$15 million misclassification class judgment reversed in Duran v. U.S. Bank National Association

Exemption-based misclassification cases are hard to certify.  But when you certify an overtime exemption misclassification case, try it, and win a $15 million verdict, you'd think that the hard times are behind you.  Not so fast.  In Duran v. U.S. Bank National Association (February 6, 2012), the Court of Appeal (First Appellate District, Division One) reversed that verdict, decertified the class, and sent the whole thing back down to the trial court for further consideration of how to resolve the individual break claims in light of Brinker.

The plaintiffs in the case were 260 current and former business banking officers (BBO's) who claimed they were misclassified by USB as outside sales personnel exempt from California‘s overtime laws.  The procedural history was messy.  Exemption defenses were summarily adjudicated.  The defendant moved unsuccessfully to decertify.  The trial included motions about evidentiary exclusions.  It appears from the summary that a substantial amount of evidence the defendant sought to introduce was excluded from the trial.  Significantly, a small survey was conducted and then relied upon by a statistics expert to determine class-wide liability.

The Court issued a number of significant holdings, which all revolve around the propriety of proving liability in a misclassification class action with statistical evidence, as opposed to proving damages once liability is established.  For example, the Court held that use of statistical evidence to prove liability is inconsistent with cases examining such evidence at certification:

USB claims California law precludes class-wide liability determinations based on evidence obtained from a representative sample in employment cases alleging misclassification. USB relies on several state and federal wage and hour class action cases for the proposition that surveying, sampling, and statistics are not valid methods of determining liability because representative findings can never be reasonably extrapolated to absent class members in misclassification claims given that time spent performing exempt tasks may differ between employees. While all the cases cited by USB involve rulings on motions to certify or decertify class actions, they support the conclusion that improper procedures were followed in this case.

Slip op., at 47-48.  The Court also held that statistical sampling for proof of liability is inconsistent with its Bell III decision:

The procedures we approved in Bell III are only superficially similar to the procedures utilized in the present case.  Again, in Bell III we did not have occasion to consider the use of a representative sample to determine class-wide liability, since liability was not an issue on appeal. Accordingly, the only issue we addressed was the damages calculation itself, and not whether the plaintiff employees had a right to recover damages in the first place. And our assessment was based on a record evidencing cooperation and agreement among the parties and their counsel.

Slip op., at 45.  With respect to Bell III, the Court explained that the present case suffered a number of flaws (sample too small, no test studies to set sample size, lack of randomness, and no cooperation between the parties) not found in Bell III.  The Court then said:

Fifth, the restitution award here was affected by a 43.3 percent margin of error, more than 10 percentage points above the margin of error for the double-overtime award we invalidated in Bell III. In absolute terms, the average weekly overtime hour figure could conceivably be as low as 6.72 hours per week, as opposed to the 11.86 hour figure arrived at here. While we again will not set a bright line for when a margin of error becomes so excessive as to be deemed unconstitutional, we are troubled by this result.

Slip op., at 46.

Next, the Court concluded that the exclusion of 78 sworn statements that, if admitted, would have reduced the class size by about one-third, was a prejudicial error that violated the defendant's due process right to present relevant evidence in its defense: "The evidence USB sought to introduce, if deemed persuasive, would have established that at least one-third of the class was properly classified. Thus, this evidence USB sought to introduce is unquestionably relevant and therefore admissible."  Slip op., at 55.

The Court then explained that the fatal flaw in the trial management plan was the exclusion of virtually all means by which the defendant could have defended against class-wide liability:

Fundamentally, the issue here is not just that USB was prevented from defending each individual claim but also that USB was unfairly restricted in presenting its defense to class-wide liability. With that in mind, the cases relied on by plaintiffs are inapposite. Both Long v. Trans World Airlines, Inc. (N.D.Ill. 1991) 761 F.Supp. 1320 [protective order limited discovery of information from plaintiff flight attendants to a representative sample of class members], and In re Antibiotic Antitrust Actions (S.D.N.Y. 1971) 333 F.Supp. 278 [states sought recovery for alleged overcharges in the sale of certain antibiotics], concerned the damages phase of a trial, not the liability phase.

Slip op., at 58.  So, when a defendant asserts that this case stands for the proposition that it gets to defend agasint each individual class member's claim, be sure to remind the defendant and Court that the holding actually criticized the absence of any means to mount a defense, rather than specifying the specific forms that a reasonable opportunity to defend must take:

In sum, the court erred when, in the interest of expediency, it constructed a set of ground rules that unfairly prevented USB from defending itself. These ground rules were the product of the trial court. We do not suggest that the implementation of any particular additional procedural tool would have satisfied due process. We simply hold that the court, having agreed to try this matter as a class action, denied USB the opportunity to defend itself by flatly foreclosing the admission of potentially relevant evidence.

Slip op., at 60.

The Court spent some additional time commenting on the margin of error near 44 percent, which it found to be unacceptably large to form the basis of any reasonable result.  The Court concluded its opus by finding that, under the second motion to decertify, the trial court erred by failing to decertify the class.

I think I can sum all this up by observing that (1) misclassification cases in the exemption context are difficult cases and getting tougher all the time, and (2) defendants will incorrectly claim that this decision stands for a mythical due process right that the defendant gets to challenge each class member's claim.  Can't help with one, and can't stop two, but as to two, you can point out that there are many ways to provide a defendant with a reasonable opportunity to defend against class liability.

Lots of catch-up posts today, so scroll, baby, scroll

Today, as I play catch-up, we have posts about "hot gas," the sufficiency of a "commission" for overtime exemption purposes, and yet another arbitration decision.  That means you have a significant amount of scrolling to do.  Or pick your post:

• Hot gas
• Commissions
• Arbitration

"Hot gas" case against Chevron lives to fight another day in Klein v. Chevron U.S.A., Inc.

Hot gas.  This is not a term of art describing oral argument.  It literally refers to gasoline, and its propensity to expand as it gets warmer.  In Klein v. Chevron U.S.A., Inc. (January 25, 2012), the Court of Appeal (Second Appellate District, Division Seven) dispensed wisdom, a drop at a time, about the viability of claims related to hot gas.  Before I pump up this case any more, allow me to fuel your appetite with some background.  After that we'll motor on to the significant holdings.

How does hot gas work again?  The Court explained:

Motor fuel expands in volume as it is heated. As a result of this thermal expansion, a gallon of motor fuel at a warmer temperature has less mass and less energy content than a gallon of motor fuel at a cooler temperature. A temperature increase of 15 degrees causes motor fuel to expand in volume by approximately one percent, with a corresponding one percent decrease in energy output. For example, when 231 cubic inches of motor fuel, which equals one volumetric gallon, is heated from 60 degrees Fahrenheit to 75 degrees Fahrenheit, the motor fuel will expand to occupy a volume of approximately 233 cubic inches.

Slip op., at 4.  Ahh.  Anyhow, after a lot of discussion about regulations, and how fuel must be temperature adjusted if sold in amounts about 5,000 gallons, the Court turned to the theories impacted by the trial court's rulings on a demmurer and motion for judgment on the pleadings.

First, the Court held that the trial court erred when it dismissed the plaintiffs' claims arising under the CLRA and UCL:

Chevron's arguments are predicated on the assumption that the only possible form of relief in this case is a court order mandating that Chevron offer its retail consumers temperature-adjusted motor fuel through the implementation of ATC technology or other similar technologies. The plaintiffs' complaint, however, seeks other relief, including a disclosure requirement that, if granted, might not require substantial changes to the way Chevron currently sells motor fuel at the retail level.

Slip op., at 26.  That "other relief" mentioned by the Court includes injunctive relief compelling disclosure to consumers.  The Court next concluded that no alternative means exist for addressing the plaintiffs' issues.  On that basis, the Court concluded that judicial abstention was improper.

The Court then turned to specific claims, beginning with a half-hearted standing challenge.  The Court wasn't impressed: "Chevron concedes that, at the pleading stage, a plaintiff asserting a UCL or CLRA claim 'satisfies its burden of demonstrating standing by alleging an economic injury.' (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 254.)"  Slip op., at 35.  (Had to get that Boschma cite in there - my colleague, J. Mark Moore, argued that appeal.)

Next, the Court tackled the prongs of the UCL, beginning with the "unfair" prong:

At the pleading stage, we cannot presume that these alleged harms are not “substantial” or are otherwise outweighed by benefits that consumers derive from Chevron's practice of selling non-temperature adjusted motor fuel at the retail level. (Camacho, supra, 142 Cal.App.4th at p. 1403.) Although the evidence in this case may show that consumers do not suffer any substantial injury from the sale of nontemperature adjusted fuel or that the costs associated with remedying such injuries outweigh any benefit to consumers, we agree with the trial court‟s conclusion that such issues must “be determined on a developed factual basis.”

Slip op., at 37.  Chevron argued that it was not obligated to pass along or disclose its profit margins.  The Court distinguished Chevron's authority:

There are, however, important distinctions between this case and McCann. First, the holding in McCann has no relevance to plaintiffs' claim that, by selling non-temperature adjusted fuel at retail, Chevron is able to charge consumers more in purported motor fuel tax than it is required to pay to the government. Plaintiffs' tax-based claim has nothing to do with Chevron's failure to disclose its profit margins or the price at which it procures motor fuel at wholesale.

Second, unlike in McCann, the “gist” of plaintiffs‟ unfairness claim is not that Chevron was required to “disclose their own costs or profit margins” to consumers. (McCann, supra, 129 Cal.App.4th at pp. 1387, 1395 [“gist” of plaintiff's claim was that defendant “fails to disclose . . . that it gets a more advantageous rate of exchange on the wholesale market than it gives the customer”].) Instead, plaintiffs argue that, by failing to compensate for temperature variations in retail motor fuel, Chevron is engaging in a practice that misleads consumers as to the actual amount of motor fuel they are purchasing and the actual price that they are paying for that fuel. By contrast, the plaintiffs in McCann were informed of the specific exchange rate they would receive in their retail transactions (id. at p. 1382), but argued that the money transmitter had a duty to disclose the more favorable wholesale rate at which it was able to purchase foreign currency and pass those benefits on to consumers.

Were plaintiffs in this case simply alleging that Chevron had a duty to disclose the price at which it procured motor fuel at wholesale, McCann might foreclose such a claim. However, nothing in McCann suggests that the UCL does not, as a matter of law, apply to conduct that allows a retailer to charge more in taxes than it is required to pay to the government or to obscure the true cost of goods at retail.

Slip op., at 39.  The Court then dismantled a "safe harbor" argument, explaining that the "safe harbor" statute must "explictly" prohibit liability for the conduct.  Chevron's attempt to fashion a "safe harbor" by implication was rejected.

The Court then concluded that plaintiffs stated a claim under the "fraudulent" prong:

At the pleadings stage, we cannot say, as a matter of law, that consumers are not likely to be deceived in the manner alleged by plaintiffs. As the trial court observed, plaintiffs have alleged “facts which, if true, may reveal that members of the public . . . [assumed] that . . . they were receiving standardized units of motor fuel when, in fact, the energy content of each gallon depended on the temperature of the motor fuel at the time of purchase.” Plaintiffs have also alleged facts that, if true, may reveal that consumers were deceived as to the true price of motor fuel, which may vary depending on the temperature at which it is sold.

Slip op., at 43.  The Court distinguished Bardin v. Daimlerchrysler Corp. (2006) 136 Cal.App.4th 1255 on the ground that the plaintiffs alleged a specific expectation in the public about what they receive at a gasoline pump.  Following that discussion, the Court immediately turned to the CLRA, noting that conduct which is "fraudulent" under the UCL also violates the CLRA.  And, stay with me here, since the plaintiffs stated a claim under the CLRA, based on the same deceptive conduct that satisfied a UCL "fraudulent" claim, they, by definition, stated a UCL claim under the "unlawful" prong, since it borrows the CLRA violation.  Presto.

The breach of contract and unjust enrichment claims didn't do so well.  Saved you eight pages of reading right there.

And to think that I was not impressed with the "hot gas" theory when I heard it years ago.  What was I thinking?

In Muldrow v. Surrex Solutions Corp., court holds that commissions need not be strict percentage of sales

Trials of class actions are uncommon.  Here, though, we have an example of a class action that made it through trial (though admittedly a bench trial, which is more like a long and painful, multi-day summary judgment hearing).  In Muldrow v. Surrex Solutions Corp. (January 24, 2012), the Court of Appeal (Fourth Appellate District, Division One) considered "whether the trial court erred in determining that an employer was not required to pay overtime wages (Lab. Code, § 510) to a class of its current and former employees because they were subject to the commissioned employees exemption (Cal. Code. Regs., tit. 8, § 11070, subd. (3)(D))."

The class of employees was comprised of recruiters that located potential employees for clients of Surrex.  Surrex was paid only when an employee was successfully placed with a client.  The class members were paid a percentage of "adjusted gross profit."  The "adjusted gross profit" was calculated by subtracting various costs from the amount clients paid for a placement.

The Court reached two key conclusions that resulted in an affirmance for the trial court.  First, the Court concluded that "sales-related activities" should be viewed more broadly than the time involved in the sale itself:  "We also reject appellants' contention that time spent 'searching on the computer, searching for candidates on the website, cold calling, interviewing candidates, inputting data, and submitting resumes,' may not be considered sales-related activities."  Slip op., at 14.

Second, the Court concluded that "commissions" do not have to equal a fixed percentage of revenues:

We disagree that either the Keyes Motors court or the Ramirez court intended to preclude an employer from calculating commissions based on anything other than a straight percentage of profits. Most importantly, neither the Keyes Motors court nor the Ramirez court had any occasion to address this issue, because in both cases, the employees' commissions were based on a straight percentage of the price charged to the customer. (Keyes Motors, supra, 197 Cal.App.3d at p. 561 [The "mechanic earns a fixed percentage of the hourly rate charged the customer"]; Ramirez, supra, 20 Cal.4th at p. 804 [employee received a "percentage of the price of the bottles of water and related products sold"].) " ' "It is axiomatic that cases are not authority for propositions not considered." ' " (Silverbrand v. County of Los Angeles (2009) 46 Cal.4th 106, 127, citations omitted.) Thus, "the Keyes Motors definition of 'commission' . . . does not control our case." (Areso, supra, 195 Cal.App.4th at p. 1006.)

Slip op., at 17.  The Court then focused on incentives, distinguishing Keyes Motors and Ramirez:

In this case, in contrast, appellants affected not only the revenue that Surrex received, but also the costs that Surrex would bear. Paige Freeman, a senior consulting services manager, testified that consulting service managers negotiated both the rates that Surrex paid candidate/consultants and the rate at which Surrex billed clients for those services. Appellants therefore had an impact on both the revenue (bill rate) that Surrex received and the costs (pay rate) that Surrex incurred. Thus, while in Keyes Motors and Ramirez, a commission system based on the price of the products or services provided employees with an incentive to increase the number of repairs performed (Keyes Motors) or the number of bottles of water sold (Ramirez), in this case, a commission system based solely on revenue or price would fail to reward employees who helped Surrex achieve greater profits by limiting costs. We see nothing in Ramirez or Keyes Motors that requires such a result, particularly since neither court had occasion to consider a compensation system similar to the one at issue in this case.

Slip op., at 18.  This is all very interesting, but the Court cites no authority in support of its power to define commissions so as to apply the incentives that it views as, in some manner, "better."  Instead, the Court falls back to Black's Law Dictionary for its definition of commission.  Maybe someone has some regulatory history materials handy to check and see whether the Court has the right of what the IWC intended when it created this exemption.

Arbitration agreement did not clearly and unequivocally delegate to arbitrator the power to determine unconscionability

Rent-A-Center, W., Inc. v. Jackson, 561 U.S. ___, 130 S.Ct. 2772 (2010) held that parties could delegate to the arbitrator the power to decide threshold decisions of arbitrability.  This, of course, leads to questions about how explicit such a delegation must be to pass muster.  Rent-A-Center observed that, unless the parties "clearly and unmistakably provide otherwise," the question of arbitrability is one for the Court.  In Ajamian v. CantorCO2e, L.P. (February 16, 2012), the Court of Appeal (First Appellate District, Division Five) examined an arbitration agreement to determine whether the trial court erred by deciding the arbitration question and concluding that the agreement was unconscionable.

The Court first considered the issue of who should decide the arbitrability question:

The “clear and unmistakable” test reflects a “heightened standard” of proof. (Rent-A-Center, supra, 130 S.Ct. at p. 2777, fn. 1.) That is because the question of who would decide the unconscionability of an arbitration provision is not one that the parties would likely focus upon in contracting, and the default expectancy is that the court would decide the matter. (First Options, supra, 514 U.S. at pp. 943-945.) Thus, the Supreme Court has decreed, a contract's silence or ambiguity about the arbitrator's power in this regard cannot satisfy the clear and unmistakable evidence standard. (Id. at pp. 943-945.)

Slip op., at 9.  Turning to the language of the agreement, the Court concluded that the agreement was ambiguous.  The Court held that a provision directing “[a]ny disputes, differences or controversies” to arbitration could apply to the threshold question of arbitrability or all substantive disputes.  Becasue the language was not clear and unmistakable, the Court held that no delegation of the threshold question was enforcable.

Next, the Court considered whether a reference to AAA rules, which give arbitrators the right to decide arbitrability, was sufficient to delegate that question to the arbitrator.  The Court examined existing decisions, finding a split of authority on the issue.  After identifying cases on both sides of the issue, the Court concluded that a reference to AAA rules, without more, was insufficient:

In our view, while the incorporation of AAA rules into an agreement might be sufficient indication of the parties' intent in other contexts, we seriously question how it provides clear and unmistakable evidence that an employer and an employee intended to submit the issue of the unconscionability of the arbitration provision to the arbitrator, as opposed to the court. There are many reasons for stating that the arbitration will proceed by particular rules, and doing so does not indicate that the parties' motivation was to announce who would decide threshold issues of enforceability.

Slip op., at 19.  The Court also noted that the agreement was unclear as to whether AAA rules or rules of another arbitration entity would govern.

The Court next reviewed the trial court's finding of unconscionability.  First, the Court exmained the procedural unconscionability:

Substantial evidence supports the court's finding. Ajamian, who had already been working as a broker for almost 10 months, had no realistic bargaining power and was required to sign the Employment Agreement to receive her promised compensation – for work she had already performed. Furthermore, the Employment Agreement was not the subject of any negotiation. Ajamian stated in her declaration that she wanted to make changes to the Employment Agreement and felt uncomfortable signing it, but felt she had no choice based on Margolis' statements.

Slip op., at 26.  The Court concluded that it was unnecessary to quantify the degree of procedural unconscionability, since substantive unconscionability was evident in several ways:

In finding that the arbitration provision was unconscionable, the court found that the damages limitation in the arbitration provision was unlawful and the attorney fees clause elsewhere in the Employment Agreement (which the arbitration provision would enforce) was unconscionable. Ajamian also argued, as she does here, that the arbitration provision is substantively unconscionable for reasons the trial court did not rule upon: the provision requires her to forfeit numerous unwaivable substantive California statutes; it grants CantorCO2e discretion to choose the arbitration rules and source of the arbitration panel; and it forces Ajamian to pay tens of thousands of dollars she did not have when she entered into the agreement to obtain relief by arbitrating before three arbitrators in New York.

Slip op., at 28-29.  During its extensive discussion, the Court explained by Pearson Dental did not apply:

As a general proposition (where the clear and unmistakable test does not apply), we agree that ambiguous terms should be construed, where reasonable, in favor of arbitration. But the Pearson Dental rule does not apply here. In Pearson Dental, the court considered a single potentially unconscionable term in an arbitration agreement; here, there are multiple unconscionable terms in the Employment Agreement. Moreover, the term in Pearson Dental was ambiguous and did not expressly preclude the plaintiff from pursuing any remedy; by contrast, the unconscionable terms in the Employment Agreement categorically mandate that arbitration proceed, under the laws of New York and an arbitration organization of CantorCO2e's choosing, without the relief to which Ajamian would be entitled in California, but with an obligation to pay CantorCO2e's attorney fees if unsuccessful. Further, the language of the arbitration provision does not lend itself to an interpretation that the arbitrator may make awards contrary to the terms of the Employment Agreement; indeed, the Employment Agreement explicitly states just the opposite. (See Wherry, supra, 192 Cal.App.4th at pp. 1249-1250.)

Slip op., at 33.  The Court concluded its analysis by rejecting an argument that an Employee Handbook referencing an arbitration policy that would be signed by employees could create an enforceable arbitration agreement.

The arbitration arms race continues...

Peremptory challenges by different plaintiffs in two PAGA suits held valid in Pickett v. Superior Court

In my experience, there is a good deal of confusion about what is meant by the "one challenge per side" rule governing peremptory challenges to assigned trial judges under Code of Civil Procedure section 170.6.  In Pickett v. Superior Court (February 22, 2012), the Court of Appeal (Second Appellate District, Division Five) reduced at least some of that confusion, upholding the right of the plaintiff in a second, related action to exercise a peremptory challenge after the plaintiff in the earlier-filed action had already done so.

Pickett’s action that included a Private Attorney General Act (Lab. Code, § 2698 et seq.) (PAGA) claim.  It was deemed related to a prior-filed PAGA action brought by Eugina Bright, against the same defendant, 99¢ Only Stores, on similar allegations.  The two action sought somewhat different remdies.  Pickett’s action was reassigned to the all-purpose judge in the prior-filed action, but not consolidated with that first action.  Pickett timely filed a peremptory challenge to the trial judge pursuant to Code of Civil Procedure section 170.6.

The trial court struck the challenge as improper.  It determined that Pickett’s action was identical to and a continuation of the action brought by Bright, who had already used her one peremptory challenge in the matter after remand following a successful appeal.  The Court of Appeal concluded that under section 170.6 and the authorities applying it, Pickett’s action is not a continuation of Bright’s action, nor is Pickett on the same “side” as Bright in one action, and therefore Pickett’s peremptory challenge should have been accepted.

An interesting extra detail is that in the Notice of Related Cases, Pickett described her claims as "identical" to Bright's.  Despite that characterization, one that the defendant sought to turn to its advantage, the Court of Appeal determined that the right to exercise a peremptory challenge should be determined by the nature of the cases and identity of the parties, not the characterization by a party in a Notice of Related Cases.

Supreme Court activity for the week of February 13, 2012

With a lot of catching up to do, I'm starting easy.  The California Supreme Court held its (usually) weekly conference on February 15, 2012.  Notable results include:

• On a petition for review, review was granted in In re Cipro Cases I & II.  This case is one to follow if you practice in the area of anti-competitive behavior.  There's a big dash of pre-emption thrown in, along with some procedural questions about a trial court's obligation to rule on evidentiary objections at summary judgment.
• On a petition for review, review and depublication were denied in Collins v. eMachines, discussed on this blog here. The Court of Appeal held that “injury in fact” can be satisfied by alleging as damages the difference between the actual purchase price and the fair market value of a defective product.