Posts belonging to Category Caselaw Developments

In the first Ninth Circuit decision relating to the Private Attorneys General Act of 2004 (“PAGA”), a panel held in Urbino v. Orkin Services of Calif., No. 11-56944, 11-57002 (9th Cir. Aug. 13th, 2013) (slip opinion available here) that federal diversity jurisdiction cannot be exercised over California’s unique PAGA enforcement action. At the same time, the panel stayed its decision in Baumann v. Chase Investment Services, No. 12-55644 (Mr. Baumann is represented by Capstone Law APC), heard concurrently with Urbino and which presented an additional, closely-related issue as to whether a PAGA action is removable under the Class Action Fairness Act (“CAFA”).

First, Urbino prohibits district courts from aggregating PAGA civil penalties to establish the amount in controversy for diversity jurisdiction. Under the PAGA statute, civil penalties are measured by the number of violations against an employer’s current and former employees. If penalties for all aggrieved employees could be aggregated to meet the $75,000 amount in controversy threshold, most PAGA actions would be subject to federal jurisdiction. Urbino holds that aggregation is improper because, although a PAGA action unites aggrieved employees’ claims into one action, their underlying interests are not “common and undivided,” and thus do not fall within the narrow exception to the prevailing non-aggregation principle. Rather, in a PAGA action “[e]ach employee suffers a unique injury… [and therefore] Defendants’ obligation to them is not ‘as a group,’ but as ‘individuals severally.’” Slip op. at 8 (quoting Gibson v. Chrysler Corp., 261 F.3d 927, 944 (9th Cir. 2001)). Second, and separately, Urbino holds that because the benefits of PAGA inure primarily to the state, “[t]he state [is] the real party in interest [and] is not a ‘citizen’ for diversity purposes.” Slip op. at 9.

The main result of Urbino is that pure PAGA actions will not be removable under 28 U.S.C. §1332 (the statutory basis for diversity jurisdiction), since “federal courts lack subject matter over this quintessentially California dispute.” Slip op. at 9. But Urbino leaves open the question of whether PAGA actions are subject to removal under CAFA. That question will be settled by Baumann, which has been stayed pending the U.S. Supreme Court’s decision in Mississippi ex rel. Hood v. AU Optronics Corp., 701 F.3d 796 (5th Cir. 2012), cert. granted, 133 S. Ct. 2736 (May 28, 2013). However, it is unlikely that Hood, which addresses the “mass action” provision of CAFA, will affect the analysis. CAFA excludes from its definition of “mass action” any action where “all of the claims in the action arise from an event or occurrence in the state” where the action was filed. 8 U.S.C. § 1332(d)(11)(B)(ii). Because a PAGA action is limited to collecting penalties arising from labor law violations that occurred in California, it cannot be defined as a “mass action” for CAFA purposes. In the meantime, PAGA plaintiffs faced with a removal under CAFA should continue to rely on Washington v. Chimei Innolux Corp., 659 F.3d 842 (9th Cir. 2011), which makes clear that only class actions — and not actions “resembling” class actions — are removable under the class action provision of CAFA. Baumann is unlikely to upend the reasoning of Chimei.

Finally, by identifying the state as “the real party in interest,” Urbino also bolsters recent scholarship and case law drawing a close analogy between PAGA and the qui tam action. See, e.g., Cunningham v. Leslie’s Poolmart, 2013 U.S. Dist. LEXIS 90256 (C.D. Cal. June 25, 2013); Janet Alexander, To Skin a Cat: Qui Tam Actions as a State Legislative Response to Concepcion, 46 U. Mich. J. L. Reform 1203 (Summer 2013).

There was some question whether the National Labor Relations Board’s landmark D.R. Horton, 357 NLRB No. 184 (Jan. 3, 2012) decision would survive American Express v. Italian Colors Rest., 133 S. Ct. 2304 (2013), which narrowed the “effective vindication” limitation to the Federal Arbitration Act. However, the Administrative Law Judge deciding a Board charge in Cellular Sales of Missouri, LLC, held that D.R. Horton’s holding is unaltered by American Express:

I find that the Supreme Court does not expressly overrule the finding in D.R. Horton. The case at issue is distinguishable because the arbitration agreement precludes employees from exercising their substantive rights protected by Section 7 of the [National Labor Relations] Act. The NLRA “protects employees’ ability to join together to pursue workplace grievances, including through litigation. Id., slip op. at 2. By initiating arbitration on a classwide basis and filing a class action lawsuit in district court, both Bauer and the charging party in D.R. Horton were engaging in conduct that the Board has noted is “not peripheral but central to the Act’s purposes.” D.R. Horton, supra at 4. The Board went on to find that there was no conflict between the NLRA and the FAA “[s]o long as the employer leaves open a judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of class-wide arbitration.” D.R. Horton, slip op. at 16. The agreement in this matter does not provide for such an option.

The claim brought by the merchants in American Express Co., is distinguishable in that it was for a violation of antitrust laws. Unlike D.R. Horton and the case at issue, the merchants were alleging not that they were precluded from pursuing their claim but rather the cost to do so individually would be prohibitive. Id. at 2309. However, the Supreme Court noted “antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” American Express Co., supra at 2309.

Cellular Sales, slip op. at 7-8.

This decision comports with a recent administrative decision in Ralph’s Grocery Co., where D.R. Horton was harmonized with American Express. (This decision arose from a charge brought by Terri Brown, who is also the plaintiff in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011) and is represented by Capstone Law APC in both state court and before the Board.)

Although D.R. Horton’s impact has thus far been limited, its reasoning is very powerful and may yet prove persuasive to higher courts. The D.R. Horton Board explained, in considerable detail, that an employee’s right to collective legal action, including filing of putative class actions, has long been considered a “concerted activity”— the core right protected by the NLRA and the Norris-LaGuardia Act (NLA). The Board found that a forced waiver of that right, whether in an ordinary agreement or tied to an arbitration clause — is an unfair labor practice under Section 8(a) of the NLRA.

In a particularly well-reasoned section, D.R. Horton harmonized its decision with the FAA, explaining that the Supreme Court has long held that an arbitration agreement cannot be enforced if it extinguishes a core substantive right. Also, the NLA, enacted in 1932, expressly supersedes any conflicting prior-enacted law, which would include the FAA, which was signed into law in 1925.

Thus far, employees taking collective action against their employer in the face of a mandatory class action waiver have had much greater success filing charges with the Board than by invoking D.R. Horton in court. In refusing to accept D.R. Horton, many courts have relied on an inapposite case called CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012), where the Court held that a claim under the Credit Repair Organization Act cannot be exempted from arbitration absent an explicit congressional command.

This appears to reflect a common confusion between arbitrability and the effect of an illegal waiver. D.R. Horton did not hold that employment class actions are exempt from arbitration, since a statutory claim can be exempt from arbitration only when the statutory language expressly provides. Rather, the Board held that a mandatory waiver of a core federal substantive right is not enforceable, whether the illegal waiver is tied to an arbitration clause or not. D.R. Horton’s reasoning is entirely consistent with American Express, which stated that an arbitration agreement cannot be enforced if it “forbid[s] the assertion of certain statutory rights.” American Express, 133 S. Ct. at 2310. As these administrative decisions move forward, courts should take a second look at the well-reasoned D.R. Horton and look to balance core substantive rights protected by the NLRA with the FAA.

The California Court of Appeal recently affirmed a trial court’s denial of defendant Integrated Healthcare’s petition to compel arbitration. Avery v. Integrated Healthcare Holdings, Inc., No. G046202, ___ Cal. App. 4th ___ (Jun. 27, 2013) (available here). Despite the decision’s ostensibly narrow holding, the unanimous three-judge panel underscored that employers facing a wage-and-hour class action will not be able to seize on recent developments in arbitration jurisprudence with evidence amounting to little more than an “incomplete and confusing patchwork of documents.” Slip op. at 25. On July 23, 2013, nearly a month after the decision was issued, California’s influential Fourth Appellate District, Division Three, ordered Avery published in the Official Reports, stating: “Pursuant to California Rules of Court, rule 8.1105(c), and for good cause shown, nonparty Capstone Law’s request to publish the opinion filed on June 27, 2013 is GRANTED.” See Order Granting Request for Publication.

The defendant premised its contention that the plaintiffs must proceed in individual arbitration rather than pursue a class action on the plaintiffs having signed a form acknowledging receipt of an employee handbook, which was purported to contain the hospital’s arbitration policy – euphemistically called the “Open Door Policy and Fair Treatment Process.” See slip op. at 3-5. (In fact, the defendant brought eight separate motions to compel eight named plaintiffs in related putative class actions to arbitrate.) The trial court denied all of the arbitration motions with the finding that the defendant had “‘failed to meet [its] burden to show that any of the Plaintiffs are subject to an enforceable arbitration agreement’” and the defendant appealed. Slip op. at 7.

In the 3-0 decision upholding the motions’ denial in all respects, despite one motion being subject to a “substantial evidence” standard while the rest were subject to de novo review, Associate Justice Richard Aronson began by noting that one plaintiff had not even signed the form acknowledging receipt of an employee handbook, and that plaintiff could not be deemed to have agreed to arbitration under an implied-in-fact contract theory premised on the plaintiff having continued working and thereby having implicitly agreed to arbitration. See slip op. at 13-14. In particular, the opinion gave emphasis to the defendant’s erroneous contention that it need not establish that the employee ever received the employee handbook to make out its implied-in-fact theory. Slip op. at 16-17.

As to the other employees, the decision faulted the defendant for failing to establish the actual arbitration terms that would govern the plaintiffs’ claims. “Although we agree Plaintiffs . . . generally agreed to a Fair Treatment Process by signing one or more of these documents, we nonetheless affirm the trial court’s order denying the motions to compel arbitration because Integrated failed to present sufficient evidence establishing the specific Fair Treatment Process it presented to the trial court was the Fair Treatment Process to which Plaintiffs agreed.” Slip op. at 17 (emphasis in original).

Thus, while the decision expressly limited its holding to the facts at hand, Avery reiterates a general proposition of law set forth earlier in Kleveland v. Chicago Title Ins. Co., 141 Cal. App. 4th 761 (2006), demanding specificity in the purported arbitration terms when a defendant attempts to enforce an arbitration agreement by way of an employee handbook acknowledgement. “The party seeking to enforce an arbitration provision incorporated by reference must establish the provision it seeks to enforce is the same provision to which the parties agreed.” Slip op. at 18, citing Kleveland at 765.

Again relying on the Kleveland decision, Avery takes seriously the “mutual consent [that] is an essential element of any contract,” a mutuality that many recent aggressively pro-arbitration decisions have seemingly disregarded. In a portion of Avery likely to be much cited by prospective wage-and-hour class representatives, the decision concludes that “it is not sufficient for the party seeking to compel arbitration to show the parties generally agreed to arbitrate their disputes by incorporating some arbitration provision into their contract. Rather, the party must establish the precise arbitration provision which the parties incorporated into their agreement to govern their disputes.” Slip op. at 19-20.

In a major victory for consumers, the Sixth Circuit Court of Appeals has, for a second time, affirmed a district court’s class certification ruling, this time in light of the more rigorous standards imposed by the U.S. Supreme Court’s recent ruling in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). Insofar as some had speculated that Comcast rendered class certification impossible as a practical matter, the Sixth Circuit’s ruling is among the most significant class action jurisprudence developments of 2013 thus far. See Glazer v. Whirlpool Corp., No. 10-4188, (6th Cir. July 18, 2013) (slip opinion available here).

The underlying multi-district consolidated action pending in Ohio’s Northern District alleges that Whirlpool’s “front-loading washing machines (the Duets) allow mold and mildew to grow in the machines, leading to ruined laundry and malodorous homes.” Slip op at 2. Following the district court’s certification of a class, the Sixth Circuit heard an interlocutory appeal pursuant to Federal Rule 23(f) and affirmed the trial court’s grant of certification, yielding a decision now known as “Whirlpool I”. 

Whirlpool persisted, unsuccessfully petitioning the Sixth Circuit for en banc rehearing and then filing a certiorari petition with the U.S. Supreme Court, which was granted. This resulted in the Supreme Court remanding the case to the Sixth Circuit (not the trial court) under the “grant, vacate, and remand” procedural device, which specifically directed the Sixth Circuit to reconsider Whirlpool’s Rule 23(f) appeal in light of Comcast v. Behrend. Slip op. at 2-3. Notwithstanding Comcast, the Sixth Circuit reconsidered its prior ruling but reached the same conclusion: affirming the district court order certifying a class for the determination of liability. See slip op. at 3.

The Sixth Circuit’s decisive analysis, under the often-dispositive rubric of determining whether common questions of law or fact predominate, distinguishes Comcast as follows: “Here the district court certified only a liability class and reserved all issues concerning damages for individual determination; in Comcast Corp. the court certified a class to determine both liability and damages. Where determinations on liability and damages have been bifurcated, see Fed. R. Civ. P. 23(c)(4), the decision in Comcast—to reject certification of a liability and damages class because plaintiffs failed to establish that damages could be measured on a classwide basis—has limited application.” Slip op. at 27. Consequently, plaintiffs’ counsel will likely style class actions akin to the liability-damages bifurcation in Glazer v. Whirlpool that kept the Sixth Circuit’s predominance analysis outside the ambit of Comcast.

Additionally, the decision, known as “Whirlpool II”, represents some pushback with respect to another relatively recent Supreme Court decision thought to spell trouble for the future of class actions, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), which some Court observers presumed to open the class certification inquiry to a full-scale determination on the merits. Seizing on Dukes, Whirlpool argued that the district court had committed reversible error by avoiding “several questions of fact arising from the evidence presented by the parties in connection with the motion to certify a class.” Slip op. at 13. However, the Sixth Circuit held that the “rigorous analysis” mandated by Dukes does not imply that a trial court must engage in the extensive merits-based determinations advocated for by Whirlpool. See slip op. at 13-14.