgment" rather than misconduct.  The Court may have been persuaded otherwise had Medeiros engaged in a pattern of insubordination, or if his action had been detrimental to the employer.

This case is Paratransit v. CUIAB and the opinion is here.

California Supreme Court Washes Unclean Hands. And After Acquired Evidence, Too

The defense of "after acquired evidence" is a variation on the equitable defense of "unclean hands." A party's "unclean hands" are supposed to "close the courthouse door" to those guilty of wrongdoing directly related to the heart of his or her claims.  "Unclean hands" is supposed to apply only when the wrongdoing goes to the heart of the claims the employee is asserting.

After-acquired evidence is a broader concept, in that the focus is on whether the employer would have denied employment to the employee, had the employer known about the misconduct during the hiring process or before termination.  As the Supreme Court explained:

The doctrine of after-acquired evidence refers to an employer‟s discovery, after an allegedly wrongful termination of employment or refusal to hire, of information that would have justified a lawful termination or refusal to hire.

Unlike unclean hands, the after-acquired information may not have to cut to the heart of the employee's case. But the employer must prove that the employee would not have been hired or would have lost his or her job.

In the employment law context, for example, a California court once held that someone who lied on his employment application, that he was not convicted of a crime, was not permitted to sue for martial status discrimination under the Fair Employment and Housing Act. The court reasoned the employee was not entitled to the job in the first place because of his misconduct, because he never would have been hired. (Camp v. Jeffer Mangels et al.) Another court held that an employee who was unauthorized to work in the U.S. could not proceed on termination-based claims because she was not entitled to the job in the first place.  (Murillo v. Rite-Stuff Foods).

Under federal employment laws, such as Title VII, however, these defenses can limit damages available, but are not complete bars to liability. McKennon v. Nashville Banner Publishing Co. (1995) 513 U.S. 352.  That is, if the employer proves it would have fired an employee had it known about information acquired after the termination, the employer can argue that damages should be reduced, but cannot assert a complete defense.

The California Supreme Court just decided in Salas v. Sierra Chemical that the federal rule is the better one.

Vicente Salas intentionally and repeatedly used someone else's social security number to obtain employment with Sierra Chemical Company. He signed an I-9 form under penalty of perjury, attesting to the documents he submitted in support of his eligibility to work in the U.S.  Because his job with Sierra was seasonal, Salas repeatedly misrepresented his social security number, every time he re-applied for seasonal work.

Mirabile dictu, the social security bureaucracy figured out that Salas's social security number was bogus. Of course, that was the social security office of many years ago; the one that issued "no-match" letters and required an explanation from the employees whose numbers did not match their names.  Sierra Chemical apparently didn't do anything about the employees with no-match letters.  They allowed Salas and the other employees to continue working.

Meanwhile, in 2006, Salas injured himself  He returned to work the next day, with restrictions, which Sierra honored.  He returned to full duty a couple of months later, in June. But in August, he hurt himself again, and required modified duty until December, when he was laid off for the season (as he had been in the past).

Salas went to work for another company after the layoff.  But then his Sierra managers called him and asked if he wanted to return to work. They then told him he would have to have a release from his doctor - to full duty - before he could return. (Spot the issue, accommodation mavens).

Salas told his boss he would try to get the release by June 2007. The boss said he would hold open Salas's job.  But Salas did not contact the boss again.  Instead, he sued.  He claimed denial of reasonable accommodation under the Fair Employment and Housing Act, and retaliation for filing a workers' compensation claim, in violation of public policy.

As the trial date approached, both parties filed motions in limine regarding evidence.  Salas acknowledge it is a crime (illegal) under federal and state law:

for a person to use false identification documents to conceal the person‟s true citizenship or resident alien status. Plaintiff stated that he would testify at trial and assert his privilege against self-incrimination under the Fifth Amendment to the United States Constitution if asked about his immigration status. He asked that he be allowed to assert the privilege outside the jury's presence and that the court and counsel not comment at trial on his assertion of the privilege. 

So, Salas' disclosure for the first time prompted the defense to investigate the bona fides of Salas' immigration status.  The defendant found out that Salas' social security number actually belonged to a person on the East Coast.

Sierra moved for summary judgment on the ground that Salas falsified his employment authorization paperwork. The company submitted a sworn statement from the real owner of the social security number and of the company's president, who said they would have fired Salas had they known of his deception.

Yet the trial court denied Sierra's motion for summary judgment.  The Court of Appeal, on the other hand, held Salas's claims were barred. Per the Supreme Court:

The Court of Appeal reasoned that the doctrine of after-acquired evidence barred plaintiff‟s causes of action because he had misrepresented to defendant employer his eligibility under federal law to work in the United States. It also held that plaintiff‟s claims were subject to the doctrine of unclean hands because he had falsely used another person's Social Security number in seeking employment with defendant, he was disqualified under federal law from working in the United States, and his conduct exposed defendant to penalties under federal law.

The lower court's decision was entirely consistent with California law up to this point.

But the California Supreme Court disagreed with the Court of Appeal and held that "after-acquired evidence" or "unclean hands" defenses are not complete bars to liability under FEHA.  Rather, the Court decided, these defenses in some cases may be used only to limit damages. As a result, summary judgment based on the defenses no longer is an option.

California law protects  immigrant workers who are unauthorized to work by guaranteeing them access to the same employment laws that protect those legally entitled to work.  So, Salas argued, if late-discovered unauthorized status resulted in application of unclean hands, these worker would be barred from bringing wrongful termination claims.

The Court agreed with Salas. First, the Court decided that federal immigration laws do not preempt California's laws preserving illegal aliens' employment-based claims. If federal law preempted California law, the California statutes would not impede the application of unclean hands. The Court engaged in a lengthy analysis of federal preemption jurisprudence, concluding that California was free to pass laws guaranteeing illegal aliens the right to benefit from employment law on the same terms as authorized workers.

The Court could have limited its discussion to whether unclean hands / after acquired evidence may be applied to hose who lie about their immigration status / identification documents.  But no.

The Court then examined, and gutted, the application of after-acquired evidence / unclean hands in FEHA cases generally.  The Court decided that the defenses are not complete bars in Fair Employment and Housing Act cases because employers should not be insulated from liability for making unlawful employment decisions, even those taken against employees who should never have been employed in the first place.  The Court reasoned that the employer made the challenged decisions without knowing of the employee's misconduct that would have led to termination or refusal to hire.

The Court then decided that, like under the federal rule, employees found to have engaged in misconduct that would have disqualified them from employment should be limited in their potential remedies:

Generally, the employee's remedies should not afford compensation for loss of employment during the period after the employer‟s discovery of the evidence relating to the employee‟s wrongdoing. When the employer shows that information acquired after the employee‟s claim has been made would have led to a lawful discharge or other employment action, remedies such as reinstatement, promotion, and pay for periods after the employer learned of such information would be “inequitable and pointless,” as they grant remedial relief for a period during which the plaintiff employee was no longer in the defendant‟s employment and had no right to such employment. (McKennon, supra, 513 U.S. at p. 362.)

The remedial relief generally should compensate the employee for loss of employment from the date of wrongful discharge or refusal to hire to the date on which the employer acquired information of the employee‟s wrongdoing or ineligibility for employment. Fashioning remedies based on the relative equities of the parties prevents the employer from violating California‟s FEHA with impunity while also preventing an employee or job applicant from obtaining lost wages compensation for a period during which the employee or applicant would not in any event have been employed by the employer. In an appropriate case, it would also prevent an employee from recovering any lost wages when the employee's wrongdoing is particularly egregious.

The lower courts apparently are left to decide what an "appropriate case" or "egregious" means in this context.

The significance of the Court's no-preemption holding now becomes clear.  If preemption applies, it is likely that federal law would preclude any post-termination or back pay to an employee who falsifies employment documents to obtain employment.  Given the California Supreme Court decided state law is not preempted, its holding under state law is viable.  But if the U.S. Supreme Court hears this case and decides federal immigration law applies, it could be that unauthorized workers are entitled to no post-termination pay, but could still recover for pre-termination damages due to unlawful harassment, for example.

The Court then separated the "unclean hands" defense from the "after-acquired evidence" analysis.  But then the Court simply said that the defense of unclean hands, normally a complete bar, would not apply in FEHA cases either, but again authorized trial courts to fashion appropriate equitable remedies.  It's hard to tell, but it seems like the courts will apply the same analysis whether the defense is expressed as "unclean hands" or "after-acquired evidence."  Again, "unclean hands" likely will apply only when the misconduct relates to serious application fraud, but it appears not to matter anymore.

Retired Justice Joyce Kennard wrote the opinion for 5 justices; her final gift to the plaintiffs' bar.  Retiring Justice Baxter wrote a concurrence/dissent, joined by Justice Ming Chin, the editor of the "leading employment law treatise" in the words of a recent court opinion.  Justice Baxter opined that federal immigration law indeed precludes any remedy to employees who falsify eligibility to work in the U.S. And Justice Baxter pointed out that the "unclean hands" defense, when applicable, generally is a complete bar to a plaintiff's access to court.

The opinion in Salas v. Sierra Chemical Co. is here.

U.S. Supreme Court: President's "Recess Appointments" to NLRB Were Invalid

The U.S. Supreme Court unanimously held that the President made invalid "recess appointments" to the National Labor Relations Board in January 2012. The Senate declared itself in recess for three-day periods during that month. The President then appointed three out of five members to the NLRB.

The Court's judgment - that the recess appointments were invalid - is unanimous. But only 5 out of 9 justices joined the majority opinion, written by Justice Breyer (joined by Justices Kennedy, Kagan, Sotomayor, and Ginsburg), Four justices, led by Justice Scalia (with Justices Thomas, CJ Roberts, and Alito), issued a separate opinion, disagreeing with the majority's conclusions regarding when recess appointments are valid.

This opinion is over 50 pages long, and it is mostly devoted to the history of the Constitution's recess appointments clause, and the way it has been used historically.  The upshot, however, is that the President has a lot of power to make recess appointments, but there has to be a sufficiently long recess. Moreover, the house of Congress that is controlled by the political party not in power may re-call the Congress from recess and thwart recess appointments. Checks and balances.

Because the appointments were invalid, the NLRB operated without a quorum for several months.  As a result, hundreds of decisions are invalid. It remains to be seen precisely what the NLRB will do with those decisions. The Board currently has a full compliment of members.  Therefore, recent decisions issued since the Senate confirmed the 5 members will be valid and enforceable.  We will update what happens next when we find out.

This case is National Labor Relations Board v. Noel Canning and the opinion is here. 

CA Supreme Court: Class Action Waivers in Arbitration Are Valid; Overrules Gentry; But...

... not all good news for employers or arbitration fans.

The California Supreme Court ruled that the Federal Arbitration Act preempts its previous decision in Gentry v. Superior Court (2007) 42 Cal.4th 443, which invalidated class action waivers in most wage-hour matters.

Here are the facts per the Court:

Plaintiff Arshavir Iskanian worked as a driver for defendant CLS Transportation Los Angeles, LLC (CLS) from March 2004 to August 2005. In December 2004, Iskanian signed a “Proprietary Information and Arbitration Policy/Agreement” providing that “any and all claims” arising out of his employment were to be submitted to binding arbitration before a neutral arbitrator. The arbitration agreement provided for reasonable discovery, a written award, and judicial review of the award; costs unique to arbitration, such as the arbitrator’s fee, would be paid by CLS. The arbitration agreement also contained a class and representative action waiver that said: “[E]xcept as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.”

The Supreme Court previously held in Gentry, cited above, that most of these class action waivers would be void and contrary to public policy. As a result, courts invalidated many class action waivers, despite the U.S. Supreme Court's ruling in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __. In Concepcion, the U.S. Supremes held that the Federal Arbitration Act preempts state law rules that invalidate class action waivers.

So, in this case, Iskanian v. CLS Transportation Los Angeles, opinion here, the Court recognized that Gentry could not survive Concepcion.

The high court in Concepcion made clear that even if a state law rule against consumer class waivers were limited to “class proceedings [that] are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,” it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration “even if it is desirable for unrelated reasons.”

The California Supreme Court also rejected Iskanian's argument that class action waivers are illegal under the National Labor Relations Act.  The National Labor Relations Board so held in D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184.  But the courts have not agreed. In fact, the Court of Appeals for the Fifth Circuit refused to enforce the decision.  The Supreme Court joined the other courts in rejecting the NLRB's rule:

We agree with the Fifth Circuit that, in light of Concepcion, the Board’s rule is not covered by the FAA’s savings clause. Concepcion makes clear that even if a rule against class waivers applies equally to arbitration and nonarbitration agreements, it nonetheless interferes with fundamental attributes of arbitration and, for that reason, disfavors arbitration in practice. (Concepcion, supra, 563 U.S. at pp. __–__ [131 S.Ct. at pp. 1750–1752].) Thus, if the Board’s rule is not precluded by the FAA, it must be because the NLRA conflicts with and takes precedence over the FAA with respect to the enforceability of class action waivers in employment arbitration agreements. As the Fifth Circuit explained, neither the NLRA’s text nor its legislative history contains a congressional command prohibiting such waivers. (Horton II, supra, 737 F.3d at pp. 360–361.)

The news was not all good for arbitration, however.

The Court maintained its rule in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (Sonic II)," such that courts may find arbitration agreements unconscionable if they do not provide protections similar to the wage claim statute.   That means the court is leaving open the door to invalidation of arbitration agreements under state law for a variety of reasons that courts have come up with over the years.  Only the U.S. Supreme Court will be able to fix this ongoing situation, if the Court is so inclined.

The Court also held that employers may not require waiver of "representative" actions in arbitration.  Therefore, employees who cannot maintain class actions in arbitration can pursue claims under the Private Attorney General Act, or PAGA.

What is a PAGA representative action?  The Court explained, quoting from a prior decision:

An employee plaintiff suing . . . under the [PAGA] does so as the proxy or agent of the state’s labor law enforcement agencies. . . . In a lawsuit brought under the act, the employee plaintiff represents the same legal right and interest as state labor law enforcement agencies — namely, recovery of civil penalties that otherwise would have been assessed and collected by the Labor Workforce Development Agency. [Citations.] . . . . Because collateral estoppel applies not only against a party to the prior action in which the issue was determined, but also against those for whom the party acted as an agent or proxy [citations], a judgment in an employee’s action under the act binds not only that employee but also the state labor law enforcement agencies.

“Because an aggrieved employee’s action under the [PAGA] functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Lab. Code, § 2699, subds. (a), (g)), and an action to recover civil penalties ‘is fundamentally a law enforcement action designed to protect the

Also, the plaintiff keeps just 25% of the penalties recovered, the rest go to the state.

Iskanian's arbitration agreement waived "representative" claims as well as class claims. Therefore, because he had to arbitrate all claims, and could not arbitrate representative claims at all, the question was whether the agreement was enforceable.

The Supreme Court said, "no."

a prohibition of representative claims frustrates the PAGA’s objectives. As one Court of Appeal has observed: “[A]ssuming it is authorized, a single-claimant arbitration under the PAGA for individual penalties will not result in the penalties contemplated under the PAGA to punish and deter employer practices that violate the rights of numerous employees under the Labor Code. That plaintiff and other employees might be able to bring individual claims for Labor Code violations in separate arbitrations does not serve the purpose of the PAGA, even if an individual claim has collateral estoppel effects. (Arias, supra, 46 Cal.4th at pp. 985–987.) Other employees would still have to assert their claims in individual proceedings.” (Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, 502, fn. omitted.)

The Court then addressed whether the Federal Arbitration Act would require the courts to allow waiver of representative claims.  Again, the California Supreme Court said "no."

We conclude that the rule against PAGA waivers does not frustrate the FAA’s objectives because, as explained below, the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.

* * *

Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents — either the Labor and Workforce Development Agency or aggrieved employees — that the employer has violated the Labor Code. Through his PAGA claim, Iskanian is seeking to recover civil penalties, 75 percent of which will go to the state’s coffers.

So, where does this leave us with respect to arbitration:

1.  Class action waivers are enforceable. Employers may implement valid arbitration agreements with class action waivers and foreclose employees from bringing class actions in court or arbitration.  That will change only if the U.S. Supreme Court overrules itself, or if Congress amends the FAA.  Given the ease with which courts are granting class certification, a properly managed and implemented arbitration program may be a wise decision for employers exposed to wage hour class actions.

2. Arbitration agreements cannot validly waive "representative" actions. Therefore employees proceeding under PAGA may pursue those Labor Code penalties  authorized by PAGA, whether in arbitration or court.  However, employees cannot use PAGA to bring claims for, damages, such as meal and break premiums, overtime,  etc.  Only penalties.  This may change if the U.S. Supreme Court takes up this case.

3.  Employers still must draft arbitration agreements to comply with the courts' notions of what is "unconscionable."  This case does nothing to affect the unconscionabilty jurisprudence that the California courts have developed. That means arbitration will be remain expensive, and employers will not be able to use arbitration agreements to unfairly limit claims, statutes of limitations, or remedies. This will not change unless the U.S. Supreme Court decides that the FAA overruled the California courts' unconscionability jurisprudence.

4.  The California Supreme Court's interpretation of the FAA and the NLRA provide a means for the U.S. Supreme Court to review this case, because of the federal laws involved.  Let's see if the high Court takes the opportunity to clarify when state law "unconscionability" or "public policy" doctrine  conflicts with the FAA.

U.S. Supreme Court Protects Public Sector Employee's First Amendment Rights

Central Alabama Community College hired Edward Lane to be Director of Community Intensive Training for Youth (CITY).  After learning CITY had budget problems, he audited the program’s expenses.  During the audit, Lane found out Schmitz, an Alabama state representative, was on the CITY payroll, but not working.  Lane pressed the issue, demanding Schmitz report to work.  She refused.  Lane fired Schmitz.

Schmitz took offense that Lane would try to save the tax payers some money by firing someone collecting a salary for not doing any work.   She allegedly told another employee she would seek retribution against Lane and that she would see to it that his agency would not receive favor from the legislature.  The FBI became involved, and Schmitz was later convicted of corruption charges.   Lane testified under oath before a grand jury and at trial, under subpoena.

Meanwhile, the CITY agency continued its budget woes.  Lane's boss, Franks, later laid off Lane and another probationary employee.  Lane sued Franks under 42 U.S.C. 1983 for violation of his civil rights (First Amendment right to testify without retaliation, among other things).  He sued Franks in his "official capacity" as a substitute for the state, and in his individual capacity.

But the lower courts held that Lane was not entitled to First Amendment protection because the testimony he haves were related to his official duties.  Precedents establish that when government employees speak within the course of their duties, the First Amendment provides minimal protection, because of the employer's interest in orderly operation of its work place. 

The U.S. Supreme Court accepted the case to determine if the First Amendment protects employees who provide testimony under oath on matters that concern the job site.  The Court unanimously held that it does, thereby giving Lane a retaliation claim against Franks in his "official capacity" as a representative of the state.  (Lane sought reinstatement and equitable relief against Franks in his official capacity).  

From the Court's unanimous opinion:

Truthful testimony under oath by a public employee outside the scope of his ordinary job duties is speech as a citizen for First Amendment purposes. That is so even when the testimony relates to his public employment or concerns information learned during that employment.

The Court also held:

The content of Lane’s testimony—corruption in a public program and misuse of state funds—obviously involves a matter of significant public concern.

The Court also held that the government did not have an adequate justification to tip the balance in its favor:

an employee’s sworn testimony is not categorically entitled to First Amendment protection simply because it is speech as a citizen on a matter of public concern. Under Pickering, if an employee speaks as a citizen on a matter of public concern, the next question is whether the government had “an adequate justification for treating the employee differently from any other member of the public” based on thegovernment’s needs as an employer. * * * 

Here, the employer’s side of the Pickering scale is entirely empty: Respondents do not assert, and cannot demonstrate, any government interest that tips the balance in their favor. There is no evidence, for example, that Lane’s testimony at Schmitz’ trials was false or erroneous or that Lane unnecessarily disclosed any sensitive, confidential,or privileged information while testifying . . . .  

So, Lane's case against the state could proceed via his suit against Franks in his "official capacity."  But the Court also held that the lawsuit against Franks personally would be barred by "qualified immunity.":

Qualified immunity “gives government officials breathing room to make reasonable but mistaken judgments about open legal questions.” Ashcroft v. al-Kidd, 563 U. S. ___, ___ (2011) (slip op., at 12). Under this doctrine, courts may not award damages against a government official in his personal capacity unless “the official violated a statutory or constitutional right,” and “the right was ‘clearlyestablished’ at the time of the challenged conduct.” * * * 

The relevant question for qualified immunity purposes is this: Could Franks reasonably have believed, at the time he fired Lane, that a government employer could fire an employee on account of testimony the employee gave, under oath and outside the scope of his ordinary job responsibilities? Eleventh Circuit precedent did not preclude Franks from reasonably holding that belief. And no decision of this Court was sufficiently clear to cast doubt on the controlling Eleventh Circuit precedent. * * * *

So, Lane's official capacity case was returned to the lower courts.  Franks is off the hook personally.

This case is Lane v. Franks and the opinion is here.

Happy 8th Anniversary Shaw Valenza LLP

Shaw Valenza and this blog celebrate our 8th anniversary today. 8 years is a long flash in the pan.  We wouldn't be here if it wasn't for our great team, our fantastic clients, and our exclusive club of readers.  That's you.  So, thank you all!

Thank you, too, to the Legislature, agencies, and courts for keeping us busy.

Finally, thank you Jennifer Brown Shaw, the best employment lawyer, partner, and friend one could hope to have.

DGV 6/19/2014

Court of Appeal: Extortion Is Not a Legally Protected Pre-Litigation Demand

From the Court of Appeal's opinion:

Jerome Stenehjem sued his former employer, Akon, Inc., and Surya Sareen, Akon‘s president and chief executive officer, for defamation, among other causes of action. Sareen countersued for civil extortion. Sareen alleged in an amended cross-complaint (Cross-Complaint) that Stenehjem (1) had asserted, through his counsel, a prelitigation claim for defamation; and (2) had later, while representing himself, made a written threat by e-mail to file a false criminal complaint against Sareen unless he paid Stenehjem monies to settle his defamation claim. Stenehjem‘s e-mail demand mentioned a potential qui tam suit; alluded to accounting documents created by Stenehjem at Sareen‘s specific direction, and referred to potential involvement of the United States Attorney General, Department of Justice, and Department of Defense. Sareen alleged that Stenehjem‘s demand constituted extortion in violation of criminal laws.

Shorter:  Stenehjem is Akon's ex employee. Akon is the employer.  Sareen is Akon's CEO.  Stenehjem  claims wrongful discharge, defamation, etc.  His lawyer tries to demand over $600,000 in settlement. Akon, the former employer, repeatedly tells him to jump in the lake.

Then, Stenehjem discontinues his relationship with his lawyer and sends the following email to Akon's lawyer, McDonnell:

Dear Mr. McDonnell, [¶] Although you have been quite firm and I feel un-professional in your response to my request to discuss the matter of my wrongful termination and the defamation claim I know is valid face to face, I take your comments about this being a Bogus claim very personnelly [sic]. I at no time wanted to cause any un-neccessay [sic] or long court procedings [sic] to hinder Akon or Mr. Sareen from continuing to doing bussiness [sic] as usual. As Akon‘s attorney I leave it in your hands to get the facts from Mr. Sareen and Dick Sanders in regards to a contract review by the aduitor [sic] Wayne Vartek and the documents I created on orders from Mr. Sareen regarding BOM‘s and purchase orders for three DLVA‘s under contract aduit [sic]. Mr. Sareen went into great detail about the reasons and figures which he had me write down in my notebook required in the BOM documentation he asked me to provide. [¶] I never wanted this to become a long and expensive process let alone involve the United States Attorney General, the Department of Justice or the DOD. Other then [sic] the wrongful termination I have never held any ill feeling towards Akon or Mr. Sareen. I also never wanted to enrich a bunch of bottom feeding attorneys such as yourself and the ones I have been meeting with. With that said I advise you to forward this to Mr. Sareen, act in good faith as his attorney and decide if this is the manner in which you want to continue responding in [sic]. [¶] In closing please inform your client I do not wish to make a Federal case out of this or create any unneccessary [sic] stress on Mr. Sareen or any Akon employees. Please remind Mr. Sareen of his statement that ―when I am wrong I will be the first to admit it and appoligize [sic.]‖ [I]t is still my desire to resolve this matter face to face and with no involvement of the courts and a bunch of attorneys serving there [sic] own self interests. [¶] I am extending my hand and this offer to meet one last time because of my disgust with the idea of enriching a large group of bottom feeding attorneys such as you and the ones advising me. It is not my first choice to procede [sic] with the Qui Tam option but the choice of a group of attorneys looking for the biggest payout they can get with the least effort and expense. I have yet to sign an agreement with the Lawyer out of Los Angeles who specializes in Qui Tam suits but he has reviewed my statement, investigated the facts, talked to former Akon employees, and wants to fly up to sign an agreement and formalize my statement. [¶] I was always honest with Mr. Sareen[;] hence my disclosure of the pending actions and my extension of one last opportunity to settle this in a gentlemens [sic] manner, shake hands and put this matter behind us. If you are acting [sic] in his best interests you will forward this letter to Mr. Sareen and respond in a civil and professional manner and not in the manner which you so un-professionally replied previously. [¶] Sincerely, Jerry Stenehjem‖

(emphasis mine)

In essence, Stenehjem attempted to gain advantage in his own civil suit by threatening Akon with a "qui tam" or false claims suit, the involvement o the government, etc., unless Akon settled with Stehehjem.

Akon, bless 'em, then sued Stenehjem for extortion.  Actually, Akon filed a cross-complaint to Stenehjem's complaint for defamation etc.  In response to the cross-complaint, Stenehjem filed a motion to strike that extortion claim as a "SLAPP" or "Strategic Lawsuit Against Public Participation."

The trial court granted the motion to strike, deciding that Stenehjem's email was protected pre-litigation speech.  But the Court of Appeal reversed the trial court.  It held that Akon's lawsuit would go forward against Stenehjem because his e-mail was indeed extortion.  Extortion is not protected speech.

It is important to consider the context under which the e-mail was sent. This backdrop included Stenehjem‘s initial settlement demand through counsel of $675,000; McDonnell‘s repeated statements that Stenehjem‘s claims had no merit; and McDonnell‘s having previously rebuffed any idea of settling the claims. McDonnell: (1) advised Stenehjem‘s attorney, Heymann, six months earlier that the claims were ―meritless‖ and that the only way Stenehjem would receive any monetary payment was by obtaining a judgment against Defendants; (2) told Heymann, in response to the latter‘s overtures regarding mediation of the dispute, that Akon would not mediate the matter and would not ―waste any more time on pointless settlement discussions‖; and (3) responded to Stenehjem‘s personal e-mail of June 23, 2011, in which Stenehjem had sought ―to settlethis matter by direct negotiation,‖ by stating that ―AKON is not interested in spending any time on any further settlement discussions of your bogus claims.‖13 Stenehjem in his August e-mail is therefore characterizing as unprofessional McDonnell‘s consistent position that Stenehjem‘s claims were unmeritorious and that his clients would pay no money to settle them.

*  *  *

We conclude that Stenehjem‘s August e-mail constituted extortion as a matter of law. It threatened to expose Sareen to federal authorities for alleged violations of the False Claims Act unless he negotiated a settlement of Stenehjem‘s private claims. Even were it true that Sareen had in fact committed acts violating the False Claims Act—and there is no evidence to support this, since Stenehjem filed no declarations in connection with the motion other than his attorney‘s fee declaration—this is ―irrelevant‖ to whether the threatened disclosure was extortion. (Flatley, supra, 39 Cal.4th at p. 330.) And it is of no consequence that the e-mail did not specifically identify the crime of which Stenehjem intended to accuse Sareen. (Flatley, at p. 331; Mendoza, supra, 215 Cal.App.4th at p. 806.)

* * *  

Furthermore, the alleged criminal activity that Stenehjem threatened to expose in a qui tam action was ―entirely unrelated to any alleged injury suffered by‖ Stenehjem as alleged in his defamation and wrongful termination claims. (Flatley, supra, 39 Cal.4th at pp. 330-331.)

Bottom line -  plaintiffs, you cannot attempt to leverage your own weak cases by threatening to expand claims to unrelated matters.  If you do, that could be extortion, for which you could be held liable.  I hope a few of my adversaries read this.  I've heard threats like this during my own lawsuits.

This case is Stenehjem v. Sareen and the opinion is here.

Court of Appeal: Employer Must Litigate Exhaustion of Remedies in FEHA Cases and More

Kim v. Konad USA Distribution, Inc. is an opinion about a sexual harassment / wrongful termination claim against a small employer and its owner.  No, Beavis, the accused harasser's name is not Whang Dong.  OK, yes it is.

Anyway, the opinion concerns some procedural issues, so I won't review the facts, which are pretty bad.  You can review the opinion here.

The plaintiff in a Fair Employment and Housing Act case must "exhaust" administrative remedies by filing an administrative complaint with the Department of Fair Employment and Housing, and by obtaining a right to sue letter.  The agency has reduced this obligation to filing a boiler-plate form online and receiving an immediate right to sue letter.   But the filing is still mandatory.

If the employer believes the administrative complaint is not filed, or inadequate to cover the claims in the lawsuit, the employer may raise that issue before trial via motion for summary judgment, demurrer, or judgment on the pleadings.  But, the Court of Appeal decided, the employer cannot wait until the end of a trial to seek dismissal of a claim under the Fair Employment and Housing Act on the basis that an employee failed to exhaust her administrative remedies:

If a defendant timely presents the issue of whether a FEHA plaintiff has properly presented all claims to the DFEH, a court must decide the merits of this question. (Keiffer, supra, 65 Cal.App.4th at p. 900.) But “‘it would be grossly unfair to allow a defendant to ignore this potential procedural defense at a time when facts and memories were fresh and put a plaintiff to the time and expense of a full trial, knowing it could assert the failure to exhaust administrative remedies if it received an adverse [judgment].’” (Ibid.; see also Mokler, supra, 157 Cal.App.4th at p. 136 [defendant waived exhaustion defense by “waiting to raise exhaustion until after a full trial on the merits”].)

We therefore disagree with defendants’ underlying premise that exhaustion of administrative remedies affects the fundamental subject matter jurisdiction of the court. Prior to submission of the case for decision, defendants did not request dismissal of the FEHA causes of action based on plaintiff’s failure to exhaust.

The Court of Appeal also addressed the defendants' separate argument that the plaintiff did not establish 5 or more employees worked for the employer, which would establish coverage by the statute.  The employer argued on appeal that a common law wrongful termination claim would not be viable if it had fewer than five employees. 

But the plaintiff was suing for sexual harassment as well. Sexual harassment requires only one employee.  Plaintiff claimed she was forced to quit due to the sexual harassment.  Therefore, she argued the public policy applied to the employer, even though it was too small to be held liable for discriminatory or retaliatory termination under the FEHA.

The Court of Appeal decided the plaintiff had the better argument:

all employers (not just those with five or more employees) accused of harassment (based on sex or some other classification listed in Gov. Code, § 12940, subd. (j)(1)) are subject to a FEHA harassment claim. Likewise, because plaintiff’s common law claim is based on sexual harassment, the applicable FEHA public policy applies to employers with less than five employees.

Again, you can read Kim v. Konad USA Distribution, Inc. here.

California Supreme Court's Class Action Decision in Duran

Employees and employers alike have awaited the California Supreme Court's opinion in Duran v. U.S. Bank Natl Assoc. for some time.  Our little firm submitted an "amicus curiae" brief on behalf of the California Chamber of Commerce, supporting the employer (available here).  And, we're happy to say, the Court saw things our way, not that we are taking credit. #humblebrag.

That said, as the California Supreme Court is wont to do lately, the Court left a lot open to interpretation and further litigation.  There are some guidelines, but no bright line rules.  So, let's see what we have ....

Duran and the class were loan officers. USB classified them as outside sales, who are exempt if they spend more than 50% of their time outside the office making sales.

Per the Court:

After certifying a class of 260 plaintiffs, the trial court devised a plan to determine the extent of USB’s liability to all class members by extrapolating from a random sample. In the first phase of trial, the court heard testimony about the work habits of 21 plaintiffs. USB was not permitted to introduce evidence about the work habits of any plaintiff outside this sample. Nevertheless, based on testimony from the small sample group, the trial court found that the entire class had been misclassified. After the second phase of trial, which focused on testimony from statisticians, the court extrapolated the average amount of overtime reported by the sample group to the class as a whole, resulting in a verdict of approximately $15 million and an average recovery of over $57,000 per person.

You don't hear about many class action trials.  In fact, this was one of the only cases in California history to go to trial on an exemption case.  The trial court, apparently believing 260 class members should not be testifying about their duties, selected 21 people, at random, to testify.  Then, statisticians testified how much overtime the 260 people worked to calculate their damages.

So, about 240 employees did not testify about their duties or their time worked at all. US Bank had this notion that it should be able to prove employees are exempt by using any employee or manager's testimony, and that any employee who did not deserve overtime should not be paid based on a statistical extrapolation.  The trial court would not allow any such testimony.

The Court of Appeal agreed with US Bank, holding that the plaintiff's statistical proof of liability violated USB's entitlement to due process of law.  As such, the Court reversed the $15 million judgment.

The Supreme Court upheld the Court of Appeal in full, unanimously. So, this case will be sent back to the trial court for a new trial, and a new fight over class certification.  The Supreme Court did not rule on the constitutional "due process" issue.   The Court also did not draw any bright line rules about whether statistical evidence is appropriate at the liability phase.  But the Court strongly criticized the superior court's methods, and there is very helpful language for employers.  There is some helpful language for the plaintiff's bar too.

Here are the main takeaways with supporting quotes:

1.  Courts must consider not just whether there are common questions, but also whether it is feasible to try those common questions in one proceeding:

In the misclassification context, as in other types of cases, trial courts deciding whether to certify a class must consider not just whether common questions exist, but also whether it will be feasible to try the case as a class action. Depending on the nature of the claimed exemption and the facts of a particular case, a misclassification claim has the potential to raise numerous individual questions that may be difficult, or even impossible, to litigate on a classwide basis. Class certification is appropriate only if these individual questions can be managed with an appropriate trial plan.

2.  The issue of "manageability" is a co-equal and separate issue from whether common questions predominate.  Manageability goes to whether the class action is "superior" to individual lawsuits:

Although predominance of common issues is often a major factor in a certification analysis, it is not the only consideration. In certifying a class action, the court must also conclude that litigation of individual issues, including those arising from affirmative defenses, can be managed fairly and efficiently. ... In wage and hour cases where a party seeks class certification based on allegations that the employer consistently imposed a uniform policy or de facto practice on class members, the party must still demonstrate that the illegal effects of this conduct can be proven efficiently and manageably within a class setting. (Brinker, at p. 1033; Dailey v. Sears, Roebuck & Co. (2013) 214 Cal.App.4th 974, 989.)

* * *

Trial courts must pay careful attention to manageability when deciding whether to certify a class action. In considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class.

3.  Class certification in wage-hour cases alleging misclassification will depend on whether individual questions predominate as to the liability for overtime, not the amount of overtime pay due:

Defenses that raise individual questions about the calculation of damages generally do not defeat certification. (Sav-On, supra, 34 Cal.4th at p. 334.) However, a defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability. This distinction is important. As we observed in City of San Jose v. Superior Court, supra, 12 Cal.3d at page 463: “Only in an extraordinary situation would a class action be justified where, subsequent to the class judgment, the members would be required to individually prove not only damages but also liability.”

4.  Class certification is more likely to be appropriate in cases where the job is highly standardized, and if the corporate policy uniformly requires overtime work:

Where standardized job duties or other policies result in employees uniformly spending most of their time on nonexempt work, class treatment may be appropriate even if the case involves an exemption that typically entails fact-specific individual inquiries.

5.  Statistical proof cannot establish liability without additional "glue" binding a class together.  Courts should consider whether statistical proof is a viable way of handling individual issues at the certification stage:

if sufficient common questions exist to support class certification, it may be possible to manage individual issues through the use of surveys and statistical sampling. Statistical methods cannot entirely substitute for common proof, however. There must be some glue that binds class members together apart from statistical evidence. . . .

If statistical evidence will comprise part of the proof on class action claims, the court should consider at the certification stage whether a trial plan has been developed to address its use. A trial plan describing the statistical proof a party anticipates will weigh in favor of granting class certification if it shows how individual issues can be managed at trial. Rather than accepting assurances that a statistical plan will eventually be developed, trial courts would be well advised to obtain such a plan before deciding to certify a class action. In any event, decertification must be ordered whenever a trial plan proves unworkable.

And

While representative testimony and sampling may sometimes be appropriate tools for managing individual issues in a class action, these statistical methods cannot so completely undermine a defendant’s right to present relevant evidence.

And, this language, which casts some doubt on how there can be statistical proof of liability in mis-classification cases that are fact intensive:

We need not reach a sweeping conclusion as to whether or when sampling should be available as a tool for proving liability in a class action. It suffices to note that any class action trial plan, including those involving statistical methods of proof, must allow the defendant to litigate its affirmative defenses. If a defense depends upon questions individual to each class member, the statistical model must be designed to accommodate these case-specific deviations. If statistical methods are ultimately incompatible with the nature of the plaintiffs’ claims or the defendant’s defenses, resort to statistical proof may not be appropriate. Procedural innovation must conform to the substantive rights of the parties.

6.   The employer's "blanket" classification of a group of employees as exempt is not sufficient to justify certification of a class based on common questions.

7.  The way to defeat certification remains by demonstrating that individual issues will swamp the common ones.

. . . USB’s exemption defense raised a host of individual issues. While common issues among class members may have been sufficient to satisfy the predominance prong for certification, the trial court also had to determine that these individual issues could be effectively managed in the ensuing litigation. (See Brinker, supra, 53 Cal.4th at p. 1054 (conc. opn. of Werdegar, J.); Sav-On, supra, 34 Cal.4th at p. 334.) Here, the certification order was necessarily provisional in that it was subject to development of a trial plan that would manage the individual issues surrounding the outside salesperson exemption.

In general, when a trial plan incorporates representative testimony and random sampling, a preliminary assessment should be done to determine the level of variability in the class. (See post, at p. 40.) If the variability is too great, individual issues are more likely to swamp common ones and render the class action unmanageable. No such assessment was done here. With no sensitivity to variability in the class, the court forced the case through trial with a flawed statistical plan that did not manage but instead ignored individual issues.

8.  The trial of a class action must allow for litigation of affirmative defenses.  Therefore, courts evaluating certification must weigh that litigation in deciding the manageability issue.  If a court does not make this finding at the certification stage, the certification is reversed:

Although courts enjoy great latitude in structuring trials, and we have encouraged the use of innovative procedures, any trial must allow for the litigation of affirmative defenses, even in a class action case where the defense touches upon individual issues. As we will explain, the trial plan here unreasonably prevented USB from supporting its affirmative defense. Accordingly, the class judgment must be reversed. The trial court is of course free to entertain a new certification motion on remand, but if it decides to proceed with a class action it must apply the guidelines set out here.

* * * 

the trial court could not abridge USB’s presentation of an exemption defense simply because that defense was cumbersome to litigate in a class action. Under Code of Civil Procedure section 382, just as under the federal rules, “a class cannot be certified on the premise that [the defendant] will not be entitled to litigate its statutory defenses to individual claims.” (Wal-Mart Stores, Inc. v. Dukes (2011) 564 U.S. __, __ [131 S.Ct. 2541, 2561].) These principles derive from both class action rules and principles of due process. (See Lindsey v. Normet (1972) 405 U.S. 56, 66; Philip Morris USA v. Williams, (2007) 549 U.S. 346, 353.)

9.  Classwide liability in misclassification cases is possible, but just got harder:

This is not to say that an employer’s liability for misclassification may never be decided on a classwide basis. A class action trial may determine that an employer is liable to an entire class for misclassification if it is shown that the employer had a consistently applied policy or uniform job requirements and expectations contrary to a Labor Code exemption, or if it knowingly encouraged a uniform de facto practice inconsistent with the exemption.

10. Statistical proof may be allowed to prove damages. However, estimates of damages cannot be based on overtime that was worked by those employees found to be exempt. That alone creates a major impediment to class-wide trials in misclassification cases.

So, I'm sure others will have more to say.  But this is a lot.  Although the Supreme Court's unanimous opinion is not definitive about the use of sampling and statistics for liability, the Court has left only a narrow gap in the door.

This case is Duran v. U.S. Bank Nat. Assn. and the opinion is here.

Cal. Court of Appeal Applies Avoidable Consequences Defense to Discrimination Claim

This case illustrates the benefit of a good internal complaint procedure.  Employers may rely on effective "grievance" or "open door" policies to reduce potential liability, particularly when employees rush to court without first relying on them.

Rosenfeld, a teacher, sued her employer, a school, for age discrimination. She claimed she was forced out by having her hours cut.  However, the school showed there was a decline in enrollment, and that it would have offered her the same hours in the year following her resignation.

At trial, the school argued that Rosenfeld's failure to use the school's internal complaint procedure should work to cut off her damages, based on an "avoidable consequences" theory.   That is a state law defense that says your recovery may be reduced by your failure to reasonably avoid harm.  The California Supreme Court applied this defense to a sexual harassment case (State Dept. of Health Servs. v. Superior Court), rejecting the more employer-friendly federal standard.

Quoting the Supreme Court opinion, the Court of Appeal explained the defense:

State Department of Health Services held “that in a FEHA action against an employer for hostile environment sexual harassment by a supervisor, an employer may plead and prove a defense based on the avoidable consequences doctrine. In this particular context, the defense has three elements: (1) the employer took reasonable steps to prevent and correct workplace sexual harassment; (2) the employee unreasonably failed to use the preventive and corrective measures that the employer provided; and (3) reasonable use of the employer’s procedures would have prevented at least some of the harm that the employee suffered. [¶] This defense will allow the employer to escape liability for those damages, and only those damages, that the employee more likely than not could have prevented with reasonable effort and without undue risk, expense, or humiliation, by taking advantage of the employer’s internal complaint procedures appropriately designed to prevent and eliminate sexual harassment.” (State Department of Health Services, supra, 31 Cal.4th at p. 1044, italics added.)

Here, the Court of Appeal held that the trial court properly admitted the school's defense in the context of a discrimination claim, rather than a harassment claim:

the trial court properly allowed Heschel to present evidence that Rosenfeld failed to pursue the internal grievance procedure which could have prevented at least some of Rosenfeld’s damages. [fn 6] [n.6]As indicated, the evidence showed that shortly after Rosenfeld submitted her letter of resignation, five more teaching hours became available, so that Rosenfeld could have taught 15 hours per week, instead of 10 hours. Therefore, had Rosenfeld pursued the internal grievance procedure, she would have taught the same number of hours during the 2007-2008 school year that she taught the year before.

This opinion also includes a good discussion of the difference between disparate treatment and disparate impact.  The plaintiff tried to try the case based on a "disparate impact" theory, arguing the school's new criteria for evaluating teachers had a disparate impact on older teachers.  But the trial court excluded this effort because the plaintiff had been treating the case as "disparate treatment" - intentional discrimination - all along.   Quoting from a Ninth Circuit decision, Coleman v. Quaker Oats, (9th Cir. 2000) 232 F.3d 1271, The Court of Appeal rejected the argument that a FEHA claim can be proved by either method without any previous notice to the defendant (in the complaint):

allowing the plaintiffs “to proceed with their disparate impact theory after the close of discovery would prejudice [defendant] Quaker. A complaint guides the parties’ discovery, putting the defendant on notice of the evidence it needs to adduce in order to defend against the plaintiff’s allegations. A disparate impact theory, lacking the requirement that the plaintiff prove intent and focusing on statistical analyses, requires that the defendant develop entirely different defenses, including the job relatedness of the challenged business practice or its business necessity. Neither of these are necessary to defend against a disparate treatment theory. This case illustrates the problem. At no time prior to summary judgment did [plaintiffs] identify which facially neutral Quaker employment practice they challenged as having a discriminatory impact. . . . The lack of notice on this issue central to the cause of action makes it difficult, if not impossible, for Quaker to know how to defend itself. After having focused on intentional discrimination in their complaint and during discovery, the employees cannot turn around and surprise the company at the summary judgment stage on the theory that an allegation of disparate treatment in the complaint is sufficient to encompass a disparate impact theory of liability.” (Coleman, supra, 232 F.3d at pp. 1292-1293, italics added.)

This case is Rosenfeld v. Abraham Joshua Heschel Day School, Inc. and the opinion is here. 

Court of Appeal: Employer Not Responsible for Off-the-Clock Work

Kaiser won summary judgment against an employee who claimed he was working off the clock, contrary to Kaiser policy and procedures for reporting time worked.

To recover on a claim for unpaid work time, the employee must prove that the employer knew or should  have known (via the exercise of reasonable care) that the employee was working off the clock. That is called "actual" or "constructive" knowledge.  This court distinguished between "should" have known and "could" have known.  That is, it is not enough for the employee to argue that the employer somewhere had enough data to infer that an employee was working off the clock. Quoting analogous federal authorities interpreting the federal Fair Labor Standards Act, the Court of Appeal explained:

In Forrester v. Roth’s I.G.A. Foodliner, Inc. (9th Cir. 1981) 646 F.2d 413, the court held that “where an employer has no knowledge that an employee is engaging in overtime work and that employee fails to notify the employer or deliberately prevents the employer from acquiring knowledge of the overtime work, the employer’s failure to pay for the overtime hours is not a violation of § 207.” (646 F.2d at p. 414.) “An employer must have an opportunity to comply with the provisions of the FLSA. This is not to say that an employer may escape responsibility by negligently maintaining records required by the FLSA, or by deliberately turning its back on a situation. However, where the acts of an employee prevent an employer from acquiring knowledge, here of alleged uncompensated overtime hours, the employer cannot be said to have suffered or permitted the employee to work in violation of § 207(a).” (Id. at pp. 414-415; see also, e.g., Kellar v. Summit Seating, Inc. (7th Cir. 2011) 664 F.3d 169, 176-178; cf. Brown v. Scriptpro, LLC (10th Cir. 2012) 700 F.3d 1222, 1230-1231.) This qualification was implicitly endorsed by our Supreme Court in a different context (Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 585 [“ ‘ “[T]he words ‘suffer’ and ‘permit’ as used in the statute mean ‘with the knowledge of the employer.’ ” ’ ”]

Here is what the plaintiff-employee testified to:

Jong acknowledged that he “knew of Kaiser’s written policy that OPMs should be clocked in whenever they were working,” that he was always paid for time he recorded on Kaiser’s recording system, including overtime hours, that he was instructed he was eligible to work and be paid for overtime hours, that there was never an occasion when he requested approval to work overtime that was denied and there were occasions when he worked and was paid overtime even though he did not seek pre-approval, that he was not told by any of his managers or supervisors or any other Kaiser management personnel that he should perform work before he clocked in or after he clocked out or otherwise work off-the-clock,1 and that he signed the attestation form and understood it was an attestation that he would not work off-the clock.

The plaintiff tried to get around that testimony by arguing that Kaiser knew he was working off the clock - or should have known - because other employees dong the same job testified that they were working off the clock; sort of "me-too" wage hour evidence.

Agreeing with the trial court, the Court of Appeal held that "me too" evidence was irrelevant:

Under these admitted circumstances, evidence that Kaiser was aware that many OPMs worked more than 40 hours a week before being reclassified would not support a finding that after the reclassification Kaiser knew or should have known that Jong was not correctly reporting his hours.

The Court of Appeal also rejected the plaintiff's argument that Kaiser "should have known" the plaintiff was working off the clock because the "alarm code" records showed he was reporting to work before his shift started, and activated the alarm code long after he punched out.

We again find the trial court’s reason for rejecting the sufficiency of this evidence to be persuasive: “[E]ven assuming that the availability of such data could otherwise meet the ‘should have known’ requirement, as opposed to ‘could have known’ [citation], the alarm data does not show what Jong was doing during the time between disarming the alarm and clocking in, or between checking out and arming the alarm.” While the summary judgment papers may have contained evidence that Jong was working whenever the alarm was off, that information was not before Kaiser when paying Jong and Kaiser could reasonably believe that he did not begin or end work except as he reported.

So, although this case involves an individual employee's summary judgment loss, this case is going to help in class action cases involving off the clock work.  The court will not accept the premise that other employees' testimony that a job took them more than 40 hours to perform proves that it takes more than 40 hours to perform ALL class members' job duties. 

There are good take-aways for employers prevention efforts here, as well.  It is key to have a written policy prohibiting off-the-clock work.  Employers also should have employees acknowledge, in writing, and perhaps under penalty of perjury, that they accurately report hours worked.  It is helpful, too, to have proof of paying overtime when work is reported. 

This case is Jong v. Kaiser Foundation Health Plan, Inc. and the opinion is here. 

Quick Reminder: California Employers Must Update Minimum Wage Posters

The California minimum wage goes up on 7/1/14 to $9.00 per hour.
Get your new poster here.

Remember, the exempt minimum salary for executives, administrative and professional workers will go up to $37,440, or $3120 per month.  So, make sure any exempt employee earning less than those minimums gets a raise!

Have a good holiday weekend!

California Court of Appeal: Certify 'Em All!

The California Supreme Court has to clarify class action standards again.  If there were any doubt, the Court of Appeal's decision in Hall v. Rite Aid, opinion here, seals it.  Strong words, I know.  But read on and you'll see what I mean.

In Hall,  the Rite-Aid cashiers sued because they claim they were denied "suitable seating" under the California wage orders:

Kristin Hall filed this action, on behalf of herself and similarly situated persons, alleging defendant Rite Aid Corporation did not provide seats to employees while the employees were operating cash registers at Rite Aid check-out counters in violation of section 14 of Wage Order 7-2001 (section 14) (Cal. Code Regs., tit. 8, § 11070(14)), promulgated by California's Industrial Welfare Commission (IWC). Section 14 requires an employer to provide employees with suitable seats "when the nature of the work reasonably permits the use of seats." (Cal. Code Regs., tit. 8, § 11070(14)(A).)

Hall moved for class certification arguing the following:

(1) all Cashier/Clerks are covered by the same job description and have similar job duties, including check-out work; (2) on average, Cashier/Clerks spend a 4 majority of their hours working at the register; (3) most check-out work (which largely involves scanning and bagging merchandise, processing payments, and handing the bags and receipt to the customer) can be done while seated, but Rite Aid required its Cashier/Clerks to stand while performing check-out work; and (4) Rite Aid's standard counter configurations could accommodate a seat with minimal modifications.

Rite-Aid pointed out in opposition to class certification:

(1) its stores differed in size, sales volume, number of Cashier/Clerks, and sales counter configurations; (2) when Cashier/Clerks are not performing check-out counter work they are tasked with duties that varied among the stores; and (3) the percentage of time each Cashier/Clerk spent behind the check-out counter varied from 2 percent to 99 percent (with an average of about 42 percent) and the time spent on stockroom or floor duties was equally varied. Rite Aid's evidence also showed that, even when performing duties at the check-out counter, the distance Cashier/Clerks had to move away from the register (to retrieve controlled items such as tobacco and liquor) varied depending on the specific configuration of each store, and they often or very often performed tasks requiring them to lift, bend, twist, lean over, or move around while working at the check-out register. Because of the variety of tasks, 69 percent of surveyed Cashier/Clerks reported they spent at least half their time moving behind the counter, and 31 percent reported they spent at least 3/4 of their time moving behind the counter.

So, do common issues predominate (making class certification appropriate)?  Or do individual issues predominate, making class certification inappropriate?  To answer this question, don't you have to know what the "nature of the work" means under the Wage Order?  You would have to know whether the common issues, if decided in the plaintiff's favor, would lead to victory for the plaintiff, wouldn't you?  For example, don't you need to know whether suitable seating is required even if significant parts of the job involve moving around?

That's what the trial court did. It looked at the term "nature of the work," and decided that the variances in employees duties made it impossible to generalize on a class wide basis.

Specifically, it concluded, contrary to Hall's postulated theory, that section 14 does not mandate the provision of suitable seats when the nature of a substantial task within an employee's range of duties would reasonably permit the use of seats, but instead mandates the provision of suitable seats only when the nature of an employee's work as a whole would reasonably permit the use of seats. Based on that construction of section 14, the trial court concluded decertification was proper because individual issues as to each class member's "job as a whole" would predominate over common questions.

Wrong, said the Court of Appeal.

Our review of Brinker, which is binding on this court (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450), compels the conclusion the trial court erroneously based its decertification order on its assessment of the merits of Hall's claim rather than on the theory of liability advanced by Hall.

The Court went even further:

Rite Aid asserts the trial court properly reached the merits of (and correctly rejected) Hall's theory of liability when it ruled on the decertification motion because Brinker cannot be read to permit a plaintiff to "invent a class action by proposing an incorrect rule of law and arguing, 'If my rule is right, I win on a class basis.' "

* * *

We read Brinker to hold that, at the class certification stage, as long as the plaintiff's posited theory of liability is amenable to resolution on a class-wide basis, the court should certify the action for class treatment even if the plaintiff's theory is ultimately incorrect at its substantive level, because such an approach relieves the defendant of the jeopardy of serial class actions and, once the defendant demonstrates the posited theory is substantively flawed, the defendant "obtain[s] the preclusive benefits of such victories against an entire class and not just a named plaintiff." (Brinker, supra, 53 Cal.4th at pp. 1034, 1033.) For these reasons, Brinker has concluded "[i]t is far better from a fairness perspective to determine class certification independent of threshold questions disposing of the merits, [because] defendants who prevail on those merits, equally with those who lose on the merits" (id. at p. 1034) have the benefits of their substantive legal victory applied to the class as a whole.

So, the Court of Appeal now held that trial courts must rely virtually exclusively on whether the plaintiff's "theory" presents common questions.  But a class action is not a lawsuit to prove a plaintiff's theory.  It's a lawsuit to prove something illegal happened to a group.   As the U.S.  Supreme Court put it in the Wal-Mart v. Dukes case,

That common contention, moreover, must be of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

Frankly, the California Supreme Court in Brinker also did not go as far as the Court of Appeal in Hall.  In Brinker, the Supreme Court recognized:

Presented with a class certification motion, a trial court must examine the plaintiff's theory of recovery, assess the nature of the legal and factual disputes likely to be presented, and decide whether individual or common issues predominate. To the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them.

The Hall court even quoted this language - repeatedly - but appeared to have ignored its significance.

Let's put the Hall court's holding into practice with a (rather extreme) example:  Let's say a plaintiff files a class action that alleges:   the Defendant law firm has a policy of requiring its lawyers  to wear red ties. Therefore, the law firm  misclassified the lawyers as exempt from overtime.  Under the Hall decision, the class must be certified, because under the plaintiff's "theory," the red-tie policy is common to all members of the class and can be resolved on a class wide basis.  True, but answering that common question proves nothing. The red-tie policy will not determine the employees' exempt status.  Lawyers are exempt because they are licensed professionals.  The legal standard for who is exempt does not take into consideration tie color.  Therefore, red ties and the policy requiring them to have red ties are common, but have no bearing on the relevant legal issue.

Four thoughts. First, the Court of Appeal's theory is an abdication of the trial court's role to protect defendants from unmeritorious class actions as a gatekeeper.  Certify now, ask questions later is no way to ensure due process.  When certification happens, cases settle out of fear.

Second, the Court of Appeal's suggestion that defendants can rely on summary judgment motions and motions for judgment on the pleadings to defeat unmeritorious class actions is cold comfort.  Anyone who litigates in state court lastly knows that the odds of winning summary judgment are low, even in the best of cases  And losing summary judgment is not appealable.  If there's anything less likely than winning summary judgment, it is obtaining writ review of summary judgment rulings.  Perhaps the courts of appeal will consider more writs. But that remains to be seen.  As for judgment on the pleadings, they are based on the four-corners of the complaint.  The plaintiffs' bar is capable of developing a complaint that will survive a motion for judgment on the pleadings.

Third thought:  Easy certification means that attorneys' fees for class actions will climb precipitously, as will employer commitment to discovery and depositions. Depending on how the Supreme Court rules in the upcoming Duran case, class action litigation may end up focusing on expert witnesses and motions for summary judgment. Or mediation.

Fourth thought:  When the legal theory is frivolous, despite the commonality of factual issues, Defendants will have to strongly consider motions for sanctions under Civ. Proc. Code section 128.7 to stop class action claims that simply have no substantive merit.  Those motions are granted less frequently than summary judgment motions.  But perhaps when the stakes are this high, superior courts will begin taking these motions more seriously.

So, I know this is a long post, but if your company or clients face class actions, this case is a game-changer.  Perhaps the Supreme Court will take it up. I'm hoping Rite-Aid is preparing its Petition for Review.

DGV

Court of Appeal: Arbitrator Can Decide Unconscionability

Here's a case that could favor employment arbitration in California.  If it stays on the books.  The Court of Appeal held that an arbitration agreement lawfully delegated to the arbitrator the responsibility to determine if the arbitration agreement was enforceable.  That is, the arbitrator, not the court, would decide if the agreement is unconscionable.

In a nutshell, as stated by the Court:

Several years after she was hired, Lourdes Tiri signed an agreement with her employer, Lucky Chances, Inc., requiring disputes between them to be resolved by arbitration. In one of the provisions, the parties agreed to delegate questions about the enforceability of the agreement to the arbitrator, instead of a court. Tiri was subsequently fired, and she filed a complaint in superior court for wrongful discharge. Lucky Chances petitioned to compel arbitration, but the trial court denied the petition on the basis that the arbitration agreement was unconscionable and therefore unenforceable.

Lucky Chances appeals the court’s order denying arbitration. We hold that the trial court lacked the authority to rule on the enforceability of the agreement because the parties’ delegation of this authority to the arbitrator was clear and is not revocable under state law. Accordingly, we reverse.

What-what-what?  Read on.

The arbitration agreement contained this language:

The agreement also includes an explicit provision that delegates to the arbitrator issues regarding the agreement’s enforceability: “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.” 

As the court noted, that is a delegation clause, which grants the arbitrator the jurisdiction to determine  whether the arbitration agreement is enforceable.  In the absence of that sort of clause, a court determines whether there is a valid agreement, including whether the agreement is "unconscionable."
As you know if you're reading this, in California, there is a lot of litigation in court over that issue.

Here's why the delegation clause is important. The trial court denied the employer's motion to compel arbitration?  Why?  1) the agreement was "take it or leave it," i.e., procedurally unconscionable and 2) the employer did not attach the AAA arbitration rules, even though it cited the website where they must be found.  Those two facts rendered the agreement "unconscionable," a word that has been stretched into meaninglessness.  It used to mean something like "so one-sided as to shock the judicial consciousness," but now it simply means "not exactly perfect."

The court of appeal made some important rulings. First, the court recognized its decision would be the same under California's or the federal arbitration acts.  Second, the court explained that the court may consider challenges to the delegation clause itself, but not to the enforceability of the agreement to arbitrate as a whole.

Third, the court explained that a delegation clause is enforceable if (1) it is clear and unmistakable (2) if the clause itself is not void because of some defense applicable to any contract (fraud, duress, unconscionability).

The court found the language above was clear and unmistakable.  The employee argued that the clause was unconscionable.  The court of appeal found it was procedurally unconscionable (because it was "take it or leave it.").  But the court also found no reason that a delegation clause automatically is substantively unconscionable.  And there was nothing about this delegation clause that rendered it one-sided or non-mutual. Therefore, it was not unconscionable as a whole.

Of course, the arbitrator is free to rule on whether the agreement as a whole is unconscionable. So, there may still be litigation over such agreements. But they will be in arbitration.  If this ruling stands, it will certainly make arbitration agreements easier to enforce without court litigation.

This case is Tiri v. Lucky Chances, Inc. and the opinion is here.