California Supreme Court Rejects Trial by Formula and Reaffirms That a Class Action Trial Must Properly Manage, Not Ignore, Individual Issues Bearing on Liability
In a case that CDF has been handling since its inception in 2001, we are pleased to report that yesterday the California Supreme Court issued its opinion in Duran v. U.S. Bank National Association, affirming in full a Court of Appeal decision overturning a $15 million judgment in favor of a class of Business Banking Officers (“BBOs”) who alleged that they were misclassified as exempt outside salespersons and owed overtime wages. The California Supreme Court agreed with the Court of Appeal that the trial plan resulting in the judgment was fundamentally flawed and violated U.S. Bank’s due process rights. The flawed trial plan involved the use of sampling and “representative” testimony of just 21 class members to determine class-wide liability and restitution to the entire class of 260 BBOs. The plan precluded U.S. Bank from presenting evidence or testimony bearing on liability or damages as to any class member outside the 21-person sample. Thus, U.S. Bank was precluded from, among other things, presenting evidence that 1/3 of the class members had executed declarations under oath establishing that spent the majority of their time on sales duties outside the Bank and, therefore, were properly classified. U.S. Bank was also precluded from presenting evidence that the four prior named Plaintiffs in the case also all testified under oath that they spent the majority of their time on sales duties outside the Bank. Based instead only on the limited evidence surrounding the small sample, the trial court found that the entire class was misclassified. The trial court then allowed the overtime hours reported by the sample group to be extrapolated to the entire class (with a 43% margin of error), resulting in a verdict of $15 million and an average recovery of over $57,000 per person. U.S. Bank appealed.
The Court of Appeal reversed the judgment, holding that the trial plan violated U.S. Bank’s constitutional due process rights by preventing U.S. Bank from presenting its affirmative defenses. The Court of Appeal also held that the trial court should have decertified the class based on the demonstrated unmanageability of individual issues at trial. Our post on the Court of Appeal decision is available here. The California Supreme Court granted review and issued its opinion affirming the Court of Appeal’s decision in full.
The Trial Court’s Use of Sampling Was “Profoundly Flawed”
In upholding the reversal of the judgment, the California Supreme Court explained that “the judgment must be reversed because the trial court’s flawed implementation of sampling prevented USB from showing that some class members were exempt and entitled to no recovery.” The Court explained that misclassification cases, and particularly cases involving the outside salesperson exemption, have the “obvious potential” to generate individual issues “because the primary considerations are how and where the employee actually spends his or her workday.” In such cases, “a defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability.” The Court acknowledged that trial courts may employ various procedural tools to manage individual issues at trial, including statistical sampling, but emphasized that any such trial plan "must allow for the litigation of affirmative defenses, even in a class action case where the defense touches upon individual issues." Additionally, the trial plan must be statistically sound. "[W]hen a trial plan incorporates representative testimony and random sampling, a preliminary assessment should be done to determine the level of variability in the class. If the variability is too great, individual issues are more likely to swamp common ones and render the class action unmanageable." Against this backdrop, the Court held that the trial plan in this case was a "flawed statistical plan that did not manage but instead ignored individual issues." The Court explained that the parties' evidence revealed great variation among class members in the amount of time they spent outside the Bank and that such variation signaled that the exemption question could not be resolved by a simple "yes" or "no" answer as to the entire class. However, the trial plan ignored this variation by limiting the evidence from which liability would be determined to a small, unrepresentative sample of class members. The Court criticized the trial court's arbitrary determination of the size of the sample, which was done without any expert input or validation, and further attacked the trial court's method of determining which class members would comprise the purportedly "random" sample. This is because, among other things, the trial court allowed the named plaintiffs to be in the "representative" sample and also allowed BBOs to choose to opt-out of the trial sample (even though there was evidence that several class members with testimony favorable to the Bank opted out on the urging of Plaintiffs' counsel). The Court also heavily criticized that the plan precluded U.S. Bank from presenting relevant evidence relating to BBOs outside the sample group:
"The court's decision to extrapolate classwide liability from a small sample, and its refusal to permit any inquiries or evidence about the work habits of BBOs outside the sample group, deprived USB of the opportunity to litigate its exemption defense. USB repeatedly submitted sworn declarations from 75 class members stating that they worked more than half their time outside the office. This evidence suggested that work habits among BBOs were not uniform and that nearly one-third of the class may have been properly classified as exempt and lacking any valid claim against USB. USB also sought to introduce live testimony from witnesses about their work outside the office as BBOs. Yet the court refused to admit any of this evidence or allow it to be considered by experts as part of a statistical sampling model. Instead, extrapolating findings from its small sample and ignoring all evidence proffered to impeach these findings, the court found that the entire class was misclassified. The injustice of this result is manifest. While representative testimony and sampling may sometimes be appropriate tools for managing individual issues in a class action, these statistical methods cannot so completely undermine a defendant's right to present relevant evidence."
Thus, while the Court did not go so far as to say that statistical sampling may never be used to prove liability in a wage and hour class action, the Court strongly emphasized that any such use must, as a matter of constitutional due process, still allow the defendant to present its affirmative defenses.
The Court acknowledged that the use of statistical methods to prove damages in a class action is more acceptable than to prove liability, but that the statistical methods still must be scientifically sound and expert-endorsed. Here, the trial court's extrapolation of overtime from the sample group to the entire class had an astounding 43% margin of error, which the Court held was unacceptably high, in addition to having been linked to an invalid finding of classwide liability. For these reasons, the Court held that the judgment could not stand.
The Class Properly Was Decertified
In addition to holding that the trial plan was unconstitutional and required reversal of the judgment, the Court also held that the class properly was decertified due to the lack of manageability of individual issues surrounding U.S. Bank's exemption defense. The Court emphasized that the presence of common issues does not necessarily mean that class certification is appropriate, if there are still individual issues that cannot be effectively managed at trial, as was the case here. The Court instructed that the time to consider manageability issues is at the class certification stage, not at trial. "In considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class." The Court held that while statistical methods possibly may be used to manage individual issues, such "methods cannot entirely substitute for common proof." "There must be some glue that binds class members together apart from statistical evidence." If statistical evidence will comprise a part of the proof on a class action claim, trial courts should consider at the class certification stage how such methods will be used and whether they will effectively and fairly manage individual issues. "Rather than accepting assurances that a statistical plan will eventually be developed, trial courts would be well advised to obtain such a plan before deciding to certify a class action. In any event, decertification must be ordered whenever a trial plan proves unworkable."
Because the trial court had "no evidence establishing uniformity in how BBOs spent their time" and the trial plan wholly failed to manage individual issues bearing on U.S. Bank's exemption defense, class certification could not stand.
The Court's decision is clearly favorable for California employers defending wage and hour class actions, both on certification principles and on the use of statistical methods to prove liability and damages in such cases. The decision confirms a class action defendant's right to present its affirmative defenses, even where those defenses hinge on individualized issues, and also underscores that manageability issues must be at the forefront of the initial decision to certify a class. CDF has represented U.S. Bank throughout this litigation and is very pleased to report this outstanding result.