Posts belonging to Category Caselaw Developments

California’s Second Appellate District has held that a trial court erred by dismissing the plaintiffs’ PAGA action (Cal. Lab. Code §§ 2698 et seq.) for essentially the same reasons as it denied the plaintiff’s class certification motion. Nelson v. Southern California Gas Co., No. B238845 (Cal. Ct. App. May 30, 2013) (Slip opinion available here). The oral argument in Nelson – which strongly suggested that the Second District would rule as it did – was covered here. 

In Nelson, the plaintiffs, drivers for the SoCal Gas Company, brought a putative class action seeking unpaid wages and other damages arising from alleged meal and rest break violations, “off-the-clock” work, and other derivative violations. Slip op. at 2. The plaintiffs also sought separate relief, as the proxy of the State seeking the recovery of civil penalties pursuant to PAGA. Slip op. at 3. The defendant filed a motion for an order that would both declare the suit inappropriate for class treatment and deny the plaintiffs’ PAGA claim. Soon after, the plaintiffs filed a motion for class certification. The trial court denied the motion for class certification, reasoning that common questions would not predominate. Applying substantially the same analysis, the trial court also held that the plaintiffs could not bring their PAGA claim “because individual issues would predominate and a representative action would not be manageable.” Slip op. at 13.

The plaintiffs appealed both the trial court’s denial of their class certification motion and the effective dismissal of the PAGA claim. While this Court of Appeal held that the trial court had not abused its discretion in denying class certification (see slip op. at 14-29), it reversed the trial court’s PAGA analysis and holding, concluding that “the trial court abused its discretion in applying class action requirements to the PAGA claim.” Slip op. at 29.

Although Arias v. Superior Court, 46 Cal.4th 969 (2009), firmly held that class action requirements are inapplicable to PAGA, Arias did not address a case where the PAGA claim is alleged alongside class claims, which is a common type of pleading. The Arias court therefore had no occasion to draw rigorous distinctions between class actions and PAGA representative actions. Indeed, the Nelson trial court was convinced by the defendant’s argument that it could dismiss the plaintiffs’ PAGA claim on the ground that the PAGA litigation would be “unmanageable”― an element found nowhere in the PAGA statute but which is functionally identical to one aspect of the class certification “superiority” analysis. See slip op. at 31. The Court of Appeal identified the fallacy in the defendant’s argument, noting that the trial court’s conclusion that the PAGA claims would be unmanageable was based entirely on a class certification commonality analysis, and found that “[s]ince, under Arias, a plaintiff need not even plead a representative PAGA claim in accordance with class action requirements, it seems anomalous to require that the plaintiff establish the community of interest class action requirement with respect to a PAGA claim, in the context of a class certification procedure.” Slip op. at 31.

Though Nelson has been designated “unpublished,” it is expected that requests for publication will be filed by the June 19th deadline, at least as to the decision’s PAGA reasoning and holding.

Unpaid internships, a staple ritual for ambitious resumé builders, were dealt a blow this week, as a New York federal judge ruled that Fox Searchlight Pictures violated minimum wage and overtime laws when it failed to pay interns who worked on the movie Black Swan. See Glatt v. Fox Searchlight Pictures, No. 11-6784 (S.D.N.Y. June 11, 2013) (order re summary judgment and certification motions, available here).

While numerous other cases have argued that interns ought to be paid, Glatt appears to be the first decision to adopt this argument, after rigorously reasoning through the applicable six-part test. See order at 20-26. While not every factor weighed strongly in favor of finding the plaintiffs entitled to pay, Judge William H. Pauley III concluded that the plaintiffs “were classified improperly as unpaid interns and are ‘employees’ covered by the FLSA,” and that “[t]he benefits they may have received—such as knowledge of how a production or accounting office functions or references for future jobs—are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer.” Order at 26.

Though the decision arose in the context of the entertainment industry, where unpaid internships have for some time gained neophytes entrée to an elite field with virtually limitless long-run income prospects, the decision’s wide media coverage suggests that a major re-think might be underway in all fields that make use of unpaid interns, including politics, high tech, and fashion. Interns who have gone on to major accomplishments in diverse fields include Steve Jobs (Hewlett-Packard), Bill Gates and Patrick Ewing (U.S. Congress), Anderson Cooper (CIA), and Steven Spielberg (Universal Studios).

Eric Glatt, the lead plaintiff, has an MBA from Case Western Reserve University and is currently in law school at Georgetown University. No doubt having already helped shape a major legal issue will assist Glatt in the increasingly competitive atmosphere around landing highly-paid summer associate positions during law school.

With the admonition that “this is the price for agreeing to arbitration,” Justice Elena Kagan’s unanimous majority opinion in the much-anticipated Oxford v. Sutter has affirmed the Third Circuit’s deference, pursuant to Section 10(a)(4) of the Federal Arbitration Act (FAA), to an arbitrator’s conclusion that the parties had contractually agreed that their disputes could be adjudicated on a class-wide basis, in arbitration. See Oxford Health Plans LLC v. Sutter, No. 12–135, slip op. at 1-4 (U.S. June 10, 2013) (available here). While undeniably favorable in holding out the possibility of some class actions being salvaged, albeit in arbitration, the most prominent consequence of the Oxford decision is likely to be that those companies seeking to avoid class actions will be more assiduous in categorically proscribing class treatment in the arbitration agreements they extract from employees and consumers.

Oxford arose when doctors sued their insurance company over reimbursements, and the insurer moved to compel arbitration. Slip op. at 2. After the arbitrator initially found the parties had agreed to class-wide arbitration, the insurer sought reconsideration on the basis of the Supreme Court’s Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) decision, the most expansive reading of which has been that arbitrators’ referral to class-wide arbitration must be vacated when arbitrators conclude in favor of class arbitration on the basis of anything short of an unambiguous, overt, and mutual consent to use class arbitration. See, e.g., Reed v. Florida Metropolitan Univ., Inc., 681 F.3d 630 (5th Cir. 2012). Instead, Oxford largely adopts a narrower reading of Stolt-Neilsen, embodied in decisions like Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), which focus on the quite inelastic range of judicial review afforded by the quite clear provisions of Section 10(a)(4) of the FAA and have found an intent to use class arbitration even where the parties’ arbitration agreement does not expressly consent to, or even reference, class arbitration.

Oxford turns entirely on the scope of judicial review under Section 10(a)(4). Under Oxford, there is little or no room for second-guessing the arbitrator’s interpretation provided the arbitrator has done a plausible impersonation of contract interpretation. Though seemingly an aggressive jurisprudential gesture, that Oxford is a unanimous decision is perhaps best explained by how little room Section 10(a)(4) leaves for cogent interpretation other than that adopted in the Kagan opinion concerning the deference owed arbitrators under Section 10(a)(4): “[C]onvincing a court of an arbitrator’s error—even his grave error—is not enough. So long as the arbitrator was ‘arguably construing’ the contract—which this one was—a court may not correct his mistakes. . . . The potential for those mistakes is the price of agreeing to arbitration.” Slip op. at 8.

When U.S. Supreme Court Associate Justice Antonin Scalia blithely dismissed adhesion contracts with the observation that “the times in which consumer contracts were anything other than adhesive are long past” (AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1750 (2011)), it was widely received as a death knell for the application of unconscionability analysis to arbitration agreements. And few contracts are more adhesive than those that are presented to employees on their first or last day of work; most newly-hired or newly-fired employees have little or no bargaining power. For that matter, employees typically have negligible bargaining power throughout their employment, when they are often asked to sign new contracts, tweaked to fully avail employers of new developments in the law.

Lou v. Ma Laboratories involved multiple agreements presented to plaintiff Cher Feng, both with and without arbitration provisions. See Lou v. Ma Labs., Inc., No. 12-5409 (N.D. Cal. May 17, 2013) (order denying motion to compel arbitration, available here). Yet despite the defendant having assiduously attempted to preserve its ability to force the plaintiff to arbitration, Judge William Alsup, of California’s Northern District, declined to enforce the at-issue arbitration agreement. See slip op. at 1-2.

Ms. Feng worked as an account manager at Ma Laboratories, and upon being hired, she signed a detailed, fourteen-page employment contract providing for disputes to be litigated in court. Slip op. at 1. However, a few months later, the plaintiff was asked to sign a nine-page “supplement” to the employment contract, which drastically changed the terms of her employment, including the addition of an arbitration clause, and which she contends she was required to sign in order to keep her job. Slip op. at 1-2.

Throughout the Lou decision, Judge Alsup’s focus was on the arbitration clause in the contract supplement. In finding the clause unconscionable, Judge Alsup undertook unconscionability analysis under California law, which has both a substantive and procedural component. “To determine whether an arbitration agreement is unconscionable, courts apply a sliding scale: ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’” Slip op. at 3, citing Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000). By relying on Armendariz and only making passing reference to Concepcion, Alsup thus tacitly affirmed the continuing vitality of California’s unconscionability doctrine.

Judge Alsup determined that the at-issue arbitration clause was procedurally unconscionable due to it being a contract of adhesion, since there was effectively no opportunity to negotiate its terms. Slip op. at 3-4. In addition, Alsup held to California authority requiring that if the rules governing an arbitration are not attached to an arbitration contract that an employee signs, that weighs as evidence of procedural unconscionability. Slip op. at 4-6. It was as to the arbitration provision’s substantive unconscionability that Alsup deployed his sharpest criticism, assailing the contract’s lack of mutuality (the defendant could litigate claims for injunctive relief, whereas the employer couldn’t) and asymmetric, ambiguous fee-shifting provision. Slip op. at 7-8.

While the decision made clear that the ruling is limited to Ms. Feng’s arbitration agreement, and not to any other class member, it would be surprising if future motions to compel arbitration did not meet the same fate, since the company presumably used the same or similar documents and procedures with all of their employees.