Employment Class Action Blog - Information and Commentary on Employment Class Action Cases Affecting Employers

Introduction

In April 2010, Stephanie Sutherland (“Sutherland”) filed a putative class action against Ernst & Young under the Fair Labor Standards Act (“FLSA”) and New York law claiming that low-level accountants were improperly deprived of proper compensation for time worked in excess of 40 hours per week.

Ernst & Young filed a motion to dismiss or stay the proceedings and to compel arbitration of Sutherland’s claims on an individual basis under the Company’s dispute resolution procedure.  Ultimately, District Judge Kimba Wood, relying on the Second Circuit’s decisions in Italian Colors Rest. v. Am. Express Travel Related Servs. Co. (“AMEX”) (the three AMEX decisions are discussed extensively in a March 5, 2013 article), denied Ernst & Young’s motion to compel because “the enormous costs and fees attendant to prosecuting her claim on an individual basis would effectively prohibit her from bringing suit at all.”  The Sutherland case illustrates how a relatively modest wage and hour dispute can be portrayed as one requiring extensive attorneys and expert fees, only suitable for class handling.

The Second Circuit Appeal

An appeal resulted (Case No. 12-304), and in June 2012 the Equal Employment Opportunity Commission and Secretary of Labor filed an Amicus Brief supporting Appellee Sutherland in the Second Circuit.  The brief argued:

 (1) That Sutherland submitted undisputed evidence that she was unemployed, owed $35,000 in student loans and had no savings.  Further, her attorney submitted a declaration stating that litigating whether junior accountants like Sutherland were exempt from the FLSA would cost over $160,000 in fees, plus arbitration costs of $6,000 and expert testimony of more than $33,500.

(2) That expert witnesses testimony “can be useful in some FLSA cases to determine whether a statutory exemption applies, and . . . the Secretary and courts have relied on expert testimony in such cases.”

(3) That Ernst & Young’s stipulations to pay costs and attorneys’ fees were insufficient because it was unclear if expert witness fees would be covered and that the Company stipulated to pay costs and fees only if Sutherland prevails.

But, under AMEX I, according to the Amici, Sutherland “must include the risk of losing and thereby not recovering any fees, in [her] evaluation of [her] suit’s potential costs.”  See AMEX I, 554 F.3d 300, 318 (2009).  Hence, the Amici concluded that “Sutherland’s inability to advance substantial costs, . . . the [unwillingness] of her attorneys . . . to invest large amounts of potentially uncompensated time in a case where the Plaintiff has plausible claims . . . mean that Sutherland cannot effectively vindicate her FLSA rights by suing individually.”  (Amicus Brief at 13).

The E & Y Response

Ernst & Young filed its response to the Amicus Brief on March 7, 2013.  In that response the Company first noted that Amici do not argue that the FLSA creates a substantive right to proceed as a class.  (E&Y Response at 1).  Next, the Company attacked the argument that arbitration would be cost prohibitive.  Indeed, it pointed out that Sutherland would be fully compensated for all her alleged fees and costs, even those relating to unidentified (and perhaps unnecessary) expert fees based on its prior express stipulation. 

Then, Ernst & Young attacked the underpinnings of the Amici’s arguments one by one. The Company pointed out that, as the District Court recognized, it would pay all arbitration-related costs.  The expert fees were challenged next.  While Amici relied on $33,500 in expert fees they offered no rationale why those fees were needed.

The Amici termed experts “useful” in some FLSA cases not “necessary” in the Sutherland case.  And, in the AMEX decision the Appellate Court found that “substantial expert witness costs” were “necessary” to prove the individual anti-trust tying claims.  AMEX III, 667 F.3d 204, 218 (2012).  Ernst & Young also pointed out that none of the FLSA cases cited by the Amici considered that the expert evidence was “necessary.”  Sutherland’s proper classification “will be determined ‘by examining [her] actual job characteristics and duties’ not by expert analysis.”  (E&Y Response at 4).

The need for the “risk of losing” consideration, was also challenged by the Company.  Amici argued that even if Sutherland recovered all her fees and costs it was insufficient because she also had to consider the fact that one might lose.  Ernst & Young responded that this AMEX III dicta did not overturn established authority holding that statutory fee shifting provisions enable a plaintiff to secure representation even when the potential recover is small.  Attorneys do pursue individual wage and hour claims seeking a modest monetary recovery because of such fee shifting.

And, her attorney’s declaration stating that he would not represent her in an individual action is insufficient to avoid a class waiver.  If not, according to the Company, “virtually any plaintiff, in any type of case, could assemble a similar record and avoid arbitration.”  (E&Y Response at 6).  AMEX does not permit avoidance of class action waiver “’simply by manufacturing an affidavit or choosing pricey attorneys’ or engaging unnecessary experts”.  Id.  Reading AMEX that broadly would nullify the purpose of the Federal Arbitration Act (“FAA”), to “ensur[e] that private arbitration agreements are enforced according to their terms”.  AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1748 (2011).

In the final analysis, the Sutherland case most aptly illustrates the cost, delay and manipulation that can surround the application of the effective vindication of federal rights doctrine.  These ramifications can eliminate any certainty in the application of an arbitration agreement, run counter to the intent of the FAA and second guess the legislative wisdom in enacting fee shifting provisions.  All these concerns likely will be addressed in the U.S. Supreme Court’s Opinion in the AMEX case itself which was argued on February 27, 2013.

The Bottom Line:

The Sutherland case illustrates how even a modest employment case can be impacted by the “effective vindication of rights” doctrine.  Each case can result in a threshold inquiry into claims and related costs where plaintiff’s counsel, experts and judicial analysis can dictate varying results.  Thankfully, some guidance likely will come from the U.S. Supreme Court’s upcoming AMEX decision.

While there were no blockbuster cases in 2012 in the league of 2011’s Concepcion and Dukes decisions, it was still an eventful year.  The Supreme Court accepted its first case under the Class Action Fairness Act (“CAFA”), lower courts and the NLRB continue to address class action waivers, and many courts have grappled with issues relating to Dukes’ fallout.   Important decisions have been handed down relating to issue certification, approval of settlements, the use of experts, cy pres funds, California employment law, and offers of judgment.

While many of these cases are not strictly employment actions, their impact is keenly felt in class actions arising out of the workplace.  These decisions, and commentary on trends, are all discussed in the BakerHostetler 2012 Year-End Review of Class Actions.  The Review is a joint project of the firm's Employment Class Action, Class Action Defense, Antitrust, Data Privacy, and practice teams and is the fruit of collaborative efforts of numerous attorneys from across the firm.  Credit for putting it all together goes to Denver Partner Paul Karlsgodt, whose own excellent class action blog can be found at classactionblawg.com.

You can access an electronic version of the BakerHostetler 2012 Class Action Year End Review by clicking on this link.  If you would like a hard copy, please email us and we would be happy to send one to you.

Authored by: Ericka Spears

Much like a war where each side steadily amasses victories and defeats, the federal courts and the National Labor Relations Board (NLRB) continue to have diverging opinions on the enforceability of class action waivers in arbitration agreements.

Federal courts have won the most recent battle in the war. In Owen v. Bristol Care, Inc., No. 12-1719, 2013 WL 57874 (8th Cir. Jan. 7, 2013), the Eighth Circuit held that class action waivers are enforceable in Fair Labor Standards Act (FLSA) cases, and became the first court of appeals to explicitly reject the National Labor Relations Board’s (NLRB’s)  stance against class waivers in the employment context as established in  In re D. R. Horton, Inc., 357 NLRB No. 184,2012 WL 36274 (N.L.R.B. Jan 03, 2012), appeal pending, No. 120600031 (5th Cir.  Jan. 13, 2012) (oral argument is scheduled for February 5, 2013), which held that class action waivers violated employees’ rights to engage in protected concerted activity under Sections  7 and 8(a)(1) of the National Labor Relations Act (NLRA).

The Owen Decision

In 2009, Bristol Care, Inc. hired Sharon Owen as a nursing home administrator.  Both parties signed a Mandatory Arbitration Agreement in which they agreed to resolve all claims or controversies, including claims arising from the FLSA, by binding arbitration.  The agreement also contained a class action waiver prohibiting parties “from arbitrating claims subject to [the] Agreement as, or on behalf of, a class.” The agreement, however, did not waive the right to file a complaint with a federal, state or local agency designed to investigate statutory violations or similar claims. 

In September 2011, Owen initiated an action against Bristol Care, alleging that her employer intentionally misclassified her and other similarly situated individuals as exempt employees in order to avoid paying proper overtime compensation under the FLSA.  In response, Bristol Care moved to stay district court proceedings and compel arbitration in accordance with the agreement and the Federal Arbitration Act (FAA).

The District Court in Owen v. Bristol Care, Inc., NO.11-04258-CV-FJG, 2012 WL 1192005 (W.D. Mo. Feb 28, 2012), denied the motion to compel arbitration, holding that class action waivers are invalid in FLSA cases because the FLSA provides for the right to bring a collective action.  In reaching this conclusion, the Court distinguished the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which upheld the enforceability of a class action waiver in a consumer contract, stating that the holding was not controlling in an employment context.  Instead, the District Court relied on the NLRB’s decision in D.R. Horton and the Southern District of New York’s decision in Chen-Oster v. Goldman, Sachs & Co., 785 F. Supp. 2d 394, 398-408 (S.D.N.Y. 2011), stating that “[i]n the employment context, waivers of class arbitration are not permissible.”

On appeal, the Eighth Circuit Court of Appeals reversed the District Court’s ruling and held that mandatory arbitration agreements containing class action waivers are valid and enforceable in cases arising under the FLSA.   The appeals court stated several reasons for their reversal including:

• The Supreme Court’s decision in Concepcion applies to employment as well as consumer cases.
• Nothing in the text or legislative history of the FLSA indicates a congressional intent to bar employers and employees from agreeing to arbitrate FLSA claims.
• The FAA created a strong public policy in favor of arbitration and nothing in the FLSA overrides this.
• Unlike the agreement in D.R. Horton,   the agreement did not bar all concerted action—under the agreement employees had the right to file a complaint with administrative bodies such as the U.S. Department of Labor or Equal Employment Opportunity Commission.
• The Court declined to defer to the NLRB’s interpretation of Supreme Court precedent and stated that the NLRB did not have special competence or experience in interpreting the FAA.
• The conclusion that class action waivers are enforceable is consistent with two decades of Supreme Court precedent and the majority of federal courts that have ruled on this issue.

Federal Courts:  Class Action Waivers in Arbitration Agreements Are Enforceable

The Eighth Circuit has many allies that oppose the NLRB’s holding in D.R. Horton. The general trend among federal courts at all levels is that class action waivers in arbitration agreements are enforceable.

Courts of Appeal in the Third (Vilches v. The Travelers Companies, Inc., 413 F. App’x  487 (3rd Cir. 2011)), Fourth (Adkins v. Labor Ready, Inc. , 303 F.3d  496 (4th Cir.  2002)), Fifth (Carter v. Countrywide Credit Industry, Inc., 362 F.3d 292 (5^th Cir 2004)), Ninth (Horenstein v. Mortgage Market, Inc. , 9 F. App’x 618 (9^th Cir. 2001)), and Eleventh Circuits (Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11^th Cir. 2005)) have concluded that arbitration agreements containing class waivers are enforceable in FLSA cases.  However, since these cases pre-date D.R. Horton, the Eighth Circuit in Owen was the first federal court of appeals case to directly refuse to follow the NLRB’s ruling in D.R. Horton.

Similarly, a majority of federal district courts, including those in New York (LaVoice v. UBS Financial Services, Inc., NO. 11 CIV. 2308 BSJ JLC,  2012 WL 124590 (S.D.N.Y.  Jan. 13, 2012); Cohen v. UBS Financial Services, Inc., NO. 12 CIV. 2147 BSJ JLC, 2012 WL 6041634 (S.D.N.Y. Dec . 4, 2012)), California (Morvant v. P.F. Chang's China Bistro, Inc., 870 F. Supp. 2d 831 (N.D. Cal. 2012); Reyes v. Liberman Broadcasting, Inc., 146 Cal. Rptr. 3d 616 (C.D. Cal. 2012); Swift Transp. Co. of Ariz., LLC, No. 10-cv-03739, 2012 WL 523527 (N.D. Cal. Jan. 17, 2012)); Johnmohammadi v. Bloomingdales, Inc., No. CV 11-6434 (C.D. Cal. Feb. 23, 2012)), Arkansas (Delock v. Securitas Sec. Services USA, Inc., NO. 4:11-CV-520-DPM, 2012 WL 3150391 (E.D. Ark.  Aug 1, 2012)), Florida (De Oliveira v. Citicorp North America, Inc., NO. 8:12-CV-251-T-26TGW, 2012 WL 1831230 (M.D. Fla. May 18, 2012)), Kansas (Spears v. Mid-America Waffles, Inc., NO. 11-2273-CM, 2012 WL 2568157 (D. Kan. Jul 02, 2012)), Pennsylvania (Tenet HealthSystem Philadelphia, Inc. v. Rooney, NO. CIV. A. 12-MC-58, 2012 WL 3550496 (E.D.Pa. Aug. 17, 2012); Brown v. Trueblue, Inc., NO.  1:10-CV-0514, 2012 WL 1268644 (M.D. Pa. Apr. 16, 2012)), Texas (Carey v. 24 Hour Fitness USA, Inc., Civil Action No. H–10–3009, 2012 WL 4754726 (S.D. Tex. Oct.4, 2012); Johnson v. TruGreen Ltd. Partnership, Cause No.  A-12-CV-166-LY (Oct. 25, 2012)), and Georgia (Palmer v. Convergys Corp.,No. 7:10-CV-145 HL, 2012 WL 425256, at *3 (M.D. Ga. Feb. 9, 2012)), have expressly declined to follow D.R. Horton, repeatedly observing that the NLRB’s ruling conflicts with Supreme Court precedent.

California state courts have also expressly rejected D.R. Horton, as in Truly Nolen of America v. Superior Court,  208 Cal. App. 4th 487 (Cal. App. 4 Dist. 2012), and Nelsen v. Legacy Partners Residential, Inc., 207 Cal. App. 4th 1115 (Cal. App. 1 Dist. 2012).

And, most recently, the United States District Court of Appeals for the District of Columbia  determined that President Obama’s recess appointments in January 2012 were illegal. Therefore the NLRB has not had a working quorum since the end of Member Becker’s term at the end of December, 2011, and  its decisions since then have been invalid.  See Noel Canning v. NLRB – F.3d. – (D.C. Cir. 2013). This ruling places D.R. Horton in doubt and the issue may ultimately be determined by the U.S. Supreme Court.

NLRB:  Class Action Waivers in Arbitration Agreements are Unenforceable

Despite the wave of attacks from the federal courts, the NLRB continues to fight back and apply its holding in D.R. Horton, striking down the use of class action waivers as unfair labor practices.  The NLRB has upheld and extended D.R. Horton in Administrative Law Judge Opinions (24 Hour Fitness USA, INC. and Alton  J. Sanders, NO. 20-CA-035419, 2012 WL 5495007 (N.L.R.B. Div. of Judges Nov 06, 2012); Convergys Corporation  and  Hope Grant, NO. 14-CA-075249, 2012 WL 5494972 (N.L.R.B. Div. of Judges Oct 25, 2012); Advanced Services, Inc., NO. JD(ATL)-16-12,2012 WL 2562584, *1+ (N.L.R.B. Div. of Judges July 2, 2012)); a NLRB Board Decision ( SUPPLY TECHNOLOGIES, LLC AND TEAMSTERS LOCAL 120, 359 NLRB 1 (N.L.R.B. Dec.  14, 2012)); and in a General Counsel Memorandum  (Concord Honda, 2012 WL 5942369 (N.L.R.B.G.C. 2012)). 

In addition to the NLRB’s rulings, there are a minority of federal district courts that share the view that class action waivers are unenforceable and could be potential NLRB allies.  For example, in Herrington v. Waterstone  Mortg. Corp., NO.11-CV-779-BBC, 2012 WL 1242318 (W.D. Wis. Mar 16, 2012), the district court  applied D.R. Horton to strike down a class action waiver in an arbitration agreement stating that it violated the NLRA and distinguished the Concepcion decision as not being controlling. Pre D.R. Horton, in Raniere v. Citigroup, Inc., 827 F. Supp. 2d 294 (S.D.N.Y. 2011), the court held FLSA class action waivers unenforceable as a matter of law.  Most recently, in Ryan v. Event Operations Group, Inc., No. 2:12-cv-0070-MHH (N.D. Ala. Jan. 7, 2013), the judge opined that a written arbitration clause that encompassed the plaintiffs’ FLSA claims would not be enforceable.

Bottom Line:  The law regarding the enforceability of class action waivers in arbitration agreements is still in flux, and federal courts will continue to enforce the same arbitration agreements that the NLRB would strike down. 

Co-authored by Dustin M. Dow

A familiar debate involving alternative methods of statutory interpretation erupted again at the Supreme Court on Monday, January 7, 2013.  The debate unfolded in The Standard Fire Insurance Company v. Knowles, No. 11-1450, a case that could have a significant impact on the business community that has benefitted from several recent class action rulings by the Court. 

Standard Fire will be the latest installment in the Court’s developing class action jurisprudence, and Monday’s oral argument suggests that it could produce an interesting majority when the decision is issued sometime before July.  Moreover, the potential effect of the decision was underscored by Justice Kagan in a remark to Theodore J. Boutrous, attorney for Standard Fire, near the end of oral arguments.  “Then you really are asking us to blow up the whole world,” Justice Kagan said in response to Boutrous’ contention that putative class action representatives should not be able to defeat federal court removal jurisdiction by stipulating to an artificially low set of damages below the threshold for federal court jurisdiction.

Whether Standard Fire succeeds in “blow[ing] up the whole world”, depends on how a majority of the Court views the class action world and one of the statutes governing it, the Class Action Fairness Act of 2005 (CAFA).  The oral argument suggested that perhaps a reluctant majority of six or seven justices may be inclined to side with Standard Fire in order to stem plaintiffs’ allegedly repeated artificial bypasses of CAFA’s rules.  Yet the argument also revealed that no Justice is having an easy time resolving the conflict between statutory text and its purpose, as expressed in the legislative history.

Neither party disputed that the primary purpose of CAFA was to stop perceived class action abuses.  The statute targeted plaintiffs’ attorneys who artfully drafted class actions to prevent removal to federal court.  One of CAFA’s primary reforms involved a provision that provided federal removal jurisdiction so long as the aggregate claims of class plaintiffs surpassed $5 million.  Under CAFA’s removal provision, a defendant facing class action liability in a plaintiff-friendly state court venue could remove the case to federal court where the rules governing class actions will be more uniformly and fairly applied.  But, CAFA does not expressly prohibit plaintiffs’ attorneys from stipulating to damages of less than $5 million, which was the tactic the Standard Fire plaintiffs used to defeat federal removal jurisdiction, even though the stipulation is not binding on absent class members.  According to Boutrous, plaintiffs’ lawyers were “slicing and dicing the classes up into pieces to thwart jurisdiction and manipulate jurisdiction.” 

Even if Boutrous’ arguments are accurate, the Court will have to decide if such manipulation under CAFA is permissible.  Resolving the difference between what CAFA says and what it means will require the Justices to engage in a struggle they’d rather not have: whether to defer to the actual text of the statute or to allow the legislative history behind the statute to close what Justice Breyer termed a strategic “loophole because it swallows up all of Congress’ statute.”

For a court that has been concerned with reforming class action law in recent years, the prospect of taking another step in the same direction may be attractive.  It will nonetheless be fraught with the peril of elevating the statutory purpose above text.  After all, as Justice Kagan noted, “usually we look to the text and the text makes very clear that Congress was concerned about many things,” but the CAFA text “did not eliminate the . . . master of the complaint rule,” which would allow plaintiffs to stipulate to an artificially low level of damages.  Chief Justice Roberts acknowledged as much, but seemed willing to explore the legislative history of CAFA. “It’s very difficult to speculate about Congress . . . about what they would have intended,” he said to Knowles attorney David C. Frederick.  But “they may not have thought about the idea that there will be class actions worth a lot more than $5 million, but the plaintiff’s lawyer will only ask for less than $5 million.” The potential for abuse was substantial Justice Roberts said, because a permissible damages stipulation “gives extraordinary leverage to the individual class representative – precisely the sort that Congress was worried about.”

Signaling some agreement with Justice Roberts’ position, Justice Breyer pressed Frederick to justify why a jurisdiction-defeating stipulation that would not actually be binding on absent class members was anything but a “way around” CAFA whose “purpose seems to strongly cut the other way.”  When Frederick responded that “Congress could have addressed any number of those kinds of issues” but didn’t, Justice Kennedy jumped in and accused him of trying to “evade the statute.”

It is perhaps a reflection of the tension in the courtroom that the Justices accused one side of the debate of “evad[ing] the statute” and the other side of wanting to “blow up the whole world.” No clear answer emerged at the end of the argument, except that a majority of the Justices seemed intrigued by the potential of adhering to Congressional purpose even if it meant resorting to legislative history.  On the other side was Justice Kagan, emphasizing a textual approach that would result in preserving the status quo in class action law.

The Bottom Line:

The Supreme Court is deciding whether a party can stipulate to an amount in controversy less than $5 million to avoid CAFA removal.  The case embodies the on-going interpretative conflict between analyzing the text of a statute versus the intent of the law.  CAFA’s rich legislative history reveals an intent to eliminate manipulative tactics used by plaintiffs’ counsel to defeat CAFA removal.  If the Court gives voice to CAFA’s intent, the resulting decision could dramatically alter class action jurisprudence.

The “frappe” button on a blender is useful for all kinds of recipes when you want to mix things up, but it, until now, has not been considered a viable rule of statutory construction.

We’ve written before (previous post) about Title VII’s structure and, to a degree, its legislative history. The statute provides a number of tools to address different types of discrimination, and Congress very specifically spelled out what type of claim could be brought and under what circumstances. These legislative decisions were also bound up on Congress’s view that the EEOC was to work first by informal efforts at conciliation and that different means of proof called for different handling and remedial schemes.

The EEOC does have different tools at its disposal. Under section 706 of Title VII, it can bring a garden-variety claim of discrimination and recover extensive remedial relief and damages (up to Title VII’s caps), including on a class-wide basis. Under section 707, the EEOC can bring a “pattern or practice” claim if it can show that the employer’s “standard operating procedure” was to discriminate. See Teamsters v. United States, 431 U.S. 324 (1977). The upside (for the EEOC) is that in a section 707 case, the Commission can shift the burden of proof to the employer to prove that it did not discriminate in a given situation. The downside is that there are more limited damages, and the case is tried to a court, not to a jury.

Yes, the scheme forces the EEOC to make a choice, but it is one that Congress made and reflects careful choices in the methods of proof and the available damages. The “pattern or practice” claim does ease the burden of proof for the purposes of equitable relief, but since the Commission is being relieved of its obligation to prove that a given individual was the subject of a given discriminatory decision, it also makes sense to limit relief. The relief provided, incidentally, still includes panoply of equitable remedies. Of course, given Title VII’s emphasis on informal efforts to conciliate, having the different schemes also aids the conciliation process by requiring the EEOC to find and discuss the alleged pattern or practice with the employer before filing suit.

But wouldn’t it be much easier, if you were the Commission, just to throw the two claims into a blender and to use the best of each? Some courts have examined Title VII and have determined that it cannot. See our related post from June 15, 2012.

Last week, a divided Sixth Circuit demoted “pattern or practice” claims to a mere “standard of proof” and held that it can. In Serrano v. Cintas Corp.pdf., Case. No. 10-2629/11-2057 (6th Cir. Nov. 9, 2012), the EEOC did try to assert both claims under section 706, as well as class-type claims, in a generally vague complaint. It asserted that uniform supplier Cintas discriminated against women in its sales positions. The district court held that the Commission could not bring a pattern or practice claim under the rubric of section 706 and ultimately granted summary judgment for the employer.

The Sixth Circuit panel consisted of two Sixth Circuit judges and one senior judge from the Ninth Circuit. The court issued a 2:1 decision reversing the district court with one Sixth Circuit judge, Karen Moore, writing the majority opinion and the other, Julia Gibbons, dissenting.

For such a difficult issue, the case presented less than pristine facts. First, of course, the district court’s finding that there was no sufficient evidence that discrimination even took place as to the individual claimants suggests strongly that there was no “pattern or practice.” “Pattern or practice” evidence, proof that the employer operates under a general practice of discrimination, would very likely result in there being a question of fact on the individual claims as well, yet even the majority opinion identified no such evidence. There were also serious questions as to whether the Commission had adequately pleaded a pattern or practice claim, an issue that would have caused the dissent to affirm. In light of its decision, the majority ordered additional discovery, including possibly the defendant’s CEO, but in doing so the majority violated the Sixth Circuit Rule not to rely upon unpublished decisions, as it also did with respect to its underlying holding that a pattern or practice claim could be pursued under section 706.

The Serrano decision is troublesome and will simply make the defense of traditional Title VII claims more difficult and expensive. Given the conflict among the courts, at some point this issue may call for Supreme Court review.

The Bottom Line: The Sixth Circuit has held that the EEOC may pursue pattern or practice theories under section 706 of Title VII.

We’ve commented in this blog before about the Sixth Circuit’s holdings regarding retiree healthcare under collective bargaining agreements.  Starting with the case of UAW v. Yard-Man, Inc., 716 F.2d 1476 (6^th Cir. 1983), the Sixth Circuit began to apply an “inference” that collectively bargained retire welfare benefits, primarily paid health insurance, would “vest” and would survive the clear expiration of the agreement.  Since that time, the Sixth Circuit has published many decisions in favor of the retirees and vesting, but very few in favor of the employer.  Just such a case has now been decided and should be of use to Sixth Circuit employers.

In Witmer v. Acument Global Technologies, Inc.pdf., Case No. 11-1793 (6^th Cir. 2012), the company provided paid health insurance to its retired employees pursuant to a series of collective bargaining agreements.  These benefits were contained in an appendix to the contracts that contained a reservation of rights clause, a not uncommon arrangement.  In 2008, the last collective bargaining agreement expired and the employer discontinued providing the benefits.  A class of 64 retirees brought suit, contending that the benefits had vested under Yard-Man, but the district court granted summary judgment in the employer’s favor.

In a rare published pro-employer decision, the Sixth Circuit affirmed.  The court found that the plaintiffs were relying on an appendix that itself contained disclaimer language and could not meaningfully divorce that language from their claims.  Of equal significance, the court rejected much of the routine evidence used by plaintiffs in Yard-Man cases.  Perhaps most importantly, the court found that in light of the disclaimer, the contract was unambiguous and thus the plaintiffs could not rely upon extrinsic evidence, the core of virtually every garden-variety Yard-Man claim. 

The court also limited some of its prior rules of construction such as the plaintiffs’ argument that the benefits were “vested” because they were “tied” to pension benefits.  The court actually turned that rule against the plaintiffs, finding that limits on other types of retiree benefits also suggested that health insurance benefits did not vest.

Particularly in the wake of the decision two weeks ago in Reese v. CNH America LLC., Case Nos. 11-1359/1857/1969 (6^th Cir. Sept. 13, 2012), employers in the Sixth Circuit may have greater flexibility to make changes to collectively bargained retiree health insurance benefits than they had only a few months ago.

The Bottom Line:  The Sixth Circuit has now upheld the use of disclaimer language, at least in some contexts, to change or eliminate retiree health insurance benefits in the collective bargaining context.

One of the primary catalysts for class action litigation both in the employment context and outside of it is the availability of attorney’s fees.  In many cases, plaintiffs can recover their “reasonable” attorney fees, and predictably fees are frequently a key topic in settlement negotiations. So, what is a “reasonable” attorney fee award?  Many courts permit a percentage of the total recovery in so-called “common fund” settlements in which the settlement creates a pool of money to pay claims, administrative costs, and attorney fees.

In McKenzie v. Federal Express Corp.pdf., Case No. CV 10-02420 GAF (PLAx) (C.D. Cal. July 2, 2012), the plaintiffs brought a California wage and hour claim against FedEx, contending that its wage statements did not comply with the requirements of California Labor Code 226(a).  That provision of the California spells out what the information that a paystub must contain.  The trial court granted summary judgment against the defendant, finding that its wage statements were overly confusing, and triggering penalties under California law.  The parties settled the case for $8.25 million, and the plaintiffs’ attorneys sought 1/3 of that amount in attorney fees.

According to the court, the plaintiffs’ attorneys spent slightly over 1,000 hours on the case at rates between $550 and $600 an hour.  The total fee on an hourly basis would have been $640,695.  One-third of $8.25 million, the amount the attorneys sought, is $2,749,725.

The court was generally underwhelmed by the by the difficulty of the case, and found that the amount sought was excessive.  It found that a 25% contingency was the “benchmark” in the Ninth Circuit in common fund cases, and, absent any genuine reason to depart from it, the court trimmed the award from 33% to 25% or to  $2,062,500. 

The award was less than the amount sought, but still came to something in the neighborhood of $1,500 per hour on a case that, at least according to the court’s rulings, presented little risk to the attorneys. 

The common fund theory was developed in equity, but one might genuinely question why it continues to apply in employment context, as well as in many others. 

Just two years ago, in Purdue v. Kenny A., 130 S. Ct. 1662 (2010), the United States Supreme Court considered a fee award in a class action civil rights case under 42 U.S.C. section 1983. The Kenny A. case involved a class of children in state-sponsored foster care. The court re-affirmed that under federal fee-shifting statutes, a reasonable fee is a lodestar amount, meaning a reasonable hourly rate times a reasonable number of hours.  Indeed, according to the Court, there is a “strong presumption” that the lodestar calculation is the correct one.  Only when, according to the Court, there are “rare” or “exceptional” circumstances should that amount be increased. 

One could question whether a common fund theory should be permitted to override what the court described as a “strong” presumption that the correct figure is essentially a reasonable hourly rate times the time reasonably expended.  Even before Purdue, the Second Circuit affirmed a lodestar award in Arbor Hill v. County of Albany, 522 F.3d 182 (2d Cir. 2008).

The Bottom Line:  Courts will examine attorney fee awards in class action settlements, but 25% will still be the norm in the Ninth Circuit.   At some point the question may arise why a rate times hours calculation is not more appropriate.   

This blog relates to a highly technical and, in some respects, dry material, so let’s try to avoid getting overly legalistic.

Introduced back in the 1970’s, a line of children’s clothing called Garanimals was popular with parents.  The idea was that you could buy the Garanimals clothing and not worry about your children wearing patterns or styles that clashed.  Each item in the Garanimals line had a picture of an animal, and all your child had to do was to make sure that pieces of the clothing they wore had matching animals (all with the lion, the zebra, the okapi, etc.).  All in all, it was a pretty good idea, and also a good way to make sure that consumers bought essentially complete wardrobe of your product, or else the system wouldn’t work.

Title VII is a little like the Garanimals system.  The EEOC has broad enforcement powers under Title VII.  In addition to processing routine charges of discrimination, it can request records, can assert Commissioner’s charges, and can maintain essentially class action claims in court with fewer requirements than those imposed on private plaintiffs.

Unlike private plaintiffs, if you are the EEOC you can bring two types of claims.  First, you can bring a straightforward discrimination claim for equitable relief and damages, so long as you meet the burden of proving that the employer engaged in an act of discrimination.  This is a section 706 claim, but we can call it the “lion” pattern.  The good news is that the recovery can be extensive, including money damages up to Title VII’s caps.  The bad news is that you have to prove that the challenged decision was the result of unlawful discrimination.

The second type of claim is one for a pattern or practice of discrimination under section 707. We’ll call this the giraffe claim.  To establish a pattern or practice claim, the EEOC must show that the employer’s “standard operating procedure” was to discriminate.  If it makes that showing, it can shift the burden of proof to the employer to show that a given decision was NOT the result of illegal discrimination.  See Int’l Bhd. Of Teamsters. v. U.S., 431 U.S. 324 (1997).  The downside is that there is no right to trial by jury and the relief is limited to equitable relief.  So in a giraffe (section 707) claim, the burden of proof is easier, but the damages are less extensive.

So, can you mix the lion (section 706) and giraffe (section 707) claims to get both the easier burden and the greater damages?  The fashion police, and now the United States District Court for the Southern District of Texas say “no.”  In EEOC v. Bass Pro Outdoor World, LLC, the EEOC tried to bring a section 707/giraffe/pattern or practice claim under the rubric of a section 706/lion/discrimination claim.  It contended that it could bring a pattern or practice claim under section 706, take advantage of the easier burden of proof of section 707, and recover the higher section 706 damages.  It sought to pursue such claims on a nationwide basis against Bass Pro Outdoor retail chain.

These enforcement provisions have proven up to the task for decades, and as reflected in this blog, the commission has been guilty of overreaching in several cases, resulting in the imposition of serious sanctions from the courts.  Still, however, the EEOC wants to wield an even bigger club against target employers, and has tried to get the best of both worlds in claims against larger employers by trying to combine the two types of claims.

The district court, however, after reviewing Title VII’s language and history, found that the two could not be mixed, and that if the EEOC could maintain a pattern or practice claim under section 706, section 707 would be rendered redundant.  It therefore dismissed the section 706 “pattern or practice” claim, although it did give the EEOC leave to amend to fix other pleading deficiencies.

This may all sound like issues that are only important to lawyers, but the impact of a contrary decision would be to make it much harder for employers to defend EEOC pattern or practice claims.  This decision also stops the EEOC dead in its tracks (whether a lion or a giraffe) in its attempt to bring ever larger claims alleging systemic discrimination against employers with nationwide operations.  Title VII’s structure, like that of the Garanimals clothing line, only works if you don’t mix products that clash.

The Bottom Line:  Despite its effort to bring ever larger and more dangerous claims, EEOC cannot try to take advantage of both the greater damages of a garden variety discrimination claim and the easier burden of a pattern or practice claim in the same case.

On February 1, 2012, a two-judge panel of the Second Circuit reaffirmed its holding in an antitrust action brought against American Express (“AMEX”) that class action waivers involving federal statutory rights were unenforceable.  Largely based on an expert’s affidavit, the panel concluded that “the only economically feasible means for Plaintiffs enforcing their statutory rights is via a class action.”  See In Re American Express Merchants' Litigation.pdf., 667 F.2d 204 (2d Cir. 2012) (“AMEX III”).  (We covered AMEX III extensively on February 6, 2012).

The Second Circuit has now declined AMEX’s petition for rehearing en banc with five judges dissenting – some vigorously.  (The May 29, 2012 order.pdf denying rehearing, including concurring and dissenting opinions can be found here).

I.          Judge Pooler Concurring

Judge Rosemary Pooler, the author of AMEX III, concurred in the denial of rehearing en banc, emphasizing the “limited holding” in AMEX III and that its “analysis . . . rests squarely on a vindication of statutory rights analysis – an issue untouched in [AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011)].”  (The Concepcion decision, also covered extensively in this blog, held that the Federal Arbitration Act (“FAA”) preempted California law barring the enforcement of class action waivers in the consumer context.)

Judge Pooler argued that “[w]hile Concepcion addresses state contract rights, AMEX III deals with federal statutory rights – a significant distinction.”  And, she also distinguished Coneff v. AT&T Corp.pdf, 673 F.3d 1155 (9th Cir. 2012), because it “like Concepcion – examines when the FAA preempts state contract law. Unlike AMEX III, the Coneff court was not focused on individual plaintiffs lacking an effective means of enforcing their rights.”

Judge Pooler’s concurrence ended with a bold shot at those who disagreed: “AMEX III gives full effect to a long line of Supreme Court precedent preserving plaintiffs’ ability to vindicate federal statutory rights, rather than eviscerating more than 120 years of antitrust law by closing the courthouse door to all but the most well-funded plaintiffs.”

II.         The Donnybrook Begins!

Chief Judge Dennis Jacobs, joined by Judges José Cabranes and Debra Ann Livingston, delivered a forceful rejoinder, detailing the need for en banc review.  “The panel opinion . . . impairs the [FAA’s] strong federal policy favoring the enforcement of arbitration agreements, and frustrates the goal of arbitration by multiplying claims, lawsuits and attorneys’ fees.”

Chief Judge Jacobs identified three areas supporting the need for en banc review: (1)  AMEX III “is unbounded and can be employed to defeat class-action waivers altogether”; (2) “it makes the district court the initial theater of arbitral conflict on the merits . . . ”, and, (3) “it is already working mischief in the district courts.”

In support of his first reason, Chief Judge Jacobs argued that AMEX III is “a broad ruling that . . . can be used to challenge virtually every consumer arbitration agreement that contains a class-action waiver -- and other arbitration agreements with such a clause.”  Indeed, “every class counsel and every class representative who suffers small damages can avoid arbitration by hiring a consultant . . . to opine that expert costs would outweigh a plaintiff’s individual loss.”

As to the second basis for en banc review, Chief Judge Jacobs found that AMEX III required district judges, rather than arbitrators, to consider the merits of the case for a variety of reasons.  The threshold consideration of expert testimony and discovery issues:

“Effectively displaces arbitration with a trial court proceeding whenever lawyers assert a class claim . . . .  Even if arbitration is given a green light at the end of the judicial proceeding, the party seeking to arbitrate may have already spent many times the cost of an arbitral proceeding just enforcing the arbitration clause. * * * The predictable upshot is that AMEX III will render arbitration too expensive and too slow to serve any of its purposes.”

A third basis for en banc review is the unwarranted expansion of the decision.  Three district courts within the Second Circuit already have applied the AMEX decision to federal employment claims.  The panel opinion, according to Chief Judge Jacobs, also created a split with the Ninth Circuit’s holding in Coneff v. AT&T Corp.  In Coneff, a group of AT&T wireless customers brought a class action raising a number of claims including a violation of the Federal Communications Act.  The Ninth Circuit enforced the class action waiver in the arbitration agreement finding that the FAA was not concerned with whether customers “have sufficient incentive to vindicate their rights.”

Chief Judge Jacobs further condemned the panels’ legal analysis as proceeding “by selective quotation from Supreme Court dicta, and by aggressive measures to distinguish away the Supreme Court’s recent holding in Concepcion.”

Judge Cabranes filed a separate dissenting opinion “to underscore that the issue at hand is indisputably important, creates a circuit split, and surely deserves further appellate review.”  Tellingly, he added, “[t]his is one of those unusual cases where we can infer that the denial of in banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.”  So, the analytical Donnybrook now may move to a broader venue.

The final dissent was authored by Judge Reena Raggi and joined by Judge Richard Wesley.  Judge Raggi maintained that the panel decision holding a class action waiver unenforceable was “at odds” with Coneff v. AT&T Corp., and based on applicable Supreme Court precedent, created an unnecessary circuit split, as “forcefully advanced by Judge Chief Judge Jacobs.”

III.        The Next Battle?

As the dissents suggest, this dispute likely will find its way to the U.S. Supreme Court.  AMEX III’s “vindication of statutory rights analysis” is not confined to anti-trust cases.  As Chief Judge Jacobs noted, the decision’s elastic principles have been applied to federal employment claims and could be used with respect to any federal claim.  Indeed, three employment-related class action waiver cases are currently before the Second Circuit, two involve alleged violations of the Fair Labor Standards Act, and the third is premised on Title VII gender discrimination.  They involve Citigroup, Inc., Ernst & Young LLP and Goldman Sachs & Co.

The Bottom Line:  The AMEX III decision warrants U.S. Supreme Court review.  Until then, it remains a potential impediment to enforcing class action waivers involving federal claims, at least in the Second Circuit.  Its “vindication of federal statutory rights analysis,” provides plaintiff’s lawyers with a weapon to attack class action waivers. 

Illinois District Court Refuses to "Supersize" Race Discrimination Claims Against McDonald's

In this day and age when discrimination lawsuits are commonplace, it is all too easy to forget that Title VII was passed in the hopes that discrimination claims could and would be resolved outside of court.  When Congress enacted Title VII, it expressly included the requirements of the filing of a charge, and of conciliation, to resolve discrimination complaints without litigation.  Ironically, it is now the plaintiffs' bar that tries to get around these requirements by filing charges that do not include class allegations, and then seeking to assert them in court once a charge has been dismissed.

Not so fast.  Numerous courts are refusing to permit a plaintiff to pursue class action allegations when they have not been raised in a charge or have only been raised obliquely, as a recent decision from the Northern District of Illinois demonstrates.  In Dovgin v. McDonald's Corporation.pdf, Case No. 11 C 7883 (May 25, 2012, N.D. Ill.), three plaintiffs raised various race or religious discrimination claims against McDonald's. In each case, the plaintiffs had filed charges addressing their own personal situations, but that did not reference class wide discrimination.  In the subsequent lawsuit, however,  they sought to pursue class-wide claims. 

The District Court dismissed the class-wide allegations.  It found that a charge was intended to fulfill two purposes, providing notice to the defendant and giving the EEOC the opportunity to investigate and conciliate.  Absent class allegations in the charge, such claims could not be pursued in court.

While not addressed in the court's opinion, one can only wonder why the claims were brought in the manner they were.  McDonald's has a robust diversity commitment and has strongly supported minorities as franchisees and vendors.  Put another way, while a large employer, it has an enviable record on race.   Moreover, the plaintiffs brought claims for different types of race discrimination (African American, Korean, Indian) and religion, as well as for different alleged discriminatory acts (training, negative performance reviews, discharge).  Had the plaintiffs properly alleged class claims in the charge, it is difficult to see how such claims could proceed as a class.

One might also wonder why class allegations were not alleged in the charge.  The EEOC has made addressing systemic discrimination a priority and has aggressively pursued such claims against many employers.  Apart from the desire to bring a claim directly in court, a desire Title VII discourages, such claims should be raised to promote Title VII's aims of resolving claims outside of litigation.

The Bottom Line:  A plaintiff cannot assert Title VII class claims without identifying them in a properly filed charge of discrimination.

Authorship credit: Paul S. Enockson

ERISA class certification motions routinely cite cases for the proposition that ERISA cases are the paradigmatic example of cases that are appropriate for class certification.  The United States District Court for the Southern District of Ohio’s recent decision in Adams v. Anheuser-Busch Companies, Case No. 2:10-cv-826, provides continuing support for this oft-cited proposition even after the Supreme Court’s decision in Wal-Mart-Stores, Inc. v. Dukes.

In Adams, the named plaintiffs, former employees of an Anheuser-Busch subsidiary, sought to pursue claims on behalf of a class of former employees for denial of benefits under ERISA § 502(a)(1)(B) , 29 U.S.C. Sec. § 1132(a)(1)(B), and for breach of fiduciary duty under ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2).  The claims at issue were based on plaintiffs’ claim that when their AB subsidiary was sold, they had been “involuntarily terminated” under the AB Pension Plan.  The plaintiffs’ claims for benefits were denied and, after the named plaintiffs exhausted their plan remedies, they filed a class action lawsuit.

The District Court in Adams certified the class.  In discussing commonality, the District Court cited without any significant discussion the Supreme Court’s Dukes opinion.  According to the District Court, common questions of law existed because the meaning of the AB Pension Plan’s provisions regarding change of control and involuntary termination were at issue.  The Adams Court also concluded that common questions of fact existed because the class was comprised of former employees impacted by the same fiduciary decision, and the same denial of benefits determination.

Despite suggestions of the demise of class actions following the Supreme Court’s decision in Dukes, the Adams decision is an indication that little has likely changed in ERISA class actions.  For cases that involve challenges to fiduciary decisions that impact an ERISA governed plan, it will likely remain the case that certification will continue to be the de facto result.

The Bottom Line:  Successful challenges to class in ERISA cases on commonality will continue to be left to those cases where questions of law or fact are so individualized that commonality can be defeated by showing the unique and individualized nature of the claims for which certification is being sought—the same challenges that were common before Dukes.

Editor’s Note: This post  is a joint article for the Baker Hostetler Class Action Lawsuit Defense and Employment Class Action Blogs.  Be sure to visit the Class Action Lawsuit Defense Blog for additional content regarding class action news and developments.

The Third Time is Not a Charm as the Second Circuit Again Holds Class Action Waivers Unenforceable

The Second Circuit considered the validity of class action waivers for the third time in an antitrust action brought against American Express ("AMEX") based upon the company’s Card Acceptance Agreement.  And, despite intervening Supreme Court opinions, for the third time the appellate court held class action waivers involving federal statutory rights were unenforceable.  The Second Circuit’s February 1, 2012 opinion held "that each waiver must be considered on its own merits based on its own record and governed with a healthy regard for the fact that the [Federal Arbitration Act] is a congressional declaration of a liberal federal policy favoring arbitration agreements."  This third opinion likely will have an impact beyond costly antitrust litigation, but the question is how far?  Indeed, the opinion cited two District Court decisions denying enforcement of class action waivers in the employment law context.

I.        The History

A brief review of the case’s long appellate history is helpful.  The appeal was originally argued on December 10, 2007.  In Re American Express Merchants' Litigation.pdf, 554 F.3d 300 (2d Cir. 2009) ("AMEX I") the court held the class action waiver unenforceable “because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs."  AMEX I at 304.  The U.S. Supreme Court vacated that decision and remanded it for reconsideration in light of its Opinion in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).  Stolt-Nielsen, which was previously discussed in this blog, held that imposing class arbitration on parties that had not agreed to it conflicts with the FAA.  The Second Circuit, however, found that Stolt-Nielsen did not affect its original analysis and again reversed the District Court's decision and remanded the case.  AMEX II, 634 F.3d at 199-200. 

On April 11, 2011, the appellate court placed a hold on the mandate in AMEX II so that AMEX could seek a writ of certiorari.  During that time, the Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).  The Concepcion decision, also extensively covered in this blog, held that the FAA preempted California law barring the enforcement of class action waivers in the consumer context.  131 S.Ct. 1740 (2011). The Second Circuit then received supplemental briefing on Concepcion's potential impact on the case.

II.       The Background

A.       The Claims

The Merchants in the AMEX litigation brought antitrust claims under both the Sherman and Clayton Acts maintaining that the "Honor All Cards" provision in AMEX’s Card Acceptance Agreement created an illegal "tying arrangement."  The Merchants were "faced with the choice of paying supracompetitive merchant discount fees . . . on AMEX’s new mass-market products [credit cards] or losing 'a significant portion of the sales they received from businesses, travelers, affluent consumers, and others’ who are the traditional users of AMEX charge cards."

B.       The Costs

The Court found that the Merchants' evidence "establishes, as a matter of law, that the cost of plaintiff's individually arbitrating their dispute with AMEX would be prohibitive, effectively depriving plaintiffs of the statutory protection of the antitrust laws."  In reaching that conclusion, the appellate court relied upon the affidavit of economist Gary L. French, Ph.D. which detailed the costs of expert assistance for individual plaintiffs in antitrust cases.  Dr. French summarized those expert costs:

. . . the cost of [Nathan Associates'] expert assistance in individual plaintiff antitrust cases has ranged from about $300 thousand to more than $2 million.  However, after reviewing the complaint and doing some preliminary research in this case, it is my opinion that . . . the cost for this case will fall in the middle of the range of [Nathan Associates'] experience.

Dr. French then considered those expert witness costs in relation to a plaintiffs' potential recovery.  He concluded:

The largest volume named plaintiff merchant, with reported American Express Card volume of $1,690,749 in 2003, might expect four-year damages of $12,850, or $38,549 when trebled.

In my opinion as a professional economist . . . it would not be worthwhile for an individual plaintiff . . . to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million.  (Emphasis added). 

Largely based on Dr. French’s affidavit, the Second Circuit concluded that "the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action."  In AMEX I the court had found the expert’s affidavit was "essentially uncontested".  554 F.3d at 317.  In reaching its conclusion, the court discounted the fact that the Clayton Act provides for treble damages and the recovery of attorneys' fees and expenses.

III.       Legal Analysis in AMEX III

AMEX argued that Concepcion required a reversal of the holding in AMEX III.  The Second Circuit rejected that argument stating:

It is tempting to give both Concepcion and Stolt-Nielsen such a facile reading, and find that the cases render class action arbitration waivers per se enforceable.  But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.  (Emphasis added). 

The Court, in a footnote, also brushed aside the Supreme Court’s opinion in CompuCredit Corp. v. Greenwood, 2012 WL 43517 (Jan. 10, 2012) (addressed in this recent blog post).  CompuCredit Corp. held that because the Credit Repair Organization Act was silent on whether claims could be arbitrated, the FAA mandated that the arbitration agreement be enforced.  Even after CompuCredit Corp., the Second Circuit found that Congressional intent could be discovered in the history or purpose of a statute.  So,

[a]lthough the Sherman Act does not provide plaintiffs with an express right to bring their claims as a class in court, forcing plaintiffs to bring their claims individually here would make it impossible to enforce their rights under the Sherman Act and thus conflict with congressional purposes manifested in the provision of a private right of action in the statute. (Emphasis added).   

The Court instead looked to older Supreme Court precedent to find support for whether arbitration can be rejected if it does not fully vindicate federal statutory rights.  It cited Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., for the proposition that arbitration can be "an effective vehicle for vindicating statutory rights but only 'so long as the prospective litigant may effectively vindicate its statutory cause of action.'"  Citing Mitsubishi, 473, U.S. 614, 632 (1985).  The Court then looked to dicta in Green Tree Financial Corp-Alabama v. Randolph stating "that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum."  531 U.S. 79, 90 (2000).  Because Mitsubishi and Green Tree were not impacted by Stolt-Nielson or Concepcion, the Second Circuit felt it was free to rely on those opinions. 

The Court emphasized that it relied not on the size of the Merchants involved but "on the need for plaintiffs to have the opportunity to vindicate their statutory rights."  As support of this analysis, the Court cited two employment cases – Raniere v. Citigroup, Inc.pdf., No. 11 Cir. 2248, 2011 WL 5881926 (S.D.N.Y., November 22, 2011) and Chen-Oster v. Goldman, Sachs & Co.pdf., No. 10 Cir. 6950, 2011 WL 2671813 (S.D.N.Y. July 7, 2011).  Raniere involved a putative nationwide collective action under the Fair Labor Standards Act as well as a New York class action under the New York Labor Law.  The District Court found that since Concepcion involved state not federal rights, "even if . . . read broadly to acquiesce to the enforcement of an arbitral agreement that as a practical matter would prevent the vindication of state rights in the name of furthering the strong federal policy favoring arbitration, that would not alter the validity of the federal statutory rights analysis . . . . "  (Emphasis added). 

The underlying action in Chen-Oster was a pattern and practice claim for gender discrimination under Title VII of the Civil Rights Act of 1964.  After considering Concepcion, the judge in Chen-Oster found it was not a "controlling decision."  And, both Raniere and Chen-Oster cited AMEX II as controlling precedent. So, what these two lower court decisions really illustrate is that the reasoning in AMEX III may well extend into other areas of federal law. 

IV.      What’s Next

While the AMEX III decision cautioned that it did not hold that class action waivers were "per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions," it left many unanswered questions.  Instead of considering whether Congress intended to preclude arbitration of the statutory claims involved, it focused on whether arbitration would preclude vindication of the federal statutory rights.  It also took a broad view of the way in which the statutory rights would be determined.  It apparently based its decision on a case-by-case analysis of litigation costs   (expert witness fees) and discounted the potential benefits of multiple damage awards, attorneys' fees and expenses provided to successful plaintiffs by the federal statutes involved.

But, AMEX III established no objective guidelines for the task – other than to point out that many plaintiffs failed in their quest.  "The fact that plaintiffs so often fail in their attempts to overturn such waivers demonstrate that the evidentiary record . . . is not easily assembled, and that the courts are capable of the scrutiny such arguments require."  But are they?  Is it only where vindication of the federal rights would be impossible?  And, does the ability to bring aggregate actions become a substantive right when the statute does not mention the procedure and when the federal statute provides multiple damages, attorneys fees for prevailing parties and other fee shifting provisions.  Under what circumstances will the statutorily created remedies be considered inadequate?  Hopefully, the Supreme Court will resolve some of these issues and properly interpret Concepcion when AMEX III is considered on certiorari.

The Bottom Line:  AMEX III will be another potential obstacle to enforcing class action waivers, at least in the Second Circuit.  However, it’s difficult to say what practical effect it will have on employment actions.  It’s a rare employment case, indeed, in which a plaintiff must spend between $300 thousand to more than $2 million for expert witness costs and only expect to recover $38,549 (after being trebled).

Confidentiality provisions in employment settlements are routine, but they can be problematic in the context of the settlement of a class or collective action. Class action settlements require court approval under Rule 23(e) (if the class is certified) and FLSA settlements require approval from either the United States Department of Labor or a court. See Lynn's Food Stores v. United States, 679 F.2d 1353 (11th Cir. 1982). So, can the parties get that approval without publicly disclosing the terms through a court filing?

In a recent case, Rice v. Lucky Brand Dungarees Stores, Inc., Case No. 11-CV-61923 (Jan. 9, 2012), the parties settled a putative FLSA collective action, but apparently chose not to seek court approval, and simply tendered a stipulation that stated that the case was to be dismissed with prejudice. The court, however, refused to enter the stipulation and directed the parties to file the agreement publicly or to show extraordinary circumstances why the agreement should not be filed. This decision is similar to one reached two years ago by another district court in Florida in Dees v. HydraDry, Inc., Case No. 8:09-CV-1405 (M.D. Fla. Apr. 19, 2000), in which the court rejected such an attempt in a much longer opinion.

One interesting twist in the Rice case is that the parties did not explicitly ask the court to approve the settlement or to issue any class-wide relief, but had only filed the stipulation of the court. Despite the lack of any such request, the court still refused to permit so much as a stipulation for dismissal with prejudice under Rule 41.

Rice was, of course, under the FLSA, but class actions (as opposed to collective actions) are subject to the additional disclosure requirements of Rule 23(e) and the Class Action Fairness Act, 28 U.S.C. section 1715. Thus, the same, and probably higher, obligations apply.

The Bottom Line: Parties should assume that a court will demand the public disclosure of the terms of a either a class or collective action settlement.

In the much anticipated ruling in D.R. Horton, Inc. and Michael Cuda.pdf, released Friday, January 6, the National Labor Relations Board (“NLRB”) held that the Company violated Section 8(a)(1) of the National Labor Relations Act (“NLRA”) by “requiring employees to waive their right to collectively pursue employment-related claims in all forums, arbitral and judicial.” The decision, which will have a far-reaching impact on all employers, also concluded that recent United States Supreme Court rulings on the Federal Arbitration Act and class arbitration were not implicated. To many management observers, the ruling elevates a procedural device, a class or aggregate proceeding, to the status of an individual statutory right applicable to any employment claim. The decision reasoned:

“an individual who files a class or collective action regarding wages, hours or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7.”

The Company and the Arbitration Agreement

The Company, D.R. Horton, Inc., builds homes and operates in more than 20 states. Starting in 2006, the Company required employees to sign a Mutual Arbitration Agreement (“MAA”) that essentially provided that all employment-related disputes be resolved through individual arbitration. The Charging Party Michael Cuda worked for the Company as a superintendent and had signed the MAA. His attorney later informed the Company that it was misclassifying superintendents as “exempt” under the Fair Labor Standards Act and that he had been retained to represent Cuda and a nationwide class of superintendents. Cuda’s attorney also attempted to give notice of intent to arbitrate on a class or collective basis. When the Company resisted, Cuda filed an unfair labor practice charge with the NLRB.

A Necessary Substantive Right?

Several groups that filed Amici Curiae briefs with the NLRB urged that employees’ Section 7 rights were not impacted because they could jointly discuss their claims, pool their resources to hire a lawyer, seek litigation advice and support from a union, seek support from other employees and coordinate the filing of claims. The Board majority was unpersuaded, responding,

“if the Act makes it unlawful for employers to require employees to waive their right to engage in one form of activity it is no defense that employees remain able to engage in other concerted activities.”

The decision also categorically rejected arguments that the right to bring a class or collective action was “procedural” rather than substantive.

“Any contention that the Section 7 right to bring a class or collective action is merely ‘procedural’ must fail.”

According to the decision, the salient issue is:

“Whether [the Company] may lawfully condition employment on employees’ waiving their right under the NLRA to take the collective action inherent in seeking class certification . . . .. Rule 23 may be a procedural rule but the Section 7 right to act concertedly by invoking Rule 23 . . . or other legal procedures is not” (emphasis added).

Supreme Court Precedent Found Not Implicated

The ruling also found that the U.S. Supreme Court’s opinions in Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), and AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) (discussed in detail in other blog articles here and here) were not implicated. The Board majority reasoned that “[n]either involved the waiver of rights protected by the NLRA or even employment agreements.” AT&T Mobility (which arose in a consumer context) was distinguished by the majority because it involved a conflict between the Federal Arbitrator Act (“FAA”) and state law not where two federal statutes potentially conflict. The FAA did not preempt the NLRA which gave employees a federally protected right to engage in concerted action. And, the Cuda decision emphasized it did not require class arbitration to protect employees’ rights under the NLRA. Instead, it held “only that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial.

Impact and Next Steps

The decision was completed last Tuesday and signed by the two Democratic Board members, before one, Craig Becker, had his recess appointment expire. The Board’s sole Republican member, Brian Hayes, recused himself, without explanation.

The decision, which applies both to union and non-union workforces, will undoubtedly be appealed to a federal court of appeal.

The Bottom Line: The controversial NLRB has created another potential obstacle to the enforcement of class action waivers. A federal appellate court or the Supreme Court will likely resolve these important issues.

At present, most employment class actions relate to wage and hour issues, but there are still many (and frequently hugely expensive) ERISA class actions challenging a host of benefits issues. A recent case underscores that the threat of ERISA class action litigation can be exacerbated by a very long statute of limitations.

ERISA does not contain a statute of limitations for claims to recover benefits due under the terms of a plan. Courts apply the most clearly analogous state statute of limitations to these claims. Breach of contract claims typically allow for a relatively longer statute of limitation period than for other causes of action. As a result, plaintiffs often seek to characterize the ERISA cause of action as a contract claim to take advantage of a longer statute of limitation period. See, e.g., Meade v. Pension Appeals and Review Committee, 966 F.2d 190 (6th Cir. 1992) (applying Ohio’s fifteen-year statute of limitations to alleged wrongful denial of permanent disability benefits under terms of ERISA-governed pension plan).

In Clemons v. Norton Health Care Inc. Retirement Plan, No. 08-69-C, 2011 WL 5519823 (W.D. Ky. Nov. 14, 2011), the United States District Court for the Western District of Kentucky held that Kentucky’s fifteen-year statute of limitations for contracts, KRS § 411.090 applied to the plaintiffs’ claim for benefits due under the terms of a plan. The certified class consisted of retirement plan participants who claimed that the Norton Healthcare Retirement Plan (“Plan”) made several errors when calculating their contractual lump sum retirement benefits. For example, the class claimed that the Plan failed to include the value of an annual cost of living adjustment and/or an alternative lump sum benefit when doing so would have yielded the highest value for the participant.

The Clemons court rejected the Plan’s argument to apply Kentucky’s default five-year statute of limitations for actions upon a liability created by statute, KRS § 413.120(2). It held that the cause of action did not arise from ERISA’s statutory protections, but was instead based on an independent promise or contract. The Court found that the plaintiffs’ claim for equitable relief under ERISA § 502(a)(3) based on a violation of the plan is not the same as asserting ERISA-specific statutory grounds for relief. As a result, Kentucky’s fifteen-year limitations period for breach of contract applied. The Court further held that the claims accrued on the dates the individual plaintiffs received their lump sum distributions.

Clemons distinguished two federal cases that applied Kentucky’s five-year statute of limitations to ERISA claims. In Redmon v. Sud-Chemie Inc. Retirement Plan for Union Employees, 547 F.3d 531 (6th Cir. 2008), the allegation centered on a waiver of survivor benefits that allegedly violated ERISA’s statutory protections. In Fallin v. Commonwealth Indus. Inc. Cash Balance Plan, 521 F.Supp.2d 592, 597 (W.D. Ky. 2007), the action was premised on an alleged violation of ERISA § 502 due to changes to an employee retirement plan. Clemons found that, in contrast, the class was not suing on statutory rights provided by ERISA; rather, the state law claims for breach of contract were preempted by ERISA.

The Bottom Line: ERISA cases can have extremely long statutes of limitation. When the plaintiffs seek relief primarily to recover benefits allegedly due under the terms of an ERISA-governed plan and the dispute centers around rights under a contract, the statute of limitations in Kentucky is fifteen years, not five years.

A recent decision from the United States District Court for the Northern District of Illinois contains three important lessons for employment class action litigation. The first is that disability cases, such as those under the Americans with Disabilities Act, are particularly hard to prosecute as a class. The second is a reminder that the parties, even if the plaintiff is the EEOC, must still meet the requirements of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The third is that the EEOC, despite the first two lessons, is still taking aggressive positions in class litigation even when those positions are legally and/or factually wrong.

The case of EEOC v. United Parcel Serv. Inc.pdf., Case No. 09-5291 (N.D. Ill., Sept. 28, 2011), began as two more or less garden-variety ADA charges against shipping giant UPS. UPS furnishes its employees with up to 12 months of unpaid medical leave, or roughly four times what it is required to provide under the Family and Medical Leave Act. The first charge related to an employee suffering from MS who requested, among other accommodations, leave in excess of 12 months for her medical condition. The second was an employee with emphysema who requested assignments to generally cooler, well-ventilated work areas, was placed on medical leave because the company determined that that accommodation could not be provided. Both employees were terminated after their 12 months of medical leave expired. Both charges fell within the EEOC's latest efforts to create an obligation under the ADA for employers to provide almost unlimited leave to disabled employees under the rubric of a "reasonable accommodation." We'll leave the discussion of that issue to others.

In the UPS case, however, the EEOC not only asserted the claims of these two employees, but also asserted vague class allegations. It sought to pursue claims that UPS discriminated generally against an undefined class of disabled employees. UPS moved to dismiss those claims, citing the Twombly standard.

The district court began its analysis by recognizing that disability claims are fundamentally unlike other discrimination claims. While there is no good reason to discriminate based on race, gender, or similar traits, and employer may very well have a legitimate reason to take a disability into account where the disability prevents an employee from performing the essential functions of his or her job. Thus, the pleading standards in a disability case extend to the nature of the disability itself. 

[As an aside:  This is, of course, one key reason why it is so difficult to create a class-wide disability claim, because the type, nature, and extent of disabilities vary so widely as to defeat the 23(a) elements of commonality and typicality, as well as the superiority and predominance elements of Rule 23(b)(3).]

The district court found that the complaint only provided a "formulaic" description of the proposed class members, such as statements that they were disabled and "could perform the essential duties of her or her job without a reasonable accommodation." These vague allegations, the court held, did not meet the Twombly standard. The court similarly rejected arguments by the Commission that it was relieved of the Twombly standards because it allegedly was acting in the public interest or that it, rather than the charging parties, was the plaintiff. Concluding that the EEOC had not met the requisite pleading standard, the court dismissed the class allegations. It did, however, grant the opportunity to correct the pleading deficiencies, if possible, and noted that the action would still proceed on behalf of the two representative claimants.

The Bottom Line: The EEOC and others are pursuing class claims based on vague allegations, but courts are holding them to the Twombly pleading standards.

Post-Script:  On January 11, 2013, while the EEOC was seeking an appeal, the district court reconsidered its prior order and held that the EEOC’s proposed second amended complaint did satisfy the Twombly/Iqbal pleading standard.  While the court recognized that the Commission had couched its allegations in “conclusory” terms, they were not so vague as to justify dismissal.  Further, while the EEOC’s lack of effort to identify employees with potentially meritorious claims gave the court “some pause” it found that the allegations were sufficiently definite to avoid dismissal.

As a policy matter, the initial order was more supportable.  Even the court recognized that the EEOC has investigatory powers and obligations that most plaintiffs do not.  In light of those powers and responsibilities, as well as its extensive resources, it would not have been unreasonable to hold it to at least the same pleading standard as private plaintiffs. 

Recognizing the employer’s concern that the EEOC was simply using the complaint to engage in a fishing expedition, however, the court directed that discovery be supervised by a magistrate judge to “move the case forward through the discovery phase as quickly as possible” and to explore settlement opportunities.

A class action over socks?!

Employers operating in California are subject many state-law employment regulations and the resulting ever-present threat of class action litigation. Suits over employment practice seem to come in waves based on industry and type of employee (e.g. insurance claims adjusters, retail managers) or specific policies (such as the current spate over meal and rest periods). Many lawyers monitor lawsuits filed in the state to watch for the next trend.

A recent case suggests that it may very well NOT be minor apparel items. California Labor Code section 2802 provides that "[a]n employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties as such, or of his or her obedience to the directions of the employer."

In Gallardo v. United Parcel Service, Inc.pdf., Case no. 2:10-cv-08624 (C.D. Cal. Aug. 22, 2011), the plaintiff claimed that UPS required its drivers wearing shorts to purchase and use socks in UPS brown and with the UPS logo. She contended that this policy violated Labor Code section 2802, because such a purchase constituted an "expenditure" required by the employer, and she sought to represent a proposed class of over 10,000 employees to recover their cost.

The plaintiff argued that the issue of certification was simple. She contended that there was a state-wide policy of requiring the logo socks and that, in any case, it was "obvious" that if drivers bought and wore the UPS socks it must have been because they were told to do so.

As is true in many of these cases, the real facts were not quite so simple. UPS was able to demonstrate that each of its 150 or so locations operated differently. It had different policies at different locations and supervisors had discretion regarding how they interpreted and enforced the company's requirements over uniforms. Some permitted merely brown socks; while others expressed a preference for the logo socks. UPS argued that these variations undermined the elements of commonality and typicality under Rule 23(a) and those of predominance and superiority under Rule 23(b)(3).

With issues as to commonality and typicality being raised, one would naturally expect the Supreme Court's recent decision in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. ___ (June 20, 2011), to be discussed. Interestingly, however, the District Court's decision cited and relied upon the Ninth Circuit's Dukes decision, one that was overruled by the Supreme Court as being too lenient. Even under that standard, though, the court found that the plaintiffs had failed to demonstrate the necessary commonality and typicality. It also agreed with the defendant that the 23(b) requirements of predominance and typicality had not been met. The court thus denied certification and set the case for a trial on the plaintiff's individual claims, which could not have amounted to more than a few dollars, later in the fall.

The Bottom Line: Plaintiff's attorneys are experimenting with new theories to drive employment class action in California. Variations in the application of employment policies will still serve to defeat class certification even for large employers.

Of all the potential reasons to deny certification under Rule 23(a) (numerosity, commonality, typicality, and adequacy of representation), probably the least commonly used is that of adequacy of representation.  Even in those cases, the focus is more often on problems with the named plaintiff than with the attorney bringing the action.  A recent Seventh Circuit decision reflects that certification can be denied based on conduct by the lawyers bringing the action and that at least some courts are attuned to the waste of time and money that may result from class action litigation.

In Gomez v. St. Vincent Health, Inc.pdf., Case No. 10-2379 (7th Cir., Aug. 15, 2011), the employer was a large Indiana hospital system with thousands of employees.  Although the employer endeavored to comply with COBRA, including hiring  third party administrators and conducting periodic audits,  over a two-year period approximately 250 separated employees did not timely receive their COBRA notices.   Three of the affected employees filed a putative class action in the Southern District of Indiana to assert COBRA violations as a result of the late or failed notice.  Upon investigating the matter, the company realized the mistake, contacted the affected individuals and offered them various arrangements to reinstate their coverage if they desired.  In the meantime, the plaintiffs were suffering their own problems in the lawsuit, including various discovery disputes, and were subject to orders to compel and to pay costs.  The district court ultimately denied certification of the class for numerous reasons, including adequacy of representation, and granted summary judgment against the two named plaintiffs.  Among other issues, the court found that the plaintiff's attorney had not diligently pursued the case, had not properly conducted discovery, and had created an incomplete record for summary judgment. Justice, at this point, prevailed, as the employer took reasonable steps to correct its mistake and the court refused to permit the class to proceed due to the procedural abuses and missteps of plaintiff's counsel.

Undaunted, the same attorney took the listing of names obtained in discovery of the first case, solicited new plaintiffs, and then filed a second putative class action.  The action was filed in the same court, but assigned to a different judge.  That judge, too, denied certification, but limited the grounds for the holding to adequacy of representation, based largely on the conduct that occurred in the first case.  The court went on to award one of the individual plaintiffs less than $400 in damages, and dismissed the remaining claims for statutory damages.

The Seventh Circuit affirmed the district court's decisions with respect to the damages issues, and then addressed the question of certification.  It found that the district court had appropriately denied certification because of the attorney's conduct in the first action as well as filing the second, nearly identical case without additional evidence.  For an attorney to "lose" a class action due to his own conduct, and, worse, to have that conduct spelled out in a federal court of appeals had to be bad enough, but that wasn't all.  Throughout its opinion the court noted gaps (to put it politely) in the plaintiff's counsel's assertions, described him as having "misrepresented fundamental facts," and quoted portions of his brief containing typographical errors and butchered English as additional proof of his inadequacy as class counsel.  Ouch!

The Bottom Line:  Some courts will deny certification when plaintiff's counsel is viewed as having abused the discovery process and of misusing judicial resources.

The battle between California courts and the U.S. Supreme Court over arbitration agreements wages on. Though California courts frequently make perfunctory statements about the strong public policy in favor of arbitration agreements, these statements are undercut by the many cases in which the courts appear to bend over backwards to find arbitration agreements unconscionable or otherwise unenforceable. This is particularly true where the arbitration agreements attempt to waive or limit class action or representative claims.

While the Supreme Court held in AT&T Mobility v. Concepcion.pdf ("Concepcion"), 563 U.S. __, 131 S. Ct. 1740 (2011), that a class action waiver is enforceable in the arbitration context, cynical observers believed that some courts, particularly in California, would try to find a way around its clear holding: that the scrutiny applied to arbitration agreements should be no different than the scrutiny applied to all other contracts and that an arbitration agreement must be enforced according to its terms. (We wrote about the Concepcion decision in a post on April 27.) In a divided ruling, the California Court of Appeal took its first swing at Concepcion, and held that arbitration agreements cannot be applied to claims brought under the California Private Attorney General Act of 2004 ("PAGA").

In Brown v. Ralphs Grocery Co.pdf., the Court of Appeal considered the enforceability of an arbitration agreement that contained the following provision: "there is no right or authority for any Covered Disputes to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims ort disputes brought in a representative capacity on behalf of the general public." The primary question presented was whether the Concepcioncase--which had invalidated another California decisional rule forbidding certain kinds of class action waivers--also preempted California law that PAGA claims cannot be subject to an arbitration agreement.

The majority acknowledged the long history of the U.S. Supreme Court overturning California law contravening enforcement of arbitration agreements (on various ground), but it concluded that "United States Supreme Court authority does not address a statute such a the PAGA."

The Court’s basis for distinguishing PAGA claims from other employment claims was that PAGA claims are "in large part 'for the benefit of the general public rather than the party bringing the action.'" Therefore, the Court (citing past cases) determined that PAGA waivers are contrary to California law. The Court found that making PAGA claims unarbitrable did not contradict the Federal Arbitration Act (“FAA”) because, unlike class actions which require a formal certification process and other procedural requirements, PAGA does not have any such requirements. Therefore, reasoned the Court, taking PAGA off the list of arbitrable disputes did not frustrate the FAA in the same way as the rule at issue in Concepcion.

This reasoning is more than arguably contrary to several pages of the analysis in Concepcion, which pointed to numerous problems with compelling the arbitration of class-wide claims, including the issue of absent parties and the fact that representative and class claims often involve much higher stakes for the employer than individual claims. Moreover, because of CCP section 1281.2 which grants courts the discretion refuse arbitration on all claims rather than split a case between civil court and arbitration (where a complaint alleges both arbitrable and non-arbitrable claims), a court might refuse arbitration merely because Plaintiff has alleged PAGA claims among a slew of other arbitrable claims. (Note: after Concepcion, there is a strong argument that the discretion afforded courts under CCP section 1281.2 is preempted by the FAA, but so far this issue has not been ruled on.)

In light of the Browndecision, employers should be aware that California courts will likely not send PAGA claims to arbitration. Further, a court may also find that a PAGA provision in an arbitration agreement is not severable (an issue left open in the Brown case) and therefore hold that the entire agreement is not enforceable. To that end, employers may consider revising existing arbitration agreements to make any PAGA provisions clearly severable.

The Bottom Line: California courts remain hostile to arbitration agreements that purport to limit class/representation claims despite the strongly worded Concepcion opinion. Employers will therefore need to exercise caution in this arena.

Authorship credit: Alastair Gamble

We've written several times this year about the wide split in authority regarding whether a plaintiff in a wage and hour case may bring both a collective action under the FLSA and a Rule 23 class action with respect to claimed parallel violations of state law. Apart from concerns over the management of simultaneous "opt-in" and "opt-out" classes, many courts refusing to permit both have noted the legislative history of FLSA section 16(b), which created the collective action vehicle. These courts have found, based on the statute's history, that Congress passed section 16(b) in response to "a national emergency spawned by out-of-control litigation of employee minimum wage and overtime claims." Ellis v. Edward D. Jones & Co., 527 F. Supp. 2d 439, 450 (W.D. Pa. 2007).

Earlier this year, the Seventh Circuit concluded in Ervin v. OS Restaurant Services, Inc., 632 F.3d 971 (7th Cir. 2011), that both could be maintained, a decision we wrote about on January 26. Subsequently, as reflected in our blog entries on May 30 and June 6, both the Southern District of New York and the Middle District of Pennsylvania have found that the two are incompatible, and cannot be combined.

On June 8, 2011, the Western District of Pennsylvania, in Bell v. Citizens Financial Group, Inc.pdf, Civil Action No. 10-0320 (W.D. Pa. June 8, 2011), again weighed in on the issue and held that the two could not be combined. After reviewing the conflicting authority, it found that permitting both "would allow plaintiffs to evade the requirements of the FLSA," largely by "eviscerat[ing]" the purposes of the FLSA's opt-in requirement. It therefore denied certification of a state law class when it had already certified the class as an opt-in class under the FLSA.

The Bottom Line: The legislative history of FLSA section 16(b) makes it clear that the opt-in requirement was intended to limit overtime litigation, but there is a distinct split among courts whether the plaintiffs can avoid the requirement by seeking a state law class on the same issues.

Today, June 20, 2011, the Supreme Court issued its highly anticipated decision in Wal-Mart Stores Inc v Dukes.pdf Case No. 10-277 (U.S. S. Ct. June 20, 2011). The Court not only reversed the Ninth Circuit, but issued several clear pronouncements regarding the plaintiff's burdens and the quality of evidence necessary to certify an employment class. The Dukes case will change the complexion of class employment litigation immediately, and will likely result in numerous issues being decided in the years ahead that may make defense of such cases less difficult for employers.

Most employers are already generally familiar with the facts of the Dukes case, which was the largest employment class action ever certified. Wal-Mart is the world's biggest private employer, with over 1,000,000 employees. Each of its 3,400 stores may have upwards of over 50 departments and anywhere between 80 and 500 positions.

The plaintiffs in Dukes were women with garden-variety gender discrimination claims arising out of workplace issues as diverse as having been yelled at by a manager, being frustrated in seeking promotions, claimed pay disparities and a dispute over a demotion. They brought suit in the United States District Court for the Northern District of California under Title VII of the 1964 Civil Rights Act, 42 U.S.C. §§ 2000e et seq. They also sought to represent a class of all female employees at Wal-Mart, contending that they were all subject to class-wide gender discrimination.

There was no dispute that Wal-Mart had no nationwide policy favoring sex discrimination - in fact, the opposite was true as the company's policies stressed the need for fair, non-discriminatory treatment. The plaintiffs therefore argued that an unwritten country-wide practice of discrimination existed. They pointed to the gender make-up of Wal-Mart's workforce, emphasizing that while the company's hourly workforce was two-thirds female, only one third of its managers were women. They argued that Wal-Mart had a strong "corporate culture" and that individual store managers were given discretion in employment decisions. To bolster that assertion, they also presented the testimony of a sociologist named William Bielby, who opined that those given discretion may tend to discriminate based on stereotypical thinking. They further presented statistical testimony regarding the breakdown of positions by gender by region of the company. Finally, they submitted declarations from approximately 100 women regarding alleged discriminatory actions against them.

Wal-Mart, for its part, emphasized that employment decisions were undertaken at a local level and that there was no nationwide policy of discrimination against women. It also introduced its own expert testimony regarding the gender makeup of the workforce, including testimony that women expressing an interest in promotions tended to progress more quickly than men. It also challenged the plaintiffs' experts, and repeatedly argued that the class was simply too large, too complex, and too diverse to be certified.

The District Court certified a class of 1.5 million women pursuant to Rule 23(b)(2) and a divided Ninth Circuit affirmed en banc. Both courts largely swept aside the arguments Wal-Mart raised. In many instances, those courts appeared to contend that the company's arguments strayed too far into arguing the merits, or that its objections could be resolved by sampling or other means.

The Supreme Court reversed and at least two aspects of the decision were surprising. First, the Court's conclusion, at least in part, was unanimous. Second, the majority concluded that the plaintiffs had failed to satisfy even the requirements of Rule 23(a), meaning that no such class could ever be certified.

The majority decision, authored by Justice Antonin Scalia, not only accepted Wal-Mart's arguments, but also addressed other troubling rulings made by the courts below. As to the principal issues in the case, the majority concluded that it was improper to certify the case under any part of Rule 23 because there was no "commonality" under Rule 23(a)(2). The Court found that commonality was lacking because there was insufficient evidence that Wal-Mart "operated under a general policy of discrimination." Quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982). The Court noted the lack of any illegal policy and specifically rejected the viability of proffered expert testimony as to the potential bias of hiring managers. It similarly rejected the statistical approach as too general, and found that the anecdotal evidence was of such a small portion of the workforce that it proved "nothing at all." That the ruling turns on commonality is highly significant because the majority found the plaintiffs' evidence lacking under the more lenient standard of Rule 23(a) and never had to reach the predominance issues that are tougher for plaintiffs under Rule 23(b)(3). Further, the majority expressly left open the question of whether the Rule 23(a) requirements of typicality and adequacy of representation were satisfied.

The Court's discussion of this issue will likely shape employment class jurisprudence for many years to come. The opinion repeated the admonition that courts should engage in a rigorous review of the class action elements, but also emphasized that the inquiry went beyond the pleadings and would also frequently involve consideration of the merits. Cutting against the arguments often raised by plaintiffs, the Court rejected the view that general allegations that a statute was violated would suffice but found, instead, that there must be a narrow contention whose "truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke."

In the second part of its holding, largely agreed to by all of the justices, the Court concluded that the case could not be certified under Rule 23(b)(2), for equitable relief. In doing so, the Court resolved a long-standing split among the Circuits as to whether Rule 23(b)(2) applied when plaintiffs were seeking back pay and other monetary relief. The majority appeared to side with the more defense-friendly holding in Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998), and rejected the Ninth Circuit view that a court should determine whether the claim for monetary relief predominated. The dissent agreed that Rule 23(b)(2) was inapplicable, but would have remanded the case for consideration under Rule 23(b)(3). By contrast, the majority found no class proper at all because Rule 23(a) was never satisfied.

Justice Scalia's opinion also addressed several other aspects of the case that should be of interest for employers. For example, many courts have recognized that expert testimony at the certification stage must meet the standards of Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). With respect to the district court and Ninth Circuit's pronouncement that Daubert standards did not apply to certification decisions, Justice Scalia's opinion comments "[w]e doubt that is so." The Court's opinion also comments on issues regarding subjective decision making and disparate impact claims, questions that were left largely unanswered in the Court's splinter decision in Watson v. Fort Worth Bank & Trust, 487 U.S. 977 (1980). The majority was also dismissive of some of the "rough justice" attempts by the lower courts to address many of the individual issues by estimates, sampling, and extrapolation, referring to them as "Trial by Formula" (capitalization in original). Taken together, the majority's analysis and commentary suggest a far more rigorous and fact-specific analysis than that advocated by the lower courts.

The Bottom Line: The Court's decision in Dukes is a major victory for employers on its face, but the Court's discussion also appears to clarify standards in a way that will make the defense of employment actions more predictable and less difficult.

Jury trials of employment class actions are rare.  If a case is certified, oftentimes the risk of going forward is simply too great for the employer, and it settles.  Three recent cases, however, reflect that in those few class action cases that are tried, a plaintiff's verdict is far from a certainty, particularly in the wage and hour arena.

Most recently, in Johnston v. The Rawlings Co.LLC, Case No. 08-0800 (Oldham Cty., Kentucky, Circuit Court), a class of 360 medical claims examiners sought $12 million arising out of their alleged misclassification as exempt employees.  Following a 3-week trial in Kentucky state court, the jury returned a defense verdict on May 27, 2011.

One day earlier, in Lopaz v. Tyson Foods, Inc., Case No. 8:06-CV-459 (D. Neb), a class of hourly meat processing employees contended that they were not properly paid for all hours of work.  They specifically challenged a "gang time" system used by the employer that they claimed deprived them of pay for donning and doffing, sanitizing equipment, and similar duties.  On May 26, a federal jury returned a verdict in favor of the employer.  What makes this case especially interesting is that the employer had previously lost such a case in Kansas earlier in 2011 and had settled a similar case with the United States Department of Labor.  Further, the attorneys for the plaintiffs had previously recovered a $32 million verdict in a wage and hour case against Family Dollar Store.

Earlier this year, in Henry v. Quicken Loans (E.D. Mich), a group of mortgage loan officers brought suit against Quicken Loans, contending that they were misclassified as administrative exempt employees and were owed overtime.  They argued, essentially, that they were actually salespeople, and lacked any significant discretionary authority.  They also relied on a 2010 U.S. Department of Labor interpretation that stated that such employees most likely were not administratively exempt.  Following a four-week trial, the jury returned a defense verdict on March 14, 2011, and also returned jury interrogatories reflecting its finding that the employees performed duties that were administratively exempt.

The Bottom Line:  Class action trials involve very high stakes, but recent history shows that employers, as well as plaintiffs, may prevail.

In the wake of the Supreme Court’s April 27th decision in AT&T Mobility v. Concepcion.pdf, Senator Al Franken (D-Minn) and others re-introduced legislation (S.987, H.R. 1873.pdf) that would forbid pre-dispute mandatory arbitration agreements in employment, consumer or civil rights disputes. 

The Concepcion opinion (reviewed in Greg Mersol's April 27, 2011 post on this blog and in the May 5, 2011 Baker Hostetler Employment Class Action newsletter) involved a consumer class action but will impact the enforcement of many types of arbitration agreements. 

The Concepcions, customers of AT&T Mobility LLC (“AT&T”), brought suit after they were charged sales tax on a phone that had been advertised as “free” with the purchase of an AT&T service plan.  The service contract included an arbitration agreement requiring that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

When AT&T moved to compel arbitration, the Concepcions successfully had the class waiver provision declared invalid under a California rule (the so-called “Discover Bank rule”, named for the seminal case on the issue: Discover Bank v. Superior Court, 36 Cal. 4^th 148 (2005)), which held that class waiver provisions, like that contained in the AT&T arbitration agreement, are unconscionable and in violation of the state’s public policy against exculpation.  AT&T appealed, and the Ninth Circuit affirmed.

The Supreme Court reversed.  Justice Antonin Scalia, writing for the majority, held that the Discover Bank rule conflicted with the purpose and language of the Federal Arbitration Act (“FAA”) and therefore was preempted as an improper challenge to the enforcement of arbitration agreements.  The Concepcion decision means that an employer now can avoid class action liability by providing for mandatory arbitration of employment claims and restricting that arbitration to individual disputes.

The reintroduced bill, entitled “the Arbitration Fairness Act of 2011” (the original was introduced in 2009), is intended to counter that outcome.  It contains a number of “findings” including that “[a] series of decisions by the Supreme Court . . . have changed the meaning of the [FAA] so that it now extends to consumer disputes and employment disputes.”  Another finding declares that “mandatory arbitration undermines the development of public law because there is inadequate transparency and inadequate judicial review . . . . ”

This bill was not unexpected but has no Republican support and little chance of passage at this time.  But, never say never.  Senator Franken did succeed with earlier legislation, known as the “Franken Amendment”, which required withholding defense contracts if companies required their employees or independent contractors to enter mandatory arbitration agreements.  (See Section 8816 of the Department of Defense Appropriation Act for 2010, and the implementing regulations at 48 C.F.R. Section 222.7401).

The Bottom Line: We have not seen the last of the opposition to the Concepcion decision or to mandatory arbitration for employees or consumers.  Many pro-employee and consumer groups would like to take a bite out of all non-commercial arbitration and give every American an inalienable right to present their claims in a class action or other aggregate proceeding.

A recent California case demonstrates that a class action that should never have been brought can still bounce around the court system for years. Starbucks Corp. v. Superior Court.pdf (Cal. App. 4^th Dist., Apr. 25, 2011).  For reasons that will become apparent shortly, we are going to call the most recent opinion “Starbucks II.”

During the 1970’s, California enacted legislation requiring the destruction of minor marijuana convictions that were more than two years old.  The same law prohibited employers from asking about such convictions in employment applications, and prescribed monetary penalties if they did so.  In Starbucks Corp. v. Superior Court, 168 Cal. App. 4^th 1436 (2008) (“Starbucks I”), the plaintiffs contended that Starbucks violated this California law over 100,000 times because its pre-printed employment applications allegedly inquired into those convictions.  They sought $26 million in statutory damages for these purported violations. The trial court certified a class of all California Starbucks applicants since 2004. It held that class members without convictions could still recover each.  Those with covered convictions could opt out and potentially recover more.  Starbucks appealed.

In Starbucks I, the court of appeals reversed, finding that those who had no convictions were not entitled to relief under the statute.  Further, as none of the named plaintiffs actually had any marijuana convictions covered by the statute, the court held that none of them had standing to pursue any such claims.  As the court commented, a contrary view would have recreated a “veritable financial bonanza for litigants like plaintiffs who had no fear of stigmatizing marijuana convictions.”

Despite the dismissal of the plaintiffs’ claims, the case did not end.  Instead, the trial court permitted the plaintiffs to amend their complaint and, more importantly, to conduct further discovery to find a “suitable class representative.”   The case was now a so-called “headless” class in that there were no named plaintiffs, but somehow the litigation was permitted to continue.

 The trial court’s order permitting discovery was bad enough, but  the court went even further, and ordered Starbucks to search its own records to find 25 applicants who had covered convictions and, further still, to disclose those names to “class counsel”  with a potential for opt-out.   Following additional procedural wrangling, Starbucks appealed again.

The court of appeals appears from the language of the opinion to have been incredulous.  It expressed surprise that the case was still being litigated and noted that the discovery order itself likely violated both the spirit and language of the statute.  It described the amount sought by the plaintiffs as “excessive.”  It declined to create a per se rule against discovery orders in headless class cases, as some federal courts had done, but found no reason to do so in the case before it.  Unfortunately, while the court questioned whether any viable class could ever be identified, it limited its holding to the discovery order, leaving the door open to the litigation continuing after the second remand.

The Bottom Line:  In most cases a “headless” class should be dismissed, but some courts will permit such cases to continue for years while the would-be class counsel tries to find a suitable representative plaintiff.

The Supreme Court has now held that the Federal Arbitration Act ("FAA"), 9 U.S.C. section 2, preempts state laws that would condition arbitration agreements on the availability of class action arbitration procedures.  AT&T Mobility v. Concepcion.pdf, 563 U.S. ____ (April 27, 2011).  This new holding overturns prior holdings from California as well as other jurisdictions, and may make arbitration agreements a much more attractive prospect for employers. 

We first wrote about this case on June 1, 2010, in the wake of the Supreme Court's decision in Stolt-Nielsen v. AnimalFeeds Int'l Corp.pdf., 559 U.S. ___ (2010), in which the Court found that a party could not be forced to compel class action arbitration of claims when the agreement did not provide for such treatment. The Concepcion case presents the related issue of whether a state can prevent the enforcement of arbitration agreements that do not provide for class actions on unconscionability or other grounds.  Although courts almost universally cite the strong public and statutory policy favoring arbitration, some courts had created rules specific to arbitration that made it more difficult and expensive, particularly for employers.  Chief among these requirements, most notably in California and the Ninth Circuit, was one that rendered such agreements "substantively unconscionable" if they contained a class action waiver.  See Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005).  Thus, if an employment agreement required the arbitration of employment claims, but either waived or did not provide for class-wide arbitration, it would be unenforceable in most cases. 

The Concepcion case itself was not an employment action, but a claim that AT&T should not have charged consumers sales tax on allegedly "free" cellular telephones.  Although the named plaintiffs had signed an arbitration agreement as part of their cellular telephone contract, they brought suit in the United States District Court for the Southern District of California, where their claims were consolidated with a putative class action involving the same subject matter.  When AT&T moved to compel arbitration of the claims, they opposed the motion because the agreement barred the use of class action proceedings and because, under Discover Bank, it therefore could not be enforced.   The district court found that the agreement was unconscionable for that reason and the Ninth Circuit affirmed.  These rulings were consistent with both Discover Bank and prior Ninth Circuit authority. 

The Supreme Court, however, reversed and found that the FAA preempted the state law requirement that rendered arbitration agreements unenforceable unless they provided for class-wide litigation.  First, it found that while the FAA did not preempt state law rules of general contract interpretation, the California requirements went beyond those rules.  Instead, it likened the requirement that class-wide treatment be available to one dictating that the matter be heard by a judicial officer, or a jury, rules that would quickly make arbitration meaningless.  Because the rule requiring class action procedures was applied in a fashion that disfavors arbitration, it was itself unenforceable.

Further, the court found that the purpose of the FAA had been to avoid "judicial hostility" to arbitration, and to promote arbitration in accordance with the parties' agreements.  The California requirement, it concluded, interfered with both of those purpose.  Of critical importance, the court noted that class procedures were by their very nature likely to defeat the purpose of arbitration by including nonparties, slowing the proceedings, increasing their costs and procedural complexity, destroying confidentiality, and placing the matter into the hands of an arbitrator who might lack the requisite class action expertise.  Further, because of the limited right of review, such a proceeding would be more prone to error, and errors could not be corrected until far later in the process.  Thus, the Court concluded that the California requirements were "an obstacle to the accomplishment and execution of the full purposes and objectives of Congress" and were preempted.

The importance of this decision cannot be overemphasized and will likely be a topic of discussion for months or years.  At its most basic level, the Concepcion case means that an employer can avoid class actions by providing for arbitration of employment claims and limiting arbitration to the resolution of claims on an individual basis.  The decision also appears to limit other court-made restrictions to arbitration and my make arbitration overall a much more favorable alternative for employers trying to control their litigation costs. 

The Bottom Line:  The Supreme Court has now recognized that employers can avoid class actions through their arbitration agreements.  Expect much more from courts, commentators, and Congress over this issue.

Decades ago, Rolls-Royce drew some attention for contending that its cars did not "break down," but, rather, "failed to proceed."   In a recent case from the Seventh Circuit, a putative class action against that company not only "failed to proceed," but broke down utterly.

In Randall v. Rolls-Royce Corporation.pdf., Case No. 10-3446 (7th Cir. Mar. 30, 2011), two female Rolls-Royce employees brought a putative class action against the company for sex discrimination.  While claims arising from the production of Rolls-Royce luxury cars might have had more panache, their claims actually arose from an Indiana plant that manufactured  aircraft, commercial, and marine engines.  They contended that the plant paid women less money for the same job categories, and also that the company discriminated against them in promotions.  They sought to assert class action claims under both Title VII and the Equal Pay Act, 29 U.S.C. section 206(d)(1) on behalf of 500 women.  Many of the jobs at stake were high-paid, professional positions, earning well in excess of $100,000 per year. (we authored a related blog post on the Randall decision on April 7, 2011).

The district court denied certification and granted summary judgment for the defendants.  It also denied a request from the plaintiffs to permit female employees with stronger claims to intervene. 

The case could have produced interesting issues involving the EPA.  The EPA does not use Title VII's enforcement mechanisms, but instead incorporates those under the Fair Labor Standards Act, which do not provide for class actions.  In light of problems with the lead plaintiffs' claims, however, the court never had to reach those issues.

As to the unequal compensation claim, Rolls-Royce, like many employers, had set broad pay ranges for each class of employees. Within those pay bands, the company made adjustments based on the market demands for employees with particular skills.  In the case of certain positions, the market demands could result in wide variations, even within a salary band.  The company also made pay adjustments based upon performance.  The court ultimately found that while, on average, men made slightly more than women, the named plaintiffs were unable to identify any man that had the same equality of job skills making more than they did, making summary judgment on the EPA claim appropriate.  As to the Title VII claim, the defendant retained an expert who demonstrated that once differences in the actual jobs performed by men and women were accounted for, there was no pay disparity.  One example was the case of personnel officers and aeronautical engineers - while both were of value to the company, the company was required to pay more in the market place for one than the other, and its recognition of that fact was not sex discrimination.  The plaintiffs' expert, the court found, failed to account for these differences and made other errors as well.

The court also dismissed the claims for sex discrimination in promotions based on testimony of the same defense expert.  That expert found that women were actually promoted more quickly than men.

The court likewise denied the plaintiffs' motion to intervene to include women with stronger cases, as that motion was filed four years after the case was filed and only after certification was denied.

The Seventh Circuit affirmed.  Judge Posner, writing for the majority, analyzed the strategy employed by both parties.  His frank post-mortem provides a nice primer of the strategic concerns of both sides in such a case, and that discussion alone makes it worthwhile to read the opinion .  He noted that the plaintiffs had moved for certification under Rule 23(b)(2), a decision he described as a "risky strategy" given the more limited notice and opt-out rules.  On the flip side, he questioned whether the company should even have opposed the motion given the weakness of the lead plaintiffs' claims since it could have obtained a no-opt-out judgment as to the entire class.  Given the unpredictability of litigation, we are not sure this might be the best strategy, irrespective of Judge Posner's otherwise pragmatic opinion.  He concluded  that the proper course for the plaintiffs would have been to seek certification under Rule 23(b)(3), requiring notice to the class and giving potential class members the opportunity to opt out and to pursue their own, stronger claims, if they believed they had one.

Even had the plaintiffs filed such a motion, the Seventh Circuit's opinion makes it obvious that certification would have been properly denied.  The court criticized the plaintiff's counsel for the "almost imperceptible pace" of their prosecution of the case. Infused throughout the opinion was also concern over a class being bound by an unfavorable judgment due to the questionable cases of the named plaintiffs.

The court also criticized the late effort to have plaintiffs with stronger cases intervene, commenting:  "Intervention shouldn't be allowed just to give class action lawyers multiple bites at the certification apple, when they have chosen, as should have been obvious from the start, patently inappropriate candidates to be the class representatives."

The Bottom Line:  Not every case is a class action.  Plaintiffs seeking to pursue classes to bolster weaknesses in their own claims may find themselves worse off.  Statistical experts for both sides must perform an apples-to-apples analysis comparing the right groups of employees.

A wise man (who we'd never heard of until searching for witty quotes with which to open this article) once said, “Procrastination is the bad habit of putting off until the day after tomorrow what should have been done the day before yesterday.”   The UAW will undoubtedly attest to this notion following the decision earlier this year from the Fourth Circuit in Barbour, et al. v. UAW, et al.pdf.

The plaintiffs in Barbour claimed that the UAW International and two of its locals lured them into a January 31, 2007 retirement from a Chrysler plant in Maryland by assuring them that any retirement incentive plan announced later that year would apply retroactively.  Anyone care to guess what happened next?  If you said, "A retirement incentive plan was announced later that year but wasn't retroactive," congratulations, you've been paying attention!  In fact, it was announced two weeks later, in mid-February.  (Kind of an incredible timetable since, if the UAW is to be believed, there was no incentive plan in the works as of the end of January....)

The plaintiffs sued both the International and the two locals on a wonderful assortment of state law claims.  The International was served on March 20, 2008, and the first local was served nine days later on March 29th.  These two defendants filed a notice of removal in federal court on April 28, 2008, the thirtieth day following service on the first local.  (The second local--apparently the most adept of the three at dodging service--was not served until after the case was removed.)   So far so good, right?

Wrong!  The Fourth Circuit rejected recent case law from the Sixth, Eighth and Eleventh Circuits, and held that the 30-day time limit for removal does not begin to run when the last defendant is served.  Rather, the court held, the first-served defendant has 30 days after service to remove the case.  If the case is removed, defendants who are served thereafter have 30 days from their own date of service in which to decide whether to join the removal or move to remand.  Here's the catch, however - if the first-served defendant decides not to remove the case, the case stays in state court regardless of whether subsequently served defendants wish for it to be removed.  So, if the plaintiff serves the first defendant more than 30 days before serving anyone else, the subsequent defendants may be left wafting up a creek with 'nary a paddle in sight. 

But no, you say!  How can that be fair to the poor, subsequently served defendants?  Well, the Fourth Circuit explained, it's not unfair because that first-served defendant obviously will have identified the potential bases for removal, weighed all the risks and benefits of each, studied the relevant case law and arrived at a carefully reasoned decision that the case should remain in state court.  Thus, the court reasoned, even if the subsequently served defendants did have some theoretical right to remove the case to federal court, the first-served defendant would nix the idea based on its aforementioned, carefully thought out decision.  The much-beloved rule of unanimity (which, by the way, isn't in the statute) would see to it.

This seems to us like a pretty big assumption.  It's not hard to conceive of a situation in which the first defendant would forego removal based on something other than an analysis of the issues, particularly in some of the more arcane realms of employment and labor law where field preemption guards the castle walls and the well-pleaded complaint rule stands lonely on the opposite side of the moat.  (What would the world be without overdramatic metaphors?)  On the other hand, at least based on the facts described in the Fourth Circuit's opinion (which may not be complete), it's difficult to understand the motive for waiting until the last possible day to remove a case.

The Bottom Line:  If removal is a possibility, be cautious and thoughtful in deciding when to file the petition, particularly if other defendants are served first.

The mantra uttered by plaintiffs in FLSA cases is the "fairly lenient" standard used by many courts to determine conditional certification. As we have written before, this standard may give the plaintiffs an early victory, but may not really benefit either side as such claims are frequently decertified, suggesting that the original decision to certify conditionally was a waste of money and judicial resources. A recent case from the Western District of New York reflects that common sense may still result in conditional certification being denied.

In Brickey v. Dolgencorp., Inc.pdf., Case No. 06-CV-6084L (W.D.N.Y. Feb. 23, 2011), the plaintiffs were hourly employees of the Dollar General Stores. They contended that as a result of the company's allocation payroll budgets to individual stores, managers were pressured to “shave” time from payroll records or to ask employees to work off the clock. They claimed that these policies encouraged violations not only of the FLSA, but also that of the laws of New York, Ohio, Maryland, and North Carolina, where the individual plaintiffs worked. They sought conditional certification of a nationwide class of assistant managers and clerks under the FLSA, and also state law class actions in the four states in which they had worked.

The district court cited and followed the two-step procedure for certification of an FLSA collective action. It first noted, however, that there was nothing inherently illegal about an employer having or enforcing a payroll budget. To the extent that they were claiming violations, their real complaint was that individual managers may not have complied with the statute to meet their budgets. Thus, the court found, following the lead of at least one other case, that a policy that might indirectly encourage managers to limit overtime did not violate any statute. Further, because the existence of any violation turned on the actions of individual managers, the court found that examination of the plaintiffs' claims would have to be undertaken on a manager-by-manager basis, and not on a nationwide or state-wide basis. While acknowledging the “fairly lenient” standard for conditional certification, the court concluded that the plaintiffs had not shown that they “were subject to a common policy or practice that violated the law, as opposed to unlawful actions by individual, anomalous managers” and denied the plaintiffs’ motion.

With that ruling, the court’s conclusion as to the state law claims was no surprise. It found for the same reasons that the plaintiffs could not establish that common legal or factual issues predominated or that the interests of judicial economy would be served by having “hundreds of fact-intensive ‘mini-trials.’” Thus, it found that the plaintiffs could not satisfy the requirements of Rule 23(b) and denied certification of the state law classes.

The Bottom Line: While plaintiffs have a lesser standard for conditional certification, they still need to demonstrate a common class-wide policy that actually violates the law.

As many of the postings in this blog reflect, there has been a veritable flood of class and collective actions asserting wage and hour violations.  But even apart from Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9^th Cir.), cert. granted, 131 S.Ct. 795 (2010), now pending before the United States Supreme Court, discrimination cases still are being brought and may, under the proper circumstances, be certified.

In Brown v. Nucor.pdf. Case No. 2:04-CV-22005-CWH (D.S.C. Feb. 17, 2011), the plaintiffs brought suit against the employer under Title VII and 42 U.S.C. Section 1981, asserting hostile environment race discrimination claims on a class-wide basis.  They supported their claims with anecdotal evidence regarding numerous racist comments and monkey noises being broadcast over the company’s radio system, as well as other discriminatory acts. They also presented statistical evidence regarding lost promotional opportunities.  Incidentally, the plaintiffs were represented by the Alabama firm of Wiggins, Childs, Quinn, and Pantazis, among others, a firm that has scored a number of notable victories in both the discrimination and wage and hour arenas.

The suit was originally filed in 2004.  In 2007, following numerous procedural turns, the district court denied class certification, but that determination was overturned by the Fourth Circuit in 2009.  See Brown v. Nucor Corp., 576 F.3d 149 (4^th Cir. 2009),  In a 2:1 opinion, that court found that the denial of certification was an abuse of discretion.  This was itself an unusual holding, but the Fourth Circuit’s decision focused entirely on Rule 23(a) did not state which of the required Rule 23(b) provisions would apply.  In fact, after the court amended its opinion, it did not even mention Rule 23(b) at all.. 

On remand, predictably, the focus of the argument was on the meaning of the Fourth Circuit’s ruling.  The plaintiffs argued that the Fourth Circuit, by omitting any Rule 23(b) discussion, essentially directed that the class be certified under Rule 23(b)(2), for equitable relief.  Plaintiffs tend to prefer Rule 23(b)(2) classes because of their relative ease of administration and the absence of any opt-out rights by class members.  The defendant argued that the court of appeals had left open the possibility of denying certification if the district court found that no provision of Rule 23(b) applied.

The district court disagreed with both parties, but still handed the plaintiffs a victory.  It found that while the Fourth Circuit had not prescribed a provision of Rule 23(b), its order was clear that some class should be certified.  It found, however, no basis to apply Rule 23(b)(2), however, because the plaintiffs’ claims for back pay and punitive damages caused monetary relief to predominate. It also refused to certify a “hybrid” 23(b)(2)/23(b)(3) class.  It noted that there was a three-way split among the circuits and that the issue was currently before the Supreme Court in Dukes.  As to the availability of a hybrid claim, it sided with the Fifth Circuit in Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5^th Cir. 1998), and held that none was available.  Finding that class issues predominated, it therefore certified the class under Rule 23(b)(3).

Nucor has promised another appeal.  If and when a district court ever reaches the merits, the parties will have to litigate claims that may be seven to ten years old, and will likely test the limits of the witnesses’ memories.

The Bottom Line:  Wage and hour claims may now comprise the lion’s share of class action litigation, but don’t discount the possibility of race or sex discrimination class actions, which can themselves be extremely dangerous for the employer.  Litigation of this type can and often does drag on for many years.

In a decision that emphasizes practicality over formalism, the Ninth Circuit recently held that pharmaceutical sales representatives (“PSRs”) are exempt from overtime pay.  In Christopher v. SmithKline Beecham Corp.pdf, __F.3d___, 2011 WL 489708 (9^thCir. Feb. 14, 2011) the Court concluded that the “outside sales” exemption to the FLSA applies to PSRs, meaning that they are not entitled to overtime pay.  Christopher held that the PSRs’ primary duty was making sales in the sense that “sales” occur in the pharmaceutical industry. 

PSRs have been the subject of numerous class and collective action cases claiming entitlement to overtime, and specifically challenging the application of the outside sales exemption to the FLSA.  The basis for these lawsuits is that the law prohibits manufacturers and PSRs from directly selling prescription drugs to the public or to physicians. Thus, the plaintiffs argue, they cannot be “selling.”

As a result of the legal restrictions on direct sales, the pharmaceutical industry employs approximately 90,000 PSRs to personally convince physicians in a targeted area to prescribe the drugs for which the PSR is responsible.  The PSRs personally visit physicians and provide samples along with information about the products.  The goal of the PSR is to seek non-binding commitments from the physicians to prescribe the assigned product, since the law precludes a direct sale in the strict sense of the word.  (Nota bena for movie aficionados:  The recent film “Love and Other Drugs” depicts the competitive sales atmosphere among PSRs—and, a frolic involving the patient played by Anne Hathaway, raising unrelated issues of binding v. non-binding commitments.). 

In Christopher, the GlaxoSmithKline PSRs were paid a base salary and incentive-based compensation tied to whether market share, sales volume, revenue, or dosage associated with the product increases in the PSR’s territory.  The employer asserted that the “outside sales” exemption applied because the PSRs’ primary duty involved making sales or obtaining orders away from the employer’s business.  The plaintiffs argued that their primary duty was not making sales, but instead communicating features and benefits of the products to physicians.  The Department of Labor (“DOL”) supported the plaintiffs’ position that PSRs do not meet the primary duty test necessary for the exemption. 

Congress has defined “sell” for purposes of the exemption as a “sale” or “other disposition.” Congress has not defined the specific parameters of the outside sales exemption but has granted the DOL power to issue regulations to this end.  Courts typically defer to the DOL interpretation as long as it is based on a permissible construction of the statute.  However, Christopher found that the DOL had not provided specific, meaningful language interpreting the meaning of sales in this context. 

Christopheranalyzed the current and historical job functions for PSRs industry-wide and concluded that the job duties are homogeneous among various drug manufacturers and have changed little over the past 50-60 years.  The Court emphasized that the DOL had interpreted the exemption as far back as 1940 to require only a sale “in some sense” of the word.  As a result, Christopher held that the DOL’s current position in the context of an amicus brief was not entitled to deference since it had essentially acquiesced to the industry practice for decades.  Further, the Court concluded that the DOL view was plainly erroneous and inconsistent with regulations and practice. 

Christopher recognized that legal restrictions prohibit the PSRs from directly selling the drugs, but that physicians are in reality the decision makers that result in the sales.  Based on the pharmaceutical business model, the prescription is the sale for practical purposes.  The manufacturers hire PSRs based on their sales experience, exercise limited oversight of day-to-day activities of the PSRs, and tie compensation to whether sales of the product for which the PSRs are responsible increase.  As a result, the Court concluded that the PSRs’ jobs involve selling at least  in “some sense” of the word.  The Court opined that the bulk of the PSRs’ job duties are in line with those of the “classic salesman” as set forth in a 1941 case, Jewel Tea Co. v. Williams, 118 F.2d 202 (10^th Cir. 1941).  The PSRs’ primary duty is not promoting their employer’s products in general to the at-large public.  Instead, the PSR is primarily concerned with inducing a particular physician in a particular territory to prescribe a particular drug.

In contrast to Christopher, the Second Circuit has found that PSRs do not qualify for the outside sales exemption because they do not literally consummate sales with physicians or receive binding commitments from physicians.  In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010).  The Novartis Court gave controlling deference to the DOL view requiring essentially a transfer of title to fall within the outside sales exemption.  The Court construed the outside sales exemption narrowly against the employer and viewed the PSRs’ primary duties as promotional in nature. 

Other courts have considered whether the separate “administrative” exemption to the FLSA applies to PSRs.  This exemption requires that the employee receive at least $455 per week and that the “primary duty” involve discretion and independent judgment in the performance of significant office or non-manual work directly related to management or general business operations.  In Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), the Court held that  the administrative exemption applied to the PSRs, finding that they engaged in planning, exercised discretion to develop their own strategies for marketing, and could chose which doctors to visit within territories.  As a result, Smith rejected the PSRs’ claim that they lacked discretion with respect to matters of significance and found it unnecessary to consider the outside sales exemption.

In contrast to Smith’s application of the administrative exemption, Novartisfound that the PSRs did not exercise discretion and independent judgment with respect to matters of significance.  The Court stated that the PSRs had no role in planning sales strategy or the core message to physicians and were forbidden from answering any questions for which they had not been scripted.  In the wake of Novartis, the Eastern District of New York has denied summary judgment due to a factual dispute concerning the job duties and discretion of telephone claims representatives alleged to be exempt under the administrative exemption.  Harper v. Government Employees Ins. Co., ___F.Supp.2d___, No. 09-2254 2010 WL 4791635 (E.D. N.Y. Nov. 16, 2010).  The Court stated that the employer’s argument in favor of the exemption was strong but that more facts were needed based on the Second Circuit’s “very narrow” interpretation of the administrative exemption.

The Bottom Line:   Courts are now split over the application of the outside sales exemption.  The Ninth Circuit views PSRs as exempt based on the outside sales exemption and the Third Circuit reaches the same result based on the administrative exemption.  The Second Circuit disagrees, holding that PSRs do not qualify for either exemption.  Courts disagree on fundamental concepts, such as the deference owed to the DOL and the proper construction of the exemptions based on decades old industry practice.  The Supreme Court is considering petitions for certiorari and may weigh in to resolve the difference of opinion among lower courts.  Regardless, employers relying on the outside sales and administrative exemptions should review the realities of employees’ day-to-day duties, including the amount of discretion and judgment exercised. 

Some defense counsel breath a sigh of relief after they manage to remove a class action to federal court but, as the case below illustrates, the battle may be far from won.

The Class Action Fairness Act of 2005 (“CAFA”) permits defendants to remove a diversity action from state to federal court when certain criteria are met, including that the parties are minimally diverse and the amount in controversy exceeds $5,000,000.  A plaintiff whose action has been removed can secure a remand to state court based on the “local controversy” exception.

The recent Ninth Circuit opinion in Coleman v. Estes Express Lines Inc.pdf. (Case No. 10-56852, January 25, 2011), considered whether the federal district court is limited to the complaint in determining if two of the criteria for the local controversy exception are satisfied.

Coleman claimed in his complaint based on California law that Estes West and Estes Express (a) failed to pay overtime, (b) failed to provide meal and rest periods, (c) failed to timely pay earned wages after discharging employees, (d) failed to pay earned wages to current employees, (e) failed to provide wage statements, and (d) engaged in unlawful business practices.

After the defendant companies removed the action to federal court under CAFA, Coleman moved to remand to state court contending that the local controversy exception was applicable.  The local controversy exception requires that a federal district court “shall decline to exercise [removal] jurisdiction . . . over a class action in which –

(I)  greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed;

(II)  at least 1 defendant is a defendant –

(aa)  from whom significant relief is sought by members of the plaintiff class;

(bb)  whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and

(cc)  who is a citizen of the State in which the action was originally filed; and

(III)  principal injuries resulting from the alleged conduct or any related conduct of each defendant where incurred in the State in which the action was originally filed.”  28 U.S.C. § 1332(d)(4)(A)(i).  (Emphasis added).

The plaintiff seeking remand has the burden of demonstrating that the local controversy exception is met.

Here, the companies contended that two necessary criteria for the local controversy exception were not satisfied.  And, they filed the declaration of Estes Express’ Director of Human Resources in support. First, the companies argued that Estes West (a California corporation) lacked sufficient funds to satisfy a judgment and that hence “significant relief” had not been “sought” from it.  See 28 U.S.C. § 1332(d)(4)(A)(i)(II)(aa).  Second, the companies argued that Estes Express (a Virginia corporation) exercised almost total control over the operations of Estes West and that therefore Estes West’s “alleged conduct” did not “form a significant basis for the claims asserted by the proposed plaintiff class.”  Id.

The district court found it could only look to the complaint’s allegations to determine if Coleman sought significant relief from Estes West.  After analyzing only the complaint, it held Coleman had met the significant relief requirement of §1332(d)(4)(A)(i)(II)(aa).  As to the issue of whether Estes West’s “alleged conduct form[ed] a significant basis” for Coleman’s claims, the district court held regardless of the declaration that the plaintiff had satisfied the conduct requirement of §1332(d)(4)(A)(i)(II)(bb).

On appeal, the Ninth Circuit considered both the text and legislative history of the exceptions to determine if extra-complaint materials was admissible.  First, the appellate court held “that CAFA’s language unambiguously directs the district court to look only to the complaint in deciding if the criteria in [subsections (aa) and (bb)] are satisfied.”

The Ninth Circuit compared the language in subsections (aa), (bb) and (cc) – relating to criteria that must be met before the local controversy exception to CAFA jurisdiction applies.  While subsections (aa) and (bb) used the words “sought” and “alleged”, which can be drawn from the complaint, subsection (cc) uses the word “is” which signals that the “actual fact must be established.”

While the Ninth Circuit was not required to consult the legislative history because the text was unambiguous, it did so because several courts had relied on a Senate Judiciary Committee Report in reaching an opposite conclusion.  However, the Court didn’t find anything in the Report that was inconsistent with its conclusion.  The Report indicated there could be fact-finding on the questions of citizenship and amount-in-controversy but not as to subsections (aa) and (bb) -- relief sought and alleged conduct – that were before the Court.

So, the Ninth Circuit concluded that Coleman’s complaint “seeks sufficient relief against Estes West to satisfy subsection (aa)” and sufficiently alleges conduct of Estes West to satisfy subsection (bb).  Since Estes West was the actual employer the allegations were significant.  Finally, the Court noted because of different state pleading requirements, a district court might, in its discretion, either “require or permit” the plaintiff to file an amended complaint to facilitate analysis of the relevant CAFA criteria.

The Bottom Line:  As to the local controversy exception, a careful analysis of the complaint is required including any attached materials.  Sometimes, a plaintiff’s zeal to attach company documents may actually assist the defendant.  And, if there is ambiguity on a key CAFA issue, a motion to seek an amended complaint may be helpful.  The Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), and Bell Atlantic Corporation v. Twombly, 550 U.S. 544 (2007), decisions may be useful in attempting to secure a complete explanation of the claims of the putative class. 

Overtime pay under federal law is calculated at one and a half times the employee’s regular rate.  Most employers are already aware that the “regular rate” is not simply the employee’s agreed upon hourly rate of pay, but may also include shift premiums, many bonuses, and other types of compensation.  See 29 U.S.C. § 207(e).   A recent case from the Tenth Circuit highlights that while the regular rate includes most types of remuneration, employees cannot include contractually agreed overtime and thus get a federal overtime premium on top of the contractually agreed one.

In Chavez v. City of Albuquerque.pdf, the plaintiffs, all city employees, brought two collective actions against the City of Albuquerque contending that it had miscalculated the regular rate and thus had failed to pay them appropriate overtime.  While they identified a number of issues, their primary claim rested on the overtime provisions negotiated by their unions.  In the case of police officers and firefighters, their claim was bolstered by differences in the number of hours entitling them to overtime.  Unlike most non-exempt employees, who receive overtime pay after 40 hours of work per week, for example, the FLSA entitles police officers to overtime only after 43 hours.  The Albuquerque police collective bargaining agreement, however, gave them the right to overtime over 40 hours.  Thus, the officers argued, they should be paid overtime pay after 40 hours under the contract AND then they were entitled to additional pay under the FLSA based on the the higher “regular rate” provided in the contract.  The remaining plaintiffs, who were firefighters, clerical workers, transit workers, and others, raised essentially the same claim.

The trial court held for the City as to this claim and the Tenth Circuit affirmed.  It held that the employees were entitled to only one dip of overtime compensation.  For each hour, they were entitled to the greater of the FLSA or contractual overtime, but nothing in the statute required that the City pay FLSA overtime on top of contractual overtime.  Similarly, it held that any overtime required by the contract would be calculated based on the contract and not based on federal law.

The court also addressed the employees’ claims that pay they received for unpaid sick and vacation time should be added back into the regular rate.  While this claim was smaller, the district court found in their favor on both counts.  The Tenth Circuit, however, reversed as to the vacation pay claim, citing long-standing Department of Labor regulations.  It noted the well-settled principle that courts should defer to the Department of Labor’s rulings and interpretations.  The DOL has indicated that a buy-back of sick pay is akin to an attendance bonus, which encourages certain behaviors wanted by the employer, and should be added to the regular rate.  By contrast, vacation time is generally scheduled in advance and is not abused in the way that sick time may be.  Deferring to this DOL distinction, the Tenth Circuit reversed the trial court’s finding with respect to the addition of reimbursement of unused vacation days to the regular rate.

The Bottom Line:   Plaintiffs can exploit even minor FLSA violations effectively through collective actions, but ultimately they still need to establish a violation of the FLSA to recover.

In the wake (no pun intended) of the Horizon gulf oil spill, what could be worse than (a) representing BP; (b) in Louisiana; (c) on a case involving personal injuries allegedly sustained on an oil platform? How about making the injury one for alleged radiation exposure? And the defendant wins! We don't ordinarily comment on personal injury class actions, even ones by employees, but the case of DeHart v. BP American Inc.pdf was just too interesting to pass up.

Here’s what happened. The plaintiff worked on a decommissioning project for a BP platform in the Gulf of Mexico in early 2007. He and others contended that they were injured by exposure to radioactive dust and liquids and brought personal injury claims for negligence under the Jones Act, 33 U.S.C. section 905(b). Following a removal and procedural wrangling, the plaintiff moved for certification. So far, so good for the plaintiffs.

After that, it seems, nothing went right under Rule 23. First, in response to some of the defendants’ arguments, the plaintiff had re-defined and limited the proposed class from 130 to as few as about 35 individuals. This number was below that generally recognized to support “numerosity” under Rule 23(a), and the actual number of class members exhibiting symptoms was even lower than that. More importantly, the court found that the plaintiff could not satisfy Rule 23(b)(3)’s predominance requirement because of highly individual inquiries required to determine what exposure caused what injury, including the type and magnitude of exposure, the duration of exposure, the employee’s prior health condition, the alleged health condition(s), what treatment they needed, and difficulties inherent to the specific materials claimed by the plaintiffs to have harmed them. Indeed, the court found these features so strong as to preclude a finding of typicality. Further, these differences undermined the element of “superiority.” The court also found that because DeHart claimed not to be exhibiting symptoms of radiation exposure and other putative class members did, they had an inherent conflict over whether they wanted a large present recovery, or monitoring and payment of future medical costs. Thus, the court found, the plaintiff could satisfy virtually none of the elements of Rule 23 and denied certification.

The bottom line: Sympathetic facts or a locally unpopular defendant won't support a class action if the Rule 23 requirements aren’t present.

We've written at least three times now on the case of Dukes v. Wal-Mart, now pending before the United States Supreme Court, as it is the largest employment class action in history.  Perhaps a relatively distant second is the collection of cases against FedEx Ground Package System, currently being handled through the multidistrict litigation docket in Northern Indiana.  See In re FedEx Ground Package System, Inc., Employment Practices Litigation.pdf Cause No. 3:05-MD-527 RM (MDL-1700). The MDL litigation includes over 40 cases arising in more than half of the states in the Union. Those cases, together, challenge various aspects of the decision by FedEx Ground of classifying its drivers as independent contractors under a variety of theories and statutes that include (depending upon the case), state laws of contract, state tort claims, various state employment and business practices acts,  ERISA, the FMLA, USERRA, and the FLSA.  During the litigation's long, complex, and tortuous procedural history, several of the cases were certified, at least in part, and over 2,000 pleadings or orders were filed.

 It's not over yet, but on December 13, 2010, the court rendered a 182-page opinion that will pare down the case's massive scope.  The court's opinion is notable not only because of the size of the case, but because even after granting much of the employer's summary judgment motion, several large cases remain.  The case is also worthy of note because the court had to deal with the unique variations among states regarding tests for "independent contractor" status.

The beginning of the end, so to speak, came a few months ago, on August 11, 2010, when the court granted summary judgment with respect to the claims of the company's Kansas drivers.  Applying Kansas law, and focusing on the "right of control," the court concluded the terms of the FedEx operating agreements under which the drivers worked did not render them employees. Finding the agreement to be controlling, the court largely rejected arguments by the plaintiffs regarding the control they claimed that the company actually exercised, and drew a distinction between the company's requirements as to results versus the manner and means by which work was to be performed.   Following that decision, the court directed the parties to brief the same issues regarding the cases in states other than Kansas. 

In its lengthy December 13 order, the court reviewed the laws of the various states regarding the tests for independent contractor status and, for the most part, concluded that the company was also entitled to summary judgment because the laws were substantially similar to those of Kansas.  It did not grant summary judgment with respect to some of the federal claims (such as the FLSA or FMLA) as well as certain state law tort or statutory claims.  Interestingly, in some cases, such as the Kentucky Wage Payment statute, the court actually granted summary judgment in favor of the plaintiffs.  With respect to the surviving claims, the court generally asked the parties to submit proposed pretrial orders to resolve the outstanding issues.

The Bottom Line:   Even very large cases are amenable to summary judgment.  State law variations may or may not lead to different determinations on complex issues.

Class and collective actions raise myriad ethical issues.  Many of these issues center on class communication issues and determining who is a client. Some relate to settlement tactics.  Others, relating to conflicts of interest, may be so serious that they result in the class not being certified under the Rule 23 requirements of commonality, typicality, adequacy of representation, or predominance.

For strategic reasons, some plaintiffs' attorneys may try to maintain large wage and hour cases, or a series of cases against the same defendant.  On the one hand, doing so helps counsel take advantage of what may be a steep learning curve regarding the employer's operations, and may also facilitate the sharing of information among various groups of employees.  Plaintiffs' counsel may also do so to maximize the pressure on the defendant to settle, but in doing so, may create both problems holding the class together and potential ethical concerns.

A recent case highlights the fine line that exists between the desire to assert multiple claims against the employer and potential ethical violations. (See McCauley v Family Dollar.pdf).  The Family Dollar Store chain has been the subject of several wage and hour class and collective actions, one of which resulted in a sizable verdict involving the alleged misclassification of its store managers.  (See Morgan v. Family Dollar Stores, Inc.pdf, 551 F.3d 1233 (11th Cir. 2008)).  Most recently, two putative class actions were brought against it in federal court in Kentucky under the Kentucky wage and hour laws.  The first was a claim asserting the the company's store managers were misclassified as exempt for overtime purposes.  The second, brought two months later by the same attorneys, was by a group of hourly employees claiming off-the-clock time.  Family Dollar store sought to disqualify the attorneys on the second case on the grounds that their representation of both classes presented real or potential conflicts of interest.

On November 1, 2010, the United States District Court for the Western District of Kentucky agreed (See McCauley Order.pdf) that the same attorneys could not represent both classes, for largely common sense reasons.  In the second case, because the store managers actually supervised the hourly employees, it was their decisions as to directing their workforces that were being challenged.  Further, those same managers would be receiving privileged information and would be potentially the most important witnesses for the defense to say that they did not require hourly employees to work without pay.  Thus, because of their representation of the managers in the first case, the plaintiffs' attorneys would have access to privileged information and to witnesses they would ordinarily have to depose.  Further, the managers themselves would be in a conflict situation because they might perceive the need to help "their" lawyers in the second case, potentially affecting their testimony.  The court emphasized the lack of any evidence that any collusion had already occurred, but recognized that the risk and the appearance of impropriety were simply too great.  It therefore disqualified the plaintiffs' attorneys on the second case.

The decision did not affect their representation of the managers in the first case, nor did it dismiss the second case, which can continue with different plaintiffs' counsel.

The bottom line: The same plaintiffs' firm cannot represent both employees and the managers who supervise them in class or collective wage and hour litigation.

On October 27, 2010, the Second Circuit affirmed a federal court’s refusal to certify a proposed class of Hertz Station Managers allegedly denied overtime under New York law.  (Myers v. Hertz Corp., No. 08-1037 (2d Cir. Oct. 27, 2010)).  In doing so, the court addressed the potential difficulties of certifying Rule 23 overtime exemption cases and expounded on the appropriate certification standard for FLSA exemption cases.  

In a case the court described as “procedurally convoluted,” the plaintiffs originally sought to proceeded as a collective action under the FLSA.  After the district court denied this motion, the plaintiffs then moved for certification under Rule 23 based on alleged violations of unpaid overtime under New York Labor Law § 191.  While the court found the plaintiffs’ state law claim to be nothing more than an alternative method of seeking redress for an underlying FLSA violation, it addressed the plaintiffs’ appeal by using the traditional requirements of Rule 23. 

Finding that it only needed to address Rule 23’s predominance requirement, the court determined the relevant “question of law and fact” to be whether the plaintiffs established they were entitled to overtime under the FLSA.  The court found this to be a “complex, disputed” issue whose resolution required answering a number of subsidiary questions involving whether the plaintiffs fell under the FLSA’s executive exemption.  The court noted that while the exemption issue may not be an inherently individualized inquiry, the exemption inquiry does require examination of actual duties performed and involve evidence that the plaintiffs’ jobs “were similar in ways material to the establishment of the exemption criteria.”

The plaintiffs relied on two categories of evidence to show the required common proof:  (1) Hertz decided to classify all station managers as exempt without an examination of each individual manager’s duties; and (2) testimony of Hertz representatives which, plaintiffs claimed, established that station managers’ duties did not vary materially across Hertz locations.  With respect to the first category, the court found that the existence of such a blanket exemption policy, standing alone, “is not determinative of the main concern in the predominance inquiry:  the balance between individual and common issues.”  The court further explained that such a policy does not establish whether all plaintiffs were actually entitled to overtime pay, and that the question of entitlement to overtime pay is still answered by examining the employee’s actual duties.  As to the second category, the court found that the proffered testimony was general, largely inconclusive, and only provided mixed support for the plaintiffs.  Thus, the court found that the district court did not abuse its discretion in declining to certify a class.

While the court declined to review the district court’s refusal to conditionally certify the plaintiffs’ FLSA claims, it elected to provide guidance on the standard district courts should apply to motions seeking certification of a collective action under § 216(b) of the FLSA.  The court noted that district courts of the Second Circuit have largely adopted a two-step method.  While not required, the court found this approach to be “sensible.”  The court stated that in FLSA exemption cases, plaintiffs make the showing necessary to send notice to potential opt-ins (the first stage) by “making some showing that ‘there are other employees . . . who are similarly situated with respect to their job requirements and with regard to their pay provisions,’ on which the criteria for many FLSA exemptions are based, who are classified as exempt pursuant to a common policy or scheme.”  The court cautioned that while this is a low standard of proof, it cannot be satisfied simply by “unsupported assertions.”  In the second stage, the district court must determine whether the collective action may go forward by determining whether the plaintiffs who have opted in are in fact similarly situated to the named plaintiffs.   

The bottom line:  As this case demonstrates, Plaintiffs seeking a Rule 23 overtime class do not show predominance simply because the employer used a blanket exemption policy.  Rather, the determinative issue should be whether the plaintiffs' job duties are similar enough so that the applicability of the overtime exemption(s) can be determined on a class-wide basis.

"Hey, Judge, You Don't Understand......I Just Wanted The Money!"

About two dozen people who opted into an FLSA collective action in Nevada federal court may soon be reminded that the pinch is usually in the fine print. Magistrate Judge Peggy A. Leen recommended sanctions against these individuals after they refused to respond to discovery. In fact, these lovable rapscallions apparently enjoy life on the wild side, as they even ignored the magistrate judge's order granting the employer's motion to compel.

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Many courts today use the two-step procedure described in Lusardi v. Xerox Corp., 99 F.R.D. 89 (D.N.J.1983), to decide whether to certify potential classes under section 16(b) of the Fair Labor Standards Act.  Under that procedure, the court the court looks at certification twice, first before much discovery is done, and again at the close of discovery.  In both cases, the question is whether the class members are "similarly situated," but the standard is different.

Under the Lusardi approach, the court typically uses a lighter standard to certify at the early "preliminary certification" stage, and requires only a modest showing that the class members are similarly situated.  If the court finds that the case meets that standard, it "conditionally" certifies the class and orders notice to the potential class members and the appropriate opt-in procedures.  Once more discovery is completed, the defendant can move to decertify the class. The plaintiff has a much higher burden to keep the class at this second stage.

This two-step procedure tends to create a false sense of victory on behalf of the plaintiffs when the case is conditionally certified.  Certainly, conditional certification aids in getting notice to the class and securing opt-ins, and obviously a defeat at this stage is a serious set-back to a "class" strategy.  But unlike a Rule 23 class, decertification still remains a significant likelihood and even a probability.

Fifteen years ago (after 16(b) had been the law for many decades), the Fifth Circuit found that "Based on our review of the case law, no representative class has ever survived the second stage of review."  Mooney v. Aramco Services Co., 54 F.3d 1207 (5th Cir. 1995). Two recent decisions reflect that decertification still remains  a serious possibility in any case that has been conditionally certified.

Most recently, in Lugo v. Farmers Pride Inc.pdf, the United States District Court for the Eastern District of Pennsylvania considered the claims of a group of chicken processors who brought a "donning and doffing" claim under the FLSA for the time they spend putting on and taking off their protective clothing and equipment.  The court conditionally certified the class in the spring of 2008, permitting it to proceed as a collective action.  Following two years of additional discovery, however, the court decertified the class, finding that the employees situations varied based upon their positions, departments, and shifts.  While the court left open the possibility that a smaller class might be viable, the decision cannot be termed anything but a victory for the employer.

In a completely different court and industry, earlier this year the United States District Court for the Northern District of California considered a claim that low-level supervisors for an automobile finance company had been misclassified as exempt for overtime purposes.  Hernandez v. United Auto Credit Corp.pdf., but it too, later found that the class should be decertified. In Hernandez, the court, like the court in Lugo, conditionally certified the class, but it, too, later found that the class should be decertified.  In the Hernandez case, the difficulty was that, as discovery revealed, the duties and responsibilities of the putative class members varied, making them something other than "similarly situated," and making class action treatment inappropriate.

The bottom line:  While defendants want to avoid conditional certification, decertification under section 16(b) remains a very real likelihood at the end of the case.

"......and Please Remember to Tip Your Bartender And Waitress."

The famous 21 Club in New York was on the Curly end of a Larry-esque double-slap from the Southern District of New York last week. Alderman v. 21 Club.pdf Case No. 1:09-cv-2418 (Aug. 20, 2010). By way of background, the plaintiff employees in Alderman are seeking to represent a proposed class of 21 Club banquet staff members on wage/hour claims under the Fair Labor Standards Act and New York law, based on their receipt of gratuities. Proposed class members who work a particular event at the restaurant share an automatic 18 percent gratuity charged on the total bill. The plaintiffs, who apparently don't believe that these gratuities are gratuitous, claim that the tips should be included in their regular rate for purposes of calculating overtime pay. And, because the only thing better than getting more is getting even more, the plaintiffs also claim that the 21 Club collects more than 18 percent in service charges on banquet bills, and that they should get the whole enchilada.

The class members, however, are all covered by a collective bargaining agreement as good hard-workin', dues-payin' members of UNITE Local 100. It seems this collective bargaining agreement, which the Court described as "comprehensively set[ting] forth the terms and conditions of employment," included a provision that "specifically" (again, in the Court's words) entitled to banquet service staff only to an 18 percent gratuity on the entire bill for an event. The employer surprisingly interpreted this provision as entitling banquet service staff only to an 18 percent gratuity on the entire bill for an event.

As it turns out, the agreement apparently wasn't as "comprehensive" or "specific" as the Court first intimated. Thus, the Court rejected the employer's argument that the plaintiffs' entitlement to the 18 percent gratuity charge was governed by the collective bargaining agreement, and held instead that their claims arose under a New York state law prohibiting an employer from withholding any portion of a restaurant employee's gratuities. So what's the big deal there, right? Isn't that the law, that federal preemption doesn't apply if it's a right created under state law rather than under the collective bargaining agreement?

The big deal is that the statute specifically excludes "banquets and other special functions where a fixed percentage of the patron's bill is added for gratuities." Yes, you read that right. Banquets are excluded. The rule against withholding gratuities does not apply to employees who work banquets. (That's why we put the quote in bold.)

Well, how in the halloumi cheese did the plaintiffs survive dismissal, you ask? Because, the Court held, "the statute is somewhat confusing because the assurance of the employee's rights in the first sentence is followed by the latter portion of the last sentence which states that the statute is not applicable to functions where an amount is added to the patron's bill for gratuities." And, the Court reasoned, the plaintiffs couldn't be asserting a claim under the collective bargaining agreement anyway because the agreement only entitled them to 18 percent and they wanted more than 18%. With all due respect to the Court, that seems a bit of a head scratcher. The statute seems pretty clear to us (and a number of New York state courts) in saying that it's not intended to create rights on behalf of banquet employees. Since the labor agreement is the only other potential source of rights, the field of possibilities seems pretty narrow.

But wait, there's more! For slap #2 in its role of Larry to the 21 Club's Curly, the Court also held that the plaintiffs were not obligated to arbitrate their FLSA claims. The Court noted in this regard that the 18 percent gratuity discussed above might not be a gratuity at all, and might instead be an automatic service charge that would have to be included in the FLSA regular rate. But, numerous New York state courts have recognized that automatic service charges aren't covered by the no-withholding-gratuities statute!

Well, at least we can take some solace in the words of plaintiffs' counsel in the case, who keenly observed that "[t]his is a very good decision that might stop defendants from making these types of motions in the future."

(The real burning question of the case is ignored. When did 18 percent become automatic? Does anyone remember when the generally accepted tip calculation was 15 percent? What happened there?)

 The bottom line: Beware the law in tip-pooling cases which is still unpredictable.

The Supreme Court has issued a set of decisions that may seriously affect the utility of arbitration in the employment context and may make arbitration an effective defense against employment class actions.

On April 27, 2010, the Supreme Court decided the case of Stolt-Nielsen v. AnimalFeeds Int'l Corp.pdf 2010 U.S. LEXIS 3672 (Apr. 27, 2010). The case itself involved a class action claim of price fixing in the shipping industry, and it was undisputed that the underlying claim itself was subject to an arbitration agreement. The issue presented to the court was whether a class action was available in arbitration when the arbitration agreement was silent as to the availability of class actions. The Court concluded that absent an express agreement to provide for class actions in arbitration, no class action was available. Further, because arbitrators possess a financial conflict of interest as to whether to permit class action claims, the court, not the arbitrator, must decide the issue.

The Stolt-Nielsen case resolved an issue largely left open by the plurality decision seven years ago in Green Tree Financial Corp. v. Bazzle.pdf, 539 U.S. 444 (2003), which had seemed to indicate that class actions might be available in arbitration, but did not definitively address the question. Further, the court's broad language and reliance on its prior employment arbitration authority leaves no doubt that its holding will apply to employment actions.

A handful of courts, most notably in California and the Ninth Circuit, have taken the position in the past that an arbitration agreement is "substantively unconscionable" if it does not provide for class actions. These courts rely upon the implicit premise that that ability to pursue a class action is somehow a substantive right. The Supreme Court is now poised to address that issue. Shortly after Stolt-Nielsen, the Court vacated a Second Circuit case ordering the arbitration of a consumer class action against American Express. American Express Co. v. Italian Colors Restaurant, 176 L. Ed. 2d 920 (May 3, 2010). Most importantly, on May 24, 2010, the Court accepted certiorari in AT&T Mobility LLC v. Concepcion.pdf, 584 F.3d 849 (2009), in which the Ninth Circuit invalidated an arbitration provision because it did not provide for class actions.

The bottom line: The Supreme Court has now recognized that class actions are not available in arbitration unless the agreement specifically provides for them. The Court has also accepted cert. in an case that could spell the end for holdings that condition arbitration on the availability of class actions. If the Court holds that arbitration agreements that do not provide for class actions are enforceable, employers can dramatically limit their class action exposure through arbitration.