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Tuesday, August 31, 2010

Employer's Accountants Not Liable to Employees for Inaccurate W-2 Forms

In Giacometti v. Aulla, LLC (August 25, 2010) 187 Cal.App.4th 1133, the plaintiffs were waiters at Ago Restaurant in Los Angeles, owned in part by actor Robert DeNiro. They alleged that the restaurant required them to pool 40 percent of their tips and that the restaurant managers improperly allocated a percentage of the tips to themselves. The employees sued the restaurant, its managers, and its accountants, alleging accounting malpractice in preparing tax reporting forms that did not account for the tip sharing and thus over-reported their income, resulting in IRS audits.

The trial court (LASC, Jones) sustained the accountants' demurrer with prejudice and dismissed them from the case. The Court of Appeal affirmed, holding that the accountants owed no duty to the plaintiffs to verify the figures given to them by the restaurant.
To summarize, the scope of the accountants' employment by the restaurant in this case was to prepare year-end financial documents, including W-2 forms. There are no allegations in the charging complaint that the accountants knew that the restaurant's representation of employees' income was wrong at the time they prepared these documents, and there are no allegations that the accountants were hired to calculate, or in fact did calculate, employees' income for purposes of year-end reporting. The accountants did not owe the employees a duty of care under the negligence theory alleged in the second amended complaint. The trial court properly sustained the demurrer to this cause of action without leave to amend.
Slip op. at 5. The full text of the opinion is available here.

Court of Appeal Rejects Demurrer to Wage and Hour Class Allegations

In Gutierrez v. California Commerce Club, Inc. (August 2, 2010, pub. ordered August 23, 2010) --- Cal.App.4th ---, 2010 WL 2991875, the Second District Court of Appeal reversed a trial court order (Los Angeles, J. Munoz) sustaining a demurrer to a wage and hour class action complaint:
Sergio Gutierrez and Hector Salazar filed the operative third amended class action complaint against California Commerce Club, Inc. (Club), alleging, among other things, that they and other similarly situated members of the putative class were injured by the Club's unlawful policy and practice of denying meal and rest breaks to certain hourly, non-union employees. The trial court sustained the Club's demurrer without leave to amend, on the ground the plaintiffs had failed to show the existence of a class, and dismissed the action as to all representative claims. We reverse. In this action, as in the vast majority of wage and hour disputes, class suitability should not be determined on demurrer.
Slip op. at 1.
[T]he operative pleading here does not demonstrate that individual issues affecting the Club's liability will likely predominate. There is no discernible difference between this action and the wage and hour cases (or their type) at issue in Prince and, more recently, in Tarkington. As we explained in Prince and reiterated in Tarkington, such cases routinely proceed as class actions because they usually involve a single set of facts applicable to all members, and one question of law common to class members. As long as the lead plaintiff alleges institutional practices ... that affected all of the members of the potential class in the same manner, and it appears from the complaint that all liability issues can be determined on a class-wide basis, no more is required at the pleading stage.
Slip op. at 6 (internal quotations, citations removed). The decision is available here.

Monday, August 30, 2010

California Supreme Court Holds that Administrative Findings Have Collateral Estoppel Effect on Whistleblower

A quick note on Murray v. Alaska Airlines, Inc. (August 23, 2010) --- Cal.Rptr.3d ----, 2010 WL 3292968. On certification from the Ninth Circuit Court of Appeals, the California Supreme Court considered the following question:

Should issue-preclusive effect be given to a federal agency's investigative findings, when the subsequent administrative process provides the complainant the option of a formal adjudicatory hearing to determine the contested issues de novo, as well as subsequent judicial review of that determination, but the complainant elects not to invoke his right to that additional process, and the agency's findings and decision thereby become a final, nonappealable order by operation of law?

Slip op. at 1. The answer? Yes.
We conclude that under the particular facts and procedural posture of this case, Murray may be precluded from relitigating the factual issue of causation against Alaska in his state court wrongful termination action, removed to federal court on grounds of diversity jurisdiction. Although without doubt, Murray's claims
would have been more fully litigated in the prior ... administrative proceeding had he invoked his right to a formal hearing before an ALJ, he never did so. Under California law, however, the dispositive issue of causation was nonetheless “actually litigated” in the administrative proceeding once the matter was “properly raised” by Murray's [administrative] complaint, along with his written statements and other supporting documentation, and then “determined” by the Secretary in her written findings and order. Moreover, Murray's “fail[ure] to obtain the requisite judicial review of [the] adverse administrative finding” available to him under the “internal remedies” provided by the AIR21 whistleblower statute further supports our conclusion that the Secretary's adverse finding on causation, embodied in a final order, may be afforded preclusive effect.
Slip op. at 10. The lesson appears to be this: If you start with an administrative action, it may be better to follow it as far as possible, rather than abandon it and turn to court. That being siad, I would caution against reading too much into this case, which deals with a very specific and unique administrative scheme.

Thursday, August 26, 2010

Wal-Mart Petitions for Certiorari in Dukes Class Action

Wal-Mart Stores, Inc., yesterday asked the Supreme Court of the United States to review the Ninth Circuit's en banc decision in Dukes v. Wal-Mart. Wal-Mart frames the issues as follows:

In a sharply divided 6-5 decision that conflicts with many decisions of this Court and other circuits, the en banc Ninth Circuit affirmed the certification of the largest employment class action in history. This nationwide class includes every woman employed for any period of time over the past decade, in any of Wal-Mart’s approximately 3,400 separately managed stores, 41 regions, and 400 districts, and who held positions in any of approximately 53 departments and 170 different job classifications. The millions of class members collectively seek billions of dollars in monetary relief under Title VII of the Civil Rights Act of 1964, claiming that tens of thousands of Wal-Mart managers inflicted monetary injury on each and every individual class member in the same manner by intentionally discriminating against them because of their sex, in violation of the company’s express anti-discrimination policy.

The questions presented are:

I. Whether claims for monetary relief can be certified under Federal Rule of Civil Procedure 23(b)(2)—which by its terms is limited to injunctive or corresponding declaratory relief—and, if so, under what circumstances.

II. Whether the certification order conforms to the requirements of Title VII, the Due Process Clause, the Seventh Amendment, the Rules Enabling Act, and Federal Rule of Civil Procedure 23.

Wal-Mart makes two primary arguments.

First, Wal-Mart argues that the Court should grant review on application of Rule 23(b)(2) in cases seeking monetary relief. Wal-Mart argues that Dukes creates a three-way split among the circuits: the "majority" view, enunciated in Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415 (5th Cir. 1998), which allows certification of monetary claims that are merely incidental to the injunctive or declaratory relief sought; a "minority" view, adopted in Robinson v. Metro-North Commuter R.R. Co., 267 F.3d 147, 164 (2d Cir. 2001) and Molski v. Gleich, 318 F.3d 937, 949–50 (9th Cir. 2003), which holds that the plaintiffs' intent in filing the action controls; and Dukes, which Wal-Mart argues "looked not to the language of Rule 23(b)(2) itself, but instead to what it described as the 'advisory committee requirement' that 'the appropriate final relief' not relate 'exclusively or predominantly to money damages.'" Wal-Mart argues that all three approaches are wrong (with Dukes as the worst of the three), and claims for monetary relief may proceed only under Rule 23(b)(3).

Second, Wal-Mart argues that Dukes "creates or exacerbates numerous additional conflicts concerning Rule 23, Title VII, the Due Process Clause, the Seventh Amendment, and the Rules Enabling Act." In Wal-Mart's view, Dukes improperly subjects the requirements of substantive law to the class action device. Under this rubric, Wal-Mart argues that Dukes exacerbates a Circuit split by relieving the plaintiffs of their burden of coming forward with "significant proof" that Wal-Mart "operated under a general policy of discrimination.” Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 159 n.15 (1982). Further, Wal-Mart argues that the decision stripped it of its statutory and Due Process right “to demonstrate that [each] individual . . . was denied an employment opportunity for lawful reasons.” Int’l Bhd. of Teamsters v. United States, 431 U.S. 324, 362 (1977).

Responsive papers are due September 24, 2010. The Supreme Court's docket is here.

Wednesday, August 25, 2010

Commission on Judicial Appointments Approves Nomination of Tani Cantil-Sakauye as New California Chief Justice

The Los Angeles Times is reporting that the Commission on Judicial Appointments, headed by Current Supreme Court Chief Justice Ronald M. George, has given unanimous approval to Tani Cantil-Sakauye as the next chief justice of California.
Cantil-Sakauye, 50, a Filipina American, is a moderate Republican who began her legal career as a Sacramento prosecutor, worked on legal and legislative matters in the George Deukmejian administration and moved by Republican appointment up the judicial ranks to the state Court of Appeals in Sacramento.

She would face voters unopposed in November for a confirmation vote. If approved, as expected, she would replace George in January.

Supreme Court Holds That Rule 23 Preempts State Anti-Class Action Laws

I presented this case in a seminar in the Spring, but never posted it to the blog. Mea culpa.

In Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 130 S.Ct. 1431 (U.S., March 31, 2010), a medical provider brought a putative class action against an automobile insurer, alleging breach of contract, bad faith breach of contract, and violation of New York law in failing to pay statutory interest and penalties on overdue payments of insurance benefits owed under no-fault automobile insurance policies. The district court granted the insurer's motion to dismiss and the plaintiffs appealed. The Court of Appeals for the Second Circuit affirmed, and the Supreme Court granted certiorari.

A plurality of the Court, per Justice Scalia, held:
  1. New York law prohibiting class actions in suits seeking penalties or statutory minimum damages conflicted with Federal Rule of Civil Procedure governing class actions, and
  2. Federal Rule of Civil Procedure 23 is valid under the Federal Rules Enabling Act. 28 U.S.C.A. § 2072(b).

The full text of the opinion is here.

Friday, August 20, 2010

Paychex Gets Bifurcated Trial In Premier Mortgage Funding FLSA Suit

Paychex Business Solutions Inc. has been granted a separate trial on whether it can be considered an employer under the Fair Labor Standards Act (FLSA) in a collective action brought against the employee-leasing company by former loan officers at Premier Mortgage Funding Inc. The case, Vondriska v. Cugno, et al., Case No. 8:2007cv01322, is pending in the District Court for the Middle District of Florida. Certain papers are available here for those who do not have access to the PACER system.

Wednesday, August 18, 2010

9th Circuit Holds That Settlement Objection Deadline Cannot Predate Attorney Fee Motion

In In re Mercury Interactive Corp. Securities Litigation, ---F.3d --- (9th Cir., August 18, 2010), the Ninth Circuit held that the district court (N.D. Cal., Fogel) erred by setting the deadline for class members to object to a settlement on a date before lead counsel had filed their fee motion.
The district court certified a settlement class, preliminarily approved the settlement, and ordered notice to the class. The notice of the preliminary settlement informed the class of the general terms of the proposed settlement. It also informed class members that counsel would “request ... attorneys' fees in the amount of 25% (29.375 million).” Further, the class members were informed that they could object to the settlement or application for attorneys' fees by “appear[ing] ... at the Settlement Fairness Hearing” if they “submit [ted] a written notice of objection, received or postmarked on or before September 4, 2008.” No objections were made to the settlement itself, but two objections, including Teachers', were made to the proposed attorneys' fees.
Slip op. at 2. Lead counsel filed its attorney fee motion two weeks after the deadline to object to the settlement. A week later, the court approved the fee request.

The Court first noted that this is not an uncommon practice in securities cases:
We have not yet had occasion to construe Rule 23(h), and the schedule set by the district court in this case, requiring objections to be filed before the filing of the fee motion itself and its supporting papers, appears to be commonly employed by district courts throughout the Ninth Circuit and elsewhere in the country.
Slip op. at 4. Regardless, the Court held that the practice violates Rule 23 and may violate Due Process:
We hold that the district court abused its discretion when it erred as a matter of law by misapplying Rule 23(h) in setting the objection deadline for class members on a date before the deadline for lead counsel to file their fee motion. Moreover, the practice borders on a denial of due process because it deprives objecting class members of a full and fair opportunity to contest class counsel's fee motion.
Slip op. at 5.

The full text of the opinion is available here.

9th Circuit Reverses Order Denying Class Certification in Consumer Products Action

In Wolin v. Jaguar Land Rover North America, LLC --- F.3d ---, (9th Cir., August 17, 2010), the plaintiffs brought a class action alleging that Land Rover's LR3 vehicles suffer from an alignment geometry defect that causes tires to wear prematurely. The district court (C.D. Cal., Guilford) denied class certification for lack of commonality.
The court indicated that the number of people in the class who have experienced the alignment defect is an important factor in the Rule 23 analysis, and concluded that neither Gable nor Wolin produced sufficient evidence of the rate of the defect. After first stating that the plaintiffs in Samuel-Bassett v. Kia Motors America, Inc. showed that up to 85% of the vehicles were defective, the court held that both Gable and Wolin failed to meet their respective burdens because neither could estimate the percent of prospective class members whose vehicles manifested the defect, let alone show credibly that even a majority of class members' vehicles experienced premature tire wear. 212 F.R.D. 271, 282 (E.D.Pa.2002), vacated on other grounds, 357 F.3d 392 (3d Cir.2004). Gable and Wolin timely filed their appeals.
Slip op. at 2.

The Ninth Circuit reversed. The Court first found a number of common issues that satisfy Rule 23(a)(2):
Appellants easily satisfy the commonality requirement. The claims of all prospective class members involve the same alleged defect, covered by the same warranty, and found in vehicles of the same make and model. Appellants' complaints set forth more than one issue that is common to the class, including: 1) whether the LR3's alignment geometry was defective; 2) whether Land Rover was aware of this defect; 3) whether Land Rover concealed the nature of the defect; 4) whether Land Rover's conduct violated the Michigan Consumer Protection Act or the Florida Deceptive and Unfair Trade Practices Act; and 5) whether Land Rover was obligated to pay for or repair the alleged defect pursuant to the express or implied terms of its warranties. These common core questions are sufficient to satisfy the commonality test.
Slip op. at 3.

The Court next held that common issues predominate with regard to plaintiffs' allegations of existence of defect and violation of consumer protection laws:
The district court erred when it concluded, without discussion, that certification is inappropriate because Gable and Wolin did not prove that the defect manifested in a majority of the class's vehicles. The appellants allege a violation of the Michigan Consumer Protection Act and the Florida Deceptive and Unfair Trade Practices Act, because, for example, Land Rover represented that the vehicles had particular characteristics or were of a particular standard when they were of another, and Land Rover failed to reveal material facts about the vehicles. Gable alleges breach of implied warranty because the vehicles were defective and not of merchantable quality at the time they left Land Rover's possession. Common issues predominate such as whether Land Rover was aware of the existence of the alleged defect, whether Land Rover had a duty to disclose its knowledge and whether it violated consumer protection laws when it failed to do so. See Chamberlan v. Ford Motor Co., 402 F.3d 952, 962 (9th Cir.2005) (per curiam).
Land Rover argues that the evidence will demonstrate that the prospective class members' vehicles do not suffer from a common defect, but rather, from tire wear due to individual factors such as driving habits and weather. Thus, according to Land Rover, the district court correctly decided not to certify a class because appellants failed to prove that their tires wore prematurely due to a defect. However, we have held that proof of the manifestation of a defect is not a prerequisite to class certification. Blackie v. Barrack, 524 F.2d 891, 901 (9th Cir.1975) (“[N]either the possibility that a plaintiff will be unable to prove his allegations, nor the possibility that the later course of the suit might unforeseeably prove the original decision to certify the class wrong, is a basis for declining to certify a class which apparently satisfies the Rule.”). What Land Rover argues is whether class members can win on the merits. For appellants' claims regarding the existence of the defect and the defendant's alleged violation of consumer protection laws, this inquiry does not overlap with the predominance test.
Although early tire wear cases may be particularly problematic for plaintiffs seeking class certification, we reject Land Rover's suggestion that automobile defect cases can categorically never be certified as a class. Gable and Wolin assert that the defect exists in the alignment geometry, not in the tires, that Land Rover failed to reveal material facts in violation of consumer protection laws, and that Land Rover was unjustly enriched when it sold a defective vehicle. All of these allegations are susceptible to proof by generalized evidence. Although individual factors may affect premature tire wear, they do not affect whether the vehicles were sold with an alignment defect.
Slip op. at 3-4. In other words, the plaintiffs need not prove at class certification that each and every class member -- or even a majority of the class members -- were affected in the same manner by the alleged defect.

The Court also held that common issues predominate with regard to plaintiffs' warranty claims:
[A]ll of the proposed class members here are covered by a Limited Warranty that provides for the repair or replacement of defects, and all of the proposed class members allege that their vehicles suffer from the same defect. These claims require common proof of the existence of the defect and a determination whether Land Rover violated the terms of its Limited Warranty. Accordingly, we conclude that common issues predominate regarding Land Rover's obligations under its Limited Warranty.
Slip op. at 5.

The Court next held that the plaintiffs had satisfied Rule 23(a)(3)'s typicality requirement:
Land Rover asserts that Gable's and Wolin's claims are not typical because their tires indicate wear that is not the kind attributable to vehicle alignment. However, Gable and Wolin allege that they, like all prospective class members, were injured by a defective alignment geometry in the vehicles. Gable and Wolin and the class seek to recover pursuant to the same legal theories: violation of consumer protection laws, breach of warranty, and unjust enrichment. Land Rover has identified no defenses that are unique to Gable and Wolin that would make class certification inappropriate.
Finally, the Court held that the plaintiffs had satisfied Rule 23(b)(3)'s requirement that a class action be "superior to other available methods for fairly and efficiently adjudicating the controversy."
Gable and Wolin have identified 2100 and 1183 vehicles at issue in their class actions, respectively, that would be at issue in litigation in the same forum and that are subject to the same consumer protection laws. Appellants aver that no other prospective class members have filed other related actions, and Land Rover does not dispute this point. The amount of damages suffered by each class member is not large. Forcing individual vehicle owners to litigate their cases, particularly where common issues predominate for the proposed class, is an inferior method of adjudication. Accordingly, although alternative means of recovery are available, e.g., small claims court, we conclude that class-wide adjudication “of common issues will reduce litigation costs and promote greater efficiency.” Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir.1996).
Land Rover suggests that automobile-wear cases involve inherently individualized determinations such that classwide litigation would be inefficient and unmanageable. Instead of pursuing a class action, Land Rover argues, proposed class members should litigate separately the issues of liability and causation. However, as discussed above, appellants allege that their injury results not from bad tires, but from a single, defective alignment geometry. It is far more efficient to litigate this-the basis for their claim-on a classwide basis rather than in thousands of individual and overlapping lawsuits. Whether the alignment geometry was defective, whether Land Rover violated its Limited Warranty for defects within the vehicle, and whether Land Rover was unjustly enriched because consumers' vehicles are worth less due to the defect are issues common to all class members and can be litigated together. Proposed class members face the option of participating in this class action, or filing hundreds of individual lawsuits that could involve duplicating discovery and costs that exceed the extent of proposed class members' individual injuries. Thus, classwide adjudication of appellants' claims is superior to other means of adjudicating this case.
Slip op. at 7.

The full opinion is available here.

Court of Appeal Upholds Class Arbitration Waiver in Commercial Contract

In a commercial action between an association of walnut growers and a walnut processor, the Third District Court of Appeal affirmed an order striking all class allegations from the plaintiffs' complaint where the parties' commercial arbitration agreement included a class action waiver. Walnut Producers of California v. Diamond Foods, Inc. (August 16, 2010) --- Cal.App.4th ---, 2010 WL 3213613.

The Court held that unconscionability doctrine applies to commercial as well as consumer and employment contracts, Slip op. at 4, and that the same unconscionability standards apply to all types of contracts. Slip op. at 5.
Merely calling the Agreement a commercial or business agreement does not save it from a finding of unconscionability. “[T]here appears to be no basis [in California law] for concluding that class action waivers in the commercial context cannot be found to be unconscionable and unenforceable.” (In re Yahoo! Litigation (C.D.Cal.2008) 251 F.R.D. 459, 468.)
Ibid. This was the high point of the opinion for the plaintiffs. Next, the Court held that the plaintiffs had not pleaded procedural unconscionability.
Plaintiffs have not successfully pleaded the Agreement is a contract of adhesion under the unusual circumstances of this case. It is true that plaintiffs pleaded the Agreement is a standardized contract drafted by Diamond Foods that was presented to plaintiffs without any opportunity to negotiate its terms. However, it is not true according to plaintiffs' allegations that Diamond Foods had superior bargaining strength or that plaintiffs had no real alternatives available to them at the time they entered into the Agreement.
Slip op. at 7. The Court next held that the plaintiffs had not pleaded substantive unconscionability:
We conclude plaintiffs have not sufficiently pleaded substantive unconscionability so as to earn a hearing under Civil Code section 1670.5 to determine whether the class action waiver is in fact and law unconscionable. Plaintiffs' complaint does not demonstrate the Agreement is so one-sided that a class action is the only effective means of enforcing plaintiffs' rights under the Agreement.
Slip op. at 8.

The Court did not cite any authority for the proposition that a plaintiff bears the burden of pleading unconscionability or that it is appropriate to do so. Somebody can tell me if I'm wrong, but my recollection is that plaintiffs are supposed to plead their operative facts, and not try to plead around anticipated defenses.

The Court continued:
Unlike in Discover Bank, plaintiffs' complaint does not establish that the Agreement's class action waiver acted as an exculpatory clause or unduly hindered plaintiffs from pursuing a legal remedy. Plaintiffs' amended complaint shows that a class action is not the only viable means for recovering plaintiffs' damages or enforcing the contract against Diamond Foods. The amended complaint seeks damages for the class of “at least $70 million.” Divided evenly among 1,600 class action plaintiffs, the alleged size of the class, a damage award of $70 million would provide each plaintiff with an award of $43,750. Obviously, the actual awards would be larger or smaller than that depending on each grower's claim, but, when considered for unconscionability, requiring a grower to file an individual action for roughly $43,000 in damages does not shock the conscience. (See Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th 825, 844 [a claim for $16,000 is not so small as to justify not enforcing class action waiver].)
Finally, the Court rejected the plaintiffs' arguments that "the class action waiver prohibits them from vindicating certain unwaivable statutory rights they possess, and thus the waiver is unenforceable as it violates public policy." Slip op. at 11-12.

Here, plaintiffs claim their complaint seeks in part to enforce their statutory right to have the purchase price for their walnuts stated in writing in a definite sum. Specifically, Section 62801 of the Food and Agriculture Code states in relevant part: “[U]nless the parties agree otherwise, every contract for the sale of edible nuts shall be in writing and shall state the full purchase price in a definite sum which is to be paid in accordance with the terms of the contract....” (Italics added.)

The statute's express language indicates plaintiff's right to have the purchase price stated in a definite sum is not an unwaivable right. The right can be waived by the parties if they agree to do so. Thus, Gentry and Armendariz do not apply here.

Slip op. at 11.

Off the top of my head, I wonder whether the plaintiffs will argue that the defendant has waived its right to compel arbitration by filing a demurrer and motion to strike in the trial court before petitioning to compel arbitration. Further, if defendant has waived its right to compel arbitration, does the class action waiver in the arbitration agreement still control? Please comment if you are so inclined.

Tuesday, August 17, 2010

Car Wash Owners Plead No Contest to Labor Code Violations, Will Serve Jail Time

In February, 2009, we posted that the City of Los Angeles had filed a 176-count criminal complaint against two Los Angeles car wash owners, a manager, and their four car wash businesses for repeatedly and willfully violating labor laws and creating a work environment that bordered on indentured servitude.

Yesterday, the Los Angeles Times reported that the two car wash owners, brothers Benny and Nissan Pirian, have pleaded no contest to six criminal counts, including conspiracy, grand theft, and labor code violations. Each was sentenced to a year in jail and four years' probation and ordered to pay restitution to their victims in an amount to be decided at a future court future hearing. The Times article is here.

Friday, August 13, 2010

Court of Appeal Invalidates Class Action Waiver in Consumer Legal Remedies Action

In Fisher v. DCH Temecula Imports LLC (August 13, 2010) --- Cal.Rptr.3d ----, 2010 WL 3192912, the Court of Appeal held that the Federal Arbitration Act (FAA) does not preempt California law barring waivers of class action rights in arbitration agreements governing consumer disputes.

Defendant DCH Temecula Imports LLC (DCH) appeals the denial of its petition to compel arbitration. The trial court found that an arbitration clause in a retail installment sales contract (RISC) for the sale of a car to plaintiff Amberlee Fisher, which included a waiver of the right to bring a class action lawsuit or request classwide arbitration, was unenforceable.

Fisher presented several theories to the trial court in opposition to the enforcement of the arbitration clause, including that the arbitration clause required her to waive an unwaivable statutory right to bring a class action lawsuit under the California Legal Remedies Act (the CLRA) and that the arbitration agreement was both procedurally and substantively unconscionable.

We uphold the trial court's denial of the petition to compel arbitration.

Slip op. at 1.
The arbitration clause at issue here required Fisher to waive an unwaivable statutory right under the CLRA to bring a classwide arbitration or class action lawsuit, which violates the public policy underlying these rights. This qualifies as a private agreement in contravention of public rights. DCH has never argued that the CLRA does not further a strong public policy of California; regardless, such argument would not be successful.
Slip op. at 10.

Ninth Circuit Issues Arbitration Vacatur Decision

Following hot on the heels of Countrywide Financial Corp. v. Bundy, which reversed an order vacating an arbitration award and which we blogged here, comes Johnson v. Gruma Corp., --- F.3d ----, 2010 WL 3194622 (9th Cir., August 13, 2010), in which the Ninth Circuit affirms a District Court decision refusing to vacate an arbitration award. The Court's description of the case is interesting:

Appellant Arnold Rosenfeld is one of two plaintiff representatives in a class action against Gruma. The plaintiff class members are drivers (“distributors”) who deliver products to Gruma's customers. Each distributor signed a “Store Door Distributor Agreement” with Gruma. The agreement states that the distributors are independent contractors.

Dennis Johnson filed a class action in California Superior Court against Gruma in 2001. The action alleged that Gruma “misrepresent[ed] to Claimants and Class Members that Claimants and Class Members were and/or are independent contractors when they were and/or are, in fact, employees.” The complaint included claims of breach of contract, labor code violations including failure to pay agreed wages and overtime pay and failure to provide meal and rest breaks, and unfair business practices. Gruma removed the suit to federal district court. Upon Gruma's motion, the district court ordered the claims submitted to binding arbitration.

The case was assigned to arbitrator Richard Neal, a retired justice of the California Court of Appeal. On August 5, 2002, the arbitrator held that the California Arbitration Act governed the proceedings. The arbitrator then stayed the arbitration to allow a judicial determination whether the arbitration agreement permitted class-wide arbitration. The district court prohibited arbitration of class-wide claims and dismissed the complaint with prejudice. We vacated and remanded to the district court in light of the Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003). See Johnson v. Gruma Corp., 123 Fed. App'x 786, 788 (9th Cir.2005). On remand, the district court returned the case to arbitration.

In March 2007, the arbitrator certified a nationwide class action, designating Johnson and Rosenfeld as class representatives. After a hearing in April 2007, the arbitrator reconsidered the certification and limited the class to Gruma distributors in California. Attorney Paul Grossman argued Gruma's case for reconsideration at the April 2007 hearing. On August 12, 2008, the arbitrator found for Gruma, concluding that the distributors “properly are classified as independent contractors” rather than employees. The district court confirmed the arbitration award.

Slip op. at 1.

As in Countrywide v. Bundy, the Court began by determining whether to apply the California Arbitration Act (CAA) or the Federal Arbitration Act (FAA) rules for vacating arbitration awards. The CAA provides that a court reviewing an arbitration award shall vacate the award if the court determines:
  1. The award was procured by corruption, fraud or other undue means.
  2. There was corruption in any of the arbitrators.
  3. The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator.
  4. The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.
  5. The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.
  6. An arbitrator making the award either: (A) failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or (B) was subject to disqualification upon grounds specified in Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision....

The FAA, in contrast, provides that a district court may vacate an arbitration award:

  1. Where the award was procured by corruption, fraud, or undue means;
  2. Where there was evident partiality or corruption in the arbitrators ...;
  3. Where the arbitrators were guilty of ... misbehavior by which the rights of any party have been prejudiced; or
  4. Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

The Court held that the CAA applied:

In this case, however, the arbitration clause is more than a general choice-of-law provision. It requires arbitration to be “conducted and subject to enforcement pursuant to the provisions of California Code of Civil Procedure sections 1280 through 1295, or other applicable law.” The arbitrator read the arbitration clause to mean that the parties intended to be governed by the CAA's rules. We agree. The clause exhibits the parties' “clear intent” that the CAA's procedures shall govern.
Slip op. at 3. Despite this, the Court held that the appellant failed to show that the district court erred in confirming the arbitration award. "First, the arbitrator did not violate California disclosure rules. Second, the arbitrator did not exceed his powers." Slip op. at 4.

The Court described the conflict issue as follows:
In March 2007, five years into the arbitration, Paul Grossman, a partner at Paul Hastings, Janofsky & Walker (“Paul Hastings”), became one of Gruma's counsel. The arbitrator's wife, Barbara A. Reeves Neal, had been a partner at Paul Hastings from 1997-1999. Grossman and Reeves were listed together as co-counsel for at least one case litigated by Paul Hastings. The arbitrator did not disclose to the parties his wife's prior relationship with Grossman.

Slip op. at 6. The Court held that this did not create an impermissible conflict of interest. As an aside, the Court noted:

We note that Rosenfeld's attorney was well aware of the relationship between the arbitrator's wife and Grossman long before he raised the issue. He informed us at oral argument that he learned of the relationship at least “a year or two” before the arbitrator decided the dispute. Rosenfeld's failure to raise the issue until after the arbitrator ruled suggests two things: First, it suggests that Rosenfeld did not himself believe that the relationship rose to a level that required disclosure under any of the applicable standards. Second, it suggests that Rosenfeld may have been sand-bagging, holding his objection in reserve in the event that he did not prevail in the arbitration. Even if disclosure had been required, we would hold that Rosenfeld waived any objection by not raising it in a timely fashion.

Slip op. at 6.

The Court made short work of the appellant's remaining contention that the arbitrator exceeded his powers. "Rosenfeld disagrees with the arbitrator's interpretation of California law, but he has not demonstrated that the arbitrator exceeded his powers."

Ninth Circuit Affirms Dismissal of Overtime Case Based on "Ministerial Exception"

Today must be my day for cases I missed when they were published. Alcazar v. Corporation of Catholic Archbishop of Seattle 598 F.3d 668 (9th Cir., March 16, 2010) is a rare bird: an overtime wage case decided on First Amendment grounds. The Court summarized the case as follows:
“The First Amendment has erected a wall between church and state. That wall must be kept high and impregnable. We could not approve the slightest breach.” Everson v. Bd. of Educ., 330 U.S. 1, 18, 67 S.Ct. 504, 91 L.Ed. 711 (1947). The interplay between the First Amendment's Free Exercise and Establishment Clauses creates an exception to an otherwise fully applicable statute if the statute would interfere with a religious organization's employment decisions regarding its ministers. Bollard v. Cal. Province of the Soc'y of Jesus, 196 F.3d 940, 944, 946-47 (9th Cir.1999). This “ministerial exception” helps to preserve the wall between church and state from even the mundane government intrusion presented here. In this case, plaintiff Cesar Rosas seeks pay for the overtime hours he worked as a seminarian in a Catholic church in Washington. The district court correctly determined that the ministerial exception bars Rosas's claim and dismissed the case on the pleadings. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.
Thanks to Anthony Oncidi for noting Alcazar in his Employment Law Case Notes.

District Court Upholds Employer Policy Adjusting Wages to Account for Uniform Maintenance Costs

This District Court decision initially escaped my notice. Thanks to Sarah Beard and Sheena Wadhawan for including it in their update.

In Temple v. Guardsmark, 2010 WL 1461629 (N.D. Cal., April 7, 2010), the District Court granted an employer's motion for partial summary judgment in an action for failure to reimburse employees for required uniform maintenance. The Court described the underlying facts as follows:

Plaintiff ... was employed as a security guard by defendant .... Plaintiff was employed on an at-will basis, meaning that his position did not come with a “contract or guarantee of employment for any specified period of time” and could be terminated “at any time, with or without cause.”

Plaintiff and other security guards were required to wear a uniform consisting of a blazer, slacks, and a white shirt, and to keep this uniform “clean and presentable” at all times. According to defendant's Human Resources Service Manager, it was defendant's policy at the time plaintiff began his employment “to include (but not specifically itemize) the funds for uniform maintenance in the employee's hourly pay rate.” Defendant notified security guards of this fact in their employment agreements. As of February 2004, plaintiff was paid at an hourly rate of $11 per hour. It is undisputed that plaintiff's pay statements did not specify which portion of this amount comprised his uniform maintenance allowance.

In 2003, two Guardsmark security guards filed a class action lawsuit in California state court, alleging that defendant failed to provide its employees funds for the maintenance of their uniforms. Plaintiff was a member of [this] class, which ultimately settled with defendant in December 2004 for $2 million....

As a result of [the earlier] litigation, defendant implemented a new uniform reimbursement policy in November 2004. Defendant sent a notice to its California security guards which stated the following:

[Y]our hourly wage rate has always included a uniform maintenance allowance. For each hour paid, you receive an allowance for maintaining your uniform.... [E]ffective with the pay period beginning November 14, 2004, your uniform maintenance allowance will be listed separately on your pay statement rather than being in your hourly wage rate. The uniform maintenance allowance is $0.25 per hour, and the amount stated in your hourly wage rate will be reduced by $0.25 per hour-the total amount you receive per hour worked remains the same.

After the change in payment practice, plaintiff continued to receive $11 per hour, but his new pay statements itemized his earnings, showing that he was earning $10.75 per hour as a base wage and $0.25 per hour for uniform maintenance.

Plaintiff filed the present action on May 14, 2009, challenging, among other things, defendant's uniform reimbursement policy. Plaintiff's claim is asserted on behalf of a class of all California security guards employed by defendant from four years prior to
the filing of the complaint to the present who “received a 25 cent reduction in wages beginning on or about November 14, 2004.” Plaintiff asserts that defendant's reimbursement policy constituted a violation of California Labor Code § 2802, California Wage Order No. 4-2001, and California's Unfair Competition Law (“UCL”), Cal. Bus. & Prof.Code § 17200 et seq. Plaintiff seeks various remedies including statutory penalties under California Labor Code § 2698.

Slip op. at 1-2.

Defendant moved for partial summary judgment on the uniform reimbursement claim. The Court granted the motion.

Defendant argued that it lawfully lowered plaintiff's hourly rate and reimbursed him for cleaning expenses at the rate of $0.25 per hour. Plaintiff alleged that his hourly rate remained the same, and that defendant unlwfully deducted $0.25 per hour from his wages. The Court held that plaintiff presented no admissible evidence to support his argument:
However, plaintiff does not actually submit any evidence in support of his theory other than the following statement in his declaration: “My hourly rate of pay as compensation to me for my labor only, $11.00, did not change after November 14, 2004. It remained the same as before November 14, 2004, $11.00 per hour worked.” This statement, which consists of plaintiff's unsupported speculation as to the nature of his pay, is insufficient to defeat summary judgment.
Slip op. at 3.

The Court did not indicate, and it is not at all clear to me, what type of evidence it expected plaintiff to produce beyond the facts recited by the Court. In any case, the Court concluded "that plaintiff has failed to raise a triable issue of fact on his claim that defendant effected an impermissible after-the-fact 'deduction' of his wages."

The Court then held that plaintiff, being an at-will employee, accepted Defendant's change of his payment terms by continuing to work after Defendant gave him written notice of the changed terms. "Plaintiff does not contest that he received the November 14, 2004 notice informing employees of the prospective change in pay practice, and that he continued to work for defendant for more than three years thereafter." Slip op. at 3.

Plaintiff argued that his continued employment could not constitute an acceptance of the changed compensation terms, as he could not waive his statutory right to reimbursement for uniform maintenance. Cal. Labor Code 2804. The Court rejected this argument, holding:
The plain language of the November 14, 2004 notice does not support the interpretation that defendant was asking its employees to waive any right to compensation. Rather, the notice announced a method of specifying the apportionment of that compensation. Under California law, a court should not construe an employment contract as effecting an improper waiver of a nonwaivable right unless that waiver is stated in express terms. Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285, 292-93 (Cal.2008) (finding no waiver of statutory right to indemnity for claims resulting from the employees' acts within the scope of employment, even though release employee was asked to sign referred to waiver of “any and all” claims against employer). The November 14, 2004 notice did not expressly state or even imply that employees were required to waive the right to uniform maintenance payments. Plaintiff's position is thus untenable.
Slip op. at 4.

Second Circuit Court of Appeals Affirms Judgment for Garment Workers In FLSA Suit

In Ling Nan Zheng v. Liberty Apparel Co. Inc., --- F.3d ---, 2010 WL 3119915 (2d Cir., August 10, 2010), the Second Circuit Court of Appeals affirmed a judgment in favor of a group of garment workers. The Court described the case as follows:

Plaintiffs-appellees are 25 Chinese garment workers living and working in New York City's Chinatown. In 1999, they sued Liberty Apparel Company and its principals Albert Nigri and Hagai Laniado (collectively, “the Liberty Defendants”), and others, for violations of the Fair Labor Standards Act (“FLSA”), ... and New York state analogs.... After a lengthy procedural history, the case went to a jury trial, and the principal issue was whether the Liberty Defendants were plaintiffs' “joint employer” for purposes of the FLSA and New York state analogs. The jury returned a verdict in favor of plaintiffs, and following resolution of various post-trial motions, the United States District Court for the Southern District of New York (Sullivan, J.) entered judgment accordingly.

The Liberty Defendants appeal that judgment. In this opinion, we consider their contention that the district court-rather than the jury-should have determined whether the Liberty Defendants were plaintiffs' joint employer. And on that issue, we affirm. We consider the Liberty Defendants' remaining arguments in a summary order filed contemporaneously with this opinion.

Slip op. at 1.

The Court explained that, in the context of a jury trial, "the question whether a defendant is a plaintiff's joint employer is a mixed question of law and fact. Such questions 'involve[ ] the application of a legal standard to a particular set of facts.' ... The jury's role was to apply the facts bearing on the multi-factor joint employment inquiry to the legal definition of joint employer, as that term had been (properly) defined by the district court in the jury charge." Slip op. at 3. Accordingly, the Court found no error in allowing the jury to determine the issue.

Thursday, August 12, 2010

Supreme Court Issues Decision on Interplay Between UCL and Senior Citizen Statute

This decision is a bit outside my wheelhouse, but it caught my eye. In Clark v. Superior Court (National Western Life Insurance Company) (August 9, 2010) --- Cal.4th ---, 2010 WL 3081288, the California Supreme Court considered whether the plaintiffs could recover treble damages under the Unfair Competition Law. The Court held:

Under California's unfair competition law (Bus. & Prof.Code, § 17200 et seq.), plaintiffs, who are senior citizens, sued an insurance company, alleging deceptive business practices relating to the purchase and sale of annuity contracts. Plaintiffs sought a monetary award, and they asserted that statutory law entitled them to a trebling of the award.

Plaintiffs rely on Civil Code section 3345, which provides that in an action brought by senior citizens to redress unfair competition, a trier of fact may award up to three times the amount imposed as “a fine, or a civil penalty or other penalty, or any other remedy the purpose or effect of which is to punish or deter.” (Id., § 3345, subd. (b).) At issue here is the applicability of that provision to the unfair competition law, which generally limits a private party's available remedies to injunctions and restitution. (Bus. & Prof.Code, § 17203.)

We conclude that because Civil Code section 3345 authorizes the trebling of a remedy only when it is in the nature of a penalty, and because restitution under the unfair competition law is not a penalty, an award of restitution under the unfair competition law-which plaintiffs seek here-is not subject to section 3345 's trebling provision.

Slip op. at 1. Query what role this holding will have on the Court's decision in Pineda v. Bank of America, which is on our watch list and which will consider, among other issues, among other things, whether Labor Code Section 203 "waiting time" penalties are available as restitution under the UCL. Our post on Pineda is here.

Court of Appeal Rules on Arbitration, Choice of Law Issues

In Countrywide Financial Corp. v. Bundy (August 6, 2010) --- Cal.App.4th ---, 2010 WL 3064481, Countrywide account executives and call center employees filed consolidated class arbitrations alleging various wage and hour violations, including failure to pay bonus compensation, waiting time penalties, and violation of the UCL. The arbitrator issued a number of interim awards, including orders (1) dismissing claims for what the Court described as penalties under Labor Code section 204 and (2) granting class certification.

Countrywide filed a petition in Superior Court to modify or vacate the interim awards. The Superior Court granted the petition, the employees appealed, and the Court of Appeal reversed.

The Court first determined whether to apply Federal or California law, which incorporate different standards for vacating arbitration awards. After reviewing the applicable arbitration clauses, the Court held:
Here, the parties unambiguously agreed that any award would be reviewed as it would be by a federal district judge applying the Federal Arbitration Act. Accordingly, we review the partial awards in this case utilizing the vacatur provisions of Federal Arbitration Act which would be applied by a United States District Court judge.
Slip op. at 8. The Court noted that the arbitration agreements at issue were "executed prior to the holding in Hall Street Associates L.L.C. v. Mattel, Inc. (2008) 552 U.S. 576, 579-580, 128 S.Ct. 1396, 170 L.Ed.2d 254, that no enhanced merits based judicial review may be conducted in a United States District Court under the Federal Arbitration Act pursuant to the litigants' stipulation." Slip op. at 9. The Court thus considered the law as it existed prior to Hall Street Associates.

The Court next explained the limited review of arbitration orders available in District Court:

In federal court, there is one certain relevant statutory provision and a possible second way in which the merits of an arbitration award can be attacked. The relevant certain method for challenging the merits of an arbitration award, albeit extremely limited, is in title 9 United States Code section 10(a)(4) which provides in part: “In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-[¶] (4) where the arbitrators exceeded their powers....” The United States Supreme Court has described this narrow scope of judicial review: “It is not enough for petitioners to show that the panel committed an error-or even a serious error. [Citations.] ‘It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively “dispense[s] his own brand of industrial justice” that his decision may be unenforceable.’ [Citations.]” Even gross, ‘ “painfully clear” ‘ or “obvious” errors are insufficient to permit vacatur under title 9 United States Code section 10(a) (4) which is the relevant statutory vacatur provision.


It is less clear in federal court that an arbitration award can be attacked because the arbitrator has acted in manifest disregard of the law. At one point, there was Supreme Court authority for the proposition that in federal court an award may be vacated if it is made in manifest disregard of the law.... [However], in Hall Street Associates L.L.C., the Supreme Court cast doubt on whether the manifest disregard of the law rule remains viable.

Slip op. at 11-12. Despite this uncertainty (or perhaps because of it), the Court decided to analyze the arbitration awards under both the excess of powers test and the manifest disregard of the law test. Slip op. at 13.

Regarding the manifest disregard of the law test, the Court stated:
The most prevalent manifest disregard of the law test contains two elements. The first element is the arbitrator must know the governing rule of law and refuse to apply it or ignore it. The second element is that the law ignored by the arbitrator is well-defined, explicit, and clearly applicable to the case.
Slip op at 13.

Having gone through all of this analysis, the Court then held that Countrywide would have no grounds for vacating the arbitration awards in District Court.

First, the Court held that Countrywide could not vacate the arbitrator's award allowing the employees to proceed with a UCL claim.
Thus, Business and Professions Code section 17200 provides an independent basis for potential liability apart from Labor Code section 204. And the arbitrator expressly dismissed all of defendants' penalty claims. There is no independent Labor Code section 204 claim pending in this case. Rather, defendants are asserting claims for restitution which are expressly provided for by the Unfair Competition Law. Finally, the sole issue raised by plaintiffs is that the Labor Code section 204 claims cannot be pursued. There are a myriad of defenses which remain to be litigated. Thus, a federal district court judge could not lawfully set aside the arbitrator's ruling on defendants' Business and Professions Code section 17200 unfair competition claims.
Slip op. at 16.

Second, the Court held that Countrywide could not vacate the award on grounds that the arbitrations were barred by res judicata because the current litigation was not identical to the prior litigation on which Countrywide relied. Slip op. at 16-20.

Third, the Court rejected Countrywide's effort to vacate the award on grounds that not all class members signed the same arbitration agreement and not all class members agreed to arbitration before the AAA.
[Employees] presented evidence to the arbitrator that all employees were required to agree to arbitration. Before the arbitrator, [Countrywide] presented no evidence of a single class member who did not sign an agreement vesting potential arbitral jurisdiction in the American Arbitration Association.
Slip op. at 20.

Finally, the Court rejected Countrywide's apparently late argument that it had not consented to classwide arbitration.
Finally, there is no merit to plaintiffs' arguments that the present record supports the conclusion they did not agree to classwide arbitration. They never claimed in the trial court they had not consented to classwide arbitration. They never argued to the arbitrator they objected to classwide arbitration. And the present record indicates plaintiffs in fact agreed to classwide arbitration at the commencement of the proceedings. The present record thus indicates they consented to classwide arbitration and, in any event, the issue has been forfeited because it was not presented to the arbitrator and Judge White. ( Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. supra, 559 U.S. at p. ---- [130 S.Ct. at pp. 1774-1775] [consent]; T.Co Metals v. Dempsey Pipe & Supply (2d Cir.2010) 592 F.3d 329, 346, fn. 10 [forfeiture].)
Slip op. at 21.

Tuesday, August 10, 2010

Cal. Supreme Court Finds No Private Right of Action for Tips

In Lu v. Hawaiian Gardens (August 9, 2010) --- Cal.4th ---, 2010 WL 3081272, a card dealer brought a class action action against his employer, alleging conversion and violations of Labor Code and Unfair Competition Law (UCL) arising out of the casino's mandatory tip pooling policy, which required the dealers to share 15-20% of their tips with other employees who provided services to casino patrons. The trial court granted judgment on the pleadings or summary adjudication to the casino on all claims. The plaintiff appealed, and the Court of Appeal affirmed in part and reversed in part.

The Supreme Court granted review limited to the sole issue of whether Labor Code section 351, which prohibits employers from taking employees' gratuities, gives employees a private right of action. The Court held that it does not.

Labor Code section 351 reads, in part:
No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.
The Court examined this language and held that it "does not unmistakabl[y] reveal a legislative intent to provide wronged employees a private right to sue." Slip op. at 3. Examining the legislative history, the Court found "no clear indication that the Legislature intended to create a private cause of action under the statute." Slip op. at 5.
In sum, we find that the declaration that “[e]very gratuity” is the “sole property of the employee or employees to whom it was paid, given, or left for” (§ 351), simply affirmed what courts had “long held”: that gratuities ordinarily belonged to the waiter or waitress absent a contrary agreement. (Ops. Cal. Legis. Counsel, No. 20547 (Nov. 4, 1971) Waiters and Waitresses: Tips and Gratuities, p. 1.) It did not reflect a legislative intent to give employees a new statutory remedy to recover any misappropriated gratuities.
Slip op. at 5.

The Court rejected the argument that denying a private right of action would prevent employees from recovering misappropriated tips.
Contrary to plaintiff's suggestion, our holding that section 351 does not provide a private cause of action does not necessarily foreclose the availability of other remedies. To the extent that an employee may be entitled to certain misappropriated gratuities, we see no apparent reason why other remedies, such as a common law action for conversion, may not be available under appropriate circumstances.
Slip op. at 7. Thanks to Scot Bernstein for pointing out that this may overrule the Court of Appeal's holding in Brewer v. Premier Golf Properties (2008) 168 Cal.App.4th 1243 (Labor Code violations sound in contract and do not support an award of punitive damages).

Court of Appeal Holds That Employee Can Sue for Wrongful Termination Based on Invalid Non-Competition Agreement

Silguero v. Creteguard, Inc. (July 30, 2010) --- Cal.Rptr.3d ----, 2010 WL 2978222, caught my eye, even though it's not a wage and hour case or a class action.

This case presents the question of whether a terminated employee working in the area of sales has a viable claim for wrongful termination in violation of public policy under Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330 (Tameny) against her subsequent employer when the employee's former employer contacts the employee's subsequent employer and informs it that the employee had signed an agreement with the former employer which prohibited the employee “from all sales activities for 18 months following either departure or termination,” and the subsequent employer terminated the employee's employment out of “respect and understanding with colleagues in the same industry,” notwithstanding its belief that “non-compete clauses are not legally enforceable here in California .”

Because of Business and Professions Code section 16600's legislative declaration of California's “settled legislative policy in favor of open competition and employee mobility” (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946, 81 Cal.Rptr.3d 282, 189 P.3d 285 (Edwards)), we conclude that the employee has a viable Tameny claim. Accordingly, the judgment entered after the trial court sustained without leave to amend the subsequent employer defendants' demurrer to the second amended complaint will be reversed.

Slip op. at 1.

Court of Appeal Affirms Section 218.5 Attorney Fee Award to Defendant

The First District Court of Appeal has affirmed an award of attorney fees to a defendant under Labor Code section 218.5. Kirby v. Immoos Fire Protection, Inc. (July 27, 2010) --- Cal.App.4th ---.

The plaintiffs filed a putative class action for violation of the Unfair Competition Law ("UCL") and California wage and hour laws. After the court denied class certification, the plaintiffs settled with a number of defendants and dismissed the action with prejudice as to the remaining defendant, Immoos.

Immoos moved for attorney fees under Labor Code section 218.5. The Court awarded Immoos its fees incurred in defending plaintiffs' causes of action for violation of the UCL, rest period requirements, and Labor Code section 2810.

The Court of Appeal reversed the award of attorney fees on the UCL cause of action. Kim Kralowec has a good discussion of the UCL issue on her blog, the UCL Practitioner.

The Court also reversed on the 2810 cause of action. For those not familiar with it, section 2810 provides in pertinent part:
(a) A person or entity may not enter into a contract or agreement for labor or services with a construction, farm labor, garment, janitorial, or security guard contractor, where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided.
Immoos was not a defendant on the 2810 cause of action, and the Court of Appeal held that it could not recover attorney fees on this cause of action.

The most interesting issue is on the plaintiff's rest period claim and the relationship between Labor Code sections 218.5 and 1194. The Court put this issue as follows:
[Plaintiff] contends the trial court erred in awarding any attorney's fees to[defendant] because some of the causes of action were subject to the unilateral fee shifting provision in favor of plaintiffs provided by section 1194. [Plaintiff] points out that section 218.5 includes an express exception to its bilateral fee-shifting provision, which states: “This section does not apply to any action for which attorney's fees are recoverable under Section 1194.” (Italics added) Arguing that an “action” refers to an entire case, [plaintiff] concludes that the inclusion of causes of action subject to section 1194 bars [defendant's] recovery of any attorney's fees in this case. We disagree.
Slip op. at 3.

The Court first noted that 218.5(b) codifies the holding in Earley v. Superior Court (2000) 79 Cal.App.4th 1420. Earley held that 1194 controls in an action for unpaid overtime compensation, and 218.5 does not allow a successful defendant to recover its fees in such an action.

After reviewing the legislative history, the Court then held that the section 1194 exception to section 218.5 applies "only to causes of action for unpaid minimum and overtime wages." Slip op. at 6.
We harmonize sections 218.5 and 1194 by holding that section 218.5 applies to causes of action alleging nonpayment of wages, fringe benefits, or contributions to health, welfare and pension funds. If, in the same case, a plaintiff adds a cause of action for nonpayment of minimum wages or overtime, a defendant cannot recover attorney's fees for work in defending against the minimum wage or overtime claims. Nonetheless, the addition of a claim for unpaid minimum wages or overtime does not preclude recovery by a prevailing defendant for a cause of action unrelated to the minimum wage or overtime claim so long as a statute or contract provides for fee shifting in favor of the defendant.
Slip op. at 6.

Friday, August 6, 2010

California Supreme Court Decides Discrimination, Summary Judgment Issues

In Reid v. Google (Aug. 5, 2010) --- Cal.4th ----, 2010 WL 3034803, a terminated employee brought an action against his former employer for violation of the Unfair Competition Law (UCL) based on discriminatory hiring practices, disparate treatment under California's Fair Employment and Housing Act (FEHA), wrongful termination, failure to prevent discrimination, and emotional distress. The trial court struck the employee's UCL claims and granted summary judgment on other claims. The employee appealed, the Court of Appeal affirmed in part and reversed in part, and the employer petitioned for review. The California Supreme Court reversed the trial court orders, as follows:

In this case, we decide two issues. First, does a trial court's failure to rule on a party's evidentiary objections relating to a summary judgment motion waive the objections on appeal? Second, should California courts follow the federal courts in adopting the “stray remarks doctrine” in employment discrimination cases? Under this doctrine, statements that non-decision-makers make or that decision makers make outside of the decisional process are deemed “stray,” and they are irrelevant and insufficient to avoid summary judgment.

In this case, the Court of Appeal found that the trial court's failure to rule expressly on evidentiary objections did not waive those objections on appeal. Specifically, it ruled that Google's filing of written evidentiary objections before the summary judgment hearing was sufficient to preserve those objections on appeal. Accordingly, it reviewed Google's evidentiary objections on the merits. The Court of Appeal further refused to apply the stray remarks doctrine to exclude alleged discriminatory statements that Reid's supervisors and coworkers made. In reversing the trial court's grant of Google's summary judgment motion, the Court of Appeal considered those alleged statements and other evidence Reid presented in opposition to the motion.

We agree with the Court of Appeal's conclusions. Regarding the waiver issue, the Court of Appeal correctly determined that a finding of waiver does not depend on whether a trial court rules expressly on evidentiary objections and that Google's filing of written evidentiary objections before the summary judgment hearing preserved them on appeal. (Code Civ. Proc., § 437c, subds. (b)(5), (d).) After a party objects to evidence, the trial court must then rule on those objections. If the trial court fails to rule after a party has properly objected, the evidentiary objections are not deemed waived on appeal. Regarding the stray remarks issue, the Court of Appeal also correctly determined that application of the stray remarks doctrine is unnecessary and its categorical exclusion of evidence might lead to unfair results.

Slip op. at 1. Although not a wage and hour case, Reid is important for summary judgment procedure and tremendously important for FEHA cases.

Ninth Circuit Modifies Opinion in Independent Contractor Driver Case

On August 5, the Ninth Circuit Court of Appeals modified its decision in Narayan v. EGL, Inc. The text of the modification, which does not impact the outcome, is as follows:
On page 10084, line 20: "This is not all." is deleted. On page 10085, second indented paragraph, first sentence: "The fact that the Drivers here had contracts 'expressly acknowledging that they were independent contractors' is simply not significant under California's test of employment." is replaced with "That the Drivers here had contracts 'expressly acknowledging that they were independent contractors' is simply not dispositive under California's test of employment."
The Court thus recognized that while the contracts may impact the analysis under Borello, they are not determinative. The new citation for the case is --- F.3d ---, 2010 WL 3035487.

Thursday, August 5, 2010

Court of Appeal Issues Class Settlement Decision, Including PAGA Settlement Issue

Nordstrom Commission Cases (June 10, 2010, publication ordered July 7, 2010) 186 Cal.App.4th 576, is another case dealing with class action settlement approval. To my knowledge, it is the first one dealing with settlement of PAGA claims, although it does so without much detailed discussion.

The plaintiffs alleged that Nordstrom's policy of paying net sales commissions to its commissioned sales employees violated Labor Code sections 221 and 203 of the Labor Code. The parties settled for $6.405 million in cash and $2.5 million in Nordstrom merchandise vouchers. The trial court approved the settlement, and an objector appealed. The Court of Appeal affirmed.

The objector argued that the settlement was insufficient because it did not include or "grossly undervalued" the class members' waiting time penalties under Labor Code section 203. The Court rejected this argument:
The trial court's order overruling Taylor's objections specifies that the section 203 claims were "pleaded, demands made, and then penalty issues considered throughout the lengthy settlement negotiations. It is clear from the evidence presented too, that issues of purported 'willfulness' under section 203 and the difficulty of proof of that issue in light of the 'good faith dispute' requirement were evaluated and considered."
Id. at 584. The Court noted that Nordstrom had raised several arguments that it had acted in good faith. "[T]here was a good faith dispute regarding whether and when commission wages were due. The trial court did not abuse its discretion in determining that the class's case regarding section 203 penalties was not strong, and therefore deciding the terms of the settlement were fair, adequate, and reasonable." Id. at 587. Distinguishing Clark v. American Residential Services LLC (2010) 175 Cal.App.4th 785, the Court held that the trial court "did consider a substantiated explanation of the strengths and weaknesses of the class's claims, as well as the potential total recovery by the class under various damage theories." Id. at 588. (See our post on Clark here.)

The objector next argued that the settlement was insufficient because it did not allocate any amount to PAGA penalties. "Taylor argues the Nordstrom Commission Cases settlement 'effectively nullifies PAGA by failing to include PAGA penalties and purporting to settle all of the claims of the class members.'" Id. at 589. The Court rejected this argument. Unfortunately, its analysis is Spartan at best:

The Nordstrom Commission Cases settlement agreement identifies liability for PAGA penalties as a claim against Nordstrom and includes the following language: “The Parties allocate $0 to any Private Attorneys General Act penalty claim under Labor Code § 2699 et seq. , for penalty claims based on the Released Claims. During the Class Period, Nordstrom paid Putative Class Members' commissions pursuant to a commission plan that it contends was approved by the United States District Court in Rios, and consequently, Nordstrom contends no claim for penalties of any nature is valid.” Thus, the PAGA penalty claims were at issue, and were resolved as a part of the overall settlement of the case. We find no abuse of discretion in the trial court's approval of the settlement agreement containing these terms.

The cases Taylor cites are inapposite, at best. In Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277, 1300, 90 Cal.Rptr.3d 539, the appellate court held: “The Legislature has made clear that an action under the PAGA is in the nature of an enforcement action, with the aggrieved employee acting as a private attorney general to collect penalties from employers who violate labor laws. Such an action is fundamentally a law enforcement action designed to protect the public and penalize the employer for past illegal conduct.” The case did not address whether a settlement agreement could allocate zero dollars to PAGA penalties, however. The case stands only for the proposition that an individual arbitration agreement is invalid to the extent it purports to prevent an employee plaintiff from acting in a private attorney general capacity. (Franco v. Athens Disposal Co., Inc., supra, 171 Cal.App.4th at p. 1282, 90 Cal.Rptr.3d 539.)

Taylor also cites Waisbein v. UBS Fin. Servs. Inc. (N.D.Cal. Aug. 15, 2007, No. C-07-02328 MMC) 2007 WL 2348699, 2007 U.S.Dist. Lexis 62723. That United States District Court order, however, was vacated by a later order which directly contradicts Taylor's arguments on appeal. (Waisbein v. UBS Fin. Servs. Inc. (N.D.Cal. Dec. 5, 2007, No. C-07-2328 MMC) 2007 WL 4287334 at p. *3, 2007 U.S.Dist. Lexis 92051 at p. *9 [“the question is whether the Bowman class members voluntarily entered into an agreement in which they accepted a monetary benefit from UBS in exchange for not pursuing their claims under PAGA. The indisputable answer to that question is ‘yes' ”].)

Id. at 589.

Finally, the Court rejected the objector's argument that funding the settlement in part with in-store vouchers violated Labor Code section 212.

Section 212 does not apply because ... there is a good faith dispute as to whether and when commission wages were owed to the class members. “ ‘[W]ages are not “due” if there is a good faith dispute as to whether they are owed.’ ” (Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, 802, 90 Cal.Rptr.3d 175.) Employees may release claims for disputed wages and may negotiate the consideration they are willing to accept in exchange. (Id. at pp. 802-803, 90 Cal.Rptr.3d 175.)

Ibid. The Court noted that the vouchers made up approximately 20% of the total settlement fund and were intended to compensate class members with claims of less than $20.

A Brief Review of Cases Involving Cal. Supreme Court Chief Justice Nominee Tani Cantil-Sakauye

On July 21, Governor Schwarzenegger announced his nomination of Third District Court of Appeal Justice Tani Cantil-Sakauye to succeed Ronald M. George as Chief Justice of the California Supreme Court. I've found a few interesting cases in which Justice Cantil-Sakauye has been involved.

Justice Cantil-Sakauye concurred in the opinion in McAdams v. Monier (2010) 182 Cal.App.4th 174 (2010), in which the Court reversed a trial court order denying class certification in a case under the Unfair Competition Law (UCL) and the Consumer Legal Remedies Act (CLRA).

The plaintiffs alleged that the defendant failed to disclose that the color composition of its roof tiles would erode away, leaving bare concrete, well before the end of the tiles' represented 50-year lifetime. Following In re Tobacco II Cases (2009) 46 Cal.4th 298, the Court held that an “inference of common reliance” may be applied to a CLRA class that alleges a material misrepresentation consisting of a failure to disclose a particular fact. With regard to the UCL, the Court held: "Since individualized proof of reliance and injury is not required for non-representative class members, the issues of reliance and injury do not foreclose a UCL class action here." Slip op. at 11. My original post on McAdams v. Monier is here.

Justice Cantil-Sakauye also concurred in Stevenson v. California Security Consultants, Inc. (2007) 2007 WL 1556528 (unpublished). The plaintiff filed a complaint against his employer for alleged nonpayment of overtime compensation. The trial court denied the plaintiffs' motion for class certification. The Court of Appeal reversed, holding that the trial court "erred in ruling that there was an insufficient community of interest among the security guards who worked for defendant to warrant class certification."

Justice Cantil-Sakauye authored the opinion in a not-very-exciting arbitration case, Mansouri v. Superior Court (2010) 181 Cal.App.4th 633. A homeowners' association filed a petition to compel condominium owner to arbitrate a dispute that arose after the owner remodeled her patio. On a petition for writ of mandate after the trial court ordered arbitration, the Court held:
  1. The applicable statutory provision was statute governing procedure for compelling arbitration;
  2. Appellate court was permitted to review issue of association's failure to plead and prove a prior demand for arbitration under the parties' arbitration agreement and a refusal to arbitrate under the agreement, despite owner's failure to raise the theory in trial court;
  3. A party seeking to compel arbitration is statutorily required to plead and prove a prior demand for arbitration under the parties' arbitration agreement and a refusal to arbitrate under the agreement; and
  4. Association's failure to request arbitration pursuant to arbitration agreement before petitioning to compel arbitration was not waived or excused by owner.

This is not an extensive record, but I hope it sheds some light on Justice Cantil-Sakauye.

Wednesday, August 4, 2010

Court of Appeal Further Clarifies Settlement Approval Rules

In re. Cellphone Fee Termination Cases (June 28, 2010, publication ordered July 27, 2010) 186 Cal.App.4th 1380, arises out of an action challenging a cellphone carrier's imposition of early termination fees on customers canceling their contracts. During trial, the parties agreed to settle a California class action and three separate nation-wide class actions. The trial court approved the settlement, and objectors appealed. The Court of Appeal affirmed.

The objectors argued that "the form of notice provided to class members was ... inadequate because the notices allegedly misled members of the Subscriber Class into believing that they were 'eligible to make claims for any part of the Common Fund,' and also because the notices allegedly did not disclose the 'size of the class.'" Slip op. at 6. The Court rejected this argument, holding that the notice was sufficient because it referred class members to a detailed notice and claim form package and to a website that fully described the settlement terms. "Using the capability of the Internet in [this] fashion was a sensible and efficient way of providing notice, especially compared to the alternative [objector] apparently preferred-mailing out a lengthy legalistic document that few class members would have been able to plow through." Slip op. at 7.

The objectors also argued that the notice failed to state the size of the class. The Court held that this was not required. "[T]here is no requirement that the class size be specified in the notice [citations]...." Slip op. at 7.
Both the mail notice and the long-form publication notice identified the total amount of the common fund recovery, the nature of the costs and fees to be deducted from the common fund, and the fact that the balance of the fund would be allocated among qualified class claims. The long-form publication notice makes clear that "[t]he amount paid to class members may be larger or smaller than the amount of the claim, depending on how many claims are submitted." "The aggregate amount available to all claimants was specified and the formula for determining one's recovery was given. Nothing more specific is needed."
Slip op. at 7.

The objectors next argued that the class representatives "breached their fiduciary duties to the class by receiving the incentive awards [in the amount of $10,000 each] and that they sought 'individual gain' at the expense of the class." Slip op. at 11. The Court rejected this argument as well:
While there has been scholarly debate about the propriety of individual awards to named plaintiffs, "[i]ncentive awards are fairly typical in class action cases." These awards "are discretionary, [citation], and are intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general."
Slip op. at 11. Although there is no "presumption of fairness" in review of an incentive fee award, the Court found no abuse of discretion here.