On August 18, 2016, the California Supreme Court unanimously held that the statutory provisions requiring the prompt payment of final wages apply not only to employees who quit their employment, but also employees who retire. McLean v. State of California, et al., No. S221554 (Cal. Aug. 18, 2016) (slip op. available here). The court rejected arguments suggesting that the Legislature intended to exclude employees whose employment is terminated by retirement from seeking prompt payment of final wages.

In McLean, the plaintiff Janis S. McLean, a retired deputy attorney general, sued the State of California and the State Controller’s Office on behalf of herself and a class of former state employees who had resigned or retired and did not receive their final wages within the time periods set forth in the prompt payment provisions of Labor Code sections 202 and 203. Section 202 applies to employees who have no written contracts for a definite period and generally provides that when such employees quit their employment, their wages shall be paid within 72 hours. Section 203 requires employers to pay waiting time penalties of up to 30 days’ wages if they willfully fail to pay wages of their employees who are discharged or quit.

The plaintiff in McLean alleged that the defendants violated section 202 by failing to pay her final wages on her last day of employment or within 72 hours after her last day and failed to make full and prompt payment under section 202 to other members of the proposed class. The defendants filed a demurrer, and the trial court sustained the demurrer, finding that because the plaintiff had “retired,” she had not stated a claim for statutory penalties pursuant to section 203, which applies only when an employee “quit[s]” or is “discharged.” Slip op. at 4. The Court of Appeal reversed in part, finding that the statutory provisions apply when an employee “quits to retire.” Id. at 5.

The California Supreme Court granted review and affirmed. The court found that “retirees fall into the broader category of employees who have ‘quit’ their employment within the meaning of the general prompt payment rule of section 202(a) and section 203.” Slip op. at 9. The court found no reason to conclude that retirees would be specially disqualified from seeking prompt payment of final wages and rejected arguments that the Legislature impliedly excluded retirees from the benefit of the long-standing general rule entitling employees to prompt payment of wages upon “quitting” their employment. Id. at 7-9. Sections 202 and 203 thus “apply to persons who retire from their employment, just as they apply to those who voluntarily leave their employment for other reasons.” Id. at 14.

This comports with the purposes of the prompt payment provisions, as “California has long regarded the timely payment of employee wage claims as indispensable to the public welfare.” Smith v. Super. Ct., 39 Cal. 4th 77, 82 (2006). As a result, employers should be mindful to promptly issue final pay to retirees.

Authored By:
Liana Carter, Senior Counsel
CAPSTONE LAW APC

In Haskins v. Symantec Corp., No. 14-16141 (9th Cir. June 20, 2016) (slip op. available here), a three-page unpublished opinion, the Ninth Circuit came to the unremarkable conclusion that a plaintiff bringing fraudulent advertising claims under the Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) who “did not allege that she read and relied on a specific misrepresentation” by the defendant has failed to plead her fraud claims with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. Slip op. at 2. What is perhaps notable is that the court did not engage with the important issue of how the California Supreme Court’s decision in In re Tobacco II Cases, 46 Cal.4th 298, 328 (2009) (“Tobacco II”) factors into the federal rules for pleading UCL and CLRA claims sounding in fraud.

In Haskins, the plaintiff could not plead that she relied on a specific advertisement when she purchased Symantec’s Norton Antivirus software online, although she alleged her belief that the product would protect her from malware, viruses, and hackers. In fact, the software was compromised by hackers in 2006. Haskins v. Symantec Corp., 2013 WL 6234610, at *1 (N.D. Cal. Dec. 2, 2013). Accordingly, she sought to plead her claim under Tobacco II, in which the California Supreme Court relaxed the requirements for pleading reliance on specific misrepresentations where “those misrepresentations and false statements were part of an extensive and long-term advertising campaign.” Id. at *4. In an effort to plead a Tobacco II-type campaign, in the third amended complaint, she added allegations regarding the scope of the advertising campaign in the case. Haskins v. Symantec Corp., 2014 WL 2450996, at *2 (N.D. Cal. June 2, 2014). However, District Judge Jon Tigar, who has attempted to bring clarity to the requirements for pleading a Tobacco II-type campaign in prior federal cases (see Opperman v. Path, Inc., 84 F.Supp.3d 962 (N.D. Cal. 2015)), found those allegations did not pass muster because the at-issue advertising campaign “does not fall within the ambit of the Tobacco II exception.” Id.

On appeal, the Ninth Circuit agreed with Judge Tigar’s conclusion, but stated,

Even assuming [that the argument that a plaintiff need not allege reliance on a specific misrepresentation to meet the pleading requirements of Rule 9(b)] is correct as a matter of federal procedural requirements, Haskins failed to establish that the Tobacco II standard is applicable to her pleadings because the misrepresentations at issue here were not part of an extensive and long-term advertising campaign like the decades-long campaign engaging in saturation advertising targeting adolescents in Tobacco II.

Haskins, No. 14-16141, slip op. at 2 (emphasis added).

The Ninth Circuit’s tentative language, which appears to question the application of Tobacco II to federal pleadings standards, reflects an unresolved tension among the district courts within the Ninth Circuit regarding the requirements for pleading fraud under Rule 9(b) and the California Supreme Court’s decision in Tobacco II. On the one hand, as Judge Tigar stated, “[i]f Plaintiff can prevail at trial without demonstrating that she saw any specific advertisement, it would make little sense to interpret Rule 9(b) to require dismissal of her claim at the pleading stage for failing to include a specific allegation that she saw a specific advertisement.” Haskins, 2013 WL 6234610, at *5. While some district courts follow Judge Tigar’s approach in Opperman, other district courts disagree with what they perceive to be an overly lax application of Rule 9(b) in the context of allegations purporting to fall within the Tobacco II exception. See Yastrab v. Apple Inc., 2016 WL 1169424, at *6 (N.D. Cal. March 25, 2016) (“[T]he court disagrees with Opperman to the extent it holds that a . . . plaintiff is . . . excused from complying with Rule 9(b) when pleading a long-term advertising campaign.”).

While Haskins did not resolve this conflict, this is certainly an issue to watch. Plaintiffs have a substantive right to proceed under the UCL and CLRA when they have been deceived by the type of advertising campaign described in Tobacco II and its progeny in California courts and federal courts applying California substantive law. Federal deference is required to opinions of the California Supreme Court on issues of state law and Federal Rule of Civil Procedure 9 should not be construed to abridge or modify those rights under the guise of “procedural rules of pleading.” See Haskins, 2013 WL 6234610, at *5.

Authored By:
Robert Friedl, Senior Counsel
CAPSTONE LAW APC

This month, Judge Gonzalo P. Curiel of the Southern District of California issued a decision that bodes well for consumers seeking relief under the Rackateer Influenced and Corrupt Organizations Act’s (“RICO”) civil action provision. See Cohen v. Donald J. Trump, No. 3:13-cv-02519 (S.D. Cal. Aug. 2, 2016) (slip op. available here). The consumer class action, brought by former attendees of Donald Trump’s “Trump University,” gained national attention after Trump questioned the court’s impartiality given Judge Curiel’s Mexican heritage. Notwithstanding the hype, Judge Curiel’s order denying Trump’s Motion for Summary Judgment offers consumer plaintiffs a roadmap in the sometimes murky landscape surrounding RICO-based class actions.

RICO, enacted in 1970, contains a civil provision providing for treble damages and a private right of action, against certain fraudulent conduct. 18 U.S.C. § 1964(c). Liability under § 1962(c) requires (1) the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). “Racketeering activity” can include fraud with intent, including misrepresentations and material omissions, made over the mails or “wires.” Slip op. at 7.

The class, certified in 2014, alleged that Trump had violated RICO’s civil provision by portraying Trump University (“TU”) as a “university,” with instructors personally “handpicked” by Donald Trump himself. Slip op. at 2. TU sent consumers “Special Invitation[s] from Donald J. Trump” stating, “[m]y handpicked instructors and mentors will show you how to use real estate strategies,” and that “I can turn anyone into a successful real estate investor, including you.” Id. Discovery revealed an internal TU’s policy encouraging TU employees to “[t]hink[] of Trump University as a real University, with a real admissions process” and encouraging TU employees to “[u]se terminology such as ‘Enroll,’ ‘Register,’ and ‘Apply.’” Id. at 3.

In its motion, Trump argued that the plaintiffs sought “an unprecedented expansion of RICO law” by allowing civil RICO to become “a federal cause of action and treble damages” for every plaintiff in “garden-variety business disputes.” Slip op. at 7. Trump also argued policy dictated against applying civil RICO to consumer class action cases (a false advertising class action, Low, et al. v. Trump University, LLC, et al., No. 3:10-cv-00940, had already been filed; this Cohen RICO action was separately filed and litigated to address different harms). Id. at 10. Judge Curiel noted that while courts have often struggled with the scope of RICO’s civil provision, the U.S. Supreme Court in 1985 noted that Congress stated RICO should be “liberally construed,” and the policy implications of the statute’s breadth were issues for Congress, not the courts, to address. See Sedima, 473 U.S. at 481. The court also rejected the defendant’s argument that several courts have declined to apply RICO to “routine commercial relationships,” finding that in such cases, the plaintiffs had failed to establish an underlying element, such as knowing participation, financial loss, or the existence of an “enterprise.” See slip op. at 9-10.

The defendant further argued the plaintiffs could not show Mr. Trump “conducted the affairs of TU.” Slip op. at 10. Civil RICO requires the defendant to have “participated in the operation or management of the enterprise itself.” Id. (quoting Reves v. Ernst & Young, 507 U.S. 170, 183 (1993)). Mr. Trump argued his role was limited that of an investor and executive. The court noted that the statute’s use of the word “participated” makes clear that RICO liability is not limited to an individual or exclusive director or manager—it is enough for a defendant to play “some part” in directing the enterprise’s affairs. Id. at 12. Further, the court found persuasive the testimony of TU’s Chief Marketing Operator, who stated that, following the publication of TU’s first advertisement, Mr. Trump had asked why the advertisement had been placed on an even numbered page, when odd numbered pages are more visible to readers, calling Mr. Trump “very hands on.” Id. at 10-11 n5. The court found the plaintiffs had made a prima facie showing Mr. Trump had failed to rebut.

The court also rejected Trump’s arguments that the alleged omissions and misrepresentations were not material, finding that the plaintiffs’ evidence, including internal TU policies encouraging employees to use “real university” terminology such as “apply,” and “enroll,” and mailers addressed from Mr. Trump himself stating he had “handpicked” instructors, raised a genuine issue of material fact. Id. at 13-14. Lastly, the court rejected Mr. Trump’s argument that the plaintiffs had failed to show the requisite knowledge and intent, noting that “direct proof of knowledge and fraudulent intent—of what a person is thinking—is almost never available.” Id. at 16.

The court previously vacated pre-trial deadlines while the Motion for Summary Judgment was under submission. With the court’s recent order denying the motion in its entirety, trial dates will likely be reset.

Authored by:
Cody Padgett, Associate
CAPSTONE LAW APC

In Martin, et al. v. Yasuda, et al., No. 15-55696 (9th Cir. July 21, 2016) (slip op. available here), the Ninth Circuit Court of Appeals reaffirmed its holding that a court—not the arbitrator—determines whether arbitration has been waived, unless the arbitration agreement specifically reserves that task for the arbitrator, and found that the defendants’ litigation conduct over a seventeen-month period resulted in a waiver of the defendants’ right to arbitrate. This important ruling rejects the defendants’ attempt to manipulate the judicial and arbitral systems to gain an unfair advantage due to their litigation conduct. Slip op. at 21.

In Martin, students of the Milan Institute of Cosmetology (“Milan”) sued the school in federal court alleging that Milan was, in fact, their “employer” because they were required to perform unpaid work to graduate from Milan’s cosmetology program, including cleaning, sweeping, selling retail products, and promoting Milan’s services. Slip op. at 4. The students’ Enrollment Agreement contained an arbitration agreement that stated, “[a]ll determinations as to the scope, enforceability and effect of this arbitration agreement shall be decided by the arbitrator and not by a court.” Id. The plaintiffs filed their complaint on October 28, 2013, and the following events transpired during litigation: (1) the parties filed a Joint Stipulation to extend the time to file a motion for conditional and class certification, noting the considerable time and effort spent by the parties to conduct discovery to focus on the issue of whether Milan employed the students; (2) the court denied in part and granted in part the defendants’ motion to dismiss the plaintiffs’ First Amended Complaint, holding the plaintiffs could assert California state law claims; (3) the defendants answered a Second Amended Complaint and asserted arbitration as an affirmative defense; (4) the parties submitted a Joint Rule 26(f) Report detailing an eight-month period of discovery related to the “employee” issue and, at the scheduling conference, the court warned defense counsel about possibly waiving their right to arbitrate; (5) written discovery occurred and the deposition of Milan’s CEO was taken; and (6) seventeen months after the start of the case, the defendant moved to compel arbitration. Id. 5-9. The district court denied the defendant’s motion to compel arbitration, finding that the defendant had waived its right to arbitrate. The defendants then appealed.

The Ninth Circuit first held that there is a presumption that that the court, and not the arbitrator, should decide the waiver issue. Citing the Ninth Circuit’s decision in Cox v. Ocean View Hotel Corp., 533 F. 3d 1114, 1120-21 (9th Cir. 2008), the panel stated that waiver by litigation conduct is a gateway issue to be decided by the court, not the arbitrator, under the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Slip op. at 10-11. The broad language in Milan’s arbitration agreement assigning duties to the arbitrator does not overcome the presumption because the clause did not contain “clear and unmistakable language” that the arbitrator may decide the waiver issue. Id. at 12-13. Presumably, the arbitration agreement must clearly and specifically provide that only the arbitrator can determine whether litigation conduct waives the right to arbitrate. But, the court reasoned, such a provision would place this decision in the hands of the arbitrator, who is less familiar with the litigation than the court and with someone who has a financial interest in finding no waiver so that the arbitrator may keep the case. See id. at 12 n3.

The Court of Appeals, applying its arbitration waiver test announced in Fisher v. A.G. Becker Paribas, Inc., 791 F.2d. 691, 694 (9th Cir. 1986), then found that the defendants waived the right to arbitrate because they had engaged in conduct inconsistent with the right to arbitrate that prejudiced the plaintiffs. In so doing, the appeals court held that a statement by a party that is has the right to arbitration in the pleadings or motions is not enough to defeat a claim of waiver. Further, the court found it particularly key that the defendants had structured discovery, including a deposition, so that the trial court could rule on the defendants’ motion to dismiss on a key merits issue: whether the Cosmetology Act legally precluded the students from being classified as employees. Because the court found for the plaintiffs on the issue, the plaintiffs would be prejudiced by the delay in moving to arbitrate because they would be forced to re-litigate an issue on the merits on which they had already prevailed in court. Slip op. at 17. Finally, spending a lengthy amount of time litigating in the more complex federal court system inevitably causes the parties to spend more time, money, and effort than had they proceeded to arbitration. Id. at 18.

In affirming the district court’s decision, the Ninth Circuit agreed that the defendants couldn’t have their cake and eat it too: a party that signed a binding arbitration agreement and then is sued “can either seek to compel arbitration or agree to litigate in court. It cannot choose both.” Slip op. at 21 (emphasis added).

Authored By:
Robert Drexler, Senior Counsel
CAPSTONE LAW APC