CDF Attorneys Convince Court to Invalidate Use of Representative Testimony in Class Action Trial
CDF is pleased to report its recent victory in Duran v. U.S. Bank, a seminal decision striking down the use of statistical sampling and representative testimony to establish liability and restitution in a class action trial involving claims of alleged misclassification and unpaid overtime. Reversing a $15 million judgment awarded to a class of business banking officers (BBOs), the court held that the trial court’s use of statistical sampling and representative testimony to extrapolate liability and restitution from a sample group of 21 witnesses to a class of 260 bankers violated U.S. Bank’s constitutional due process rights. The court held that this trial plan improperly prevented U.S. Bank from presenting relevant evidence to contest classwide liability and to challenge the claims of individual class members outside of the sample. The court also held the trial court erred in focusing on U.S. Bank’s policies and uniform exempt classification in maintaining class treatment. Because the validity of each class member’s exempt misclassification claim required individual analysis, class treatment was improper and unmanageable. As a result, the court, in addition to reversing the judgment, ordered that the class had to be decertified. This case is significant because it is the first known California appellate decision reviewing a trial verdict in an overtime misclassification case, where the trial court employed one of the purported “innovative procedural tools” (statistical sampling) to manage class action trials referenced by the California Supreme Court in Sav-On Drug Stores, Inc. v. Superior Court, 34 Cal.4th 319, 339 (2004). The Court stated that “while innovation is to be encouraged, the rights of the parties may not be sacrificed for the sake of expediency.”
This case was originally filed as a putative class action alleging claims of misclassification brought under various provisions of the California Labor Code, as well as conversion and unfair competition under Business & Professions Code § 17200 (the “UCL” claim). U.S. Bank claimed that the BBOs were properly classified under the administrative exemption, commissioned salesperson exemption, and outside sales exemption. In opposing class certification, U.S. Bank argued that individual issues predominated as shown by the declarations of over 70 putative class members, in addition to deposition testimony of the four prior named class representatives, who all stated under oath that they spent a majority of their time outside U.S. Bank premises, and were therefore properly classified as exempt. After certifying the class, the trial court granted Plaintiffs’ motion for summary adjudication as to the administrative and commissioned salesperson exemptions. Just months before trial, Plaintiffs dismissed their legal claims and proceeded to a bench trial only on the equitable UCL claim that was premised on the alleged Labor Code violations and U.S. Bank’s defense based on the outside salesperson exemption.
The “Fatally Flawed” Trial Plan Violated U.S. Bank’s Due Process Rights
Although the trial court requested briefing and proposals from both parties as to an appropriate trial management plan, it ultimately decided to implement a trial plan that was neither proposed by the parties nor endorsed by their experts. Over U.S. Bank’s objections, the trial court determined that it would take a random sample of 20 class members (drawn out of a “hat”) plus the two named plaintiffs to testify at trial to determine both classwide liability and damages. The trial court also selected 5 class members as “alternates” in case any of the 20 originally drawn class members were unavailable. After this random witness group (“RWG”) was selected, however, the trial court ordered a second opt-out notice to be sent to the class because Plaintiffs had chosen to dismiss their legal claims. U.S. Bank argued that any member of the RWG group that opted out after receiving the second opt-out notice should be required to provide deposition and trial testimony to maintain the integrity of the original sample and ensure statistical reliability of the extrapolation process. Four of the 20 class members (or 20%) of the RWG opted out, while only 5 of the remaining 250 (or 2%) absent class members opted out. Notwithstanding the disproportionately higher opt-out rate among the RWG, the trial court denied U.S. Bank’s motion to allow two of the RWG witnesses to opt back into the class. When those witnesses were later called to testify by U.S. Bank as to their percipient knowledge of other RWG members, they were precluded from testifying as to their own BBO experiences.
Consistent with its determination that the trial plan only allowed for testimony and evidentiary submissions regarding the RWG, the trial court steadfastly rejected U.S. Bank’s repeated attempts to introduce relevant evidence from absent class members outside of the RWG, including sworn deposition testimony and declarations from nearly one-third of the class (including that of the four prior named class representatives) indicating they spent a majority of their time outside of their offices and were therefore properly classified as exempt. At the conclusion of the liability phase, the trial court concluded that the two plaintiffs and all 19 class members in the RWG were misclassified (one RWG member failed to appear at trial and was then treated as an absent class member) and therefore extrapolated those liability findings to conclude that all 260 members of the class were misclassified. In Phase II of the trial, the trial court accepted Plaintiffs’ experts’ testimony that concluded, using the testimony provided by the RWG and the two named plaintiffs, at a 95% confidence level, that the class members worked an average of 11.87 hours of overtime per week, with a margin of error of 5.14 hours or 43.3%. This “average” hours of weekly overtime was then extrapolated to the remaining 239 absent class members.
The Court of Appeal found the lower court’s trial methodology to be both legally unprecedented and statistically unsound. The court was extremely troubled that U.S. Bank was “hobbled” in its ability to prove its affirmative defense not only as to individual absent class members but as to classwide liability because it was “prohibited from introducing evidence pertaining to any non-RWG members, evidence that arguably would have shown some class members were either properly classified or did not work overtime.” The trial court’s blind adherence to its trial plan sacrificed “fair and accessible justice” for convenience and efficiency. The court noted that neither state nor federal law supported the use of statistical sampling or representative evidence to determine liability in a misclassification case where time spent performing exempt duties may differ between employees. Experts from both sides agree that, statistically speaking, even if 21 out of the 21 testifying class members were found to be misclassified, up to 13% of the class could nonetheless be properly classified. Hence, there is no statistical basis to conclude that 100% of the class is misclassified based on a fact-finding process involving only a small sample of class members. The court explained that using statistics to determine classwide liability in a misclassification case is problematic because a certified class that included both injured and uninjured class members would necessarily require individual mini-trials to determine which class members fell in which category.
Significantly, the court stated that “due process principles require individualized inquiries where the applicability of an exemption turns on the specific circumstances of each employee, even in cases where the employer’s misclassification may be willful.” The court distinguished this case from Bell v. Farmers Insurance, 115 Cal.App.4th 715 (2004) (Bell III), where this same court had approved the use of statistical sampling to determine classwide damages. The trial court in Bell III had conducted an appropriate pilot study to determine an appropriate sample size and desired margin of error at the outset. Importantly, both parties’ experts largely agreed on the sampling methodology and proposed margin of error. In contrast, the trial court in Duran committed a number of errors in its unscientific and inconsistent use of statistics in its trial plan, including arbitrarily using a 20-member sample group without any surveys or pilot studies, permitting selection bias by allowing randomly selected members to opt out and for including the two non-randomly selected class representatives in its sample, arbitrarily using a mid-point to determine average work hours for class members who provided a range of hours worked, and failing to extrapolate results unfavorable to Plaintiffs (such as a RWG member signing a release that prevented him from personal recovery, or that a RWG member was properly classified for two weeks of his employment). These and other errors resulted in a statistically invalid and inaccurate judgment, as evidenced by the 43.3% margin of error associated with the 11.87 “average” overtime hours worked. This meant that the overtime hours worked by class members could range anywhere from 6.73 hours to 17 hours per week. Using the low end of this margin of error meant that the $15 million judgment awarded to the class could actually be half as much and still fall within the undisputed margin of error. While the court again declined to issue a bright-line rule as to an unconstitutional level of inaccuracy, it noted its consistent rejection of results containing a large margin of error, such as 32% in Bell III’s calculation of double-time damages, and 43.3% in Duran.
In concluding that the multitude of errors committed by the trial court resulted in serious due process violations, the Court of Appeal found persuasive the reasoning and analysis laid out in the recent U.S. Supreme Court opinion in Wal-Mart Stores v. Dukes, which had rejected a similar “trial by formula” theory advanced by plaintiffs to determine liability and damages from a sample group to the class as a whole in a gender discrimination class action. The Court’s parallel reasoning and analysis of Dukes dispels any contention that the holding in Dukes would be limited to federal cases or discrimination claims.
Individual Analysis Required to Determine Exempt Classification Compels Decertification
The court acknowledged that Sav-On held there was not a requirement that “courts assess an employer’s affirmative exemption defense against every class member’s claim before certifying an overtime class action,” but concluded this passage does not apply to the trial phase of a class action lawsuit. In so doing, the Duran court addressed the problem frequently ignored by many trial courts that certified class actions with no indication as to how a class action trial would be properly managed that comported with a defendant’s due process rights. The court concluded that the evidence at trial showed that because BBOs were not monitored or tracked in any way, the “only way to determine with certainty if an individual BBO spent more time inside or outside the office would be to question him or her individually.” The court held that the trial court erred in failing to grant U.S. Bank’s second motion to decertify at the close of the liability phase of trial because it erroneously relied on U.S. Bank’s policies (primarily its uniform classification of BBOs as exempt) and ignored variances in admissible evidence that “cast serious doubts as to the prevalence of common issues affecting liability.”
This case is a welcome development to California employers that have been besieged with wage-and-hour class actions in the last decade. It calls into question the viability of using statistical sampling and representative testimony in misclassification cases where a proper exemption inquiry turns on an individual analysis. It also forces trial courts to carefully consider trial management issues and due process arguments that have been largely ignored at the class certification stage.
CDF represented U.S. Bank during the entire pendency of the case at the trial court level and on appeal.