Articles from August 2015

On August 5, 2015, after nearly five years of litigation and following a remand from the California Court of Appeal, a class of exotic dancers was finally certified in Salazar v. VIP Showgirls, aka Victory Entertainment, No. BC445154 (Los Angeles Super. Ct., filed Sept. 10, 2010).  In 2010, Salazar, an exotic dancer, sued VIP Showgirls aka Victory Entertainment, Inc. (“VIP”), an adult entertainment club, alleging wage-and-hour violations arising from the club’s misclassification of dancers who performed at the club.  VIP required its dancers to sign a standard agreement identifying them as independent contractors, and the agreement provided that either party could terminate the relationship at will.

Salazar moved to certify a class of “[a]ll persons who are employed or have been employed and who have worked one or more shifts as a ‘dancer’ for [VIP] in the State of California.” In its initial determination of whether the class certification requirements had been met, the trial court applied the common law test for whether an employee relationship existed between Salazar and VIP.  See S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989).  Defendant-employers frequently succeed in arguing that that the multi-factor Borello test, often called the “economic realities” test,[1] creates individual issues of fact which predominate over common questions, hindering class certification.  The Salazar trial court thus denied certification because it found that the dancers’ relationships with VIP under the Borello test would require individual inquiries at trial.  Salazar then appealed, and, in 2014, the Court of Appeal reversed the order denying certification in an unpublished decision and remanded to the superior court.  Salazar v. Victory Entertainment, Inc., No. B249888 (2nd Dist. Div. 7 Dec. 15, 2014) (slip op. available here). 

In reversing the trial court, the Court of Appeal cited its opinion in Dynamex Operations West, Inc. v. Superior Court, 230 Cal. App. 4th 718 (2014), which had been decided after the Salazar trial court denied certification.  In Dynamex, the Court of Appeal held the Industrial Welfare Commission (“IWC”) definition of an employment relationship applied to claims falling within the scope of an IWC wage order.  Dynamex at 734; see also Martinez v. Combs, 49 Cal. 4th 35, 64 (2010).  For claims falling outside the scope of a relevant wage order, the common law test for an employment relationship applies.  Dynamex at 734; see Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522, 531-532 (2014).  The Salazar Court of Appeal concluded that both Wage Orders 5 and 10 appeared to apply to the exotic dancers and both define the word “employ” as “to engage, suffer, or permit to work” and define an “employer” as any person “who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.”  Interpreting this same language, the California Supreme Court in Martinez previously concluded that “[t]o employ, then, under the IWC’s definition, has three alternative definitions[]: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.”  Martinez, supra, 49 Cal. 4th at 64.  The Martinez test of employment is far simpler than the Borello test and is easier to prove with common evidence.  The Salazar appellate court concluded that because the trial court had applied only the common law test, reversal was required in order to determine whether the dancers’ claims fell within the IWC Wage Orders and were thereby governed by the IWC employment test.  The Salazar appellate court instructed the trial court to determine on remand whether the IWC definitions applied, and if so, whether common issues predominated.

Applying the standards for determining employment articulated by the appellate court, the Salazar trial court held that the dancers’ claims fell within the Wage Orders and that common issues predominated, and on that basis reversed its March 2013 decision and certified the class.  This case highlights the significance of the simplified employment test announced in Martinez, which eases the burden of obtaining class certification.  This ruling is also a victory for a group of long-suffering workers who often endure difficult workplace conditions and deserve the rights and protections afforded employees under the California Labor Code. 

Authored By:
Robert Drexler, Senior Counsel
CAPSTONE LAW APC

Editors’ note: the Order in Salazar is not yet publicly available and will be posted as soon as is practicable.

Last week, the California Supreme Court issued its much-anticipated opinion in Sanchez v. Valencia Holding Co., addressing whether state law concerning unconscionability in contract formation is preempted by the Federal Arbitration Act, 9 U.S.C. § 2, as interpreted by AT&T Mobility LLC v. Concepcion, 563 U. S. 321 (2011).  See Sanchez v. Valencia Holding Co., LLC, No. S199119 (Aug. 3, 2015) (slip opinion available here).  Many observers expected Sanchez to clarify the standard for determining unconscionability; however, that was not the case.

Prior to the issuance of the U.S. Supreme Court’s landmark Concepcion decision, the Sanchez trial court had determined that the class action waiver contained within the at-issue consumer auto sale contract was unconscionable, rendering the entire agreement unenforceable.  The Second District Court of Appeal came to the same result, but on the basis that the arbitration provision was so one-sided as to be unconscionable, punting on the class waiver issue.  The California Supreme Court was then tasked with synthesizing the prior holdings with Concepcion, and found that, while Concepcion does not affect California’s defenses to contract formation, including unconscionability, it still requires enforcement of the contract’s class action waiver.  The California Supreme Court’s opinion reversed the Court of Appeal on the issue of unconscionability, finding that the agreement was not inordinately one-sided.  Slip op. at 2.   

The basic framework for finding unconscionability is well-established, and is the same standard for arbitration and non-arbitration agreements.  Procedural and substantive unconscionability must both be present for a court to refuse to enforce a contract or clause.  However, they need not be present in the same degree; rather, a “sliding scale” is invoked.  While procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, the standard for substantive unconscionability is more amorphous and has variously been described as requiring a finding that terms are “overly harsh,” “unduly oppressive,” “unfairly one-sided,” unfair “beyond a simple old-fashioned bad bargain,” and, most drastically, “so one-sided as to ‘shock the conscience.’”  Slip op. at 8.

In Sanchez, the California Supreme Court made the somewhat shocking pronouncement that the multiple formulations for substantive unconscionability “all mean the same thing.”  This is not particularly helpful when attempting to apply the standard to a particular agreement.  Does an agreement have to “shock the conscience” to be unconscionable or will “overly harsh” terms suffice?  How can these formulations really mean the same thing?  Sanchez provides no bright-line rule for litigants.  Rather, this case demonstrates that evaluating unconscionability is a fact-intensive process, highly dependent upon context, that requires inquiry into the “commercial setting, purpose, and effect” of an agreement, as the court demonstrates as it painstakingly analyzes the contract at issue.  Slip op. at 9.

The court addressed the fairness of each provision in turn, noting that much of the analysis is specific to the consumer sales context.  For example, the at-issue agreement in Sanchez allows for fee-shifting to the consumer in some situations, although the seller must advance arbitration fees.  Slip op. at 18.  The court held the allocation of costs and fees to be valid in the context of a luxury auto purchase, while noting that this would not be allowed in the employment context under the more rigorous standard of Armendariz v. Foundation Health Psychare Services, Inc. (Cal. 2000).  Slip op. at 20-21.  The court further distinguished the consumer and employment settings, noting that jobseekers are at a distinct disadvantage in terms of bargaining power due to economic pressures, while the purchaser of a luxury automobile, such as Mr. Sanchez, can not only afford any fees that may be imposed, but is also in a better position to negotiate contract terms.  Id.

The Sanchez opinion likely won’t change much for litigants.  It merely reaffirms the holdings in Concepcion and Armendariz, stating that: (1) contracts remain subject to state unconscionability law and (2) even if an agreement is deemed fair in the consumer context, it still may not pass muster under the more rigorous standard applied to employment agreements, due to greater pressure on employees and the lack of meaningful alternatives in negotiating.  Rather than formulating a bright-line rule for unconscionability, the Sanchez court instead demonstrated that courts should carefully scrutinize arbitration agreements on a case-by-case basis in order to determine if they are manifestly unfair to one party.

While the defense bar is claiming a victory in Sanchez, the case has an unexpected upside for plaintiffs: while the majority notes that many courts use what they perceive as the harsher “shock the conscience” standard as a default, the Court’s holding that unconscionability standards such as “unfairly one-sided” and “overly harsh” mean the same thing may prompt courts on the stricter end of the spectrum to develop more flexible standards for unconscionability in arbitration agreements.

Authored By:
Robert Friedl, Senior Counsel
CAPSTONE LAW APC 

On July 24, 2015, United States District Judge Lawrence O’Neil issued an order granting certification to a class of FedEx line-haul drivers alleging rest break and wage violations under California law.  See Taylor v. FedEx Freight, Inc., No. 13-01137 (E.D. Cal. July 24, 2015) (slip opinion available here).  In doing so, Judge O’Neil adopted in full Magistrate Judge Barbara McAuliffe’s 27-page Findings and Recommendations (available here), rejecting each of FedEx’s arguments to the contrary.  

Plaintiff Roy Taylor, a former line-haul driver for FedEx, brought suit in 2013 alleging that FedEx underpaid him and fellow drivers by utilizing a policy that failed to separately compensate them for non-driving activities, such as vehicle inspections, rest breaks, trip-related paperwork, and wait time.  FedEx countered that non-driving work was already built into its mileage pay program.  The plaintiff then moved for class certification under Rule 23. 

Conceding numerosity and typicality, FedEx’s main arguments against class certification related to the U.S. Supreme Court’s heightened standards for commonality in Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541 (2011), and the requirements for a manageable trial plan in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).  Ultimately, the District Court held that the question of whether FedEx’s compensation policy was lawful was well-suited for classwide determination.

With respect to commonality and predominance, FedEx argued that Dukes precludes certification because the dissimilarities among the class members prevent a common answer to the liability question of whether FedEx’s compensation policy failed to account for all non-driving work.  Distinguishing Dukes, the court held that FedEx’s mileage policy was uniformly applied without discretion, and thus resolution of the liability question did not hinge on differences among the drivers.

With respect to manageability, FedEx contended that damages for the rest break claims could not be determined by reviewing employee time cards, because, although breaks were recorded, (1) the records did not distinguish between meal periods and rest breaks, and (2) the time cards were rounded in fifteen-minute increments.  The court rejected this argument, however, finding that because the plaintiff’s theory of liability centers on FedEx’s non-payment for recorded rest breaks, liability would attach whenever the records demonstrated that a rest break was taken, regardless of the length.  With respect to the wage claims, the plaintiff persuasively argued that statistical sampling and surveys, along with FedEx’s admissions and employee testimony, would effectively manage any differences in damages.

It is also noteworthy that the plaintiff successfully moved to certify a class period which continues “through the date of trial.”  While FedEx argued that this definition subjects the company to one-way intervention and raises due process issues (because individuals hired after the mailing of the class notice would fall into the class definition, but would not have an opportunity to opt in or out), the court adopted the plaintiff’s proposed solution of providing a second class notice to such individuals just prior to trial. 

Authored by: 
Matthew Theriault, Partner
CAPSTONE LAW APC

A prospective class action against major automaker Ford received a boost recently when Judge Lucy H. Koh of the Northern District of California denied (in large part) Ford’s Motion to Dismiss. See Philips v. Ford Motor Company, No. 14-02989 (N.D. Cal. July 7, 2015) (order available here).

The complaint was filed by plaintiffs seeking to represent a class of California consumers who purchased or leased 2010-2014 Ford Fusion vehicles or 2012-2014 Ford Focus vehicles (“Class Vehicles”), which are allegedly equipped with a defective Electronic Power Assisted Steering (“EPAS”) system. The plaintiffs contended that Ford knew and should have disclosed that the Class Vehicles have the same steering defect that led the National Highway Traffic Safety Administration to investigate the Ford Explorer, resulting in a recall in 2014.

Ford’s motion sought dismissal of fraudulent omissions claims under California’s Consumer Legal Remedies Act (“CLRA”), Unfair Competition Law, and common law fraud. In arguing that Ford did not have a duty to disclose the steering defect and, therefore, that the plaintiffs could not allege a fraudulent omission claim, Ford conceded that the defect was a “safety hazard,” but tried to convince the court that the hazard was not an “unreasonable” one, and thus did not constitute a material fact under Daugherty v. American Honda Motor Co., 144 Cal. App. 4th 824 (2006). Judge Koh was not swayed by this argument, stating in the Order that, “[a]t the very least, it is plausible that a total failure in a vehicle’s power steering—at high or low speeds—constitutes an unreasonable safety hazard. Accordingly, . . . for purposes of a motion to dismiss, [the plaintiffs] have alleged a material safety defect that Ford had a duty to disclose.” Order at 22.

The court also rejected Ford’s contention that the plaintiffs had not adequately alleged Ford’s pre-sale knowledge of the defect, finding that the plaintiffs had “plausibly alleged that Ford knew about the EPAS system defects ‘since as early as 2010’” based on technical service bulletins issued by Ford in 2011 and 2012. Order at 18. The plaintiffs’ success on these two points entitles them to seek damages for violations of the CLRA and common law fraud, though the court ultimately dismissed the plaintiffs’ equitable claims under the UCL and CLRA—not based on merit, but merely because the plaintiffs already had an adequate remedy at law.

Authored by: 
Cody Padgett, Associate
CAPSTONE LAW APC