Ninth Circuit Issues Another Employer-Friendly Decision on CAFA Removals

Yesterday the Ninth Circuit issued its decision in Rea v. Michaels Stores, reversing a remand order and finding that the defendant employer’s removal of the case to federal court under the Class Action Fairness Act (CAFA) was proper.  In line with its decision last year in Roth v. CHA Hollywood Medical Center, the Ninth Circuit reaffirmed that a defendant’s removal options are not limited to the two 30-day windows specified in the federal removal statute.  As long as the defendant has not run afoul of either 30-day removal window (meaning that no pleading or other paper revealed on its face that the action was removable), the defendant may remove at any time based on its own information and investigation.  The Ninth Circuit also reaffirmed its holding last year in Rodriguez v. AT&T Mobility Services, that the preponderance of evidence standard (and not the legal certainty standard) applies to CAFA removals and that allegations in a complaint purporting to limit the amount in controversy to under $5 million are not binding and do not prevent removal under CAFA.

Applying these principles to the Michaels Stores case, a wage and hour class action alleging misclassification of store managers, the Ninth Circuit held that the employer’s removal was timely, even though it was filed years into the litigation and not within 30 days of any initial or subsequent pleading.  The court also held that Michaels had sufficiently demonstrated that the amount in controversy “could exceed $5 million” based on evidence that Michaels expected its managers to work 45 hours per week, along with deposition testimony of putative class members stating that they in fact regularly worked 45 or more hours per week.  Extrapolating these overtime hours to the number of employees in the putative class resulted in alleged overtime damages exceeding $5 million.  The court held that this evidence (particularly in the absence of any contrary evidence) was sufficient to meet the employer’s burden of proving by a preponderance of the evidence that the amount in controversy requirement was met.  For these reasons, the Ninth Circuit held that the district court’s order remanding the case to state court was erroneous.

Notably, while the plaintiff’s petition for review of the remand order was pending before the Ninth Circuit, the litigation proceeded on remand in the state court, resulting in a class being certified.  The plaintiff argued before the Ninth Circuit that this grant of class certification turned the Complaint’s non-binding allegation limiting recovery to under $5 million into a binding allegation, thereby precluding CAFA jurisdiction.  The Ninth Circuit rejected this argument, reasoning that post-removal developments are not relevant to assessing whether removal was proper at the time the removal was filed and that such subsequent developments do not defeat an otherwise proper removal.

The Rea v. Michaels Stores decision is helpful for employers defending wage and hour class actions in California state courts but seeking to remove those actions to federal court.  The full decision is available here.

California District Court Denies Class Certification Due to Inadequate Class Counsel

This month, a San Francisco district court denied class certification in Lou v. Ma Laboratories, ruling that class counsel was inadequate due to their simultaneous involvement in two class actions against Ma Laboratories, a global distributor of computer components.  The Lou case alleged FLSA and wage and hour claims, such as failure to pay overtime, failure to provide off duty breaks, failure to timely pay final wages, failure to keep accurate wage statements, and unfair competition.  Similarly, Tian v. Ma Laboratories alleged nearly identical California wage and hour violations. 

Before certifying a class, courts must consider whether the attorneys representing a proposed class are adequate.  In doing so, a court will analyze (a) whether there are any conflicts of interest between counsel, the named plaintiffs or other class members, and (b) whether counsel can vigorously prosecute their case on behalf of the class.  In federal court, Rule 23(A)(4) requires class counsel to “fairly and adequately protect the interests of the class.” 

Ultimately, the court found a conflict of interest existed due to the attorneys’ simultaneous representation of two classes against the same defendant on many of the same claims.  Given this conflict, class counsel could not fairly and adequately represent the interests of the class.  The Lou court noted that class counsel “wield great power” in their strategic decisions concerning litigation and settlement and the class deserved “to be championed by its counsel unencumbered by their duties to other clients.”  As a result, this denial of class certification for inadequacy of class counsel can be viewed as a victory for employers defending against multiple class actions in California for similar claims.

Ninth Circuit Further Weighs In on Arbitration Agreements

This week, the Ninth Circuit has issued two new decisions on the enforceability of arbitration agreements post-Concepcion.  In the first case, Ferguson v. Corinthian Colleges, the court issued an opinion favoring enforcement of arbitration agreements by striking down over a decade of California-based precedent holding that arbitration may not be compelled where the action is one seeking public injunctive relief.  This precedent was widely known as the “Broughton-Cruz” rule (which was also adopted by the Ninth Circuit in Davis v. O’Melveny & Myers).  The Ninth Circuit correctly held that, in light of the Supreme Court’s instruction in Concepcion, courts cannot carve out particular types of claims (such as claims for public injunctive relief) from arbitration.  In the Corinthian Colleges case, the plaintiffs were vocational students who alleged that the college misled them through misrepresentations about future employment opportunities.  The plaintiffs sought an injunction to preclude the college from continuing to make such misrepresentations to recruit future students.  Corinthian sought to compel arbitration of the plaintiffs’ claims, but a federal district court refused to enforce the arbitration agreement.  The Ninth Circuit reversed, holding that the claims were arbitrable regardless of the fact that they sought public injunctive relief.  While not an employment case, the Corinthian Colleges case provides further federal precedent preventing California district courts from refusing to enforce arbitration simply because a specific type of claim is at issue.  This principle applies equally to disputes concerning arbitration agreements in employment cases.  The Corinthian Colleges case is available here

The Ninth Circuit’s second arbitration decision this week was less arbitration-friendly.  That case, Chavarria v. Ralphs Grocery, involved an employment arbitration agreement between a grocery store employee and the grocery chain.  The employee filed a putative class action for alleged Labor Code violations and Ralphs sought to compel arbitration of the individual employee’s claim based on an arbitration policy the employee accepted as part of her employment application.  The district court found the arbitration agreement unconscionable under California law and refused to compel arbitration.  This week, the Ninth Circuit agreed with the district court’s holding that the agreement was unconscionable and unenforceable under California law (i.e. Armendariz and its progeny).  The court specifically held that Concepcion and subsequent United States Supreme Court decisions do not affect the continued validity of state law unconscionability doctrine as a means for invalidating an arbitration agreement.  Applying California’s unconscionability law, the court held that Ralphs’ arbitration agreement was procedurally unconscionable because it was presented to employees on a “take it or leave it” basis with no ability to negotiate, and the arbitration terms were not provided to employees until three weeks after they signed the agreement (i.e. the employment application).  The court also agreed with the district court’s finding that the agreement was substantively unconscionable, meaning that it was unfairly one-sided so as to “shock the conscience.”  The court focused on two provisions of the arbitration policy—the arbitrator selection provision and the costs provision.  With respect to arbitrator selection, the court determined that the process would always result in the arbitrator being one proposed by Ralphs, which was unfairly one-sided.  That is because the policy provided that each side could propose three arbitrators, followed by an alternating strike method allowing the party not demanding arbitration to strike first.  In the court’s view, the party not demanding arbitration would always be Ralphs in any employee-initiated claim and that would always result in the last arbitrator standing being on Ralphs' list.  (In this author’s view, that interpretation is a little tortured because in a typical case, the employee files a lawsuit in state court rather than “demanding” arbitration.  The employee opposes arbitration and the employer has to “demand” it by making a motion to compel arbitration with the court.  Ralphs also made this argument, but the Ninth Circuit rejected it.)  The policy also specifically disallowed the use of AAA or JAMS arbitrators, which meant that those institutions’ rules for neutral arbitrator selection could not be used.  

As to the costs provision in the policy, the Ninth Circuit held that this too was unconscionable.  The policy itself is somewhat unclear, but generally provides that the arbitrator is to apportion arbitration-related fees to the parties at the outset of the proceeding subject to United States Supreme Court precedent on the subject and that if such precedent requires Ralphs to pay up to all of the arbitration fees, Ralphs would do that, but if United States Supreme Court precedent did not require such a result, then the arbitrator could apportion the arbitration fees/costs equally between the parties. The Ninth Circuit interpreted this provision as requiring the arbitrator in every case to impose substantial and prohibitive fees on the employee at the outset of the arbitration, so as to effectively preclude the employee from continuing with arbitration at all.  On this basis, along with the unfair arbitrator selection provision, the court held that the agreement was substantively unconscionable.  Having found that the agreement was both procedurally and substantively unconscionable, the court held that the arbitration agreement as a whole was unenforceable and that the employee could proceed with her claims in court.  The Ralphs Grocery decision is available here.

The Ralphs Grocery decision, coupled with last week’s California Supreme Court decision in Sonic Calabasas, confirms that California state and federal courts will continue to recognize and apply California unconscionability law to review and potentially refuse to enforce employment arbitration agreements.  Thus, litigation over the enforceability of these agreements is certain to continue, even though there have been huge employer-friendly gains in the last couple of years strengthening the enforceability of these agreements.  The continued validity of the unconscionability doctrine serves as an important reminder to employers to review their arbitration policies and agreements to ensure that they pass muster under these standards.  Employers are also reminded that important cases are still pending before the California Supreme Court on the issue of the enforceability of class action waivers in employment arbitration agreements and whether California's "Gentry" analysis for evaluating the enforceability of these waiver provisions is still valid in the wake of Concepcion.  We will keep you updated on further developments in this area.

Supreme Court Issues Another Strong Decision Upholding Class Waivers in Arbitration Agreements

Today the United States Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant, holding that courts may not invalidate a contractual waiver of class arbitration simply because the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery he or she might receive.  This case is not an employment case, but a case involving a merchant with a credit card contract with American Express.  The merchant brought a class action against American Express, alleging violation of antitrust laws resulting in merchants being charged excessively high rates.  The contract between American Express and its merchants contained an arbitration agreement whereby the merchants had to agree that any disputes would be resolved by binding arbitration and that there would be no right to have claims decided on a class basis in arbitration.  Pursuant to this contractual agreement, American Express sought to compel individual arbitration of the merchant’s claim.  The trial court granted the motion to compel arbitration but the court of appeal reversed, holding that the prohibitive costs the merchant would face in arbitration to prove an antitrust violation precluded effective vindication of statutory rights and rendered the class waiver unenforceable.  Specifically, the individual merchant only stood to recover between $12,000-$38,000 in damages, but it would cost at least several hundred thousand dollars, and possibly more than one million dollars, to prove the violation through expert analysis.  The court of appeal concluded that requiring an individual to bear such cost in arbitration while precluding class wide relief, effectively eviscerated the right to pursue the action in the first place.  The United States Supreme Court granted certiorari and reversed.

In today’s decision (a 5-3 decision authored by Justice Scalia), the Supreme Court held that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced according to their contractual terms, even for claims alleging a violation of a federal statute, unless the FAA's mandate has been overridden by a contrary congressional command.  The Court made clear that neither the antitrust laws nor Rule 23 of the Federal Rules of Civil Procedure contains any congressional command that individuals be permitted to pursue antitrust violations on a class basis.  The court further rejected application of an "effective vindication" exception used by some courts to invalidate class waivers in arbitration agreements.  Under that exception, which the Court emphasized originated from dicta in an earlier Supreme Court decision, courts sometimes invalidate arbitration agreements that operate to prospectively waive a party's rights to pursue a statutory remedy.  The Court held that there was no reason to apply any such exception in this case because the arbitration agreement did not result in a waiver of the merchant's right to pursue an antitrust claim.  The merchant could still pursue the claim in arbitration, even though not on a class basis.  "[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy."  The court further reasoned that if courts could invalidate arbitration agreements based on a principle of cost versus benefit analysis of individual versus class wide claims, this would require courts, in ruling on a motion to compel arbitration, to undertake an analysis of the legal requirements for success on the merits on a claim, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success.  "Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure."  The Court thus held that the arbitration agreement, including its class waiver, was enforceable as written under the FAA.

Today's Supreme Court decision is yet another example of the Court's strong position on enforcing arbitration agreements, including class waivers, according to their terms and the parties' intentions.  While this is not an employment action, the analysis and reasoning in the decision carries over to cases interpreting the enforceability of arbitration agreements and class waivers in the employment context and may well impact the California Supreme Court's upcoming analysis in important employment cases pending before it on the issue of enforceability of employment arbitration agreements in California, including on the issue of class waivers.  As readers of this blog know, the California Supreme Court is expected to decide this year whether the United States Supreme Court's recent decision in AT&T Mobility v. Concepcion (and the FAA) preempt California laws relating to the enforceability of arbitration agreements and class waivers in such agreements in employment cases, particularly in wage and hour class actions and PAGA representative actions. 

Courts Continue to Weigh in on Impact of Arbitration Agreements on Class Proceedings

Last week the United States Supreme Court issued its decision in Oxford Health Plans LLC v. Sutter, refusing to vacate an arbitrator’s finding that a doctor’s arbitration agreement with a health plan permitted class-wide arbitration.  Sutter, a pediatrician, had entered into a fee for service contract with Oxford Health, whereby Oxford Health agreed to pay Sutter certain rates for services he provided patients.  Sutter initiated a lawsuit on behalf of himself and other doctors also under contract with Oxford Health, alleging that Oxford Health failed to pay the doctors in accordance with the contract terms.  Oxford Health moved to compel arbitration, relying on the following arbitration provision in the contract with Sutter: 

“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association before one arbitrator.”

The agreement did not expressly authorize nor expressly prohibit claims from proceeding in arbitration on a class-wide or collective basis.  However, the parties agreed that the arbitrator should decide whether the agreement permitted  class-wide arbitration or whether Sutter would be limited to pursuing only his individual claim in arbitration.  The arbitrator thereafter concluded that the agreement permitted class-wide arbitration.  The arbitrator reasoned that the agreement’s use of the term “civil action” was not limited to only certain types of civil actions, that a class action is a common type of civil action, and that by agreeing that all “civil actions” (without limitation) would be resolved by way of arbitration, the parties must have intended to include class claims in its scope. 

Oxford Health petitioned to vacate the arbitrator’s decision, but its efforts were unsuccessful.  While the arbitration process continued, the United States Supreme Court issued its decision in Stolt-Nielsen v. Animal Feeds International, 559 U.S. 662 (2010), holding that a party cannot be compelled to arbitrate claims on a class basis unless there is a contractual basis for concluding that the party agreed to do so.  In Stolt-Nielsen, the parties (very unusually) stipulated that they had no agreement concerning the use of class-wide arbitration.  Notwithstanding this fact, a panel of arbitrators ordered class-wide arbitration.  In those circumstances, the Supreme Court held that the arbitration panel exceeded its authority because it did not conclude class-wide arbitration was appropriate based on interpretation of the parties’ contract.  It could not have done so, given that the parties stipulated their contract did not cover the issue of class arbitration.  Instead, the panel ordered class arbitration as a matter of public policy.  According to the Supreme Court, this was not a proper exercise of the arbitrator’s power and as, such, the order was overturned.

Relying on Stolt-Nielsen, Oxford Health renewed its efforts to undo the arbitrator’s decision that the claims against it could proceed on a class basis in arbitration.  This time the challenge made its way to the Supreme Court, which issued its decision last week, disagreeing with Oxford Health’s position and limiting the scope of Stolt-Nielsen.  In its unanimous opinion, the Supreme Court held that this case was different than Stolt-Nielsen because in Stolt-Nielsen the parties had stipulated that they had no agreement concerning the use of class arbitration.  Here, by contrast, the parties simply disagreed about whether or not the subject was covered by the arbitration provision in their contract.  More significantly, the parties specifically agreed that the arbitrator should decide, as a matter of pure contract interpretation, whether the agreement permitted class arbitration.  By giving the arbitrator this power, the parties largely forfeited any meaningful judicial review of the arbitrator’s decision.  The Supreme Court explained that judicial review of an arbitrator’s rulings is extremely limited under the Federal Arbitration Act and a decision will only be vacated if clearly in excess of the arbitrator’s authority.  A decision that is simply a “wrong interpretation” is not in excess of authority.  The arbitrator was authorized to interpret the contract and did so.  The fact that he may have gotten the result wrong is not a proper ground for reversal. 

The Supreme Court hinted that had Oxford Health not stipulated that the arbitrator should decide the issue of class arbitration, Oxford Health could have argued that the issue was an issue of arbitrability in the first instance and one that a court, not an arbitrator, must decide.  If a court had issued the decision, judicial review would have been broader and the outcome quite possibly different. 

The Oxford Health case is a good reminder that employers must carefully review the language of their arbitration agreements to ensure that the subject of class/collective arbitration is expressly addressed and prohibited.  Employers should also consider and address in their agreements the issue of whether an arbitrator or a court will decide issues of arbitrability pertaining to the agreement.  Limited judicial review is great when the decision is in your favor, but cuts the other way too—as the Oxford Health case demonstrates.  The Oxford Health case is available here.

In a related development in California, yet another California has weighed in on the issue of whether a class waiver provision in an arbitration agreement precludes an employee from pursuing a representative claim under PAGA.  California state and federal courts have disagreed on this issue, with some concluding that class and representative claims, including those brought under PAGA, may be barred by an arbitration agreement, and others concluding that an arbitration agreement cannot preclude an employee from pursuing a representative action under PAGA.  Earlier this month, the Sixth District Court of Appeal handed down a decision in the Plaintiffs’ camp, holding that a plaintiff may pursue a representative claim under PAGA, notwithstanding an otherwise valid arbitration agreement precluding class/collective claims.  The decision is Brown v. Superior Court (Morgan Tire & Auto) and the decision is here.  Employers should note that the California Supreme Court is expected to resolve the issue of whether representative PAGA claims are excluded from the scope of an otherwise valid class waiver provision in an arbitration agreement sometime in the next year in Iskanian v. CLS Transportation (which reached the opposite conclusion with respect to the impact of a class waiver provision on a PAGA claim).  In the meantime, employers can expect continued assertion of PAGA claims by Plaintiffs’ lawyers in an effort to circumvent applicable arbitration agreements with class waivers. 

We will continue to post developments as they arise in this important area.

New Class Action Trend: Improper Calculation of Overtime Rates

Two recent class action lawsuits illustrate an emerging trend in wage and hour class action litigation, namely, claims for failure to pay overtime wages based on the improper calculation of the employees’ overtime rates.

The first lawsuit, filed against clothing retailer Forever 21 by a former 13-year employee, alleges that employees were not paid all of their overtime wages due to Forever 21’s failure to take into account non-discretionary bonuses and incentive pay when calculating the employees’ overtime rates.  Juana Diaz, the plaintiff in this lawsuit, seeks to represent all of Forever 21’s hourly warehouse employees in the State of California. This lawsuit was filed May 24, 2013 in the Los Angeles County Superior Court.

In the second lawsuit, plaintiff William Sullivan seeks to represent non-exempt employees of Lyon Management Group, a property management company, in a similar claim.  Sullivan alleges that Lyon failed to include the employees’ commissions and bonuses when calculating their overtime rates.  This lawsuit was filed May 8, 2013 in the Orange County Superior Court.

Although the outcome of these cases remains to be seen, two recent decisions finding such claims suitable for class certification confirm the viability of class certification of claims based on the improper calculation of overtime rates.  In a May 10, 2013 decision in the case of Faulkinbury v. Boyd & Associates, Inc., a California appellate court ruled that the question of whether annual bonuses must be included in calculating the overtime rates of the proposed class was appropriate for class certification.  On May 28, 2013, the federal Court of Appeals for the Ninth Circuit overturned a lower court decision denying class certification in Levya v. Medline Industries, Inc.  The plaintiffs in that action sought to represent over 500 employees on a number of claims, including a claim that nondiscretionary bonuses had been improperly excluded from overtime rates.  The federal court ordered the proposed class certified.

The calculation of an employee’s overtime rate varies from case to case.  Federal and California laws state that an employee’s overtime rate is based on that employee’s “regular rate of pay,” which includes all of the compensation the employee normally receives for the work performed for the employer.  In many cases, it is not enough to look only at the employee’s hourly rate.  The employer must also include any other compensation normally paid to the employee for their work including salary, piecework earnings, non-discretionary bonuses, and commissions in the regular rate of pay.  Conversely, discretionary bonuses, payments in the nature of gifts on special occasions, and contributions by an employer to certain welfare plans generally are not included in the calculation of the “regular rate of pay.”  Whether a particular type of compensation should be included in the regular rate of pay is a very fact-specific determination.  The cases above make clear that employers of all sizes should review their practices to ensure that the regular rate is being properly calculated.  As cases have illustrated, this is an issue that lends to class certification, which greatly increases the risk and exposure of a potential claim.

Duo of Unfavorable Class Certification Decisions Handed Down

Two steps forward, one step back.  That seems to be the pace of wage and hour class certification decisions for California employers these days.  In recent months, both the Ninth Circuit and some California Courts of Appeal have issued employer-friendly decisions holding that class certification is not proper on the facts of the wage and hour claims before them (see, e.g. Wang v. Chinese Daily News (9th Circuit) and Dailey v. Sears Roebuck (California court of appeal).  However, over the past week, two new decisions have been issued reminding California employers that class certification is far from dead in the wage and hour context.

Yesterday, the Ninth Circuit issued its decision in Leyva v. Medlin Industries, Inc., reversing a district court’s denial of class certification and ordering that class certification be granted.  The plaintiff in the case sought to represent a class of 538 hourly employees of Medline, alleging that the employer engaged in improper time rounding practices that resulted in employees performing work “off the clock” and without pay, and that the employer also failed to include bonus compensation in calculating the overtime rate.  The district court denied class certification, holding that individual damage issues predominated over any issues common to the class and that litigating the case on a class basis would be unmanageable.  The Ninth Circuit, without much factual discussion, held that the district court abused its discretion in denying class certification.  More specifically, the Ninth Circuit held that the district court erred in relying almost exclusively on individual damage issues as the basis for denial of class certification.  The Ninth Circuit held that the need for individual damage determinations does not defeat class certification and does not render a class proceeding unmanageable.  In so holding, the Ninth Circuit made clear that it does not believe the United States Supreme Court’s recent decision in Comcast v. Behrend, suggests otherwise.  According to the Ninth Circuit, Comcast v. Behrend simply held that the proponent of class certification must demonstrate a model of proving damages attributable to the theory of liability.   In Comcast, the proposed model did not isolate damages flowing from one theory of liability versus others.  The Ninth Circuit contrasted the case before it and held that if liability was proven for rounding violations and/or improper overtime rate calculations, the damages sought would all flow from the same theory of liability.  Furthermore, the employer had apparently demonstrated that classwide damages could be fairly easily calculated from the employer’s payroll database (the employer had filed a notice of removal early in the case, which included the employer’s own damages calculations).  The Ninth Circuit emphasized that individual damage issues, almost categorically, are not enough to defeat class certification in any wage and hour case.

The Ninth Circuit mentioned but provided no real discussion of facts or evidence in the case proffered by the employer to demonstrate that individual issues predominate.  For example, the employer apparently argued and/or submitted evidence that different employees had different types of bonuses—some being discretionary and some non-discretionary, which might impact whether such compensation even needed to be included in the overtime rate calculation.  Additionally, it is unclear how it could be determined on a classwide basis whether any particular class member actually performed work that was uncompensated (regardless of any rounding practice) without individually questioning each class member.  In any event, the Ninth Circuit’s view on individual damages issues was certainly made clear.  The full decision is here.

In another unfavorable class certification ruling, a California Court of Appeal issued its decision last week in Bluford v. Safeway Stores, also reversing a trial court’s denial of class certification, this time in a meal break case.  On the meal break claim, the employer’s policy apparently did not specifically mention the employee’s entitlement to a second meal break if the employee worked in excess of 10 hours per day.  There was evidence, however, that some employees indeed knew they could take second meal breaks and did take such breaks.  The trial court denied class certification, finding that individual issues predominated because a determination of liability would require questioning of the individual employees as to whether they were permitted to take such breaks and if they did not take them, why that was.  The court of appeal disagreed, holding that class certification could properly be based on the employer’s lack of a proper policy clearly authorizing and permitting second meal breaks for shifts in excess of 10 hours.  In other words, the lack of a fully compliant policy supported class certification, regardless of evidence that at least some employees knew by unwritten policy that they were in fact entitled to such breaks.

There was also a rest break claim at issue in the Bluford case, but it was premised on unique facts different that rest break claims in typical cases (i.e. employees were not permitted to take rest breaks).  Specifically, the rest break claim challenged whether Safeway provided paid rest breaks to its employees.  Safeway paid these employees based on a piece rate formula utilizing mileage rates applied according to number of miles driven, the time when the trips were made and the locations where the trips began and ended.  Pay was also based on fixed rates for certain tasks and hourly rates for other tasks and delays.  According to the court, neither the mileage rate compensation formula nor the fixed rate formula compensated employees for rest period time.  Safeway argued that the mileage and activity rates were designed to include compensation for rest periods.  The court rejected this theory, holding that averaging pay is not allowed under California law as a means for complying with minimum wage obligations.

Notably, the driver employees at issue in the Safeway case were covered by a collective bargaining agreement that had meal and rest break provisions.  The court rejected the argument that the claims were preempted by the Labor Management Relations Act.  The Bluford case is available here.

These two cases serve as an unfortunate reminder that wage and hour class actions remain alive and well in California, and will continue to so remain.  It is imperative that employers ensure that they have compliant wage and hour policies for California employees, as this remains one of the best tools for defeating class certification.  In the meantime, it remains to be seen how other courts (besides the Ninth Circuit) will interpret Comcast v. Behrend and its impact on class certification in wage and hour cases, where damages issues are often highly individualized.

Favorable Decisions Denying Class Certification in Wage and Hour Cases

In good news for California employers, over the last two weeks, two more favorable decisions have been issued denying class certification in California wage and hour actions.  Yesterday, in Dailey v. Sears, Roebuck and Co., a California court held that class certification was properly denied in a case alleging certain Sears auto center managers and assistant managers were improperly classified as exempt and denied overtime compensation as well as proper meal and rest breaks.  The court held that substantial evidence supported the trial court’s finding that individual issues predominated over issues common to the class on each claim.  The plaintiff had argued that his theory for class treatment was that Sears uniformly classified the positions as exempt, and had uniform policies and procedures (including strict labor budgets) that effectively required the employees to spend the majority of their time on non-exempt work and to work at least 50 hours per week.  Plaintiff submitted a declaration stating that he spent the majority of his work time on non-exempt work, and submitted declarations of just 4 co-workers stating the same thing.  In contrast, Sears submitted declarations of 21 putative class members, each explaining that they regularly spent the majority of their work time on exempt, managerial tasks. 

The plaintiff argued that his evidence was sufficient to demonstrate that misclassification was widespread and that class certification should have been granted.  Plaintiff argued that individual issues effectively could be managed at trial through the use of representative sampling to determine both liability and damages, whereby a random sample of class members would testify to their work experience and from that testimony liability and damages determinations would be made and extrapolated to the rest of the class.  The court rejected Plaintiff’s arguments.  The court held that the existence of uniform classification policies and other uniform policies and procedures applicable to the class was not enough to support class treatment.  Rather, the proper focus is on the impact of those allegedly uniform policies on the class and how much time class members spent on exempt versus non-exempt tasks.  In this regard, the court determined that substantial evidence supported the trial court’s finding that Sears’ evidence showed that work experiences (and time spent on exempt versus non-exempt work) materially varied from employee to employee depending on a number of factors and that there were no uniform policies “commonly” dictating that the putative class members spend the majority of their time on non-exempt work.  As such, individual issues would predominate over any common issues, making class treatment inappropriate.

The same conclusion was reached with respect to Plaintiff’s meal and rest break claims.  The court held that there was no evidence of a uniform policy or practice depriving class members of meal or rest breaks, making class treatment inappropriate.

Regarding Plaintiff’s proposed sampling plan for managing individual issues, the court expressed its doubt as to whether the use of representative sampling is proper to determine liability (as opposed to damages), based on the United States Supreme Court’s ruling in Wal-Mart v. Dukes.  The court held that even if it is permissible to use sampling to determine liability in some cases, it was not appropriate in this particular case given the predominance of individual issues and lack of common experience among class members. 

In another recently issued decision, Wang v. Chinese Daily News, the Ninth Circuit overturned a judgment following jury and bench trial in favor of a certified class of newspaper employees alleging various wage and hour claims.  The case has quite a procedural history.  First, a California district court granted class certification in favor of the newspaper employees.  Second, the district court granted summary judgment in favor of the class, finding that they did not qualify for exempt status as a matter of law.  Following that order, the district court held a trial on damages that resulted in the class being awarded over $2.5 million in damages.  Chinese Daily News appealed the judgment to the Ninth Circuit, and the Ninth Circuit affirmed.  The Supreme Court granted review and later reversed the Ninth Circuit’s decision in light of Wal-Mart v. Dukes

On remand, the Ninth Circuit reversed the district court’s grant of class certification.  In light of Wal-Mart v. Dukes, the court held that class certification could not be maintained under Federal Rule of Civil Procedure 23(b)(2) because the class sought individualized monetary relief, which was not merely “incidental” to their request for injunctive relief.  The Plaintiffs actually conceded that class certification was improper under 23(b)(2).  However, this still left open the question as to whether class certification properly could be maintained under Rule 23(b)(3), which applies when a court determines that common issues predominate over any issues requiring individualized adjudication.  In this regard, the court remanded the issue to the district court to reconsider in light of Wal-Mart v. Dukes and the Ninth Circuit’s decision.  In providing guidance and direction to the district court to consider on remand, the Ninth Circuit emphasized that “commonality” does not exist simply because the claims raise “common questions” about the employer’s compliance with wage and hour laws.  “What matters to class certification is not the raising of common questions—even in droves—but rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.”  The court held that commonality could not be established simply because the employer had a uniform classification policy.  The court further emphasized that “dissimilarities within the proposed class may impede the generation of common answers.”  As a result, the court emphasized that on remand “Plaintiffs must show significant proof that [CDN] operated under a general policy of [violating California labor laws]” in order for class certification to be warranted.

The Wang decision, like the Sears decision, also contains some positive guidance on the impropriety of using sampling at trial in the event a class is again certified on remand.  The court explained its view that the United States Supreme Court has disapproved of “trial by formula” whereby sampling is used to determine damages, which are then extrapolated to the rest of the class without further individualized proceedings.  The court emphasized that “employers are entitled to individualized determinations of each employee’s eligibility for monetary relief” and that “employers are also entitled to litigate any individual affirmative defenses they may have to class members’ claims.” 

This guidance from both a California court and the Ninth Circuit on the impropriety of sampling to determine liability and/or damages is good stuff for California employers defending wage and hour class actions.  Employers should of course be aware that further guidance on this important issue is expected from the California Supreme Court in Duran v. U.S. Bank, which is currently under review.

Class Action Plaintiff Cannot Avoid Removal Under CAFA by Stipulating to Cap on Damages

Yesterday, the United States Supreme Court issued its decision in Standard Fire Ins. Co. v. Knowles, resolving a split of authority among the federal circuit courts as to whether a class action plaintiff filing in state court can prevent the defendant from removing the case to federal court under the Class Action Fairness Act (CAFA) by stipulating that plaintiff and the putative class will not seek damages in excess of $5 million (the jurisdictional minimum for CAFA removal).  Several circuits, including the Ninth Circuit (which governs California's federal courts) had ruled that a class action plaintiff could successfully avoid CAFA removal by signing a stipulation at the beginning of the case agreeing not to seek damages in excess of $5 million.  Other circuits had held that this practice was ineffective and could not be used to avoid removal under CAFA because a named plaintiff cannot bind absent class members in an uncertified class action.  As such, regardless of any stipulation by the named plaintiff to limit damages, a defendant could still remove under CAFA by demonstrating that the parties are diverse and that the amount in controversy is sufficient under CAFA.  Yesterday, in a unanimous decision authored by Justice Breyer, the United States Supreme Court in Knowles agreed with the latter view, thereby eliminating one forum shopping tool used by plaintiffs' class action lawyers to avoid federal court.  The Knowles decision overrules prior bad Ninth Circuit precedent to the contrary in Lowdermilk v. U.S. Bank National Association, which is good news for California employers.  The full opinion of the Supreme Court in Knowles is here.

California Supreme Court Depublishes Two Favorable Cases Denying Class Certification

Following the California Supreme Court's long-awaited decision in Brinker last year, lower courts were left to resolve the numerous meal and rest break cases that had been held pending Brinker.  As we recently reported, a number of these cases have been favorably decided for California employers, with courts holding that class certification was improper on meal break claims due to the predominance of individual issues bearing on a determination of liability.  We reported on two of these specific cases, In re Lamps Plus Overtime Cases and Hernandez v. Chipotle here and here.  Following their losses, the plaintiffs in each of these cases petitioned for review to the Supreme Court.  Yesterday, the Supreme Court denied review but depublished both cases--suggesting that the Supreme Court did not agree with the court of appeals' analysis in some fashion.  This is unfavorable news for California employers and possibly an indicator that the highest court in this state will continue to view class certifcation standards in wage and hour cases with an employee-friendly eye.

In related  news, the California Supreme Court granted review yesterday of Reyes v. Liberman Broadcasting--another case addressing the enforceability of employment arbitration agreements and issues of FAA preemption (see our post here).  Review was granted on a "grant and hold" basis pending the Court's decision in Iskanian v. CLS (see our related posts here).  It appears the Court will continue to grant review on a grant and hold basis of cases dealing with these same issues until the lead case is decided.

Editor
Cal Labor Law

Robin E. Largent is a Partner in CDF’s Sacramento office and may be reached at 916.361.0991 or rlargent@cdflaborlaw.com BIO »

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