On October 26, 2015, the California Court of Appeal, Second Appellate District affirmed a Los Angeles County Superior Court decision denying a defendant’s motion to compel arbitration. See Garrido v. Air Liquide Indus. U.S. LP, No. B254490, 2015 Cal. App. LEXIS 946 (2nd Dist. Div. 2 Oct. 26, 2015) (slip opinion available here). In doing so, the court applied a test from Gentry v. Superior Court, 42 Cal. 4th 443 (2007), a once-prominent case widely thought to be obsolete in the wake of Concepcion (AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2007)) and Iskanian (Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014)). Gentry was, for a time, the leading California case on the enforceability of class action waivers in arbitration agreements. While Concepcion did not specifically overrule Gentry, many courts treated it as such, and the California Supreme Court put to rest any doubts in Iskanian, stating: “a state’s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA [Federal Arbitration Act]. . . [and] our holding to the contrary in Gentry has been abrogated by recent United States Supreme Court precedent.” Iskanian at 359-360 (internal citations omitted).

Despite the broad reach of the FAA and the Concepcion line of cases enforcing class action waivers in arbitration agreements, Garrido followed and affirmed an important exception for certain employees established by Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). Section 1 of the FAA specifically exempts “transportation workers,” such as the plaintiff in Garrido, who was a truck driver who shipped goods for the defendant across state lines. The appellate court in Garrido reasoned that the FAA could not preempt Gentry where the FAA did not apply. Instead, it found that the California Arbitration Act (CAA) applied, and where only the CAA applies, actions to collect due and unpaid wages under California Labor Code section 229 (which would be preempted under the FAA) can be maintained in court. Thus, the Garrido court held that preemption principles did not come into play, and the Gentry’s holding that public policy is a valid defense to enforcement of an arbitration agreement remains viable under the CAA.

In Gentry, the California Supreme Court articulated four factors to determine whether a class action waiver should be enforced in pre-dispute employment arbitration agreements: “the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.” Gentry at 463. Utilizing this analysis, both the trial court and appellate court in Garrido ultimately found the arbitration agreement unenforceable due to a lack of a sufficient alternative to a class action, because: (1) the plaintiff’s likely recovery was a modest $11,000; (2) evidence showed that many of the defendant’s truck drivers felt that their jobs were in jeopardy and (3) were ignorant of their rights to breaks; and (4) requiring numerous employees suffering the same harm to separately seek vindication is inefficient and would drive up the costs of arbitration. See slip op. at 12-13.

Interestingly, the Second Appellate District, Division Two, which issued the recent Garrido decision, was the same court that held in a 2012 Iskanian appeal that Gentry was overruled by Concepcion. “Now, we find that the Concepcion decision conclusively invalidates the Gentry test.” Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal. App. 4th 949, 959 (Cal. App. 2d Dist. 2012).

Authored by: 
Jonathan Lee, Associate
CAPSTONE LAW APC

In re Tobacco Cases II is a recent California Court of Appeal decision with dire consequences for consumer class actions that seek refunds under the UCL, if it is not overturned. No. D065165 (4th Dist. Div. 1 Sept. 28, 2015) (slip op. available here). The case is based on Phillip Morris’s allegedly misleading advertising of Marlboro Light cigarettes. In its decision, the appellate court effectively repudiated a plaintiff’s entitlement to a full refund for claims alleged under the California Unfair Competition Law (“UCL”), Business & Professions Code section 17200, simply because “it appears inherently implausible to show a class of smokers received no value from a particular type of cigarette.” Slip op. at 30. After extensive litigation and appeals dating back to the original filing of the complaint in 1997, the San Diego County Superior Court held a bench trial in 2013. Though the trial court found that Philip Morris’ advertising of the light cigarettes was deceptive within the meaning of the UCL, it also denied the plaintiffs’ prayer for restitution due to the lack of “competent evidence of any loss attributable to the deceptive advertising” and denied injunctive relief based on mootness. Slip op. at 7, 9. Ultimately, the trial court held that the proper theory of restitution under the UCL is “the difference between the price paid and the value actually received” and that a full refund will not be available where the plaintiffs obtained any value apart from the unlawful conduct. Id. at 7. The plaintiffs appealed this decision.

Citing In re Vioxx Class of Cases, 180 Cal. App. 4th 116, 131 (2009), the Court of Appeal concluded that “[t]he difference between what the plaintiff paid and the value of what plaintiff received is a proper measure of restitution. In order to recover under this measure, there must be evidence of the actual value what the plaintiff received.” Slip op. at 13 (emphasis added). The court also cited several federal cases holding that a full refund is completely unavailable under the UCL if the product has conferred at least some value to consumers, notwithstanding the allegedly deceptive advertising. Id. at 20. Although the court did not completely foreclose a situation where a full refund might be available in a UCL case, it opined that such a case would only be in the extremely rare instance where a plaintiff can prove that he received no value from the at-issue product, such as, for example, a case where consumers sought a full refund for a dietary supplement on the grounds that it falsely advertised aphrodisiac qualities and had no value separate from that claim. Id. at 19-20 (citing Ortega v. Natural Balance, Inc., 300 F.R.D. (C.D. Cal. 2014). However, the panel was quick to add that even in that rare type of case, the Vioxx measure of restitution would still apply since “the price paid minus the value actually received [i.e. zero] equals the price paid.” Id.

Plaintiffs in future consumer cases may be able to limit In re Tobacco Cases II based on the fact that the plaintiffs in that case failed to provide any competent evidence of loss attributable to the deceptive advertising. Plaintiffs with more compelling evidence should fare better. The trial court had rejected the plaintiffs’ “conjoint survey” which asked survey participants to choose between hypothetical cigarette products based on certain factors, including health risks, because “[t]he survey did not measure the difference between the price paid . . . and the actual value received, but rather measured ‘benefit of the bargain’ damages not available in a UCL action.” Slip op. at 8. Further, counsel for the plaintiffs appeared to concede in his closing statement at trial that the proper measure of restitution, in fact, was the difference between the price paid and the actual value received, i.e. the Vioxx measure of restitution. The appellate court further rejected the plaintiffs’ alternate theory that a defendant could be required under the UCL to make a full refund solely for the purpose of deterrence, regardless of whether the plaintiffs received value from the product apart from the deceptive advertising, concluding that restitution under the UCL cannot be awarded exclusively for the purpose of deterrence. Id. at 18-29.

A few days prior to the In re Tobacco Cases II decision, a Ninth Circuit case, Pulaski & Middleman, LLC, et al. v. Google, Inc., was decided and provides some hope to the plaintiffs’ bar. However, Pulaski will need to be reconciled with In re Tobacco Cases II. No. 12-16752 (9th Cir. Sept. 21, 2015) (slip op. available here). In Pulaski, the court held that disagreement over how to calculate restitution will not defeat class certification under Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). However, the court also suggested that a full recovery theory could be an appropriate method for calculating restitution. The Pulaski court also stated that a restitution calculation under the UCL “need not account for benefits received after purchase because the focus is on the value of the service at the time of purchase[,]” but rather, “ the focus is on the difference between what was paid and what a reasonable consumer would have paid at the time of purchase without the fraudulent or omitted information.” Slip op. at 19-20. It then concluded, restitution under the UCL measures “what the [plaintiff] would have paid at the outset, rather than accounting for what occurred after the purchase.” Id. at 20.

If the ruling in In re Tobacco Cases II stands, plaintiffs in a UCL action could win the battle—i.e., their case could be certified, but lose the war—i.e., no damages award.

Authored By:
Jordan Lurie, Of Counsel
CAPSTONE LAW APC

Many employers and defense attorneys are heralding recent amendments to Labor Code §§ 2699, 2699.3, and 2699.5 (collectively referred to as the Private Attorneys General Act of 2004, or “PAGA”)—precipitated by Assembly Bill (“AB”) 1506, Chapter 445 (available here)—as a key shift in wage statement litigation in California. However, their sentiments are premature and overstate the effect of this amendment, which will likely be minimal.

California Labor Code section 226(a) provides that employees’ wage statements must include nine specific pieces of information that allow employees to determine if they are being paid correctly. “The purpose of the wage statement requirement is to provide transparency as to the calculation of wages. A complying wage statement accurately reports . . . the information necessary for an employee to verify if he or she is being properly paid in accordance with the law.” Division of Labor Standards Enforcement (“DLSE”) Opn. Letter No. 2006.07.06 (July 6, 2006). The nine items include “the inclusive dates of the period for which the employee is paid,” (Labor Code § 226(a)(6)), and “the name and address of the legal entity that is the employer . . .” (Labor Code § 226(a)(8)). Labor Code section 226(e) allows employees to obtain damages for failing to correctly state the required items on wage statements. Specifically, an employee can collect the greater of (1) all actual damages or (2) $50 for the initial pay period in which the violation occurred and $100 for each subsequent violation for an aggregate penalty not to exceed $4,000. These remedies remain unchanged by the amendment.

Employees may also recover civil penalties on behalf of the state of California for these violations under PAGA. Under PAGA, employers are given 33 days to cure certain violations of the Labor Code before a civil action may be commenced. Previously, employers did not have the right to cure wage statement violations. AB 1506 will amend PAGA’s cure provision to allow employers to cure certain types of wage statement violations. However, the expanded cure provisions will not apply to all wage statement violations, but only those based on either missing or inaccurate inclusive dates of the pay period or the name and address of the employer. Although theoretically available, it may well prove extremely difficult for an employer to utilize the cure provision in practice. This is especially so because these two violations “shall only be considered cured upon a showing that the employer has provided a fully compliant, itemized wage statement to each aggrieved employee for each pay period for the three-year period prior to the date of the written notice sent pursuant to paragraph (1) of subdivision (c) of Section 2699.3.” In other words, the employer must provide proof that, within 33 days, it located and provided fully compliant wage statements to all employees who had received violative wage statements over the prior three years.

The amendment also likely has no retroactive effect, and therefore will not help any employer currently involved with PAGA litigation based on wage statement violations. Neither the amendment nor the legislative history provides for retroactive application, strongly supporting the notion that the amendments do not have any retroactive application. See Myers v. Philip Morris Companies, Inc., 28 Cal. 4th 828, 841 (2002) (quoting INS v. St. Cyr, 533 U.S. 289, 320-321, n.45 (2001)) (“[A] statute that is ambiguous with respect to retroactive application is construed . . . to be unambiguously prospective.”).

In short, the fact that the “cure” provision would be extremely difficult to perform in the limited time provided, and the fact that AB 1506 has no retroactive effect, means that the recent PAGA amendment should not affect the status quo regarding PAGA litigation.

Authored by:
Arnab Banerjee, Associate
CAPSTONE LAW APC

Earlier this month, Judge William Alsup of the Northern District of California denied defendant Dynamex’s motion to compel arbitration of the plaintiff’s wage-and-hour putative class claims. Saravia v. Dynamex Inc., et al., No. 3:14-cv-05003 (N.D. Cal. Oct. 6, 2015) (slip op. available here). In the same order, the court also granted in part and denied in part the plaintiff’s motion for conditional class certification.

The plaintiff, a former delivery driver, who operated a business that provided delivery services for Dynamex and other shipping companies, alleged that Dynamex misclassified him and other delivery drivers as independent contractors and that they were thereby denied minimum wage and overtime pay under the Fair Labor Standards Act. Slip op. at 2. Dynamex presented to the plaintiff, and the plaintiff had signed, delivery services agreements in 2010, 2011, and 2012. Id. at 6. The defendants then jointly moved to compel arbitration, which the district court denied. In denying the motion to compel arbitration, the court made three central findings: (1) the Texas choice-of-law provisions in the two arbitration agreements (2011 and 2012) were unenforceable; (2) the “delegation clauses” by which the defendant purported to delegate to an arbitrator gateway questions of “arbitrability” were both procedurally and substantively unconscionable, and thus unenforceable; (3) and the arbitration agreements, as a whole, were both procedurally and substantively unconscionable, and thus unenforceable. 

In declining to enforce the Texas choice-of-law provisions, the court applied the three prongs of California’s choice-of-law analysis. Slip op. at 6-7. First, the chosen state’s law must have a “substantial relationship” to the parties; the plaintiff conceded, and the court agreed, that this prong is met because Dynamex is headquartered in Texas. Id. Second, the forum state must have no “fundamental policy” inconsistent with the chosen state’s law; here, the court noted several differences between California and Texas law on the enforceability of arbitration agreements, finding “Texas law conflicts with fundamental aspects of California’s substantive law pertaining to unconscionability.” Id. at 7. Finally, the court applied the third prong of the choice-of-law analysis, and found that California has a materially greater interest than Texas in adjudicating the dispute because the plaintiff is located in California and the delivery service agreements at issue were executed and performed in California, whereas Texas’ only interest stems from the fact that one of the defendants is headquartered in that state. Id.

In declining to enforce the delegation clause, the court held that, under California law, if a delegation clause is both procedurally and substantively unconscionable, it may be severed from the broader agreement and rendered unenforceable. Slip op. at 8-9. The factors supporting procedural unconscionability included: (1) the agreements were form contracts, and the plaintiff was “tersely instructed to sign” them (id. at 9); (2) the agreements were written only in English, although the plaintiff had limited English comprehension (id. at 2, 9); (3) the plaintiff first received the agreements on the day they were to be executed (id. at 9); (4) the plaintiff was given no opportunity to re-negotiate any provision (id.); and (5) the defendant never provided the plaintiff with a copy of the rules that were to govern arbitration and that formed the sole basis for delegating arbitrability determinations under the 2012 agreement (id.). The court also indicated that delegation clauses—buried in the middle of more than 10 pages of boilerplate language and otherwise unexplained by the defendant—constituted “unfair surprise” that exacerbated the procedural unconscionability. Slip op. at 10. Although the plaintiff could have requested a translation of the agreements, but did not, and the defendant claimed the plaintiff could have sought to renegotiate the terms without adversely affecting his employment, the court nevertheless found that “the circumstances of the execution of those agreements were so oppressive that any such opportunity was meaningless.” Id. at 9-10.

The court also found the delegation clauses to be substantively unconscionable (substantively unfair) because: (1) the Texas forum selection clause would have imposed prohibitive expenses on the California plaintiff, even just for an arbitrability hearing (id. at 4, 11); (2) both agreements required the plaintiff to pay half the arbitral fees, again imposing substantial fees on the plaintiff (id. at 11); and (3) the agreements imposed two-way fee shifting where, by statute, the plaintiff would be subject to one-way fee shifting rules whereby only the employee, not the employer, could recover his attorneys’ fees as the prevailing party (id.). The court noted that “[s]evering the unenforceable provisions of an arbitration clause (or as here, a delegation clause) would allow an employer to draft one-sided agreements and then whittle down to the least-offensive agreement if faced with litigation, rather than drafting fair agreements in the first instance.” Slip op. at 12. Thus, the court found the delegation clauses to be unenforceable and held that the court must decide arbitrability.

The court found the same reasons for finding the delegation clause to be procedurally and substantively unconscionable as applicable to the broader arbitration agreements. Accordingly, the court denied the motion to compel arbitration. Slip op. at 12.

Authored By:
Katherine Kehr, Senior Counsel
CAPSTONE LAW APC