Posts belonging to Category Caselaw Developments

Earlier this month, the Seventh Circuit Court of Appeal held that “commonality of damages” was not required under Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011) and Comcast v. Behrend, 133 S. Ct. 1426 (2013) for class certification in a consumer case involving claims that “organic” roof shingles did not meet an industry standard. In the Matter of IKO Roofing Shingle Prods. Liab. Litig., No. 14-1532 (7th Cir. July 2, 2014) (slip opinion available here). Purchasers of the shingles sued IKO, alleging that the defendant falsely told customers that the shingles met an industry standard. Plaintiffs asked the district court to certify a class that would cover IKO’s sales of the product in various states since 1979, but the motion was denied by the multidistrict litigation judge in the Central District of Illinois. The district court stated that Comcast and Dukes required proof “that the plaintiffs will experience a common damage and that their claimed damages are not disparate” and that “’commonality of damages’ is essential.” Slip op. at 6.

Circuit Judge Frank Easterbrook authored the opinion for the panel consisting of Judges Wood and Kanne. The panel wrote that the district court incorrectly interpreted Comcast; such an interpretation would make “class actions about consumer products impossible.” Slip op. at 6. Distinguishing Dukes as having “nothing to do with commonality of damages,” the opinion stated, “[i]t dealt instead with the need for conduct common to members of the class, and it concerned Rule 23(a)(2) rather than Rule 23(b)(3).” Id. However, in a suit like IKO Roofing, which alleges a defect common to all instances of a consumer product, “the conduct does not differ.” Id. at 6-7.

Furthermore, while Comcast does discuss injury under Rule 23(b)(3), all it requires is that the theory of loss (damages) match the theory of liability. Id. at 7. In Comcast, the plaintiffs specified four theories of liability, but the district judge had only certified a class limited to one of the four theories. However, the plaintiffs’ damages expert estimated harm assuming all four of the theories were established. Because there was only one certified theory of liability but four theories of damages, the theory of loss failed to match the theory of liability. Id. In IKO Roofing, the panel found that the plaintiffs submitted two theories of damages that matched their theory of liability: the first being the difference between the market price between the product as represented and a tile that does not satisfy the industry standard, which is applied to every purchaser, and the second being purchasers whose tiles actually failed could recover damages if the alleged defect (not meeting the industry standard) caused the failure.

The panel stated that although the district court was not required to certify this class action if there were other issues that make class treatment unwieldy despite any common issues, here, the lower court failed to apply the correct legal standard—“commonality of damages” is not a requirement for certification. It is too early to tell, but IKO Roofing’s holding may have positive implications for wage-and-hour class actions, if utilized in employee class certification arguments.

An array of supporters have filed amicus briefs on behalf of the plaintiffs in the Fox Searchlight unpaid intern cases, including the U.S. Department of Labor (DOL), unions such as the Service Employees International Union (SEIU), and the National Employment Lawyers Association (NELA), among others. Glatt v. Fox Searchlight Pictures, Inc., Case No. 13-4478 (S.D.N.Y.). Similar amicus briefs were also filed in a related case on behalf of ex-Hearst interns who are appealing denial of their motion for class certification in the Second Circuit, which will be heard in tandem with the Fox case. Wang v. The Hearst Corp., Case No. 13-4480 (S.D.N.Y.). At issue is the proper legal test for determining whether an intern is an “employee” entitled to wages under applicable federal and state laws or a “trainee,” who is not entitled to such pay and protections. While several of these unpaid intern cases have settled, Fox is appealing the decision by U.S. District Judge William Pauley to grant class and collective action certification to the ex-interns and the finding that the two interns who worked on the set of “Black Swan” were “employees” under New York state law and the Fair Labor Standards Act (FLSA).  

An amicus brief submitted jointly by NELA, the Economic Policy Institute, and the Writers Guild of America East (available here), was filed on July 3, 2014, supporting affirmance of the certification decision. NELA’s brief noted that employers increasingly have been using labels like “intern” to keep workers outside of the protections of employment laws like the FLSA, and that this reflects a larger trend toward greater employer use of “contingent jobs.” NELA Brief at 5. By using job titles other than “employee,” like “independent contractor” or “volunteer,” to categorize workers, companies have undermined the FLSA’s protections. Id. NELA also wrote that simply labeling someone an intern cannot convert what would be considered “entry-level paid employment” into “legitimately unpaid work,” “rather, it is the relationship between the worker and the company that matters. If workers are suffered or permitted to work, their employer must pay them.” Id. at 7. Finally, NELA’s brief states that employers who misuse unpaid interns hurt workers and law-abiding employers alike: the workers are deprived of income and while companies who properly pay their employees minimum wage, overtime, unemployment insurance, workers’ compensation, and payroll taxes are at a competitive disadvantage. Id. at 16-19.

The U.S. DOL also filed an amicus brief on July 8, 2014 (available here), stating that the limited exception for trainees under federal wage requirements does not apply to the unpaid interns who performed routine tasks that would have been performed by paid employees. Further, the DOL supported the lower court’s application of the six-part DOL trainee test rather than the “primary benefit” test urged by the defendants and agreed with the court’s holding that the interns were “employees” as broadly defined by the FLSA, 29 U.S.C. section 203(g). DOL Brief at 1. The DOL test only allows unpaid interns to be classified as trainees in limited circumstances, where the employer derives no immediate advantage from the activities of the intern, the intern is the primary beneficiary of the internship, and the interns does not displace regular employees, among other requirements. On the other hand, the primary benefit test requires an analysis of the totality of circumstances, of which a key factor is who was the “primary beneficiary” of the internship. The U.S. DOL wrote that, although “trainees” whose work is intended for their own benefit are excluded from the FLSA’s wage requirements, that exception does not apply here, partly because the interns performed work that other paid employees would have otherwise had to do. Id. at 19-20. “Nothing in the FLSA or in Portland Terminal [on which the DOL’s six-part test is based] suggests that for-profit employers should be permitted to circumvent their obligation to compensate individuals who are performing productive work by categorizing [them] as interns or trainees.” Id. at 28.

Finally, in the amicus brief filed by several unions, including the SEIU and the United Food and Commercial Workers, on July 9, 2014 (available here), the unions argue that Fox’s proposed “primary benefit” test for determining whether an intern is an employee under the FLSA would effectively “absolve them, and other for-profit employers, [of having to pay] an FLSA-required wage to any worker who receives the ‘primary benefit’ of her job.” SEIU Brief at 5. “If this court were to adopt the primary beneficiary test urged by Appellants, it would significantly narrow the scope of the FLSA and . . . increase the number of workers in the labor market who are not entitled to any pay. Doing so would not only deny productive workers the living wages they legally deserve for their labor, but would also strip them of a slew of other statutory workplace rights – concerning sexual harassment, discrimination . . ., workplace safety, and collective bargaining – that apply only to wage earners. The result would be a sweeping denial of legal protections to the struggling workers who need them most.” Id.

A hearing date for oral argument has not yet been set.

Last week, the California Supreme Court affirmed the Second District Court of Appeal’s reversal of a trial court’s decision denying certification in a case involving newspaper carriers who were misclassified as “independent contractors.” Ayala v. Antelope Valley Newspapers, Inc., No. S206874 (June 30, 2014) (slip opinion available here). The Court held that the delivery workers can be certified as a class if they are subject to a common policy, which could make it more difficult for companies to defeat motions for class certification by plaintiffs. The complaint alleged that Antelope Valley treats its carriers as independent contractors when, as a matter of law, they are actually employees, and were thus denied wage-and-hour protections to which they are entitled. The plaintiffs sought class certification, arguing that the “central question in establishing liability was whether carriers are employees, and that this question could be resolved through common proof, [such as via] the contents of the standard contract entered into between Antelope Valley and its carriers.” Slip op. at 3. Antelope Valley opposed; it disagreed that the question of employee status could be resolved on a common basis because of individual variations in how the workers carried out their deliveries.

The trial court had rejected certification, concluding that common issues did not predominate because resolution of the plaintiffs’ status as “employees,” as well as the wage-and-hour claims, would require “heavily individualized inquiries,” and thus the class action vehicle could not be superior to individual lawsuits brought by each worker. Slip op. at 3. The Second District then reversed in part, holding that even though there was evidence of variation in how the carriers performed their work and how the company’s policies affected them, the company had uniform policies affecting all carriers. Before the California Supreme Court, the carriers argued that the contents of the form agreements the defendant required them to sign were proof that the paper controlled how they carried out their work. The Court explained that the lower courts properly recognized the central legal issue: “whether putative class members are employees for purposes of the provisions under which they sue,” stating, “[i]f they are employees, Antelope Valley owes them various duties that it may not have fulfilled; if they are not, no liability can attach.” Id. at 5.

The Court affirmed, stating that the principal test for whether a worker is an employee or an independent contractor under the common law is the extent to which the hiring party retains the right of control over how the work is performed. Slip op. at 2 (citing S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341, 350 (1989)). Further, “whether the hirer’s right to control can be shown on a classwide basis will depend on the extent to which individual variations in the hirer’s rights vis-à-vis each putative class member exist, and whether such variations, if any, are manageable.” Id. Because the trial court rejected certification based not on variations in the company’s right to exercise control, but rather on dissimilarities in how that right was exercised, the Court found the trial court decision could not stand. Id. Under the common law, what matters is whether the hirer retains “all necessary control” over its operations; the strongest evidence of such right to control is if an “employer” has the right discharge the worker without cause, regardless of whether or not it actually exercised that right. Id. at 6-7 (citing Borello, at 357). In addition to the right of control, the Court narrowed which “secondary” Borello factors are most significant and clarified the meaning of these additional factors.

Finally, the Court stated that after common and individual factors are identified, it must weigh the costs and benefits to determine whether the advantages of a class action to resolve a common, predominating question exceed the disadvantages created by individualized inquiries. Slip op. at 17. “Individual issues do not render class certification inappropriate so long as such issues may effectively be managed.” Id. at 17-18 (citing Sav-On Drug Stores, Inc. v. Superior Court, 34 Cal.4th 319, 334 (2004), and Duran v. U.S. Bank National Association, 59 Cal.4th 1, 29 (2014). Ayala, as a decision issued post-Duran, clarifies how the manageability of a class claims can impact class certification.

In a closely-watched case, the California Supreme Court reversed a decision of the Court of Appeal that had held that Defendant CLS Transportation’s mandatory arbitration agreement, which contained a class action waiver and a waiver of the right to bring a representative action, was enforceable in all respects. Iskanian v. CLS Transportation LLC, No. S204032 (June 23, 2014) (Mr. Iskanian is represented by Capstone Law APC) (slip opinion available here). By a 6-1 majority, the Court concluded that its prior decision holding class action waivers unenforceable under certain circumstances, Gentry v. Superior Court, 42 Cal.4th 443 (2007), is preempted by the Federal Arbitration Act (FAA) in light of recent United States Supreme Court precedent. But the Court also unanimously held that a waiver of the right to bring a representative action under the Private Attorneys General Act of 2004 (PAGA) is unenforceable, though the Justices’ analyses diverged in their reasoning. Justice Liu wrote the majority opinion, which was joined by Chief Justice Cantil-Sakauye and Justices Corrigan and Kennard. Justice Chin authored a separate concurrence which was joined by Justice Baxter, and Justice Werdegar partially dissented in a blistering attack on the use of class action waivers as a modern day version of the notorious “yellow dog” contracts of the early 20th century.

The majority began by analyzing the lower court’s enforcement of the class action waiver in CLS’s arbitration agreement, which in turn required it to revisit its earlier Gentry decision. Gentry had held that a trial court may invalidate a class action waiver in an arbitration agreement if individual arbitration was significantly less effective in enforcing unwaivable statutory rights than class arbitration based on consideration of four factors. In 2011, the U.S. Supreme Court issued AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), which invalidated the Discover Bank rule, an earlier California state law rule that had limited the enforceability of class action waivers in adhesive consumer contracts, as being preempted by the FAA. The Iskanian Court acknowledged that the Gentry rule against class waivers was narrower than the Discover Bank rule, but nonetheless held that it is preempted by the FAA. Slip op. at 7. The Court also rejected an argument made by Iskanian’s counsel at oral argument that a modified Gentry test might not be preempted if it applied only where a class action waiver amounted to a de facto waiver of rights and the at-issue arbitration agreement failed to provide a suitable alternative means for vindicating those rights. This argument, based on the Court’s analysis in Sonic-Calabasas II, was rejected because the constellation of Berman protections (the subject of Sonic-Calabasas II) includes things such as one way fee-shifting and mandatory undertaking that do not frustrate “fundamental attributes of arbitration” as articulated by Concepcion, while Gentry is focused only on a procedure that “frustrates fundamental attributes of arbitration.” Slip op. at 10.

The Court also rejected Iskanian’s argument that the class action waiver was invalid under federal labor law, specifically the National Labor Relations Act (NLRA), which protects workers’ rights to engage in “concerted activity” for “mutual aid or protection,” and the Norris-LaGuardia Act, which prohibits “yellow-dog” contracts. The Court declined to follow the NLRB’s decision in D.R. Horton Inc. & Cuda, 357 NLRB No. 184 (2012), which had held that class action waivers and other contractual prohibitions on aggregate litigation in employment contracts (including arbitration agreements) are invalid, and instead followed the Fifth Circuit Court of Appeals in D.R. Horton Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), holding that the NLRA was overridden by the earlier statute, the FAA, and did not fall within the savings clause of the FAA (i.e. poses an obstacle to arbitration). The Court also agreed with the Fifth Circuit that there is no inherent conflict between the FAA and the later-enacted NLRA (or Norris-LaGuardia Act) because the federal class action rule did not yet exist when the NLRA became law, and that the NLRA does not embody a “contrary congressional command” overriding the FAA’s mandate. Slip op. at 20-21.

Although the Court ruled that the class action waiver was enforceable, it reached the opposite conclusion regarding CLS’s contractual waiver of PAGA claims. The Court first analyzed whether PAGA claims may be waived under California law. The Court found that PAGA claims, which allow an “aggrieved employee” (an employee who has suffered an enumerated violation of the Labor Code) to recover civil penalties on behalf of the state and all other aggrieved employees, cannot be waived under California law. In its analysis, the Court noted that PAGA is a type of qui tam action, in which the named aggrieved employee recovers twenty-five percent of all the penalties (to be distributed among the other aggrieved employees in some fashion) and seventy-five percent goes to the State. Slip op. at 33. The Court further recognized that PAGA claims are inherently representative, because, at its core, the PAGA-named aggrieved employee “represents” the State’s law enforcement interest. Id. at 36. The Court concluded that, because it would cripple the State’s ability to enforce its labor laws by allowing PAGA claims to be waived by private contract, “[i]t is against public policy for an employment agreement to deprive employees of this option altogether, before any dispute arises” and thus PAGA waivers are unenforceable under state law. Id. at 35-36.

In what is likely the critical portion of the Iskanian opinion, the Court also held that the state law rule prohibiting waiver of PAGA claims is not preempted by the FAA. The Court noted that both the FAA’s text and legislative history demonstrate that it applies to private disputes between parties “in a contractual relationship.” Slip op. at 37. The Court found that a PAGA action is not a private dispute, insofar as it involves a dispute between an employer and the state Labor and Workforce Development Agency, the latter of which is the real party in interest. Id. The Court further reviewed the U.S. Supreme Court case law and found that all but one case, EEOC v. Waffle House, Inc., 534 U.S. 279 (2002), involved private disputes between parties in a contractual relationship and were thus inapposite. The Court held that Waffle House, which held that an arbitration agreement between an employee and his employer did not prevent the EEOC from suing the employer on behalf of the employee, controlled the instant case. Slip op. at 39. The Court thus concluded that “[n]othing in the text or legislative history of the FAA nor in the Supreme Court’s construction . . . suggests that the FAA was intended to limit the ability of the states to enhance their public enforcement capacities by enlisting willing employees in qui tam actions.” Id. at 40-41. Importantly, the Court also observed that an unbroken line of U.S. Supreme Court decisions have held that courts should not assume that the historic police powers of the states are preempted “unless that was the clear and manifest purpose of Congress,” that PAGA is clearly within California’s historic police powers and lies at the “heart of state sovereignty,” and that the FAA embodies no such “clear and manifest purpose.” Id. at 42. The Court therefore held that California’s rule prohibiting waiver of PAGA claims is not preempted by the FAA.

Finally, the majority opinion clarified that the rule announced by the Court is not that PAGA claims are inarbitrable, but rather that they cannot be waived entirely. Slip op. at 47 (stating that “CLS must answer the representative PAGA claims in some forum.”). The Court also identified several issues to be decided on remand, including: (i) whether the parties may agree to resolve the PAGA and other claims in the same forum; (ii) if not, whether the claims can be bifurcated and proceed in different forums; and (iii) if bifurcated, which claims should proceed first. Id.

Justices Chin and Baxter concurred with all aspects of the majority’s decision, including that the PAGA waiver in CLS’s agreement is unenforceable, but disagreed with the majority’s reasoning on that latter point. Specifically, whereas the majority found the FAA to be wholly inapplicable to PAGA claims due to their “public” nature, Justice Chin wrote that he would have predicated that holding on the U.S. Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013), insofar as Italian Colors reiterated that an arbitration agreement may not “forbid the assertion of certain statutory rights.” Slip op., Chin concurring op. at 5. Because “[r]equiring an arbitration provision to preserve some forum for bringing PAGA actions does not exceed [the FAA’s] limit,” the California rule prohibiting a complete waiver of an employee’s PAGA claims is not preempted by the FAA. Id. at 8.

Finally, Justice Werdegar concurred as to the unenforceability of CLS’s PAGA waiver, but dissented as to the enforcement of the class action waiver. In a strongly-worded defense of the federal labor laws, Justice Werdegar excoriated the majority for ignoring Congress’s declaration 80 years ago that employees have a right to engage in collective action and that contracts purporting to strip those rights are illegal. Because the right to collective litigation has been held to be protected “collective action,” employees’ right to proceed with a class action is therefore protected by the NLRA. Moreover, Justice Werdegar noted that class action waivers in employment contracts “are the descendants of last century’s yellow dog contracts,” referring to the much-maligned agreements that were outlawed in 1932 by the Norris-LaGuardia Act. Justice Werdegar also found no conflict between the FAA and the NLRA, because a rule prohibiting class action waivers would apply equally to arbitration agreements and other contracts, thus falling within the FAA’s savings clause. Slip op., Werdegar dissenting op. at 9. Moreover, she reasoned, if there were a conflict between the FAA and the later-enacted NLRA or Norris-LaGuardia Act, the Norris-LaGuardia Act would prevail, as it expressly repeals other contrary statutes. Id. Justice Werdegar concluded by observing that the majority opinion “rests on the notion that the FAA should be interpreted to operate as a super-statute, limiting the application of both past and future enactments in every particular,” but that the text and legislative history of the Norris-LaGuardia and NLRA “show no such deference” to the FAA. Id. at 13-14. She concluded, “The right of collective action they codify need not yield.” Id. at 14.

While some defense attorneys predictably have hailed the Iskanian decision as a victory for employers, a more accurate assessment would be that it was a mixed bag. Although the California Supreme Court could have adopted the NLRB’s reasoning in D.R. Horton to void the class action waiver before it, that also would have increased the likelihood of review by the U.S. Supreme Court. Further, by announcing that PAGA cannot be waived by arbitration agreements in California, the Court also preserved a powerful form of aggregate litigation for California employees. Indeed, the fact that all seven justices agreed that PAGA waivers are not only illegal under California law, but also that the rule is not preempted by the FAA is a powerful, unified statement, especially in light of recent arbitration-friendly decisions by the U.S. Supreme Court. CLS has indicated some possible interest in filing a petition for certiorari to the U.S. Supreme Court, the deadline for which is September 22, 2014.